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Court Allows False Claims Act Case Involving Janssen’s HIV/AIDS Drugs to Proceed

By Joy Clairmont

On May 31, 2017, the United States District Court for the District of New Jersey allowed relators’ False Claims Act (“FCA”) lawsuit against Janssen to proceed to litigation.  United States et al. v. Johnson & Johnson, et al., Civ. A. No. 12-7758, 2017 WL 2367050 (D.N.J. May 31, 2017).  Although claims against Janssen’s parent company, Johnson & Johnson, were dismissed, the Court denied Janssen’s motion to dismiss the lawsuit in all significant respects.  Id. *8.  The government had previously declined to intervene in the action, and the case will be litigated by relators’ counsel, Berger & Montague, P.C., and Cohn Lifland Pearlman Herrmann & Knopf LLP.

The lawsuit alleges that defendant Janssen purposely misrepresented, misbranded, and illegally marketed two potentially dangerous, expensive AIDS drugs – Intelence and Prezista – and paid kickbacks to certain physicians to influence them and others to prescribe these drugs. Defendant’s misleading marketing of Prezista concealed a dangerous side effect of the drug – elevated lipids – and falsely minimized the very serious risk of cardiovascular disease for HIV and AIDS patients. Defendant also aggressively and knowingly marketed Intelence off-label, for “treatment-naïve” patients, contrary to the label, as well as for once-daily use, which was directly contrary to its limited FDA approval for twice a day use.

In his opinion, Judge Michael A. Shipp held that relators’ complaint adequately pled “falsity” and “materiality,” required elements under the FCA.  2017 WL 2367050, *4-6. Further, the complaint satisfied the heightened pleading requirements for fraud under Rule 9(b) of the Federal Rules of Civil Procedure.  Id. *6-7.

Relying on the Third Circuit’s Petratos decision, the district court upheld allegations that use of a drug within its overall label class could still constitute false claims if the drug was not reasonable and necessary for specific patients:  “FDA approval does not per se render a drug ‘reasonable and necessary,’ but rather a drug ‘must also be ‘reasonable and necessary for the individual patient.’”  Id. *5.

The court found that materiality was satisfied by the allegations that there had been false certifications rendering the claims “ineligible for reimbursement.”  Id. *5-6.

Finally, the court followed established Third Circuit law in holding that a plaintiff need not plead specific false claims if their particularized allegations lead to a strong inference that claims were actually submitted.  Id. *6-7 (citing Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153 (3d Cir. 2014)).

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Circuit Court Endorses Tri-Partite Inquiry in Analyzing Medical Necessity Under the False Claims Act

By Joy Clairmont

On May 1, 2017, in United States ex rel. Petratos v. Genentech, Inc., 855 F.3d 481 (3d Cir. 2017), the United States Court of Appeals for the Third Circuit endorsed a tri-partite approach in analyzing the medical necessity theory of liability under the False Claims Act.  While the Third Circuit ultimately affirmed the lower court’s dismissal of the case, the Court’s three-step approach provided clarity as to how to analyze medical necessity under the False Claims Act.

The relator in Petratos alleged that the drug manufacturer, Genentech, suppressed data about the negative side effects of its oncology drug, Avastin, which in turn caused physicians to submit claims to Medicare that were not “reasonable and necessary.”  855 F.3d at 485.  The lower court dismissed the relator’s claim, reasoning that “medically ‘reasonable and necessary’ is a determination made by the relevant [government] agency, not individual doctors.”  Id. at 486.  The Third Circuit disagreed, and held that the medical necessity of an FDA-approved product is a “process involving the FDA, CMS, and individual doctors.”  Id. at 487 (emphasis in original).

Tri-Partite Medical Necessity Analysis

In reaching its holding, the Petratos Court noted the role of each entity involved in the tri-partite medical necessity analysis:

  • FDA – Whether the drug is FDA approved is one important consideration for CMS in determining whether it is “reasonable and necessary.” Id. at 487-88.
  • CMS – “[T]he ‘reasonable and necessary’ determination does not end with FDA approval. The claim at issue must also be ‘reasonable and necessary for [the] individual patient’ based on “accepted standards of medical practice and the medical circumstances of the individual case.” Id. at 487-88 (emphasis in original) (citing Medicare Benefit Policy Manual, ch. 15, §50.4.3).
  • Individual Physicians – Ultimately, CMS relies on the medical judgment of individual physicians in deciding whether to pay claims. Id. at 488.  The Court notes that “the doctors are best suited to evaluate each patient and determine whether a treatment is ‘reasonable and necessary.’” Id. at 489 (citation omitted).

The Court reasoned that from a “practical perspective” this three-part analysis “makes sense” and gave the following hypothetical example of a physician prescribing an FDA-approved drug for an on-label use that would still be considered medically unnecessary:

Avastin is approved by the FDA to treat patients with metastatic colorectal cancer and such prescriptions are reimbursable by CMS.  But if a doctor determined that a colorectal cancer patient had five hours to live and would best be treated with palliative care, then prescribing Avastin in that situation many not be “reasonable and necessary.”

Id. at 489.

The Circuit Court Affirmed Dismissal on Other Grounds

Although the Petratos Court disagreed with the lower court’s interpretation of the medical necessity standard, the Court ultimately affirmed the dismissal of the case on materiality grounds.  Id. at 489.  In Petratos, the relator did not dispute that, had the government known of the defendant’s suppression of adverse safety data, the government still would have paid the claims.  Id. at 489-93.  Consistent with the Supreme Court’s decision in Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the Petratos Court held that this concession was dispositive of the materiality analysis and that it doomed the relator’s claims.  Id.

The Precedential Effect of the Circuit Court’s Decision

The Petratos decision serves as binding precedent in the Third Circuit.  For example, on May 31, 2017, the United States District Court for the District of New Jersey denied defendant Janssen’s motion to dismiss, in part by relying on PetratosUnited States et al. v. Johnson & Johnson, et al., Civ. A. No. 12-7758, 2017 WL 2367050 (D.N.J. May 31, 2017).  Citing Petratos, the District Court for the District of New Jersey upheld allegations that use of a drug within its overall label class could still constitute false claims if the drug was not reasonable and necessary for specific patients:  “FDA approval does not per se render a drug ‘reasonable and necessary,’ but rather a drug ‘must also be ‘reasonable and necessary for the individual patient.’”  Id. at *5.

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History and Purpose of the Public Disclosure Bar

By Shauna Itri

Early Public Disclosure Bar

In the early 1940s, some enterprising individuals filed False Claims Act (“FCA”) actions based not on their own independent knowledge of a fraud but on information revealed in criminal indictments. S.Rep. No. 99–345, at 10–11 (1986).  This harmed the government because the FCA required the government to pay these relators, even though the government already knew about the fraud.

1943 Amendment to the Public Disclosure Bar

To counteract these “parasitic lawsuits,” Congress added a provision in 1943 that denied jurisdiction over FCA actions that were “based upon evidence or information in the possession of the United States, or any agency, officer or employee thereof, at the time such suit was brought.” 31 U.S.C. § 232(C) (1946). But this “government knowledge defense” had the unintended effect of also eliminating meritorious lawsuits, because courts strictly interpreted § 232(C) as barring FCA actions even when the government knew of the fraud only because the relator had reported it. U.S. ex rel. Moore & Co., P.A. v. Majestic Blue Fisheries, LLC, 812 F.3d 294, 298 (3d Cir. 2016).

1986 Amendment to the Public Disclosure Bar

“In 1986, Congress sought ‘[t]o revitalize the qui tam provisions,’” U.S. ex rel. Mistick PBT v. Housing Authority of City of Pittsburgh, 186 F.3d 376, 382 (3d Cir. 1999) (quoting U.S. ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1154 (3d Cir. 1191)), in an effort “to strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits,” United States ex rel. Zizic v. Q2 Administrators, LLC, 728 F.3d 228, 235 (3d Cir. 2013). As a result, Congress enacted 31 U.S.C. § 3730(e)(4)(A), which provides:

No court shall have jurisdiction over an action under this section based upon the public disclosure of allegations or transactions in a criminal, civil, or administrative hearing, in a congressional, administrative, or General Accounting Report, hearing, audit, or investigation, or from the news media, unless the person bringing the action is an original source (31 U.S.C. § 3730(e)(4)(A)).

31 U.S.C. § 3730(e)(4)(A) (the “Public Disclosure Bar”).

2010 Amendment to the Public Disclosure Bar

Congress amended the provisions of the public disclosure bar in 2010 as follows:

(A)  The court shall dismiss an action or claim under this section, unless opposed by the Government, if substantially the same allegations or transactions as alleged in the action or claim were publicly disclosed—

(i)   in a Federal criminal, civil, or administrative hearing in which the Government or its agent is a party;

(ii)   in a congressional, Government Accountability Office, or other Federal report, hearing, audit, or investigation; or

(iii)   from the news media, unless the action is brought by the Attorney General or the person bringing the action is an original source of the information.

(B)   For purposes of this paragraph, “original source” means an individual who either (i) prior to a public disclosure under subsection (e)(4)(a), has voluntarily disclosed to the Government the information on which allegations or transactions in a claim are based, or (2) who has knowledge that is independent of and materially adds to the publicly disclosed allegations or transactions, and who has voluntarily provided the information to the Government before filing an action under this section.

See 31 U.S.C. § 3730(e)(4) (2010).

Substantively, the 2010 amendments left the test for application of the public disclosure bar largely unchanged. Under either version, then, the public disclosure bar applies where: (1) information was publicly disclosed via a source listed in § 3730(e)(4)(A); (2) the public disclosure included an “allegation or transaction” within the meaning of the statute; and (3) the complaint is “based upon” or “substantially the same” as those disclosures of fraud. See Moore, 812 F.3d at 301.

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Bringing a False Claims Act Case Without Identifying Specific Claims to the Government

By Susan Schneider Thomas

We wrote earlier about the important holding in one of this Firm’s cases, U.S. ex rel. Groat v. Boston Heart Diagnostics Corp., 2017 WL 2533341 (D.D.C. June 9, 2017), regarding the responsibility of a medical laboratory to ascertain whether lab tests ordered by physicians are medically necessary. That opinion also includes helpful language regarding the degree of specificity and particularization of actual claims required under the False Claims Act (“FCA”).

Allegations of Unnecessary Lab Tests

The case arose when a medical doctor employed at a health insurance company filed a FCA action against a clinical laboratory alleging that the defendant engaged in a systematic scheme to bill Medicare for medically unnecessary tests and to falsely certify that the tests were necessary.  Among multiple other challenges, defendant argued that the case should be dismissed because relator had not alleged her claims with specificity and had not identified even one actual false claim that was submitted to the government.

Defendant, Boston Heart, is a clinical laboratory that provides diagnostic testing related to cardiovascular health.  Relator alleged that Boston Heart conducts laboratory tests that are ordered by doctors and other healthcare providers. More significantly, Relator alleged that Boston Heart facilitated and encouraged the ordering of unnecessary tests by providing doctors with pre-printed test requisition forms that group certain tests together in test panels, allowing the doctor to easily order multiple tests at once simply by checking one box on the form.  According to Relator, a range of genetic and non-genetic tests performed by Boston Heart are not necessary for patients with certain identified diagnostic codes, and therefore should not be performed on those patients. The specific tests at issue were identified in detail in the Complaint.

Screening Tests Must Be Supported by Relevant Diagnostic Codes

As the court summarized the allegations,

“the relator alleges: when any of these four [] diagnostic codes are given to a patient in the absence of other diagnostic codes, the tests set forth above are … known to be medically unnecessary because they (1) do not and cannot predict the patient’s risk of future heart disease, (2) do not and cannot screen for any currently existing heart disease in the patient, and (3) provide no additional information regarding the cardiovascular-related diagnoses sometimes used to justify these tests, such as hypertension, hyperlipidemia, or malaise and fatigue, and ( 4) have no bearing on any potential treatments for those diagnoses.”

Id. at *4-5.

The relator’s allegations that the tests were not medically necessary rested, in part, on national guidelines for dealing with cardiovascular risk in adults without symptoms and on local and national coverage determinations issued by Medicare and its contractors. Those authorities did not support using the challenged testing for mere screening purposes on patients without diagnoses that supported those tests. Id. at *5.

Allegations That Claims for Lab Tests Were Submitted to Insurance Company Can Support Inference That Claims Were Submitted to Government Healthcare Programs

The court found that the relator satisfied Rule 9(b) by supporting her allegations with representative claims for payment that the defendant submitted to her employer, explaining that the relator was not required to provide claims actually submitted to the government.  The court also held that Relator did not need to identify specific individuals involved because she alleged a top-down, company-wide scheme.  The Complaint was found to allege material false claims with sufficient specificity and an acceptable inference that false claims were actually submitted to the government based on the relator’s analysis of the type and volume of testing performed on thousands of patients by hundreds of laboratories that billed to her employer.  Id. at * 9-10.

The court concluded that “the relator ‘corroborated’ her allegation that Boston Heart submitted claims to the government by providing a ‘concrete example’ of a portion of the representative claims submitted to United for Medicare and Medicaid patients….  Accordingly, the relator sufficiently pleaded that Boston Heart submitted claims to the government for payment…. The Court [also] agrees with the relator that because she has sufficiently ‘alleged that Boston Heart was in the business of conducting laboratory tests on patients with all types of health insurance and earned revenue by being paid by those health insurers for the tests in conducted,’ … the Court ‘must grant [the relator] the benefit of [the] reasonable inference,’ … [that] Boston Heart also submitted claims to TRICARE and the Veterans Administration.”  Id. at *11 & n. 6.

Cases Can Proceed Where Specific Claims to the Government Are Not Known in Advance

This case falls within an ever-expanding body of case law that holds that even the specificity required under FRCP 9(b) and the presentment requirement under the FCA can be satisfied without identifying particular false claims to the government.  See, e.g., United States ex rel. Prather v. Brookdale Senior Living Communities, 838 F.3d 750 (6th Cir. 2016)(requirement that a relator identify an actual false claim may be relaxed in circumstances where the relator pleads facts supporting a strong inference that the claim was submitted); United States ex rel. Presser v. Acacia Mental Health Clinic, LLC, 836 F.3d 770 (7th Cir. 2016) (in case involving claims of medically unnecessary billing, allegations the defendant had patients on Medicare was enough to draw a reasonable inference that Medicare was billed for these services); United States ex rel. Heath v. AT & T, Inc., 791 F.3d 112, 123 (D.C. Cir. 2015)(relator not required to plead representative claims actually submitted to the government in part because that would impose a higher pleading standard than what would need to be proved at trial); U.S. ex rel. Nathan v. Takeda Pharm. N. Am., Inc., 707 F.3d 451 (4th Cir. 2013), cert. denied, No. 12-1349, 2014 WL 1271321 (Mar. 31, 2014).

Since healthcare whistleblowers often work in the clinical or marketing areas of a company, they frequently won’t have access to actual billing records.  Recognizing common sense inferences that claims must have been submitted to government payors is a critical step for allowing legitimate cases to proceed past a motion to dismiss.

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The False Claims Act’s Public Disclosure Bar Routinely Results in Windfalls to Fraudsters

By Daniel Miller

In 1986, in an effort “to strike a balance between encouraging private persons to root out fraud and stifling parasitic lawsuits,” United States ex rel. Zizic v. Q2Administrators, LLC, 728 F.3d 228, 235 (3d Cir. 2013), Congress narrowed the the public disclosure bar so that more whistleblowers would file cases.

Despite this significant amendment, many courts throughout the country have continued to dismiss qui tam False Claims Act cases under the public disclosure bar.

Part of the problem is an expansive reading of what constitutes a public disclosure.  The second part of the problem is a narrow reading of the so-called “original source exception” to the public disclosure bar.

Under the original source exception, even if a fraud has been publicly disclosed, a whistleblower can avoid dismissal on public disclosure grounds if he/she has knowledge “that is independent of and materially adds to the publicly disclosed allegations.”  31 U.S.C. § 3730(e)(4)(B).

The contours of the original source exception and the errors made by various courts are discussed below.

Courts Narrowly Define the Original Source Exception to the Public Disclosure Bar

If a public disclosure of a transaction of fraud has occurred, and the complaint is “substantially similar” to information publicly available, the case may nevertheless go forward if the whistleblower is an “original source” of information underlying the action.  31 U.S.C. § 3730(e)(4)(B).

The Pre-2010 Definition of “Original Source”

Under the FCA as it existed prior to being amended on March 23, 2010, a whistleblower is an original source if he “has direct and independent knowledge of the information on which the allegations are based.”  31 U.S.C. § 3730(e)(4) (2009).

The analysis of the “independent” requirement involves a comparison of the whistleblower’s knowledge with “the information readily available in the public domain.” United States ex rel. Moore & Company, P.A. v. Majestic Blue Fisheries, LLC et al., 812 F.3d 294, 305 (3d Cir. 2016).

Regarding the “direct” requirement, the Third Circuit Court of Appeals recently outlined the meaning of direct knowledge:

‘Direct knowledge’ is knowledge obtained without any ‘intervening agency, instrumentality, or influence: immediate. Such knowledge has also been described as “first-hand, seen with the whistleblower’s own eyes, unmediated by anything but [the whistleblower’s] own labor, and by the whistleblower’s own efforts, and not by the labors of others, and … not derivative of the information of others.” Paranich, 396 F.3d at 336 & n. 11 (internal quotation marks and citations omitted); see also Stinson, 944 F.2d at 1161 (citing with approval cases finding information is not direct if learned from “a whistleblowing insider” or by “stumbl[ing] across an interesting court file”).

United States ex rel. Schumann v AstraZeneca Pharmaceuticals, LP, 769 F.3d 837, 845 (3rd Cir. 2014) (internal quotation marks and citations omitted).

This overly narrow reading conflicts with the intent of the 1986 amendments—in  order to have “direct” knowledge of the fraud, the Relator must almost literally witness the fraud occurring.  Fraud is by definition a secretive act.  Shielding fraudsters by allowing secrecy to not only hide the fraud but also to avoid prosecution is inconsistent with the purpose of the qui tam provisions of the False Claims Act.

The Post-2010 Definition of “Original Source”

The FCA was amended on March 23, 2010 as part of the Affordable Care Act.  The amendment removed the “direct” knowledge requirement and  replaced it with a less demanding one, namely, that the whistleblower’s information must “materially add” to any publicly disclosed information.[1]  Hopefully, this amendment will encourage more whistleblowers to come forward and will guide courts toward a more sensible interpretation of the original source exception.

[1] The independent requirement was left largely intact by the ACA.  The only difference is that under the previous version, the comparison was between all information in the public domain and the whistleblower’s evidence, Moore, 812 F.3d at 305, whereas under the current version, the comparison is between all information disclosed through the statutorily enumerated sources and the whistleblower’s evidence.  Id.

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Health First Entities Agree to Pay $3.5 Million to Resolve False Claims Act Lawsuit

By Russell Paul

Health First, Inc. and related entities have agreed to pay $3.5 million to resolve a False Claims Act lawsuit filed in 2014 by a whistleblower (the “relator”). The related entities include Health First, Inc., Health First Health Plans, Inc., Health First Medical Group, Holmes Regional Medical Center, Palm Bay Hospital, Cape Canaveral Hospital, Melbourne Same Day Surgery Center, and Melbourne GI Center (collectively, “Health First”).

Health First operates an extensive healthcare system on Florida’s Space Coast and promotes itself as providing “Central Florida’s only fully integrated health system.”  Through various wholly-owned subsidiaries, Health First operates four hospitals and a hospice, offers commercial and Medicare health insurance policies, and administers a large network of outpatient and other medical facilities.

The lawsuit alleged, among other things, that Health First illegally induced referrals of patients to various Health First-owned hospitals by offering kickbacks to physicians in the community who practiced with Melbourne Internal Medicine Associates. P.A. (“MIMA”). The case is captioned U.S. ex rel. John Doe v. Health First, Inc. et al., Case No. 6:14-CV-501-RBD-DCI (Middle District of Florida, Orlando Division).  

Specifically, relator alleged, inter alia, that in violation of the Anti-Kickback Statute (“AKS”), the Health First Defendants engaged in a scheme to vastly increase the number of referrals they received from MIMA physicians by providing remuneration and other incentives for those referrals. This scheme is alleged to have included the following conduct:

(i) granting MIMA the ability to invest in and own portions of highly profitable subspecialty healthcare facilities (Melbourne Same Day Surgery Center and Melbourne GI Center) in proportion to its ability to refer patients and to induce such referrals;

(ii) paying MIMA physicians exorbitant fees as Medical Directors of its outpatient surgery center, hospital programs and hospice center for little or no work performed and without any documentation;

(iii) offering MIMA physicians exclusive free services, such as the use of hospitalists;

(iv) using HF’s insurance subsidiary, Health First Health Plans (HFHP), to induce referrals by granting MIMA nearly exclusive rights to bill and be reimbursed by the HFHP, and later, by agreeing to close HF’s own radiation therapy center at HRMC, in exchange for referrals; and

(v) ultimately buying the entire MIMA practice, and its ownership in the subspecialty centers MSDS and MGIC, for exorbitant sums greatly in excess of fair market value.

The Stark Statute prohibits a physician from referring Medicare and Medicaid patients for certain “designated health services” (“DHS”) to an entity with which the physician has a “financial relationship” when that referral results in a claim on or payment by the government, unless an exception applies. 42 U.S.C. § 1395nn(a)(1)(A).

Relator alleged that, in violation of the Stark Law, Defendant MIMA physicians consistently referred patients to: a) an outpatient surgery center in which it held ownership interests (Melbourne Same Day Surgery Center) and b) a gastrointestinal center (Melbourne GI Center) in which it held ownership interests, knowing that those facilities would and did bill government insurance programs individually for those designated health services and not as part of a composite rate.

Finally, relator alleged that the Health First Defendants violated the False Claims Act by billing for medically unnecessary blood transfusions and other blood services by requiring that those services be done on an inpatient basis.

In settling this matter, Health First expressly denied relator’s allegations.

Separately, MIMA was also a defendant in this case and settled the matter as well.

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Court Finds That Labs Must Ensure That the Tests They Perform are Medically Necessary

By Russell Paul

On June 9, 2017, the United States District Court for the District of Columbia denied the defendant’s motion to dismiss in the False Claims Act lawsuit titled U.S. et al. ex rel. Tina D. Groat v. Boston Heart Diagnostics Corp., No. CV 15-487 (RBW), 2017 WL 2533341, at *1 (D.D.C. June 9, 2017).

In his opinion, Judge Reggie Walton held that a lab has an independent duty to certify that the tests it performs and for which it seeks government reimbursement are medically necessary. The lab cannot rely on the fact that a doctor ordered the lab test. If the tests are, in fact, not medically necessary, then the lab may have violated the False Claims Act when submitting claims for those tests to government health insurance providers.

The lawsuit alleges that Boston Heart, a Massachusetts-based diagnostic laboratory, performed medically unnecessary genetic and non-genetic cardiac-related tests, which the lab bundled into easy-to-order test panels and marketed to general practitioners. Relator alleges that the tests were not medically necessary when the patient had certain diagnoses because the test results do not and cannot screen for current heart disease, do not predict the risk of future heart disease, and have no bearing on the treatment of the current health condition of a patient with those enumerated diagnoses. Relator alleges that Boston Heart wrongly billed government healthcare insurers such as Medicare and Medicaid for these unnecessary tests.

The Court found that a lab “has an obligation to establish that the tests for which it seeks government reimbursement are medically necessary because when it submits the CMS-1500 form, it certifies that the tests performed were medically necessary.” CMS Form 1500 requires the billing entity to certify that, among other things, “the services on this form were medically necessary”.

The Court pointed out that the government’s regulatory scheme “places the burden of establishing the medical necessity of diagnostic tests on the entity submitting the claim.” Garcia v. Sebelius, No. CV 10-8820 PA (RZx), 2011 WL 5434426, at *7 (C.D. Cal. Nov. 8, 2011) (citing 42 C.F.R. §§ 410.32(d) (2)(ii), (d)(3))

In support of its holding that a lab has an independent duty to certify that its tests are medically necessary, the Court noted that there were many other court decisions reviewing Medicare coverage determinations for claims submitted by laboratories in which the government determined that the tests at issue were not medically necessary, and the laboratories, not the ordering physicians, argued to the contrary.  The Court also noted that there were other False Claims Act actions against laboratories for allegedly submitting claims for medically unnecessary tests.

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When Does a Drug Manufacturer’s Savings Card Program or Discount Coupon Violate the Anti-Kickback Statute?

By Russell Paul

A drug manufacturer’s savings card program or discount coupon under which individuals who have Medicare Part D prescription drug coverage receive discounts may violate the Anti-Kickback Statute (“AKS”), unless the drug being purchased is statutorily excluded from Part D coverage.  The key here is that the drug must be excluded from Part D coverage for there to be no AKS violations.  If the drug is covered by Part D, there is a great possibility that the discount program could generate prohibited remuneration under the AKS if the manufacturer intends to induce or reward referrals of Federal health care program business.

The Anti-Kickback Statute

The AKS makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce or reward referrals of items or services reimbursable by a Federal health care program. See 42 U.S.C. 1320a–7b. The AKS has been interpreted to cover any arrangement where one purpose of the remuneration was to obtain money for the referral of services or to induce further referrals. See, e.g., United States v. Borrasi, 639 F.3d 774 (7th Cir. 2011)

Drug Manufacturer’s Savings Card Program or Discount Coupon May Violate the AKS

Individuals who have prescription drug coverage through Medicare Part D (“Part D Beneficiaries”) may receive a savings card or discount coupon issued by a drug manufacturer to receive discounts when they fill their drug prescriptions.

Part D Beneficiaries present the card or coupon to their pharmacists along with their drug prescriptions to receive discounts on out-of-pocket costs, including copayments and deductibles that they incur when purchasing the drug.

Copayment coupons constitute remuneration that is offered to consumers to induce the purchase of specific items. When the item in question is one for which payment may be made, in whole or in part, under a Federal health care program (including Medicare Part D), the anti-kickback statute is implicated. See Special Advisory Bulletin on Pharmaceutical Manufacturer Copayment Coupons (Sept. 2014), (the “Bulletin”).[1]

Copayment coupons may induce the purchase of federally payable items in two ways.

  • First, as described in the Bulletin, copayment coupons may induce the purchase of the specific items that are the subject of the coupons by reducing or eliminating Federal health care program beneficiaries’ out-of-pocket costs for those items.
  • Second, copayment coupons may induce the Federal health care program beneficiaries who receive them to purchase other federally payable products manufactured, marketed, or distributed by the manufacturer that issued the coupon.

Purchasing Drugs That are Statutorily Excluded From Part D Coverage

Some drugs are covered by many private insurance plans and by some Federal health care programs, including state Medicaid programs and TRICARE, while being statutorily excluded from coverage under Medicare Part D.

If the drug is statutorily excluded from coverage under Medicare Part D, individuals who are enrolled in Medicare Part D may purchase the drug with a manufacturer’s savings card or discount coupon because such individuals are, in effect, cash-paying customers when filling their drug prescriptions. When this is the case, the Office of Inspector General (“OIG”) will not impose administrative sanctions under the AKS. See OIG Advisory Opinion No. 16-07 (drug for the treatment of erectile dysfunction is statutorily excluded from coverage under Medicare Part D).

This statutory exclusion serves as an effective backstop that prevents the discount card or coupon from inducing the purchase of a drug payable by Medicare Part D.

Furthermore, the risk that the Part D Beneficiaries who use the discount card or coupon will purchase other federally payable products manufactured, marketed, or distributed by the same drug manufacturer is low, especially where the manufacturer certifies that it does not and will not use the discount given on the Part D excluded drug as a vehicle to market other products it manufactures, markets, or distributes to Federal health care program beneficiaries.


[1] available at:

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Pharmacy Discount Programs Can Lead to a Violation of the False Claims Act

By Russell Paul

Retail pharmacies that offer a discount drug pricing program to consumers must charge Medicare the same prices for drugs that they charge consumers who participate in those programs. To do otherwise violates the False Claims Act (“FCA”).

The specific question is whether a pharmacy that offers a discount drug pricing program for customers paying for drugs in cash can exclude the discounted prices that those customers pay when computing the “usual and customary” price that the federal Centers for Medicare and Medicaid Services (“CMS”) requires retail pharmacies to charge Medicare Part D beneficiaries for drugs.

“Usual and Customary” Drug Prices and Medicare

The answer is no, according to a Seventh Circuit ruling last year in United States ex rel. Garbe v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016), cert. denied sub nom. Kmart Corp. v. U.S. ex rel. Garbe, 137 S. Ct. 627, 196 L. Ed. 2d 517 (2017).  Federal regulations provide that for most drugs, Medicare Part D will only pay the “usual and customary charges to the general public” and defines “usual and customary” as “the price that an out-of-network pharmacy or a physician’s office charges a customer who does not have any form of prescription drug coverage for a covered Part D drug.” 42 C.F.R. §§ 423, 100, 447.512.

The Seventh Circuit found that participants in such discount programs are considered the “general public,” and the discounted prices charged to those participants are considered the pharmacy’s “usual and customary” charges, which the pharmacy must also charge Medicare.  The pharmacy cannot exclude such discounted pricing when calculating its “usual and customary” charges so as to increase the amount it charges to and is paid by Medicare.

United States ex rel. Garbe v. Kmart Corp.

Pharmacist James Garbe began working at a Kmart pharmacy in Ohio in 2007. One day, Garbe picked up a personal prescription at a competitor pharmacy and received a surprise: the competitor pharmacy charged his Medicare Part D third-party private insurer much less than Kmart ordinarily charged for the same prescription. When Garbe began inspecting Kmart’s pharmacy reimbursement claim, he discovered that Kmart routinely charges customers with insurance – whether private or public – higher prices than customers who paid out of pocket.

Not all cash customers were charged the same price; people in Kmart’s “discount programs” paid much less. Kmart recognized that it was “financially beneficial to maintain the Usual and Customary price higher than reimbursement rates.” Kmart set out to accomplish this goal by instituting a policy of setting low “discount” prices for cash customers who signed up for one of its discount programs, while charging higher “usual and customary” prices to non-program cash customers, “to drive as much profit as possible out of [third-party] programs.”

Garbe’s investigation also revealed that nearly all cash customers received the lower discount program prices. Significantly, those discount program sales were ignored when Kmart calculated its “usual and customary” prices for its generic drugs for purposes of Medicare reimbursement. This omission was significant. For example, Kmart allegedly sold a 30-day supply of a generic version of Zocor for $5 but told the CMS that the usual and customary price was $152.97.

The Seventh Circuit rejected Kmart’s contention that the term “general public,” as found in the definition of CMS’s “usual and customary pricing,” excludes customers who join a discount program. The Seventh Circuit held that the usual and customary price is defined as the “cash price offered to the general public” unless state regulations provide otherwise. Furthermore,, the Seventh Circuit stated that the “CMS Manual has long noted that ‘where a pharmacy offers a lower price to its customers throughout a benefit year’ the lower price is considered the ‘usual and customary price’ rather than a ‘one time lower cash price,’” including when the cash purchaser uses a discount card.

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Common Challenges With the Qui Tam Seal Requirement: What Whistleblowers Can Expect

By Susan Schneider Thomas

One of the various procedural requirements imposed on whistleblowers is that they file their cases “under seal.”  Not much is explained in the False Claims Act (“FCA”) as to what that means, other than the general understanding that no notification of the filing to the defendant takes place, what is commonly referred to as “service” of the complaint.  The seal stays in place automatically for 60 days, and the Government has the ability to seek extensions of the seal from the court.  Typically, the government seeks multiple extensions, generally for six months at a time, resulting in a case remaining under seal for more than a year and often up to three or four years.

What happens during that time period?  What can the relators or their lawyers say about the cases?  What does it mean to “breach” the seal? What happens if the seal is breached?  Although the False Claims Act statute says very little about the seal (other than requiring a case to be filed that way and not served upon the defendant), there is a whole body of case law that has developed about what it means to preserve the seal.

Seal Requirement Challenges

In many instances, though, there can be real challenges to relators to maintain the confidentiality that the seal requires.  For example, in various types of unrelated legal proceedings, parties can be required to divulge contingent assets – which is what a filed, but unresolved, lawsuit can be.  This frequently occurs in bankruptcy cases, in divorce proceedings, in partnership dissolutions and sometimes in other instances.  How do relators satisfy those disclosure obligations while maintaining the secrecy that the FCA seal requires?

This problem also arises in other types of litigation or legal proceedings, most frequently in unemployment compensation hearings if the whistleblower was fired and the employer is contesting entitlement to unemployment benefits, or in retaliation lawsuits (if retaliation claims are not limited to those filed as part of an FCA case).

Outside of the litigation context, issues can arise with a former defendant-employer at an exit interview or in connection with signing for severance benefits. Employees departing from a company are sometimes asked to certify that they did not observe any practices that they thought were illegal, for example.

Challenges for Whistleblowers Who Remain Employed at the Defendant Company

For whistleblowers who continue to work for the defendant company, the challenges can be even harder to predict, such as meetings at which “some government investigation” is discussed or memos are circulated to employees directing them to collect or preserve documents pertaining to the subject of the qui tam suit.  Although the case itself may remain under seal for several years, the government often begins to investigate during the time period, frequently including the issuance of a Civil Investigative Demand (similar to a subpoena) on the company.  Although the company is not officially notified that there was a whistleblower suit filed, many companies recognize what is happening and have immense concerns about whether a whistleblowing employee is still employed within the company and still has access to additional documents or ongoing internal discussions.

Tensions can become high among employees or management and speculation and accusations may lead to awkward situations for continuing employees. When it appears that certain employees’ conduct is the subject of a government investigation, there can be discussions of cover-ups or document destruction.  The emotional toll of continuing to work for a company while being a whistleblower can be quite pressing, and may require the whistleblower to conceal or actively deceive fellow employees about that whistleblower’s role in the case.  Although it is probably illegal for a company to directly ask a group of employees whether anyone reported anything to government regulators or prosecutors, we have seen instances where that happened and, of course, it would be difficult for even a responsible employer to be able to control all of the water cooler talk that occurs.

Challenges for Whistleblowers Who Have Left the Defendant Company

Even for someone who has left the defendant company’s employ – whether voluntarily or not – concerns can arise about subsequent employment. It can be difficult to explain either a voluntary or not-so-voluntary departure from a prior job if the whistleblower cannot explain what happened.  We’ve had clients express real reluctance to accept a new job in the same industry, wondering what will happen once it becomes known that the person filed a lawsuit against his prior employer.  Even if the person wanted to get that out on the table ahead of time – before relocating cross-country, for example – the seal provisions would bar or hamper such discussions.  Employees wonder if they would be protected against retaliation from a subsequent employer who learns of the person’s past whistleblowing activity and decides to discharge the employee.

And what about a situation where the whistleblower is seriously worried about public harm during the seal period — whether due to questionable financial practices or safety issues relating to continuing off-label marketing of drugs or medical devices or continued distribution of faulty products?  Although one would hope the government would act quickly in those circumstances, that does not always happen.  Often the government needs to conduct an in-depth investigation of the whistleblower’s allegations, but the whistleblower is firmly convinced that there is ongoing bad conduct occurring.  In a recent case involving questionable mortgage loans being made to veterans, the relators ended up knowingly violating the seal by going public with their allegations because they were so frustrated that the fraud was ongoing even four years after they filed their case under seal.


We believe that our job in representing whistleblowers includes counseling about these different challenges that might arise.  We discuss with our clients the types of situations that might occur and the ways to navigate through the problems.  Perhaps most importantly, we discuss these possible concerns with potential clients even before they file a case, to help them evaluate and understand what might be involved as a result of their filing.  There can be many rewards to being a whistleblower – both moral and financial – and our goal is to help our clients make well-informed decisions about whether and how to proceed.

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