Fourth Circuit Best Price Decision Highlights Role of Medicaid Drug Rebate Program Reasonable Assumptions

February 01, 2022

The US Court of Appeals for the Fourth Circuit decision in US ex rel. Sheldon v. Allergan Sales, LLC acknowledges the complexity of price calculations under the Medicaid Drug Rebate Statute and highlights the importance of manufacturers documenting reasonable written assumptions with respect to the calculation of Medicaid best price in the absence of clear governmental guidance. This LawFlash reviews the significance of the decision in the context of Medicare drug pricing developments, as well as its relevance to the reasonable assumptions made by drug manufacturers when calculating and reporting Medicaid pricing to the government.

On January 25, 2022, the United States Court of Appeals for the Fourth Circuit affirmed dismissal of a relator’s False Claims Act (FCA) qui tam suit alleging that Forest Laboratories knowingly reported a fraudulent “best price” under the Medicaid Drug Rebate Statute, resulting in underpayment of Medicaid rebates to participating states.

Under the Medicaid Drug Rebate Program, manufacturer-reported best price is used to establish the amount of the rebate paid by manufacturers to the states for certain categories of drugs on units dispensed to Medicaid patients. The relator alleged that best price was required to be calculated by aggregating all price concessions paid to any entity in the chain of distribution relating to any single unit sold by the manufacturer, and that Forest failed to aggregate these discounts in determining best price, resulting in false pricing reports to the government and underpayment of Medicaid rebates to the states. Because federal Medicaid payments to each state are reduced by rebates that states receive from drug manufacturers, the relator alleged that the federal government paid at least $680 million more than it should have due to Forest’s purported false reporting. Forest, on the other hand, argued that, under the Medicaid Rebate Statute, it was not required to aggregate rebates provided to different unrelated customers in calculating best price.

By way of background, the Rebate Statute defines best price as “the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider . . . or governmental entity,” excluding specifically enumerated exceptions, which “shall be inclusive of cash discounts . . . and rebates.” Similarly, the Centers for Medicare & Medicaid Services (CMS) rule in effect during the period covering relator’s claims defined best price as “the lowest price available from the manufacturer during the rebate period to any entity in the United States in any pricing structure…”

However, stakeholders viewed CMS’s responses to comments submitted during the rulemaking process as potentially confusing where they stated that best price was intended to be inclusive of rebates, discounts, or price concessions that adjust the price realized by the manufacturer. Moreover, the final rule stated that best price included “all sales and associated discounts and other price concessions provided by the manufacturer to any entity. . .” The relator alleged in effect that the price actually realized and the inclusion of associated discounts to any entity should be understood to mean that a single best price was required to aggregate price concessions paid to any entity in the distribution chain, not just the purchaser to whom the sale was made.

At the time of the rulemaking, Forest had submitted written comments stating that the statutory definition of best price “has always been interpreted to mean the single lowest price to a particular customer unless the customer or transaction is exempt” and urging CMS to clarify that “only discounts and price concessions to the same entity to which a drug is sold should be included in the computation of best price to that entity.” However, CMS’s final rule declined to clarify the extent to which the discounts should be aggregated.

In affirming the district court dismissal of the suit, the Fourth Circuit characterized the case as involving alleged legally false—as opposed to factually false—claims involving contested statutory and regulatory requirements. Applying the US Supreme Court’s two-step analysis in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007), in determining whether Forest exercised reckless disregard for the truth of its claims, the Fourth Circuit evaluated whether Forest’s interpretation was objectively reasonable and whether authoritative guidance might have warned Forest away from that interpretation.

The Fourth Circuit found that Forest’s interpretation of the best price rule was not only objectively reasonable but also the most natural given the statutory definition defining best price as the lowest price (singular) available to any (singular) non-excluded entity. Further, the Fourth Circuit found that Forest had not been warned away from this most-natural interpretation by authoritative CMS guidance.

To the contrary, the Fourth Circuit stated that, CMS, despite being expressly asked to clarify the rule with respect to the aggregation of discounts, “nonetheless failed to clarify and thereby maintained strategic ambiguity.” Instead of a warning, the Circuit stated that “CMS issued manufacturers like Forest a permission slip. CMS’s Rebate Agreement provides that ‘in the absence of specific guidance,’ manufacturers should ‘make reasonable assumptions in their calculations of . . . Best Price, consistent with the requirements and intent of [the Rebate Statute], Federal regulations and the terms of this agreement’” and that “CMS reaffirmed the need to make reasonable assumptions—not once, not twice, but nine times” during the rulemaking process.


The Fourth Circuit decision expressly acknowledges that the Medicaid statute and rules governing calculation of the average manufacturer price (AMP) and best price “are among the most completely impenetrable texts within human experience” and that, because of changing and complex sales practices, “manufacturers may find it difficult to determine how to treat certain sales practices when calculating prices.” In the absence of specific guidance, manufacturers should:

  • Document in writing the company’s reasonable assumptions for calculating Medicaid AMP and best price along with legal analysis and explanation that demonstrates that the assumptions are consistent with the requirements and intent of regulations and laws.
  • Ensure that these assumptions reflect objectively reasonable interpretations of the law.
  • Confirm that authoritative guidance of sufficient specificity does not warn the company away from its interpretation.
  • Designate an internal legal compliance personnel or a third party to periodically review and assess whether the document outlining the company’s reasonable assumptions meets the necessary regulations and laws. In the event of scrutiny by a court, the company will be able to provide an assessment of the issue and likely show that its claims were principled and not reckless.

As always, drug companies will need to continue to closely monitor drug pricing developments to ensure they are meeting their legal obligations as sales practices, compliance functions, and legal requirements change over time.


If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
Nikita S. Bhojani