One of the world's largest drug companies said Monday that it would reduce prices on some products paid for by the government in the wake of a trailblazing Medicaid fraud settlement finalized between the drugmaker and state and federal regulators.

Bayer Corp., a U.S. subsidiary of Bayer AG of Germany, would be the second major drug company to cut prices this year amid allegations that U.S. drug companies lied to the government about the wholesale prices of certain pharmaceuticals. The settlement, signed by Bayer last week, divides a $14 million payment by Bayer among 45 states, including $114,000 to the Illinois Medicaid program. In addition, it finalizes a five-year agreement under which the drugmaker is obligated to make thorough disclosures of the prices it sets and upon which the government bases it reimbursements.

More broadly, the settlement with Bayer is expected to serve as a model for similar arrangements for up to 20 drugmakers--including five in the Chicago area--that are still under investigation in the 4-year-old state and federal pricing fraud inquiry.

The Medicaid investigation is one of several pharmaceutical pricing inquiries undertaken since the early 1990s as regulators and policymakers grappled with a central flaw in the way key government programs pay for drugs. Such programs allow drugmakers to set the price higher than what many private-sector customers would pay.

Estimates of overpayments run in excess of $1 billion annually and may be especially troubling because of increasing political pressure on Congress to greatly expand drug coverage by Medicare, the federal insurer for nearly 40 million elderly and disabled people. The Bayer settlement was announced in September but did not take effect until 22 states with the most at stake approved the deal. The last two of the states, Illinois and California, signed off on the agreement late last month.

It is not clear how much Bayer will drop its prices and on how many drugs. Also unknown is how much those cuts will save taxpayers. Medicaid officials should see the new Bayer price list by the end of the month. The savings are expected to be significant.

In its settlement, Bayer did not admit wrongdoing, but agreed to the financial settlement and a more accurate reporting of prices. "I would anticipate that Medicaid prices would ultimately be cheaper," said Bayer spokesman Robert Kloppenburg. "The pricing is just being implemented now."

In the financial portion of the agreement, the biggest chunks of money, $2.8 million and $2.7 million, respectively, will go to Florida and New York, which operate two of the largest Medicaid programs in the country.

The settlement with Bayer grew out of a federal suit filed by a whistleblower in Florida in the mid-1990s that was eventually joined by the U.S. Department of Human Services' Office of Inspector General, the Justice Department and a coalition of state Medicaid Fraud Control Units. Bayer already has lowered prices for five drugs identified by investigators as having inflated prices. Those reductions are hefty: a 28 percent drop in charges for Kogenate, (a blood clotting agent) and an 86 percent cut in the cost of saline solution, which dropped from $11.14 to $1.53 per package, according to investigators.

The five Bayer drugs were on a list of 51 drugs made by more than 20 manufacturers for which investigators documented "a pattern of misrepresentation" that resulted in Medicaid overpaying for the products. Beginning in mid-2000, drugmakers agreed to provide new, substantially lower prices for those 51 drugs.

Despite the lower prices on the 51 drugs, however, not all states have cut reimbursements to providers. The State of Kentucky Medicaid program, for instance, is paying what investigators regard as inflated prices for the 51 drugs spotlighted in their probe. A Kentucky Medicaid spokesman said the agency received pressure from providers and was worried that they would stop carrying the drugs in rural areas of the state. Government investigators have argued that drugs were never intended to be a source of profit for pharmacists or doctors at Medicaid's expense. Profit is supposed to come from service charges like dispensing or injection fees.

Excerpts from an article by Andrew Zajac and Bruce Japsen, Chicago Tribune Staff Reporters Published August 14, 2001