The complaint alleges as follows: Nursing homes provide nursing
care and prescription drugs to residents. Nursing home residents
receive prescription drug benefits from Medicare Part A, Medicaid,
private insurance, or Medicare Part D (as of January 1, 2006). In
order to provide prescription drugs to residents, nursing homes
need reliable on-site, in-house pharmacy services. The Pharmacy
Defendants provide such on-site, in-house "institutional pharmacy"
services pursuant to written contracts.
The nursing home pharmacy model is a sole provider approach.
That is, nursing homes typically select a single institutional
pharmacy - for example, Defendant Omnicare - to provide
prescription drugs to all of that nursing home's residents,
regardless of each patient's type of insurance (e.g.,
Medicare Part A, Medicaid, private insurance, etc.).
For nursing home patients covered by Medicaid, institutional
pharmacies generally submit claims to the government on a
About the case:
With respect to Medicare Part A, prior to July 1, 1998, Medicare
Part A reimbursed nursing homes for prescription drugs on an
"actual cost" basis, i.e., the institutional pharmacy
billed the nursing home for each prescription provided to each
patient, and the nursing home later recouped those costs from
Medicare through a cost-reporting process that permitted the
nursing homes to "true up" to their actual costs. In other words,
nursing homes "passed through" all prescription drug costs for Part
A patients to Medicare. Consequently, when making a choice
regarding which institutional pharmacy to use, nursing homes did
not focus on cost. Instead, they chose the pharmacy based on the
needs of their patients, and the quality of services provided by
the pharmacy. Relevant factors included, inter alia,
the breadth of the pharmacy's drug formulary (vis-à-vis the
prescription drug needs of the residents), whether the pharmacy
offered patient-centric services (e.g., maintaining
individual patient drug profiles, maintaining a battery of
emergency prescriptions, providing daily delivery services,
providing consultant services to assist doctors and nurses,
attending the nursing home's quality assurance and infectious
disease committee meetings, and providing in-service training to
nursing home employees) and certain logistical issues,
e.g., how far away was the pharmacy in the event that
additional emergency prescriptions were needed.
This payment system dramatically changed after July 1, 1998.
After that date, Medicare Part A began paying nursing homes a
"flat" or "bundled" rate to provide medical care and
prescription drugs to residents. Under this system, which remains
in effect today, nursing homes no longer are reimbursed on an
actual cost basis, and thus they can no longer pass-through
prescription drug costs to Medicare. Instead, the nursing homes
paid the institutional pharmacies directly for the cost of the
drugs - dollar-for-dollar - but were reimbursed a flat rate by
Medicare Part A regardless of the amount they actually spent on the
drugs. Accordingly, the nursing homes were incentivized to bargain
for the lowest available prescription drug prices.
Because the payment system changed, so did the factors which
influenced the nursing homes' choice regarding which institutional
pharmacy to select. Specifically, the nursing homes were now
primarily motivated to reduce the costs of prescription drugs, not
by the needs of their patients.
In response to this change in the incentive structure, the
Pharmacy Defendants created a kickback scheme which involved a
practice known as "swapping." Specifically, the Pharmacy Defendants
underpriced Medicare Part A drugs to nursing homes in
exchange for the opportunity to provide the same drugs, at a
higher cost, to the nursing home's Medicaid, Medicare Part D, and
privately insured patients. The Pharmacy Defendants knew it was
practically impossible for a nursing home to have more than one
institutional pharmacy because of the complex administrative burden
. From a business viewpoint, to compensate for the profit they were
losing when they charged nursing homes low prices for drugs to the
Medicare Part A patients, the Pharmacy Defendants relied on the
higher paying business generated from Medicaid and Medicare Part D
patients in order to operate at a profit.
This kickback scheme was successful due to the payer
demographics in nursing homes. In the average nursing home, the
prescription drug costs of approximately 10-15% of the patients are
covered under Medicare Part A. The other 85-90% of the prescription
drug costs are paid for by Medicaid, private insurers, and, as of
January 1, 2006, Medicare Part D (Medicaid represents the great
majority - more than 60% - of the remaining 85-90% patients).
Consequently, the Pharmacy Defendants could afford to lose profit
when the nursing home was the customer, because they would recover
that lost profit through Medicaid, Medicare Part D, and private
insurers where they were charging higher prices to more patients
for the same drugs. Essentially, the Pharmacy Defendants used the
taxpayer-funded Medicaid and Medicare Part D programs to subsidize
private discounts to nursing home owners.
This kickback arrangement implicates the Anti-Kickback Statute
("AKS"), and is not protected by the "discount safe harbor." In
addition to violating the AKS, the kickback arrangement violate the
drug pricing rules of the California State Medicaid Program, known
as Medi-Cal, by charging Medi-Cal higher prices for prescription
drugs than other comparable payers.