Court Ruling Recalls Injudicious Average Wholesale Price Litigation Crusade

Cross-posted by Forbes.com at WLF’s contributor site

A little over a decade ago, federal regulators and state attorneys general initiated a litigation campaign to alter how government health care programs reimbursed doctors for prescription drugs. Like most “regulation by litigation” efforts, this campaign seized upon laws of broad application such as the False Claims Act (FCA) and encouraged private lawsuits of questionable merit. Government enforcers have long since moved on to other crusades, but as a federal court decision last month reflects, some private suits still drag on, burdening American businesses with needless legal expenses.

AWP. In the early 2000s, the federal government reimbursed health care providers based in part on a drug’s average wholesale price, or “AWP.” Some likened AWP to the sticker price, or MSRP, of a new car: an inflated number which almost no one actually paid. Everyone involved in health care was aware of the illusory nature of AWP, and federal and state regulators urged legislative change, but Congress resisted reform. So unelected officials and their brethren in the plaintiffs’ bar sought to impose change. As this 2002 WLF Working Paper explains, they devised legal theories which branded AWP as an overcharging scheme, and accused drug makers, price publishers, and other entities such as pharmacy benefit managers (PBMs) of perpetrating a fraud. State attorneys general filed billion-dollar fraud actions and plaintiffs’ lawyers teamed up with “whistleblowers” to file qui tam suits under the FCA.

The ensuing litigation crusade provided moderate returns at best to the plaintiffs’ lawyers and state AGs who jumped on board. For instance, in 2009, the Alabama Supreme Court dashed the state’s (and its contingent-fee lawyers’) dreams of a huge payday, dismissing two AWP cases, finding no fraud existed.

wblowerU.S. ex rel. Morgan v. Express Scripts, et al. Some private qui tam suits regretfully live on, however, like one case filed in the U.S. District Court for the District of New Jersey in 2002. David Morgan, a private auditor of pharmacy benefit managers, alleged a conspiracy among drug wholesalers, price publishers, and PBMs to artificially inflate the AWP. The Justice Department decided to join only the claims against one drug wholesaler in 2012, which then settled. Twenty-two states (CA, DE, FL, GA, HI, IL, IN, MA, MI, MO, NV, NH, NJ, NM, NY, OK, RI, TE, TX, VA, and WI) and the District of Columbia, under their own false claims laws, joined the case in its entirety.

The court found that because all of the information on which Mr. Morgan based his allegations was publicly available, it did not have jurisdiction over the suit. The FCA’s “Public Disclosure Bar” exists to prevent qui tam relators such as Mr. Morgan from getting rich by free-riding off of information “equally available to strangers to the fraud transaction [if they] had chosen to look for it as it was to the relator.”

Mr. Morgan’s allegations were “substantially similar,” the court reasoned, to those made in numerous other AWP-oriented lawsuits as well as congressional inquiries into the issues. Mr. Morgan argued that despite this similarity, the Public Disclosure Bar did not apply because he was an “original source” of the information. The court ruled he was not. Original sources must have “direct and independent” knowledge of the alleged fraud, and cannot engage in speculation or conjecture. Mr. Morgan had no direct knowledge. For instance, a key fact underlying his claims—that one publisher’s AWP was inflated by 4.16% over another’s—was obtained “by simply comparing two publicly disclosed numbers.”

He also had no independent knowledge. Mr. Morgan obtained some of the information while working as an expert witness on another AWP false claims suit. Also, the court noted that as new information became publicly available, Mr. Morgan amended his complaint to echo those developments.

Free-riding on a free-rider. It takes a remarkable amount of nerve to cobble together publicly available facts, claim you’ve uncovered a fraud on the government, and file a lawsuit from which you could earn substantial financial benefits. It is equally galling, however, that 22 states and DC were willing to free-ride along with free-rider David Morgan. Shouldn’t we expect that states will do a bit more vigorous due diligence before lending their names to a lawsuit?

It’s especially troubling that the responsible elected officials from a number of the free-riding states supposedly understand the impact that frivolous litigation has on free enterprise. For over a decade, the defendants in this case have had to divert money from productive purposes to legal defense.

The decision in U.S. ex rel. Morgan was not published, so it’s not likely to carry much weight as a precedent for other courts. But from our perspective, it stands as both a reminder of the last decade’s wasteful AWP litigation crusade and an important cautionary tale to state AGs that they must be more circumspect when signing their states up for private lawsuits.

2 thoughts on “Court Ruling Recalls Injudicious Average Wholesale Price Litigation Crusade

  1. Pingback: February 3 roundup | Internet Tax Lawyers

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