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Prescription Drugs: Refocusing the False Claims Act Microscope on the Rest of the Transaction

Written by:  Tara E. Swenson

Over the last decade, it has often felt as though the pharmaceutical industry has been the government’s and whistleblowers’ main, and at times only, target for False Claims Act (“FCA”) investigations.  While manufacturers are likely not out from underneath the microscope, it seems as though the lens may have shifted slightly to focus on the rest of the prescription drug transaction.  As a result of this refocusing, parties that regularly contract with manufacturers, including Medicare Part D plan sponsors, pharmacy benefit managers (“PBMs”), and pharmacies, have been increasingly confronted with various forms of investigations arising under the FCA, Medicare Part D regulations, and complicated state Medicaid regulations. 

Applying the FCA to conduct under the Medicare Part D program can be an inviting option for the government and whistleblowers.  The Part D program consumes an enormous amount of tax-payer and beneficiary money and each party in a Part D transaction must comply with voluminous regulations that touch on every part of a pharmacy transaction, from a plan sponsor submitting a bid, to a pharmacy collecting the accurate co-payment for a given prescription, ending with the plan sponsor ultimately reporting to and reconciling with CMS all remuneration the plan sponsor received from any party that effectively reduced drug costs.  The complexity of the program and the various certifications that plan sponsors must submit to CMS create many opportunities for things to go wrong.  In the fall of 2012, RxAmerica L.L.C. settled an FCA case alleging that, in the second and third years of the Part D program, the plan sponsor had submitted inaccurate drug prices to CMS’ Plan Finder which resulted in beneficiaries enrolling in the plan based on significantly lower drug prices than they ultimately received.  Even companies that are very familiar with the Part D rules and federal fraud and abuse laws can find themselves the subject of an investigation if all levels of employees are not properly trained.  For example, Walgreens settled a FCA suit in 2012 for close to $8 million when its retail employees regularly accepted Walgreens’ promotional gift cards from federal health program beneficiaries even though the gift cards expressly stated that they were not valid for such individuals.    

Many of the Part D regulations are very complicated and proving that payment was contingent, either expressly or implicitly, upon compliance with a given regulation can be very challenging.  As a result, whistleblowers relying on so-called false certifications are generally having trouble establishing that violations of technical Part D rules resulted in actual false claims being submitted to the government.  A good example of this was provided by the recently dismissed Fox Rx, Inc. case.   

While the intersection of the FCA and technical Part D rules continues to be flushed out, cases are proceeding against the pharmacy transaction players under other theories of liability often dealing with state regulations.  State Medicaid rules govern pharmacy claims, pricing, and practices are often quite specific and therefore can present governments and whistleblowers with alternative, easier to prove, violations.  For example, in March of this year, Texas-based grocery chain HEB Grocery Company, LP settled a suit brought by a whistleblower claiming that HEB had failed to comply with a Texas Medicaid pricing regulation and therefore had charged inflated prices under the Texas Medicaid program.

The relatively recent uptick in investigations in this area suggest that all parties that stand between a pharmaceutical manufacturer and a patient should expect increased scrutiny under a variety of federal and state laws and regulations.

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Theresa advises clients on all aspects of the pharmaceutical supply chain, including counseling industry stakeholders on a range of business, legal, transactional, and compliance matters. She provides clients with strategic counseling and creative business modeling that considers legal restrictions and regulatory risk in light of innovation and business goals.