The settlement with Merck also resolves allegations that the company paid improper inducements to doctors to prescribe the cholesterol drug Zocor and the painkiller Vioxx.
Drug companies are required to report to the government the lowest price for its product to ensure that Medicaid programs get the benefit of the same discount. Merck, however, was hiding the steep discounts it gave to hospitals by reporting higher prices to the government, prosecutors said.
From 1997 to 2001, Merck also gave money and perks to doctors and other health care professionals to entice them to prescribe Merck drugs, a practice the government called excessive.
Merck allegedly offered deep discounts for the two drugs if hospitals used large quantities of those drugs in place of competitors' brands, according to a state from the Justice Department.
Merck agreed Thursday to pay $399 million plus interest to settle the Medicaid Rebate as well as the kickback allegations.
"Not only is the combined recovery in these two cases one of the largest healthcare fraud settlements ever achieved by the Justice Department," said Attorney General Michael B. Mukasey, "it reflects our continuing effort to hold drug companies accountable for devising pricing schemes that deliberately seek to deny federal health care programs the same lower prices for drugs that are available to other commercial customers."
The only state not involved in the settlement is Arizona.
In a separate suit filed by a New Orleans physician, it's alleged that Merck had established a marketing scheme in which it provided substantially reduced prices for its heartburn drug Pepcid once the hospitals agreed to primarily use the drug instead of a competitor's.
Merck allegedly offered these incentives to hospitals in order to obtain the benefit of spillover business when patients would continue to purchase Pepcid once he or she was discharged.
Merck agreed to pay $250 million plus interest to settle these and other allegations.
U.S. Attorney Patrick Meehan was joined at the news conference by officials with the Department Of Health and Human Services Office of the Inspector General and representatives from the state Attorneys General in Delaware, Illinois, Massachusetts and Nevada.