AMP Must Include Price-Value Clawbacks: The Seventh Circuit’s plain-meaning rule for Medicaid rebate reporting and the limits of “reasonable assumptions” under the FCA

Introduction

In United States, ex rel. Streck v. Eli Lilly and Company, the Seventh Circuit affirmed a jury verdict finding that Eli Lilly violated the False Claims Act (FCA) by reporting artificially deflated Average Manufacturer Prices (AMPs) for Medicaid Drug Rebate Program (MDRP) purposes from 2005 to 2017. The case centers on a distribution model in which Lilly sold to wholesalers who later sold to pharmacies, while contractual “price increase value” (also referred to as “price appreciation credits” or “clawbacks”) required wholesalers to remit to Lilly the value of any manufacturer price increase that occurred before the wholesalers resold inventory. Lilly excluded these price increase values from AMP as “bona fide service fees.”

The opinion proceeds from a common-sense premise: when the price goes up before resell, and the manufacturer contractually receives that increase (in cash or by offset), the “average price paid to the manufacturer” for AMP must reflect the full amount realized—not just the initial invoice price. The court affirmed the district court’s legal ruling on falsity (Lilly’s AMP methodology was wrong as a matter of law) and upheld the jury’s findings on scienter and materiality. It also rejected relator Streck’s cross-appeal on counting the number of FCA violations as unpreserved.

Parties: Relator Ronald J. Streck brought a qui tam action on behalf of the United States against Eli Lilly. The government ultimately recovered $61,229,217 in underpaid rebates (trebled to $183,687,651), with the jury finding Lilly’s under-reporting material, and the Seventh Circuit affirming.

Summary of the Opinion

• Plain meaning controls: AMP equals the average price actually paid to the manufacturer, which, under Lilly’s contracts, included price increases recouped from wholesalers after initial sale but before resale to pharmacies.
• Bona fide service fee exclusion does not apply: “Price increase value”/“price appreciation credits” are not bona fide service fees, because they are (1) passed through to pharmacies/customers and (2) not fees paid by the manufacturer to wholesalers.
• Falsity as a matter of law: Lilly’s AMP reports were legally false; “reasonable assumptions” cannot override plain statutory/regulatory meaning or the program’s evident purpose.
• Scienter upheld: A reasonable jury could find at least reckless disregard or deliberate ignorance, given Lilly’s lack of contemporaneous documentation, CEO/CFO certifications without understanding the methodology, an unsolicited 2011 “assumptions letter” sent by a channel CMS expressly said it would not review, and a minimal 2013 audit-footnote disclosure that obscured the actual treatment.
• Materiality affirmed under Escobar: AMPs sit at the core of the MDRP. The under-reporting diverted over $60 million from public coffers while Lilly realized over $600 million from price increases; this went to the “essence of the bargain.” Government payment despite awareness is not dispositive.
• Jury instruction on materiality: The district court correctly used the statutory definition (“natural tendency to influence”) without layering Escobar’s non-dispositive factors into the charge.
• Cross-appeal on penalties per violation: The court declined to decide whether each drug-level AMP entry in a quarterly submission constitutes a separate violation because Streck did not preserve that precise argument; the legal landscape remains unsettled.

Analysis

Precedents and Authorities Cited

• MDRP/AMP Framework and Agency Rules:
  • 42 U.S.C. § 1396r-8: AMP is the “average price paid to the manufacturer … by wholesalers” (and related architecture for rebate calculations).
  • CMS 2007 rule (72 Fed. Reg. 39,142) and 2016 rule (81 Fed. Reg. 5,170): define “bona fide service fees,” exclude fees passed through to pharmacies, and indicate that “price appreciation credits” are generally not bona fide service fees.
  • ACA amendments (2010): codify bona fide service fee exclusions and reinforce pass-through prohibitions (42 U.S.C. § 1396r-8(k)(1)(B)(i)(II), (ii)).
• Statutory/Contract Interpretation:
  • BKCAP, LLC v. CAPTEC Franchise Trust (7th Cir.): plain meaning governs unless absurd.
  • Roberts v. Sea-Land; Griffin v. Oceanic; Brown & Williamson: statutes must be read coherently in context; avoid absurd results.
  • Exelon Generation Co. v. IBEW Local 15: same construction rules for regulations as for statutes.
  • D.C. Circuit concurrence (Northeast Hospital v. Sebelius): complexity of the code doesn’t create ambiguity in a specific provision.
• FCA Falsity, Scienter, Materiality:
  • Universal Health Services v. Escobar (2016): materiality is demanding and fact-specific; noncompliance can be actionable where it goes to the “essence of the bargain.”
  • United States ex rel. Schutte v. SuperValu Inc. (2023): scienter turns on subjective belief; objective reasonableness does not preclude FCA knowledge.
  • United States ex rel. Lamers (7th Cir. 1999): “knowingly lies” focus; but does not insulate unreasonable legal interpretations.
  • United States ex rel. Yannacopoulos (7th Cir. 2011): look to the contract/regulatory text to evaluate falsity.
  • Heckler v. Community Health Services (1984): those seeking public funds must know the law; “ostrich” recklessness is actionable.
  • United States ex rel. Heath v. Wisconsin Bell (7th Cir. 2024), aff’d (2025): materiality where misstatements directly affect costs in a program designed to keep prices low.
  • United States v. Molina Healthcare (7th Cir. 2021): size of price differentials supports materiality.
• Divergence with Third Circuit:
  • United States v. Allergan, Inc., 746 F. App’x 101 (3d Cir. 2018) (nonprecedential): read “price” as lacking temporal guidance; Seventh Circuit rejects this, emphasizing ordinary meaning and cumulative price realization.
  • United States ex rel. Streck v. Bristol-Myers Squibb (E.D. Pa. 2019): district court read the statutes as unambiguous in requiring inclusion of price-appreciation amounts in AMP.
• Counting Violations/Statutory Penalties:
  • United States v. Bornstein (1976): framework for causative acts under pre-amendment FCA.
  • Krizek (D.C. Cir. 1997); Hays (8th Cir. 2003); Woodbury (9th Cir. 1966): some circuits focus on the act of presentment.
  • Saavedra (2d Cir. 2016); Farfield (3d Cir. 2021 n.25): others entertain penalties per false record/statement.

Legal Reasoning

1) Falsity: AMP must capture the full price realized, including clawbacks

The statute defines AMP as the “average price paid to the manufacturer.” The MDRP agreement required manufacturers to adjust AMP when “cumulative discounts or other arrangements subsequently adjust the prices actually realized.” CMS’s rules likewise direct that AMP reflect the actual price realized and allow reasonable assumptions only in the absence of guidance and only when consistent with the statute’s intent.

Applying a simple hypothetical, the court asked: if Lilly sells at $10, raises the price to $11 before the wholesaler resells, and contractually collects the $1 difference, did Lilly realize $10 or $11? The answer is $11. Recoupment timing is irrelevant: the “price” is the consideration paid, and it can be paid over time. The contrary reading produces absurd results (e.g., report $1 AMP while collecting $11 via designed clawbacks), undermining MDRP’s core function to rebalance public and manufacturer costs when prices rise.

The attempt to cabin “other arrangements” to reductions only (not increases) failed both textually and structurally. The MDRP’s logic ties government outlays (based on pharmacies’ “usual and customary” prices) to manufacturer rebates (based on what manufacturers actually receive). If AMP reflected only initial invoices, while pharmacies’ prices and manufacturers’ recoupment climb with increases, the system would de-couple and the public fisc would overpay. The court thus held Lilly’s AMP treatment legally false.

2) Bona fide service fees: Why price-appreciation credits fail the test

The bona fide service fee exclusion is narrow: it covers manufacturer-paid compensation for legitimate, itemized services that the manufacturer would otherwise procure, but not amounts passed on (in whole or part) to pharmacies or amounts not paid by the manufacturer. Price increase value is neither:

• Passed through: The entire clawback concept presumes wholesalers recoup the higher price by charging pharmacies more; that “value” is then remitted to the manufacturer. This is quintessential pass-through.
• Not paid by the manufacturer: From 2009–2016 in particular, wholesalers literally paid Lilly cash for the price increase value. Even when offset against the distribution fee, the incremental dollars came from pharmacies’ higher purchase prices, not from Lilly paying wholesalers.

The court stressed the exploitability of Lilly’s theory: manufacturers could set artificially low initial prices and then immediately raise them, recouping the increase while reporting only the initial price as AMP—creating a gaping loophole contrary to the statute and rules. The 2016 rule’s commentary that “price appreciation credits” are generally not bona fide service fees reinforced the point, but the court’s falsity determination rests on statutory text, contract, regulatory history, and program purpose throughout 2005–2017.

3) Scienter: A fact-bound affirmance grounded in unreasonable methodology, non-documentation, and “ostrich” conduct

Under the FCA, knowledge includes actual knowledge, deliberate ignorance, or reckless disregard. While Lilly argued regulatory ambiguity, the Seventh Circuit emphasized SuperValu: subjective state of mind controls, and facial ambiguity does not defeat scienter. The record supported the jury’s finding that Lilly at least recklessly disregarded the risk that its AMP methodology was unlawful:

• No contemporaneous documentation from 2005–2011 explaining the clawback exclusion, notwithstanding the MDRP agreement’s recordkeeping obligation.
• Executives (including certifiers) lacked understanding of the methodology and relied on a single middle manager; Lilly chose not to pursue an advice-of-counsel defense.
• Internal accounting treated clawbacks as revenue, with senior-leadership presentations showing hundreds of millions of dollars—yet no corresponding AMP treatment.
• The 2011 “assumptions letter” candidly described the approach but was sent through a channel CMS explicitly told manufacturers not to use (and not to expect review). The 2013 audit response mentioned clawbacks only in a conditional footnote, essentially restating legal standards instead of disclosing the actual practice and its effect.
• Only after a 2016 CMS meeting (and a 2016 final rule cautioning against price-appreciation credits as bona fide fees) did Lilly change course and begin including increases in AMP, backdating to April 1, 2016.

The jury could view this as “ostrich” conduct and deliberate obfuscation: when Lilly knew CMS would not read (2011), it was detailed; when it knew CMS would read (2013), it offered the most parsimonious gloss.

4) Materiality: Goes to the essence of MDRP’s cost-control bargain

Materiality requires that a misrepresentation have a “natural tendency to influence” payment. Here, AMPs are the backbone of the rebate computation; lower AMPs reduce rebates while the government’s reimbursement to pharmacies tracks “usual and customary” prices. The misalignment created by excluding the clawbacks effectively shifted costs to the government as prices rose.

The court analogized to Wisconsin Bell’s “lowest corresponding price” regime: where noncompliance directly inflates what government pays or decreases what it recoups in a program designed to control costs, the misstatement goes to the essence of the bargain and is material. Although CMS continued to pay after the 2016 meeting, that fact is not dispositive under Escobar; there may be operational reasons (avoiding harm to beneficiaries), and Lilly did not lay out the magnitude of the historical shortfalls for CMS in real time. The scale (over $60 million in underpaid rebates vs. over $600 million in price increase realizations) strongly supported materiality.

5) Jury instructions on materiality: The statutory definition sufficed

The district court instructed the jury using the FCA’s statutory definition of materiality. The Seventh Circuit approved, emphasizing that Escobar supplied factors for courts to consider but did not convert them into mandatory elements for jury charges. “Less is more” is often appropriate for multifactor concepts; the instruction correctly stated the law.

6) Cross-appeal on counting violations: Not preserved; the question remains open

Streck sought penalties per false AMP entry, rather than per quarterly submission. The court declined to reach the merits, finding the argument unpreserved and entangled with evidentiary rulings. It noted the broader split among circuits: some count per presentment; others allow per false record/statement. The Seventh Circuit left the issue for another day and case.

Impact

• AMP reporting across the industry:
  • Manufacturers that used price-appreciation “clawbacks” must include those amounts in AMP. The decision reaches back through the 2005–2017 period on plain-meaning grounds; it is not limited to the 2016 rule.
  • Bona fide service fee exclusions are narrowly construed. Any compensation “passed through” to pharmacies, or not paid by the manufacturer to wholesalers for services, cannot be excluded from AMP.
• FCA exposure and compliance:
  • “Reasonable assumptions” are not a safe harbor when they conflict with statute/regulation/contract text or the evident program purpose. Complexity elsewhere in Medicaid does not create ambiguity here.
  • Scienter proof is practical and documentary: executive certifications, contemporaneous records, internal accounting treatment, and the candor (or not) of regulatory communications matter greatly.
  • Government knowledge/payment does not automatically defeat materiality. Companies should not assume silence equals approval—particularly where the methodology distorts a core program metric.
• Litigation landscape:
  • The Seventh Circuit expressly diverges from the Third Circuit’s nonprecedential Allergan approach, grounding its rule in ordinary meaning and program structure. Expect forum selection and potential circuit development on AMP issues until a Supreme Court or regulatory resolution harmonizes approaches.
  • Relators may pursue similar FCA theories wherever price-appreciation credits or analogous mechanisms were excluded from AMP.
• Program administration:
  • The court criticized CMS’s posture of refusing to review “reasonable assumptions” letters, warning that this invites “rulemaking by prosecution.” Expect more structured channels or guidance for manufacturer assumptions and more careful audit dialogue in the wake of this ruling.
• Penalties counting:
  • The Seventh Circuit left unresolved whether each drug-level AMP within a quarterly submission is a separate “record or statement” violation or whether a submission is a single violation. Defendants and relators should preserve this issue with precision at trial.

Complex Concepts Simplified

• Medicaid Drug Rebate Program (MDRP):
  • A federal-state scheme: in exchange for Medicaid coverage of a brand drug, the manufacturer pays quarterly rebates to offset costs.
  • Rebates are driven in part by AMP—higher AMPs generally mean higher rebate obligations.
• Average Manufacturer Price (AMP):
  • “Average price paid to the manufacturer” for the drug by wholesalers (for retail pharmacy distribution).
  • Must reflect what the manufacturer actually realized, including post-sale adjustments that change the effective price (e.g., clawbacks of interim price increases).
• Bona fide service fees:
  • Manufacturer-paid fees for legitimate services (e.g., distribution, storage) that the manufacturer would otherwise procure.
  • Cannot include amounts “passed through” to pharmacies/customers or amounts not “paid by” the manufacturer to the wholesaler.
• Price appreciation credits / “clawbacks”:
  • When a manufacturer raises a drug’s list price after a wholesaler has purchased inventory but before resale, contracts may require wholesalers to remit the difference back to the manufacturer.
  • These amounts are part of the price the manufacturer realizes and must be included in AMP.
• “Usual and customary” price:
  • The price a pharmacy charges the public; Medicaid reimbursement to pharmacies for brand drugs is capped by this and other measures.
  • Program design expects AMP and “usual and customary” to move in tandem so costs remain balanced.
• FCA elements in play:
  • Falsity: A statement is false if it contradicts statutory/contract/regulatory requirements; here, AMP submissions were legally false.
  • Scienter: Actual knowledge, deliberate ignorance, or reckless disregard; “ostrich” behavior (burying one’s head in the sand) can satisfy recklessness.
  • Materiality: A misstatement “has a natural tendency to influence” payment decisions; core metrics (like AMP) that drive payment or rebates are inherently material.
• “Reasonable assumptions”:
  • Permitted only when guidance is truly absent and only if consistent with the statute’s text and purpose. They are not a license to adopt interpretations that undermine the MDRP’s core design.
• Counting violations and penalties:
  • Unsettled whether per-submission or per-entry (record/statement) counting applies. Preservation and pinpointed objections are critical.

Practical Compliance Takeaways

• Include price-appreciation credits in AMP. Treat any mechanism by which the manufacturer recoups interim increases—whether by offset or cash—the same way for AMP reporting.
• Police the bona fide service fee boundary: payments must be manufacturer-to-wholesaler for services and not passed through to pharmacies; avoid relabeling price recoupments as fees.
• Document assumptions contemporaneously and elevate high-dollar methodology choices to legal and compliance leadership; ensure certifying officers understand and can defend the approach.
• Communicate candidly with CMS through accepted channels; do not assume silence or refusal to opine equals approval, especially on decisions with nine-figure impact.
• Audit internal accounting treatment for consistency: recognizing clawbacks as revenue while excluding them from AMP is a red flag for FCA scienter.
• Preserve litigation positions on penalties: if you intend to argue per-entry (or per-submission) counting, make the record clearly and repeatedly, including in jury instructions.

Conclusion

The Seventh Circuit’s decision delivers a clear rule with broad consequences: for AMP, “price” is what the manufacturer actually realizes, and that includes price increases recouped via clawbacks. The bona fide service fee exclusion does not swallow price appreciation amounts, especially where the dollars come from pharmacies through wholesalers rather than from the manufacturer. Regulatory complexity is no refuge where the text and structure are clear; “reasonable assumptions” cannot dismantle the MDRP’s core balancing of public and manufacturer costs.

On the FCA’s mental state and materiality elements, the opinion underscores familiar but potent lessons: contemporaneous records, executive certifications, and candid regulatory engagement matter; and misstatements that distort central program metrics tend to be material, even if the government continues paying in the short term. Finally, while the court left penalties counting for another day, it flagged an active split—reminding litigants to preserve those issues precisely. The case thus stands both as a substantive AMP precedent and a procedural guide for FCA practice.