Sandoz, Inc. v. State (In re Miss. Medicaid Pharm. Average Wholesale Price Litig.)

CourtUnited States State Supreme Court of Mississippi
Citation190 So.3d 829
Docket NumberNo. 2012–CA–01610–SCT.,2012–CA–01610–SCT.
Decision Date29 October 2015

190 So.3d 829

State of Mississippi.

No. 2012–CA–01610–SCT.

Supreme Court of Mississippi.

Oct. 29, 2015.
Rehearing Denied May 26, 2016.

190 So.3d 833

Joseph Angland, Michael John Gallagher, Luther T. Munford, Ridgeland, Richard T. Lawrence, J. Collins Wohner, Jr., Jackson, attorneys for appellant.

Charles G. Copeland, Rebecca Suzanne Blunden, Ridgeland, Geoffrey C. Morgan, George W. Neville, Jackson, Andy Lowry, Ellen Patton Robb, Ridgeland, Samuel Martin Millette, D. Ronald Musgrove, Blake Damon Smith, Michael Shelton Smith, II, Jackson, Wilson Daniel “Dee” Miles, III, H. Clay Barnett, III, attorneys for appellee.


CHANDLER, Justice, for the Court:

¶ 1. The State of Mississippi brought a civil action against generic pharmaceutical provider Sandoz, Inc., (Sandoz) alleging that Sandoz impermissibly exploited Mississippi's Medicaid reimbursement program by routinely and exponentially reporting fictitious “Average Wholesale Prices,” a key data factor in the federally supervised formula used by the Mississippi Division of Medicaid to reimburse pharmacies serviced by Sandoz. The trial court, sitting as fact-finder, found Sandoz in violation of the Mississippi Consumer Protection Act and liable for common-law fraud. Sandoz appeals, and the State cross-appeals. On our deferential standard of review, we affirm the trial court in full.


¶ 2. Medicaid is a joint state-federal program servicing hundreds of thousands of Mississippians. Following the passage of the Omnibus Budget Reconciliation Act of 1990 (OBRA '90), which governs Medicaid, the number of prescription drugs eligible for reimbursement rose from approximately

190 So.3d 834

1,800 to more than 65,000. More than 900 pharmacies eventually participated, submitting more than one million reimbursement claims per month. The cost to each pharmacy for each drug from providers like Sandoz changed on virtually a daily basis and varied depending on the location and nature of the pharmacy.

¶ 3. For the relevant damages period, Mississippi Medicaid was required by regulation to reimburse pharmacies the lesser of (1) the Estimated Acquisition Cost (EAC) of the drug plus a reasonable dispensing fee, or (2) the “usual and customary” price the pharmacy charges to consumers paying for the drug without government assistance (U & C). 42 C.F.R. § 447.512(b).1 Federal Regulations defined EAC as Medicaid's “best estimate of the price generally and currently paid by providers for a drug marketed or sold by a particular manufacturer or labeler in the package size of drugs most frequently purchased by providers.”

¶ 4. The federal agency responsible for Medicaid is the Center for Medicare and Medicaid Services (CMS), formerly known as the Health Care Financing Administration (HCFA). CMS was required to approve of Mississippi's “State Plan,” including its reimbursement formula for prescription drugs. Any changes to Mississippi's reimbursement rate had to be approved by CMS. From May 1, 1990, to March 31, 2002, Mississippi Medicaid defined EAC as the Average Wholesale Price minus ten percent. From April 1, 2002, to June 30, 2005, EAC was defined as AWP minus twelve percent. From July 1, 2005, until October 2005, EAC was defined as (1) the lesser of AWP minus twelve percent or Wholesale Acquisition Cost (WAC) plus nine-percent for brand named drugs and single-source generic drugs, and (2) AWP minus twenty-five percent for multiple-source generic drugs.

¶ 5. To satisfy its regulatory obligations and to efficiently process the large number of reimbursement claims, Mississippi, similar to more than forty other programs nationwide, obtained the drugs' AWPs from national data service First Data Bank. First Data Bank defined AWP as “the average price paid by the pharmacy to the wholesaler for a particular drug.” Sandoz generated and submitted the AWPs for its drugs to First Data Bank. Sandoz does not dispute that the AWPs it reported to First Data Bank never represented the net average wholesale prices that Sandoz received for the sale of a particular drug to a pharmacy or wholesaler, or that Mississippi Medicaid relied on Sandoz's AWPs as published by First Data Bank to determine the EAC for purposes of reimbursing pharmacies for the ingredient cost of Sandoz's drugs. The discrepancy between the actual cost of the drug and the reported Average Wholesale Price averaged 886%.

¶ 6. Mississippi filed suit in 2005, alleging that Sandoz's conduct of reporting inflated AWPs caused Mississippi to reimburse pharmacies excessive amounts, and that Sandoz deliberately created and marketed the discrepancy (or “spread”) between the actual prices of their drugs and the reported AWPs in order to increase market share and profit.2 The State asserted that Sandoz violated the Mississippi

190 So.3d 835

Consumer Protection Act, the Mississippi Medicaid Fraud Control Act, and that its conduct constituted commonlaw fraud. Sandoz argued that the reported AWPs were understood by all parties to be an essentially fictitious sticker price that had no relation to the actual cost of the drugs.

¶ 7. In April 2011, the trial court heard more than ten days of testimony, including more than twenty witnesses. This evidence included the testimony of both parties' experts, the testimony of Jack Lee, Mississippi Medicaid's Director of Pharmacy; the testimony of Helen Wetherbee, former Director of Mississippi Medicaid; the deposition testimony of Larry Reed, Technical Director for CMS's Division of Pharmacy; reports from the Office of Inspector General (OIG); and First DataBank's definitions of AWP from 1991 to 2003. Additional relevant facts are discussed below.

¶ 8. The court entered its amended findings of fact and conclusions of law on October 4, 2011, finding that Sandoz committed common-law fraud and violated the Mississippi Consumer Protection Act. For the damages period of January 1, 1991, through October 20, 2005, the court awarded $23,661,618 to cover the amount Mississippi Medicaid overpaid in reimbursements to pharmacies, $2,699,000 in civil penalties under the Consumer Protection Act, and $3,750,000 in punitive damages for Sandoz's willful and fraudulent misconduct. The court dismissed the claims against Sandoz under the Mississippi Medicaid Fraud Control Act and denied the State's post-trial motion for attorney's fees, prejudgment interest, and other relief. Sandoz appealed, and the State cross-appealed.


¶ 9. We will not reverse the trial court's findings of fact unless manifestly wrong or clearly erroneous. Puckett v. Stuckey, 633 So.2d 978, 982 (Miss.1993). “When a trial judge sits without a jury, this Court will not disturb his factual determinations where there is substantial evidence in the record to support those findings.” Transocean Enter. v. Ingalls Shipbuilding, Inc., 33 So.3d 459, 462 (Miss.2010) (citation omitted). “Fraud is essentially a question of fact best left for the [fact-finder] ...” Allen v. Mac Tools, Inc., 671 So.2d 636, 643 (Miss.1996). The nine elements of common-law fraud are:

(1) a representation, (2) its falsity, (3) its materiality, (4) the speaker's knowledge of its falsity or ignorance of its truth, (5) his intent that it should be acted on by the hearer and in the manner reasonably contemplated, (6) the hearer's ignorance of its falsity, (7) his reliance on its truth, (8) his right to rely thereon, and (9) his consequent and proximate injury.

Franklin v. Lovitt Equip. Co., Inc., 420 So.2d 1370, 1373 (Miss.1982). Each element of fraud must be proven by clear and convincing evidence. Cotton v. McConnell, 435 So.2d 683, 685 (Miss.1983).3

¶ 10. For both the State's common-law fraud and Consumer Protection Act claims, the primary issue of fact determined below was the parties' understanding

190 So.3d 836

of the meaning of the term “Average Wholesale Price” as this phrase was used for purposes of pharmaceutical reimbursement by the Mississippi Division of Medicaid. The trial court found clear and convincing evidence supporting that the State understood the Average Wholesale Price data generated by Sandoz to be related to the pharmacies' actual drug acquisition cost, that the State reasonably relied on this data to calculate its best estimate of the actual cost of the drugs to the pharmacies, that Sandoz intentionally reported fictitious prices that had zero relationship to the actual cost of the drug while knowing that Medicaid programs used these prices to estimate how much they should reimburse pharmacies, that Sandoz advertised to pharmacies the discrepancies between the actual and fictitious prices to attract business, and that Medicaid reasonably relied on the false data, reimbursing pharmacies $23,661,618 in excess of the regulatory minimum. We find that the State presented evidence sufficient to have enabled the trial court to have found the elements of fraud by clear and convincing evidence.

¶ 11. The court was confronted with evidence demonstrating the significant changes Mississippi Medicaid's...

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