August 29, 2006 Schering-Plough Corporation

Schering-Plough Corporation, together with its subsidiary Schering Sales Corporation, have agreed to pay $435 Million to settle allegations of Medicaid fraud involving Schering’s drugs Claritin Reditabs, a antihistamine, and K-Dur, which is used in treating stomach conditions.

The allegations of the case were that Schering was engaged in a scheme commonly known as “marketing the spread.”  Marketing the spread involves a drug manufacturing setting two prices for its drugs, the first being the actual price for which it sells it drugs to medical providers, and the second, being a false inflated price which it discloses to the federal government. 

When a doctor, hospital or other medical provider buys the manufacturer’s drugs for Medicare or Medicaid patients, they pay the actual (lower) price.  Then they bill Medicaid or Medicare for reimbursement, and Medicaid or Medicare reimburses the doctor or hospital at the falsely inflated price which the drug manufacture has provided to the government.  The doctor or hospital get to keep the difference between the two prices which is known as “the spread.” The greater the spread, the more profit the doctor makes, and the greater their incentive to buy drugs from that manufacturer.

The spread can be provide to the doctor by the Drug company in several ways.  First, they can merely sell the drugs to the doctor at a price lower than the price which the drug company provided to the federal government.  Alternatively, the drug company can have the doctors pay full price, but then give them rebates, in the form of partial refunds.  Finally, the drug company can simply charge the doctors full price for the drugs that it sells them, but also give the additional drugs for free.

In the Schering case, the allegations included, among other things, that Schering gave a major HMO free Clariton Redi-tabs to disguise a lower price which it was offering to the HMO to induce the HMO to buy drugs from Schering.

See U.S. Dept of Justice Press Release 8/29/06

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