AMP Means the Price Realized: Post‑Sale “Clawbacks” Must Be Included and Are Not Bona Fide Service Fees

United States ex rel. Streck v. Eli Lilly and Company (7th Cir. Sept. 11, 2025)

Introduction

This case sits at the intersection of pharmaceutical pricing and the False Claims Act (FCA). Relator Ronald J. Streck alleged that Eli Lilly and Company understated its Average Manufacturer Prices (AMPs) for Medicaid Drug Rebate Program (MDRP) purposes by excluding “price increase value” payments—often called price appreciation credits, clawbacks, or price increase value adjustments—that wholesalers remitted to Lilly after Lilly raised list prices. A jury found FCA liability, and the Seventh Circuit affirmed.

The Seventh Circuit announced a clear, plain-text rule with wide implications for Medicaid pricing and FCA enforcement: the AMP is the average price paid to the manufacturer—i.e., the price realized—not just the initial invoice price. Post-sale price appreciation that the manufacturer recovers from wholesalers must be included. Such price appreciation credits are not “bona fide service fees,” particularly where the value is passed through to retail pharmacies, and excluding them was both factually and legally false under the FCA. The court also upheld the jury’s findings on scienter and materiality and approved a straightforward, statutory-definition jury instruction on materiality.

Parties: United States and States (for MDRP purposes) ex rel. Ronald J. Streck, Plaintiff-Appellee/Cross-Appellant; Eli Lilly and Company, Defendant-Appellant/Cross-Appellee.

The Decision at a Glance: Key Holdings

• AMP must reflect the price actually realized by the manufacturer. Where wholesalers remit post-sale price appreciation (“clawbacks”) to the manufacturer, those amounts are part of the AMP.
• Price appreciation credits are not excludable “bona fide service fees.” They are not fees “paid by” the manufacturer for services and are “passed through” to pharmacies, defeating the statutory and regulatory test.
• Falsity is an objective question tied to the statute, the MDRP agreement, and regulations. Complex regulatory schemes do not transform clear provisions into ambiguities.
• Scienter (knowledge) may be established by actual knowledge, deliberate ignorance, or reckless disregard. Evidence supported that Lilly either knew or recklessly disregarded that its approach was noncompliant, including by obscuring its method when communicating with CMS officials who would actually read its submissions.
• Materiality was properly submitted to the jury and supported by evidence: AMP accuracy directly affects the government’s payment/rebate balance and the “essence of the bargain” in MDRP.
• A “less-is-more” materiality instruction drawn directly from the FCA’s statutory definition was legally correct; Escobar’s factors are non-dispositive and need not be listed verbatim.
• Cross-appeal on counting violations (per-AMP vs. per-quarterly submission) was not preserved and was not resolved; the court declined to decide an unsettled question not squarely presented below.

Background

Medicaid reimburses pharmacies for brand-name drugs at the lower of (i) the pharmacy’s actual acquisition cost plus a dispensing fee or (ii) the “usual and customary” price to the public. To curb program costs, the MDRP requires manufacturers to pay quarterly rebates calculated by reference to each drug’s AMP—the “average price paid to the manufacturer” for sales to retail pharmacy channels during the rebate period.

Lilly’s 2005 shift to a “fee-for-services” distribution model paid wholesalers a flat Distribution Fee (about 1% of purchase value) and, crucially, required wholesalers to “credit back” post-sale price increases on inventory—i.e., remit the value of any price appreciation if Lilly raised list prices before the wholesalers resold to retail pharmacies. From 2005–2017, Lilly excluded those clawbacks from AMP as if they were part of bona fide service fees. The effect: AMPs were depressed and rebates lower, even as pharmacies and Medicaid paid higher “usual and customary” prices following price increases.

CMS rulemaking evolved during the period. A 2007 rule allowed bona fide service fee exclusions but emphasized that fees passed through to customers were not excludable. The 2010 Affordable Care Act codified a similar structure. In 2016, CMS reiterated that price appreciation credits “would likely not meet the definition of bona fide service fee.” Lilly began including clawbacks in AMP as of April 1, 2016, after meeting with CMS, and fully changed reporting in December 2017.

Summary of the Opinion

• Falsity: As a matter of law, Lilly’s AMP submissions were false. AMP is the price realized by the manufacturer. The MDRP agreement required AMP adjustments when “other arrangements” (including post-sale arrangements) “subsequently adjust the prices actually realized.” Excluding clawbacks contradicted the plain text and purpose of the statute and regulations and produced absurd results.
• Bona fide service fee: Price appreciation credits failed the bona fide service fee test because (a) they were not fees “paid by” the manufacturer to wholesalers, and (b) the economic burden/value was passed through to retail pharmacies.
• Scienter: The jury could reasonably find Lilly acted with at least reckless disregard. Key evidence included lack of contemporaneous documentation (2005–2011), executive certifications without understanding or inquiry, accounting treatment recognizing clawbacks as revenue, and asymmetrical communications to CMS (full detail in a letter CMS would not review; vague footnote in an audit response CMS would read).
• Materiality: Accurate AMP figures go to the heart of the MDRP bargain; underreporting AMPs deprives the government of rebates while government spending rises with pharmacy prices. Continued government payments did not defeat materiality on these facts.
• Jury instruction on materiality: The district court properly instructed the jury using the FCA’s statutory definition; Escobar’s multi-factor guidance remains non-dispositive.
• Cross-appeal on counting violations: The relator did not preserve the argument that each quarterly AMP entry is a separate violation; the Seventh Circuit declined to decide that open legal question on an incomplete record.

Detailed Analysis

Precedents and Authorities Cited and Their Roles

• Universal Health Services, Inc. v. Escobar: Materiality is “demanding” and holistic; conditions of payment and continued payment are factors, not dispositive rules. The Seventh Circuit applies Escobar’s holistic lens to find materiality where AMP accuracy is central to the program’s purpose.
• United States ex rel. Schutte v. SuperValu Inc.: Scienter focuses on the defendant’s subjective state of mind; facial ambiguity alone does not preclude scienter. The Seventh Circuit uses its logic to keep falsity objective and place subjective debates at the scienter stage.
• United States ex rel. Heath v. Wisconsin Bell, Inc.: Program purpose matters for materiality; where payment is tied to rules designed to control costs, violations go to the essence of the bargain. The court analogizes MDRP/AMP to Wisconsin Bell’s lowest-corresponding-price rule.
• United States v. Rogan; United States v. Luce; United States v. Molina Healthcare: Emphasize material misstatements that directly affect government payments or core program requirements and support materiality findings.
• United States ex rel. Yannacopoulos v. General Dynamics: Falsity analysis turns on compliance with contractual/regulatory terms via standard interpretive tools.
• United States ex rel. Lamers v. City of Green Bay: Reasonable legal disagreements don’t make claims false, but only if the interpretation is reasonable. The court distinguishes Lamers because Lilly’s position was not reasonable under the statutory text and purpose.
• FDA v. Brown & Williamson; Griffin v. Oceanic Contractors; Roberts v. Sea-Land: Canon-of-construction authorities used to read statutory terms in context and avoid absurd results. These support reading “price” as price realized, including payments made after delivery.
• Vanda Pharmaceuticals v. CMS (4th Cir. 2024): Background on MDRP and ACA amendments; contextual support for program design.
• United States v. Durcholz; Spay v. CVS Caremark (3d Cir.): Government knowledge can be relevant to scienter, but requires more than mere awareness; explicit approval/cooperation is needed. The court finds Lilly lacked such approval.
• Third Circuit’s non-precedential Allergan (2018): Took a narrower, temporal view of “price.” The Seventh Circuit respectfully declines that approach, emphasizing ordinary meaning and cumulative payment reality; cites district court in Bristol-Myers Squibb (E.D. Pa. 2019) aligning with its view.
• Heckler v. Community Health Services: Parties seeking public funds must act with “scrupulous regard” for the law; no requirement that government pre-clear every issue—supporting reckless-disregard findings.
• Standards and structural authorities: MDRP statute (42 U.S.C. §1396r‑8), CMS rules (2007 and 2016), and the MDRP agreement’s “reasonable assumptions” clause “consistent with” the statute, all inform the court’s plain-text analysis.

Legal Reasoning

1) AMP is the “price realized” and includes post-sale clawbacks

The court framed a simple hypothetical: sell at $10 on Monday; raise price to $11 by Wednesday; claw back the $1 when the wholesaler sells. Did the manufacturer realize $10 or $11? The answer, said the court, is $11. Several strands of reasoning converge:

• Text: Since 2005, AMP is “the average price paid to the manufacturer … by wholesalers.” Neither the statute nor the MDRP agreement distinguishes between lump-sum versus amortized or subsequent payments; the MDRP contract requires AMP adjustments when “other arrangements” “subsequently adjust the prices actually realized.”
• Purpose: MDRP is designed to offset Medicaid costs by tethering manufacturer rebates to prices realized in the retail pharmacy channel, while Medicaid reimbursement rises with “usual and customary” pharmacy prices. Excluding clawbacks creates a gap—higher government outlays with depressed rebates—contrary to the program’s core design.
• Absurdity avoidance: Treating only the initial invoice as AMP (e.g., selling at $1, immediately increasing to $11, yet reporting $1) produces absurd results and frustrates the statute’s function.
• Ordinary meaning: The price can be paid over time; “price” is the consideration given for the thing sold, not artificially frozen at the first invoice when subsequent contractual mechanisms require additional payment.

2) Price appreciation credits fail the bona fide service fee test

The bona fide service fee exclusion applies to fees paid by the manufacturer to wholesalers for bona fide, itemized services and not “passed through” to customers. Price appreciation credits fail both requirements:

• Not “paid by” the manufacturer: In substance, the wholesaler pays the manufacturer the amount of the price increase (sometimes by netting against the Distribution Fee, sometimes by a quarterly invoice). From 2009–2016, the reality was cash remitted back to Lilly.
• “Passed through” to retail pharmacies: The mechanism presupposed wholesalers recovered the increase by charging pharmacies more; the economic burden/value was passed down the chain, which disqualifies it from the bona fide service fee exclusion.
• Manipulation risk: Allowing manufacturers to exclude clawbacks would allow timing games—sell low, raise price, collect the delta, but report the lower AMP—opening a “gaping loophole” incompatible with the statute and CMS’s 2016 reiteration that such credits “would likely not” qualify.

3) Falsity is objective; “reasonable assumptions” cannot contravene clear law

The court separated falsity from scienter. Falsity is established by applying standard interpretive tools to the statute, MDRP agreement, and regulations. While the MDRP agreement permits “reasonable assumptions” in areas lacking guidance, those assumptions must be “consistent with” the statute and regulations. Here, excluding clawbacks contradicted the text, purpose, and regulatory guidance and produced absurd outcomes. Thus, the submissions were both factually and legally false.

By reinforcing falsity’s objective character and reserving state-of-mind debates for scienter (consistent with SuperValu’s emphasis on subjective knowledge for scienter), the court avoids rewarding aggressive misreadings in complex regimes. It also rejects any due-process claim premised on alleged ambiguity in this context.

4) Scienter: Evidence supported at least reckless disregard

The jury was instructed that “innocent mistake or negligence” is not enough and that knowledge can be shown by actual knowledge, deliberate ignorance, or reckless disregard. Evidence supporting scienter included:

• No contemporaneous documentation (2005–2011) despite an MDRP duty to keep records of AMP methodology and assumptions; key decisions were made by a mid-level “government pricing specialist” without documented legal analysis or managerial review.
• Executive certifiers did not recall reading the MDRP agreement or understanding the basis for excluding clawbacks, yet they certified AMPs as accurate.
• Accounting treatment and internal presentations recognized clawbacks as revenue, with large annual sums (approaching $100 million in some years; hundreds of millions overall), underscoring the high stakes of the AMP methodology.
• Asymmetrical communications with CMS:
  • A detailed 2011 “reasonable assumptions” letter (to which CMS had instructed manufacturers not to expect responses) candidly described excluding clawbacks.
  • A 2013 audit response that CMS would read mentioned clawbacks only in a footnote and framed exclusions as contingent upon satisfying the bona fide service fee test, omitting the rationale for treating clawbacks as such—a jury could view this as misleading by omission.
• Despite relationships with CMS staff and available channels, Lilly did not pursue direct, substantive clarification when a 2011 qui tam complaint raised the very issue.

The court acknowledged government lethargy and the risk of “rulemaking by regulatory prosecution” but concluded that, on this record, the jury could reasonably infer at least reckless disregard.

5) Materiality: Goes to the essence of the MDRP bargain

Materiality was supported by:

• The central role of AMP in rebate calculations and the MDRP agreement’s express requirement of statutory/regulatory compliance (with express penalties for false data).
• The direct, substantial dollar impact—tens of millions in underpaid rebates; the government’s costs rose with pharmacy prices while rebates fell due to depressed AMPs.
• Program purpose: Like the “lowest corresponding price” rule for schools/libraries in Wisconsin Bell, accurate AMPs are a mechanism to keep Medicaid drug spending controlled; misstatements go to the program’s core.
• Continued payment is not dispositive. On these facts, CMS may have needed time to avoid harming beneficiaries; Lilly did not fully disclose the magnitude; and after a 2016 meeting and CMS’s 2016 rule, Lilly changed course and backdated compliance to April 1, 2016.

Instructionally, the district court properly used the FCA’s statutory materiality definition. Escobar’s factors are non-dispositive; the Seventh Circuit endorsed a succinct instruction to avoid juror confusion.

6) Cross-appeal on “counting” FCA violations: Not preserved

Relator sought per-AMP penalties (each AMP within a quarterly submission), but the record showed only a preserved dispute over monthly versus quarterly timing and evidentiary rulings about a summary exhibit. The court declined to decide the unsettled “per-line-item versus per-submission” question in the absence of a squarely presented and preserved issue. The opinion collects competing approaches from other circuits (e.g., Krizek/Hays focusing on claims presented vs. Farfield/Saavedra contemplating per-statement counts), flagging the legal uncertainty for a future case.

Standards of Review and Their Role in the Outcome

• Falsity: De novo review of summary judgment; the court found Lilly’s AMP methodology false as a matter of law.
• Scienter: Highly deferential review of jury verdict; evidence permitted a finding of at least reckless disregard.
• Materiality: Deferential review; the evidence permitted a finding that AMP misstatements were material.
• Jury instructions: Legal accuracy reviewed de novo; formulation reviewed for abuse of discretion. The statutory-definition materiality instruction passed both tests.
• Evidentiary rulings (summary exhibit): Abuse of discretion; no reversible error shown and, in any event, the number-of-violations issue was removed from the jury by stipulation.

Complex Concepts Simplified

• Average Manufacturer Price (AMP): The average price wholesalers pay the manufacturer for a drug in the retail pharmacy channel during a quarter. It determines the rebate the manufacturer owes Medicaid. It must reflect the total price realized, including later credits or amounts recouped due to price increases.
• Price Appreciation Credits / Clawbacks: When the manufacturer raises list price after selling to a wholesaler but before the wholesaler resells to a pharmacy, contracts may require the wholesaler to remit the value of that increase back to the manufacturer for inventory on hand.
• Bona Fide Service Fee: An excludable payment from the manufacturer to a wholesaler for itemized services the manufacturer would otherwise perform, which is not passed through to customers. If the economic value is passed along the chain or not paid by the manufacturer, it is not a bona fide service fee.
• “Usual and Customary” Price: The typical retail cash price at the pharmacy. Medicaid reimbursement aligns with this figure, meaning government outlays rise when pharmacy prices rise.
• Falsity vs. Scienter: Falsity asks whether the claim contradicts the law or contract (objective). Scienter asks what the defendant knew or should have known (subjective: actual knowledge, deliberate ignorance, or reckless disregard).
• Materiality: Whether the misrepresentation had a natural tendency to influence the government’s payment decisions. It is holistic; continued payment is relevant but not dispositive.
• “Reasonable Assumptions” (MDRP): Manufacturers may make and document assumptions in genuine gaps, but only if consistent with the statute, regulations, and rebate agreement—assumptions cannot override clear law.

Practical Implications and Compliance Guidance

• Include post-sale price appreciation credits in AMP: If contracts require wholesalers to remit value from mid-stream price increases, those amounts are part of AMP.
• Treat bona fide service fees narrowly: They must be paid by the manufacturer for bona fide, itemized services and not be passed through to customers. Netting against service fees or invoicing wholesalers for price increases is not payment of a service fee.
• Document methodology and assumptions: Maintain contemporaneous, substantive records of AMP calculations and any assumptions. Executive certifiers should review and understand the methodology; blind reliance on subordinates is perilous.
• Use appropriate channels with regulators: Do not rely on “assumption letters” that CMS has said it will not review. For material issues, engage regulators through acknowledged channels and meetings; disclose the economic impact, not just the method.
• Reassess reliance on “reasonable assumptions”: Assumptions offering convenient interpretations that depress rebates are especially risky if they conflict with statutory text or program purpose.
• FCA risk management: Periodic internal audits, legal review aligned with current CMS guidance, and, where appropriate, advice-of-counsel practices (with an understanding of privilege implications) can mitigate scienter exposure.
• Materiality awareness: If a pricing practice shifts large sums between the Treasury and the manufacturer and affects a core program metric (like AMP), assume materiality risk and treat with heightened compliance rigor.
• Litigation posture: Government knowledge and continued payment may be relevant but rarely dispositive; develop a full record of any explicit agency approval or collaborative resolution if relying on a government-knowledge defense.

Potential Impact and Open Questions

• Across-industry impact: This decision fortifies CMS’s 2016 position that price appreciation credits do not qualify as bona fide service fees, and it cements a “price realized” conception of AMP in the Seventh Circuit. Manufacturers operating nationally should be prepared for scrutiny in other circuits.
• Divergence with Third Circuit approaches: The Seventh Circuit rejects a temporal narrowing of “price” reflected in a non-precedential Third Circuit order and aligns with district court authority in the Third Circuit rejecting “ambiguity” in this context. Venue may matter until broader consensus emerges.
• Falsity versus scienter demarcation: The court’s treatment, informed by SuperValu, encourages courts to resolve falsity objectively and reserve ambiguity/knowledge debates for scienter. Expect more defendants to focus on subjective good faith while courts police reasonableness at the falsity stage.
• Government-knowledge defense: The opinion underscores that silence, non-response to assumption letters, and generalized audits rarely suffice; explicit approval remains the safer harbor.
• Jury instructions on materiality: Courts may continue using the succinct statutory definition without embedding Escobar’s non-dispositive factors in the instruction, relying instead on attorney argument and evidentiary development to present those considerations.
• Counting violations unresolved: The Seventh Circuit flags a live issue—per-document vs. per-line-item penalties for “false records or statements” under §3729(a)(1)(B). Future cases that properly preserve and brief the question could shape significant penalty exposure.

Conclusion

The Seventh Circuit’s opinion delivers a straightforward, text-driven rule: AMP is the price the manufacturer actually realizes, and that includes price appreciation clawed back from wholesalers after list price increases. Price appreciation credits are not bona fide service fees where value is passed to pharmacies and the manufacturer is the ultimate payee. On this record, Lilly’s exclusions were false as a matter of law; the jury’s findings on scienter and materiality were supported by ample evidence; and the district court’s succinct materiality instruction was correct.

Beyond the immediate affirmance of a substantial FCA judgment, the opinion clarifies important architecture for FCA analysis in complex regulatory programs: falsity is objective; scienter is subjective; materiality is holistic but stringent; “reasonable assumptions” cannot override clear statutory mandates; and government silence does not cleanse noncompliance. For manufacturers, payers, and counsel, the message is practical and urgent: align AMP methodologies with price realized, rigorously document and review assumptions, and elevate transparency in interactions with CMS when billions in public funds and core program metrics are at stake.