Medisca to Pay $21.75M Over Inflated Drug Pricing Allegations

Medisca Inc. has agreed to pay $21.75 million to resolve Justice Department allegations that it inflated the Average Wholesale Prices of two ingredients used in compound prescriptions, leading pharmacies to over-bill federal healthcare programs including TRICARE. The settlement, announced by the Justice Department on November 1, 2024, ends a False Claims Act case. A pharmacist filed the case. That pharmacist, Doug McMakin, will collect $3,425,625 from the proceeds under the law’s whistleblower provision.

The United States alleged that Medisca acquired the two ingredients at very low cost and reported Average Wholesale Prices that were orders of magnitude higher than what the company actually charged. Federal reimbursement turned on those AWPs. The higher the figure Medisca reported, the larger the reimbursement its pharmacy customers could claim, with the Justice Department alleging the scheme allowed pharmacy customers to bill federal programs inflated amounts, often thousands of dollars per prescription.

The Spread Between Cost and Reported Price

The Justice Department’s case against Medisca turns on the gap between what the company paid for two compounding ingredients and the Average Wholesale Prices it reported to outside price-listing agencies. Federal reimbursement turns on those AWPs. The higher the figure Medisca reported, the larger the reimbursement its pharmacy customers could claim. The two products at the center of the case are identified by National Drug Code numbers 38779-2863 for resveratrol and 38779-2413 for mometasone furoate.

The Justice Department’s announcement laid out the alleged spread for each ingredient in per-gram terms. The gap is the heart of the case. Medisca allegedly used those reported AWPs, and the larger federal reimbursements those reported AWPs produced, as an inducement for compound pharmacies to buy its ingredients over those of competitors. The government alleged the company knew the figures it reported would flow into federal reimbursement formulas, and that the inflated billings often reached thousands of dollars per prescription. The two NDC numbers, 38779-2863 and 38779-2413, identify the specific Medisca products covered by the agreement. The per-gram spread is laid out below.

How the Alleged AWP Markups Reached Federal Reimbursements

The Justice Department’s full text of the $21.75M settlement announcement described how a single ingredient supplier’s reported AWPs allegedly reached federal reimbursements. The chain runs from ingredient pricing agencies, to the Defense Health Agency, to TRICARE and the Department of Labor’s Office of Workers’ Compensation Programs. Compounding pharmacies prepare and fill prescriptions for patients who need a specially made medication that is not generally available in the marketplace. Federal reimbursement turned on those AWPs. The Justice Department alleged the company knew the AWP it reported would shape how much its pharmacy customers were paid, with the alleged scheme allowing pharmacy customers to bill federal programs inflated amounts, often thousands of dollars per prescription, for compounds that used those two ingredients.

The federal review of TRICARE’s compound drug payments describes how ingredient costs flow into federal reimbursements, the same payment chain the Justice Department alleged Medisca exploited. The government alleged Medisca used the high reported AWPs and the profit potential they created as a sales pitch to compound pharmacies, steering them toward its ingredients.

We will not tolerate fraudulent pricing schemes targeting health care programs that support veterans and other federal beneficiaries. As today’s settlement demonstrates, we will hold accountable not just those who submit false claims, but all who participate in schemes designed to defraud the American taxpayers.

The quote came from Brian M. Boynton, the Principal Deputy Assistant Attorney General who heads the Justice Department’s Civil Division, in the department’s November 1, 2024 announcement of the settlement. Two U.S. Attorney’s Offices joined the case. The Civil Division’s Commercial Litigation Branch and Fraud Section led the case alongside those offices, with the settlement reaching from Washington to the Eastern and Western Districts of Texas.

A Pharmacist’s Lawsuit Made the Case Visible

The case reached the Justice Department through a qui tam lawsuit. Doug McMakin filed the suit. He owned and operated a compounding pharmacy that dispensed compounded prescriptions, putting him on the buyer side of Medisca’s ingredient supply chain. The settlement ends the lawsuit captioned United States ex rel. McMakin v. Medisca Inc., filed in the Eastern District of Texas, with McMakin’s suit brought under the whistleblower provision of the False Claims Act, the legal mechanism that lets a private individual file a False Claims Act case on the government’s behalf.

The False Claims Act allows private parties to sue on the government’s behalf for false claims for government funds, with the government able to step in and the private party receiving a share of any recovery. The law calls that a qui tam action.

McMakin’s share is $3,425,625. That comes from the $21.75M resolution. The Justice Department stated the share is paid out under the FCA’s whistleblower provision, the mechanism that turns a private FCA suit into a government recovery. The case was handled by Senior Trial Counsel Sanjay Bhambhani and Trial Attorney John Deck of the Civil Division, with Assistant U.S. Attorney Mary Kruger for the Western District of Texas and Assistant U.S. Attorney James Gillingham for the Eastern District of Texas also working the case file. The investigation drew on special agents from the Defense Criminal Investigation Service and the U.S. Postal Service Office of Inspector General.

The Justice Department’s announcement credits the FCA’s qui tam mechanism with surfacing the alleged pricing scheme. No liability was determined. McMakin’s payout of $3,425,625 comes from the $21.75M resolution, with the Justice Department confirming his share in the announcement.

Which Agencies Worked the Settlement

The settlement was a coordinated federal effort. On the civil side, the Justice Department’s Civil Division ran the case through its Commercial Litigation Branch, Fraud Section, as detailed in the federal enforcement record on the case. The Civil Division worked with the U.S. Attorney’s Offices for the Eastern District of Texas and the Western District of Texas. The settlement closes the case that was filed in the Eastern District of Texas and coordinated from the Justice Department’s Washington offices.

The Defense Criminal Investigation Service led the investigation. TRICARE, the Department of Defense’s health care program for service members, their families, and military retirees, was the federal program at the center of the alleged conduct. The U.S. Postal Service Office of Inspector General and the Department of Labor also contributed to the case, with Special Agents Nicholas Koechig of the DCIS and Timothy Jones of the USPS OIG named in the Justice Department’s announcement.

Two U.S. Attorneys from the Texas districts put their names on the public statements that accompanied the settlement, with Ryan Settle of the DCIS Southwest Field Office joining them. The full list is below.

• Justice Department Civil Division’s Commercial Litigation Branch, Fraud Section: handled the case on the civil side, with Senior Trial Counsel Sanjay Bhambhani and Trial Attorney John Deck as counsel of record
• U.S. Attorney’s Office for the Eastern District of Texas: Assistant U.S. Attorney James Gillingham, with U.S. Attorney Damien M. Diggs as the public-facing signatory
• U.S. Attorney’s Office for the Western District of Texas: Assistant U.S. Attorney Mary Kruger, with U.S. Attorney Jaime Esparza as the public-facing signatory
• Defense Criminal Investigation Service (DCIS), DoD OIG: lead investigative agency, with Acting Special Agent in Charge Ryan Settle of the Southwest Field Office and Special Agent Nicholas Koechig
• U.S. Postal Service Office of Inspector General (USPS OIG): contributed investigative support, with Special Agent Timothy Jones
• Department of Labor: contributed investigative support, reflecting the impact on the Office of Workers’ Compensation Programs

What the $21.75 Million Does and Does Not Resolve

The $21.75 million settlement closes one specific set of False Claims Act claims. It covers the two ingredients. The Justice Department announced the agreement as resolving the United States’ allegations that Medisca knowingly inflated the AWPs for resveratrol (NDC 38779-2863) and mometasone furoate (NDC 38779-2413) to increase the federal reimbursements its pharmacy customers received. The settlement does not extend to other Medisca products, other Medisca customers, or any other ingredient or pricing period not named in the agreement. Medisca, in settling, did not concede liability. The Justice Department’s announcement states the claims resolved are allegations only.

The line between resolving and admitting is a familiar False Claims Act construct. Both U.S. Attorneys used that framing. Diggs tied his statement to a warning about companies that try to manipulate the federal reimbursement system for compounded pharmaceuticals. Esparza tied his statement to the False Claims Act and the protection of critical federal programs, with the U.S. Attorney for the Western District of Texas adding the case-specific framing on taxpayers and honest pricing.

When federal healthcare programs are defrauded it hurts all Americans. My office is committed to using the False Claims Act (FCA) to hold individuals and companies accountable for the impact their actions have on our critical programs. Taxpayers deserve honest pricing and assurances that the government is never overcharged.

The quote came from Jaime Esparza, the U.S. Attorney for the Western District of Texas, in the same November 1, 2024 announcement. Esparza’s statement was issued alongside other public statements. The principal deputy assistant attorney general, the Eastern District of Texas U.S. Attorney, and the DCIS Acting Special Agent in Charge all had statements in the same announcement. The joint set of statements is what the Justice Department typically issues when a False Claims Act settlement of this size closes.

Frequently Asked Questions

How much will Medisca pay, and who else receives money from the settlement?

Medisca has agreed to pay $21.75 million to the United States to resolve the False Claims Act case. The pharmacist who filed the qui tam lawsuit, Doug McMakin, will receive $3,425,625 of the proceeds under the law’s whistleblower share provision.

What is a compound prescription, and what role did the alleged AWP scheme play?

A compound prescription is a medication that a compounding pharmacy prepares and fills for a patient who needs a specially made drug not generally available in the marketplace. The Justice Department alleged Medisca’s reported AWPs for two ingredients fed federal reimbursement formulas for those compounds, and the pharmacy customers then billed the Defense Health Agency and other federal programs at the higher reimbursement level those AWPs produced.

What is a qui tam lawsuit, and how did a pharmacist’s case lead to the settlement?

A qui tam lawsuit is a private False Claims Act suit in which an individual sues a company on the government’s behalf for false claims for federal funds. The Justice Department stated that under the FCA, private parties may sue on behalf of the government for false claims and receive a share of any recovery, and that the Medisca settlement closes the lawsuit captioned United States ex rel. McMakin v. Medisca Inc., filed in the Eastern District of Texas.

Has Medisca admitted wrongdoing in the settlement?

No. The Justice Department’s announcement states that the claims resolved by the settlement are allegations only, and that there has been no determination of liability.

Which federal programs were affected by the alleged scheme, and how do they bill for compounded prescriptions?

The Justice Department named TRICARE, the Defense Department’s health care program for service members and their families, and the Department of Labor’s Office of Workers’ Compensation Programs as the federal programs whose reimbursements were tied to the AWPs Medisca reported. The Defense Health Agency administers the TRICARE program and received the pharmacy claims that the alleged scheme inflated, according to the Justice Department.