“AMP Means the Price Actually Realized”: Seventh Circuit Rejects Bona Fide Service Fee Treatment of Price-Increase Clawbacks and Affirms FCA Liability

Introduction

In United States, et al., ex rel. Ronald J. Streck v. Eli Lilly and Company (Nos. 23-2134, 23-2216, 23-2958, 23-3035, 24-1352, & 24-1884), decided September 11, 2025, the Seventh Circuit (Judge Kolar, joined by Judges Ripple and Jackson-Akiwumi) affirmed a jury verdict finding False Claims Act (FCA) liability against Eli Lilly. The ruling resolves, as a matter of law, a long-running question in Medicaid Drug Rebate Program (MDRP) disputes: whether manufacturer “Average Manufacturer Price” (AMP) must reflect post-sale price-increase credits—often called “price appreciation credits” or “clawbacks”—that wholesalers remit to manufacturers under fee-for-service distribution arrangements. The court’s answer is unequivocal: yes. AMP must capture the price the manufacturer actually realizes, which includes later price-increase value clawed back from wholesalers and ultimately passed through to pharmacies.

The case arises from Lilly’s shift in 2005 to a fee-for-service wholesaler model. Lilly paid wholesalers a distribution fee for services and, if Lilly raised a drug’s list price before the wholesaler resold inventory, Lilly “clawed back” the incremental price appreciation on the in-channel inventory. From 2005 to 2017, Lilly excluded these price-increase values from its AMP, treating them as part of excludable “bona fide service fees.” Relator Ronald Streck alleged this depressed AMPs, lowered rebate obligations, and produced false submissions under the FCA. A jury agreed, awarding $61,229,217 in single damages (trebled to $183,687,651).

On appeal, Lilly challenged: (1) falsity (arguing its interpretation of AMP was reasonable and the regulatory scheme ambiguous); (2) scienter (contending it lacked the requisite knowledge); and (3) materiality (claiming the misstatements were not capable of influencing government payment decisions). Streck cross-appealed on the number of FCA violations, seeking to count each false drug-specific AMP as a separate violation rather than one violation per quarterly submission.

Summary of the Opinion

Falsity (de novo): The court held Lilly’s AMP submissions were false as a matter of law. AMP is “the average price paid to the manufacturer,” which includes later adjustments that affect the price actually realized. Price-increase clawbacks are not bona fide service fees; they are passed through to pharmacies and are not “fees paid by the manufacturer.” Excluding them contravened the plain text, structure, and purpose of the MDRP.
Scienter (jury verdict affirmed): The jury reasonably found at least reckless disregard. Objective unreasonableness of Lilly’s position was probative; internal documentation was lacking; certifying executives disclaimed knowledge; and Lilly’s communications to CMS were strategically opaque (a fulsome 2011 “assumptions” letter sent via a channel CMS said it would not review, contrasted with a thin 2013 audit footnote).
Materiality (jury verdict affirmed): Accurate AMPs are central to Medicaid rebates; the misstatements deprived the government of over $60 million while Lilly accumulated over $600 million from price increases. Continued payment by the government did not defeat materiality under Escobar’s holistic test. The court also approved the district court’s materiality jury instruction tracking the statutory definition.
Cross-appeal on counting violations (dismissed): The court declined to reach whether each individual AMP within a quarterly submission is a separate FCA violation; the issue was not preserved and remains unsettled in the case law.

Key Issue and Holding

The Seventh Circuit’s central holding is that, for MDRP purposes, “AMP means the price actually realized,” which includes price increases recouped from wholesalers after the initial sale and passed through to pharmacies. Price appreciation credits/clawbacks are not excludable bona fide service fees under § 1396r-8(k) or CMS’s rules. Accordingly, excluding them rendered Lilly’s AMP submissions false as a matter of law and supported FCA liability.

Analysis

1) Precedents and Authorities Cited

Universal Health Services, Inc. v. Escobar (579 U.S. 176): The court relied on Escobar’s materiality framework, emphasizing a holistic, demanding standard focused on whether the misrepresentation goes to the “essence of the bargain.” Here, AMP accuracy is core to the MDRP’s cost-sharing design, analogous to Escobar’s discussion of conditions that truly matter to payment.
United States ex rel. Schutte v. SuperValu Inc. (598 U.S. 739): While SuperValu addressed scienter, it framed the analysis around the defendant’s subjective beliefs rather than an “objectively reasonable” interpretation. The Seventh Circuit used SuperValu to confirm that apparent facial ambiguity does not foreclose scienter and that objective unreasonableness is probative of recklessness or deliberate ignorance.
United States ex rel. Heath v. Wisconsin Bell, Inc. (7th Cir. 2025): The court analogized AMP’s role to the “lowest corresponding price” requirement in telecom subsidies for schools and libraries. In both programs, compliance with a price-based metric is tethered directly to how much the government pays. Violations therefore go to the essence of the bargain and are material.
United States ex rel. Lamers v. City of Green Bay (7th Cir. 1999): Lilly invoked Lamers to argue that reasonable differences in legal interpretation cannot be “false.” The court distinguished Lamers: here the interpretation was not reasonable in light of the plain text, purpose, contract terms, and regulations.
United States ex rel. Yannacopoulos v. General Dynamics (7th Cir. 2011): The court treated falsity as an objective, textual question informed by contract and statutory interpretation—whether the submissions contradicted the contract/regulatory terms—rather than a reasonableness safe harbor.
Statutory and regulatory framework: 42 U.S.C. § 1396r-8 (MDRP), including the definition of AMP; the MDRP agreement requiring adjustments when “cumulative discounts or other arrangements subsequently adjust the prices actually realized”; CMS’s 2007 and 2016 rules defining “bona fide service fees” (and indicating price appreciation credits are not bona fide fees); ACA amendments codifying bona fide fee exclusions and pass-through limitations; 42 C.F.R. § 447.512(b) (Medicaid payment pegged to pharmacies’ “usual and customary” prices).
Third Circuit’s unpublished Allergan (2018): The Seventh Circuit expressly disagreed with the non-precedential Third Circuit order that hesitated to treat “price” as cumulative absent temporal language. The Seventh Circuit grounded “price” in ordinary meaning—it can be paid over time—and stressed statutory purpose and coherence.
Other FCA principles: Durcholz (government knowledge may defeat scienter where there is explicit approval or collaboration); Spay (3d Cir.) (mere knowledge is insufficient absent approval); Care Alternatives (3d Cir.) (continued payment not dispositive of materiality); Bornstein and Krizek (on counting “claims” vs. “statements”)—illustrating unsettled law on penalties when a submission contains multiple false components.

2) The Court’s Legal Reasoning

a) Plain meaning, structure, and purpose: AMP is the price actually realized

The court applied straightforward textual and structural principles. By statute, AMP is the average price paid “to the manufacturer … by wholesalers.” The MDRP agreement and CMS guidance repeatedly require manufacturers to adjust AMP when “other arrangements” subsequently adjust “the prices actually realized.” In other words, AMP tracks what the manufacturer truly receives for the drugs—not just the initial invoice or the timing of cash flows. The fee-for-service contracts required wholesalers to remit the incremental value anytime Lilly raised prices before the wholesaler resold the product. That remitted value is part of the price Lilly realized.

The court illustrated with a simple hypothetical: Selling for $10 on Monday, raising to $11 before the wholesaler resells on Wednesday, and contractually recouping the $1 means Lilly realized $11—not $10. Treating AMP as only the initial price would permit absurd manipulation: Lilly could “sell” for $1 and immediately recoup $10 via clawback, yet report $1 as AMP. The court refused to read the statute to permit such gamesmanship, especially where it would defeat the MDRP’s cost-sharing purpose of aligning manufacturer rebates with rising market prices and the government’s reimbursement obligations.

b) AMP and “usual and customary” must cohere

Medicaid pays pharmacies for brand drugs based on the “usual and customary” price. The MDRP’s design presumes that as prices to the public rise, AMP-based rebates rise too. Lilly’s approach would decouple these levers: Medicaid would pay higher pharmacy prices while manufacturers underpay rebates by reporting a depressed AMP. The court emphasized this “harmonious whole” principle in statutory interpretation to reject interpretations that create gaps the program’s design was meant to eliminate.

c) Price-increase clawbacks are not “bona fide service fees”

The court held the clawbacks fail two core elements of the bona fide service fee test:

Pass-through prohibition: Bona fide service fees cannot be “passed on in whole or in part” to the wholesaler’s clients—i.e., retail pharmacies. But the entire premise of clawbacks was that wholesalers recouped the increased value from pharmacies by selling the inventory at higher prices, then remitted that incremental value to Lilly.
Paid by the manufacturer: Bona fide service fees must be paid by the manufacturer to the wholesaler for services. Clawbacks move in the opposite direction: wholesalers pay the manufacturer. From 2009 to 2016, Lilly even paid the full distribution fee and separately invoiced wholesalers for the price appreciation—flatly inconsistent with treating the appreciation as manufacturer-paid compensation.

The court acknowledged that compensation can be “in kind” but stressed the practical design and control here: Lilly unilaterally set prices and constructed the clawback mechanism to capture the higher resale value. That design cannot be shoehorned into the bona fide service fee exclusion.

d) Falsity as a question of law; “reasonable assumptions” are bounded by statute

Lilly’s fallback contention—that the Medicaid pricing regime is “impenetrable” and it acted under “reasonable assumptions”—failed on both fronts. First, falsity in FCA cases is an objective inquiry resolved by textual interpretation (statute, contract, and rule), not by deference to a defendant’s purported “reasonableness.” Second, the MDRP agreement and CMS guidance allow “reasonable assumptions” only “in the absence of specific guidance” and only if “consistent with the intent” of the statute and rules. The clawback exclusion flunked that test because it contravened the text, structure, and purpose of the MDRP. Permitting a “reasonable assumption” to swallow statutory design would invite “intentional twisting of language” for profit and impose an unrealistic drafting burden on the government.

e) Scienter: subjective knowledge or reckless disregard supported by the record

Applying SuperValu’s subjective-focus framework, the court found ample evidence for the jury to infer at least reckless disregard:

Lilly’s position was objectively unreasonable—probative of knowledge or recklessness.
Key certifying executives disclaimed knowledge of the basis for the AMP treatment and delegated decisions to a mid-level specialist, despite hundreds of millions of dollars at stake.
Lilly failed to keep contemporaneous documentation of the assumption for years, despite a contractual recordkeeping obligation.
When confronted by Streck’s 2011 public allegations, Lilly sent CMS a detailed “assumptions” letter by a channel CMS had told manufacturers not to use (and historically did not review), but later minimized the issue in a 2013 audit response footnote that merely restated the law rather than the company’s practice.
Internal materials treated clawbacks as revenue—reinforcing awareness that these sums were consideration for the drugs, not fees paid by Lilly for services.

The court reiterated that while government knowledge can, in some circumstances, negate scienter, it requires evidence of governmental approval or collaboration. Here, the record permitted a contrary inference: Lilly chose non-review channels, pared back disclosures in the audit response, and did not obtain explicit CMS approval before 2016.

f) Materiality: core to the MDRP’s bargain; continued payment not dispositive

The court held the AMP misstatements were material because they go to the “very essence of the bargain”—the MDRP’s mechanism for making manufacturers share in rising drug costs. The misstatements caused large dollar differentials, and both the MDRP agreement and certification language treated compliance with AMP requirements as a condition of payment. Under Escobar, continued payment is “very strong evidence” of immateriality only where the government has “actual knowledge” of the violation and continues to pay anyway. Here, the government’s awareness and motives were not clear-cut, and practical factors (e.g., protecting beneficiaries) could explain continued program operation. The court also approved a materiality jury instruction that tracked the statutory definition—“natural tendency to influence” or “capable of influencing”—observing that Escobar’s factors are non-dispositive and that simple, accurate instructions often best guide juries.

g) Cross-appeal on the number of violations: unpreserved and unsettled

Streck argued that each false AMP within a quarterly submission constitutes a separate violation (with significant penalty consequences). The court declined to reach the issue due to preservation defects and an undeveloped record. It noted that appellate authority is divided on whether multiple false statements within one request count separately and left the question for another day.

3) Impact and Implications

a) For drug manufacturers and MDRP compliance

Inclusion of price appreciation in AMP is mandatory: Manufacturers must include price-increase “clawbacks” (price appreciation credits) when computing AMP. Treating them as bona fide service fees is not defensible because they are not manufacturer-paid and are passed through to pharmacies.
“Reasonable assumptions” are narrow and must be documented: The safe harbor for assumptions is confined to true gaps and must align with statute and purpose. Manufacturers should contemporaneously document assumptions, legal bases, and internal approvals; absent records undermine good faith and heighten scienter risk.
Executive certifications carry real risk: CEO/CFO certifications without grounding in documented analyses create exposure. Governance should ensure pricing personnel escalate major interpretive calls and that counsel vet, memorialize, and periodically revisit them.
Audit and agency communications matter: Selective or opaque disclosures (e.g., burying key practices in audit footnotes or using non-review channels) will count against scienter and materiality defenses. If seeking agency feedback, use approved channels, seek meetings, and document outcomes.
Retrospective exposure: Although Lilly adjusted practice by April 2016 following CMS’s rulemaking and meeting, the court’s reasoning applies throughout 2005–2017 and beyond, anchored in statutory text and the MDRP agreement. Companies with similar past practices face heightened relator/DOJ scrutiny.

b) For FCA litigation

Falsity is an objective, text-driven question: Defendants cannot defeat falsity merely by positing a “reasonable” reading. If the statute/contract/regulation is clear, courts may resolve falsity on summary judgment.
SuperValu’s scienter standard bites: Subjective awareness or reckless disregard can be inferred from objectively unreasonable positions, missing documentation, and stratified communications with agencies.
Escobar materiality remains holistic: Program design and the “essence of the bargain” are powerful indicators of materiality. Continued payments do not automatically negate materiality, especially absent clear evidence of actual knowledge and acquiescence.
Jury instructions on materiality: Pattern instructions that track the statutory definition are sufficient; courts need not recite Escobar’s factor list.
Government knowledge defense is limited: Mere awareness is not enough; proof of explicit approval or collaborative problem-solving is needed to erode scienter or materiality.

c) Regulatory governance

Agency silence is not a safe harbor: The court criticized CMS’s practice of refusing to review “reasonable assumption” letters, remarking that this posture risks “rulemaking by regulatory prosecution” and may cost taxpayers. Manufacturers should not treat silence as approval.
Potential for further guidance: Expect continued rulemaking or sub-regulatory guidance reinforcing that price appreciation credits are not bona fide service fees and emphasizing documentation of AMP methodologies.

d) Inter-circuit dynamics

The Seventh Circuit expressly parts ways with a non-precedential Third Circuit order (Allergan 2018) that hesitated to read “price” as cumulative. Later district decisions within the Third Circuit have already moved toward the Streck view. While not a formal split (given Allergan’s posture), the Seventh Circuit’s opinion is a forceful textual and purposive roadmap likely to influence other circuits and district courts.

e) Counting violations and penalties—preservation lessons

Unsettled law: Courts differ on whether each false line-item/statement within a submission creates a separate violation or whether the “claim” is the entire request for payment. The Seventh Circuit declined to decide the issue without proper preservation.
Practical tip: Litigants seeking line-item penalties should cleanly preserve the issue: propose specific jury instructions and verdict forms; proffer summary exhibits that map items to statutory subsections; and squarely brief the distinction between “claims” (§ 3729(a)(1)(A)) and “statements/records” (§ 3729(a)(1)(B), (G)).

Complex Concepts Simplified

Average Manufacturer Price (AMP): Think of AMP as the average price the manufacturer actually gets paid for a drug when selling into the retail pharmacy channel. If a manufacturer later recoups extra money for that same unit (because it raised the list price before the wholesaler resold it), that extra money still counts—the manufacturer ultimately got more for that unit.
Price-increase “clawbacks” / price appreciation credits: If a drug’s price goes up after the wholesaler buys it but before the wholesaler sells it to a pharmacy, the wholesaler must pay the manufacturer the difference for the units in stock. These are not “fees” paid by the manufacturer for services—the cash flows run the other way, and the increased cost is passed along to pharmacies.
Bona fide service fees: These are legitimate payments by the manufacturer to wholesalers (or pharmacies) for services the manufacturer would otherwise have to perform (e.g., storage, distribution). They are excludable from AMP. But they must be paid by the manufacturer and cannot be passed through to the wholesaler’s customers (pharmacies).
Materiality under the FCA: A false statement is “material” if it is the kind of thing that could influence the government’s decision to pay or the amount it pays. Here, since AMP directly drives rebate amounts, accuracy is material.
Scienter (knowledge): The FCA requires proof the defendant knew the statement was false, was deliberately ignorant of the truth, or recklessly disregarded the truth. It’s not enough to be merely negligent. But taking an objectively unreasonable position without documentation, and obscuring key facts, can support a finding of reckless disregard.

Conclusion

The Seventh Circuit’s opinion delivers a crisp doctrinal message: common sense and plain language control. Under the MDRP, AMP means the price a manufacturer actually realizes, and that includes price-increase amounts clawed back from wholesalers and ultimately paid by pharmacies. Treating those amounts as excludable bona fide service fees misreads both text and purpose. The court’s treatment of falsity as a purely objective, text-driven question, its application of SuperValu’s scienter principles, and its Escobar-grounded materiality analysis together fortify FCA enforcement in price-based public programs.

For manufacturers, the decision underscores the imperative to align pricing methodologies with statutory design, to document “reasonable assumptions” rigorously and contemporaneously, and to ensure that executive certifications rest on robust, vetted analyses. For practitioners, it clarifies that agency silence and ambiguous channels of communication are not safe harbors; that materiality instructions tracking the statute are sound; and that counting-violation theories must be preserved with precision.

In short, the court ensures that rising drug prices borne by Medicaid are accompanied by commensurate manufacturer rebates. Hypertechnical parsing cannot be used to sever that linkage. This is a significant step toward coherence and fairness in the MDRP, with ripple effects across FCA litigation and pharmaceutical pricing compliance.