Merck & Co. Inc. agreed yesterday to pay $671 million to settle allegations that it overcharged the Medicaid program and gave doctors junkets, dinners and other inducements to promote three of its drugs.

The payments stem from two settlements, announced yesterday by U.S. attorneys in Philadelphia and New Orleans, that together show Merck executives' offering low prices to hospitals to induce them to use its drugs heavily, and then failing to acknowledge those low prices to Medicaid, the health program for the poor, as required by law.

The cases also show the company's rewarding doctors with a panoply of favors, from lavish stays in exotic locales to payments for allowing salespeople to shadow them for a day.

The company's actions kept "costs artificially inflated," said U.S. Attorney Patrick Meehan, who announced the Philadelphia settlement yesterday. "That all trickles back to the taxpayer. That's all part of the increasing cost of prescription drugs. We all pay for that."

The government could have tripled the penalty, but chose to double it because of Merck's cooperation, Meehan said.

In a statement, the company did not admit wrongdoing and said the cases stemmed from a disagreement over complex Medicaid rules. The government had focused on sales violations from 1997 to 2001, and Merck noted that it had adopted new rules for its sales force in 2001 to prevent such problems even before it learned of the federal probe.

Merck agreed to pay $399 million plus interest to settle the Philadelphia case. Because the matter involved 49 states, New Jersey will get $7.4 million and Pennsylvania will get $8.5 million.

The firm will also pay $250 million to settle similar allegations in a separate lawsuit in Louisiana involving Pepcid, the firm's heartburn drug. That suit was originally brought by a doctor, William St. John LaCorte. With interest, the two settlements come to $671 million.

The case resolved yesterday in Philadelphia started with H. Dean Steinke, a Merck district sales manager in rural Michigan, who became a whistle-blower over the firm's marketing of its withdrawn pain reliever Vioxx and the anticholesterol drug Zocor. Steinke could not be reached yesterday.

His attorney, Mark Kleiman of Los Angeles, said his client began to doubt the company when he was asked to authorize a $75,000 payment to an HMO in 1999. The HMO complained that Zocor cost too much and threatened to remove the drug from its approved list.

Merck did not want to lower the price, because that would have lessened how much it could charge other payers, including Medicaid, Kleiman said. So, he added, the company disguised the payment as an education grant to the HMO.

After Steinke declined to authorize the payment, "his relationship with the company was never the same," Kleiman said.

Hospitals represent a key battleground for drug sales, because that is where patients often get started on a drug or shifted from a competitor's. The whistle-blower's suits accused Merck of trying to corner that business.

By law, Medicaid must get the lowest price for drugs. An exception, called "nominal pricing," enables the drug company to give lower prices to needy charities. Merck was suspected of giving better deals to hospitals than to Medicaid and not reporting those discounts to the government.

Merck's targeted Zocor program was called SAVE, giving discounts to high-using hospitals from April 1998 to March 2006, the settlement said. The Vioxx program was called VIP, and operated between October 2001 and September 2004 - when the drug was pulled from the market for links to heart problems.

This favorable treatment was bestowed upon 600 to 800 hospitals nationally, according to Assistant U.S. Attorney Viveka Parker and Virgina A. Gibson, chief of the office's civil division.

Kleiman, the whistle-blower's attorney, said hospitals were also getting up to 10,000 free Zocor pills in stock bottles in the late 1990s. They were typically sent directly to hospital departments, bypassing the pharmacies, to encourage the drug's use, he maintained.

The federal settlement details nine techniques sales representatives used to influence doctors. One was a "preceptorship" in which a salesperson would shadow the doctor around, supposedly to learn more about medicine. The doctors would get $300 for a half-day or $500 for a full day of this work, Kleiman said.

Another big effort was "tutorials" in which doctors were paid several hundred dollars to evaluate sales presentations by the company.

Doctors could be paid $1,000 or more to speak at dinners attended by other physicians. And the biggest prescribers got rewarded with junkets to resorts, Kleiman said.

Steinke, who pursued this case under the False Claims Act for seven years, will receive $44.7 million from the federal share and $23.5 million from the states' share. The act typically gives whistle-blowers a share of the savings to encourage them to come forward.

Read the settlement agreement at http://go.philly.

com/merckEndText

Contact staff writer Karl Stark at 215-854-5363 or kstark@phillynews.com.