Merck agreed Thursday to pay more than $650 million to settle claims that it overcharged Medicaid programs for four drugs, including Vioxx and Zocor, from 1997 to 2001. Merck was also accused of having paid illegal kickbacks to induce doctors to prescribe its drugs.

The settlement covers two cases, in Philadelphia and New Orleans, originally filed by whistleblowers and later joined by the Justice Department and 49 states as well as the District of Columbia.

In a statement, Attorney General Michael Mukasey called the settlement "one of the largest health-care fraud settlements ever achieved by the Justice Department."

Federal law requires drug companies to report their "best prices" and other cost information to the government to ensure that Medicaid enjoys the same discounts as other drug purchasers.

An exception allows manufacturers to exclude discounts that are "nominal" in amount. Merck improperly characterized the prices it offered to hospitals to boost sales as nominal discounts.

Merck said that the settlements "do not constitute an admission by Merck of any liability or wrongdoing" and added that the company's pricing and marketing practices were "consistent with all applicable regulations and contracts."

Merck is facing a litigation maelstrom of late: Last November, it agreed to pay $4.85 billion to settle thousands of product-liability lawsuits over its painkiller Vioxx. In December, Merck said it would take a $670 million charge in the fourth quarter of 2007 in anticipation of these settlements, which, with interest, comes to $671 million.

The company's fourth-quarter release flagged the congressional and state investigations it is facing over the sales and promotion of Vytorin and also said the drugmaker has been served with "approximately 50 class actions" over Vytorin and Zetia since mid-January 2008. (This gem was first uncovered by the Wall Street Journal's health blog.)

Today's settlement came about through a "first-ever" collaboration between federal prosecutors, the states, and the plaintiffs' lawyers representing the whistleblowers, according to Steven H. Cohen, a Chicago lawyer and co-founder of the Whistleblower Action Network.

Cohen's client, Dean Steinke, had worked in the pharmaceutical industry for 11 years before becoming a district sales manager for Merck in Michigan. Steinke's whistleblower case was filed under seal in Philadelphia in 2000.

"At that time, our theory on nominal price was an innovative theory that we were promoting," Cohen said.

With the federal government's cooperation, Steinke filed a whistleblower case under the Nevada whistleblower statute in April 2005, with state prosecutors eventually intervening.

"Merck challenged the underlying basis of the case, and we got a landmark decision from the federal judge in Nevada," Cohen says. "It changed the entire dynamics of the case."

Cohen and his co-counsel have created a website devoted to the case, calling it the new model for whistleblower litigation.

Merck paid $399 million plus interest to settle the Medicaid rebate claims and allegations that Merck made excessive payments to doctors, disguised as "training," "consultation," or "market research," to prescribe its products.

Steinke will receive $44.69 million from the federal share of the settlement and another $23.5 million from the states.

Merck paid another $250 million plus interest to settle the Louisiana case, originally filed by a New Orleans physician, which involved discounted prices for the heartburn drug Pepcid when it was available only by prescription.