A Discount too far?

Edition: April 2003 - Vol 11 Number 04
Article#: 1512
Author: Repertoire

A drug industry court case could offer some instructive lessons for medical/surgical suppliers.

In a whistle-blower lawsuit filed in New Orleans, Whitehouse Station, N.J.-based Merck & Co. has been accused of selling its heartburn and ulcer medication Pepcid to some New Orleans hospitals for 10 cents, while charging Medicaid $1.65. If true, Merck might have violated a 1990 law that requires drug makers to report to Medicaid the lowest prices they charge anyone. The law was designed to give Medicaid, a state-federal program, the same kind of discounts offered to other purchasers.

According to a report in The Wall Street Journal (“Some Drug Firms Seem to Evade Medicare Price-Reporting Rules,” Feb. 24, 2003), the 1990 law does allow drug companies to exclude some low-priced sales from government calculations, presumably, to allow them to sell their products to charities or researchers at cut-rate prices. The question is, did Merck go too far?

Medical/Surgical Parallels

Medical/surgical suppliers should note that the Medicaid law appears to be similar to Title 48 of the Federal Acquisition Regulations, says J. Michael O’Connor, founder and president of Crystal Lake, Ill.-based Colonial Group, and an expert on federal contracting and sales. Although unfamiliar with the 1990 law cited in the lawsuit, O’Connor says that “I’d be inclined to believe that it does parallel Federal Acquisition Regulations as they pertain to ‘best price’ and the calculations thereof.”

Title 48 acknowledges that the federal government will seek to obtain the supplier’s best price (that is, the price afforded to the most favored customer), but adds that “the Government recognizes that the terms and conditions of commercial sales vary and that there may be legitimate reasons why the best price is not achieved.”

For example, Title 48 acknowledges that suppliers may adjust their prices based on whether it is more expensive to sell to the government than to another buyer, or whether a non-governmental buyer offers value-added functions that the government does not. “It’s up to the contractor to clearly make its case for this,” says O’Connor. “If done properly, the government will allow the manufacturer or distributor to sell to someone else at a lower cost.”

According to the newspaper report, Merck may not be the only drug company to offer low-cost drugs to hospitals in an effort to build market share and loyalty to their pharmaceuticals after patients leave hospitals. But it will be up to the U.S. District Court in New Orleans to determine if the company will serve as an example to the rest.