Two major drug companies agreed to pay $345 million in fines in the largest Medicaid fraud settlement ever. The federal government, 49 states and Washington, D.C., will split most of the settlement, with the states divvying up $147 million in amounts per state that will range from tens of milions to a few thousand. California, for instance, will receive $32.2 million; Maine, $2.5 million, and South Dakota, $260,000.

The cases against the two drug companies--Bayer and GlaxoSmithKline-- turned on the question of whether the companies were overcharging Medicaid for three popular drugs. The federal Prescription Drug Marketing Act requires that drug makers offer Medicaid the lowest price for their products. If they give someone else a better deal, they have to provide a rebate to Medicaid purchasers.

According to federal prosecutors, the firms engaged in "lick and stick schemes" with the Kaiser Permanente health organization. They offered Kaiser the drugs at a price below what they charged Medicaid. Kaiser put a different label on the drugs with a different drug- identification code, allowing the two companies to avoid millions of dollars in Medicaid rebates.

"There's been steady litigation in Medicaid drug issues for the last several years," says David Waterbury of the Washington State attorney general's office, one of three state negotiators in these cases. "It's not the first rebate case that has been prosecuted and it will not be the last."