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19 December 2018
The government has intervened in a qui tam suit against a compounding pharmacy and its private equity fund owner alleging the pharmacy filed claims with Tricare that were rendered false by kickbacks allegedly paid to marketing companies in exchange for patient referrals and directly to patients in the form of co-pay waivers (for further details please see "Private equity funds face increasing risk of False Claims Act liability"). The government alleged the pharmacy executed a provider agreement with Tricare's contracted pharmacy benefits manager in which it agreed to be bound by fraud waste and abuse laws and the provider manual, which also required compliance with the Anti-kickback Statute (AKS) and other laws. The defendants moved to dismiss and on 30 November 2018, the magistrate judge filed an opinion recommending the False Claims Act claims be dismissed.(1)
The magistrate's opinion concluded that the government had adequately alleged the submission of "legally false" claims before turning to analyse whether it had stated a claim under the express or implied certification theories of liability. As to the former, the magistrate noted that the allegedly false certifications in the provider agreement were made two years before any of the claims at issue were submitted by the pharmacy, and that the government's complaint failed to allege any false express certification of compliance with the AKS "as part of the claims submission process".
As to the implied certification theory, the magistrate similarly found the government's complaint deficient. Citing Escobar, the opinion noted that an implied certification claim must be supported by allegations that the claim contains "specific representations about the goods or services provided" and of the defendant's failure to "disclose noncompliance with material statutory, regulatory, or contractual requirements". The opinion concluded that the government failed to satisfy the first prong by including general descriptions of "representative claims" but failed to allege the "specific representations" regarding claims for reimbursement made by defendants. The magistrate went on, however, to conclude that the complaint had adequately alleged materiality in satisfaction of the second prong of the Escobar standard. Specifically, the opinion cited the government's allegations that the pharmacy was required to sign a provider agreement that required it to comply with applicable laws in order to receive reimbursements and that the provider manual provided that the agreement would be terminated for failing to comply with the AKS as sufficient "at this stage of the proceedings" to allege materiality.
In the most notable part of the opinion, the magistrate also analysed the arguments raised by the pharmacy's private equity investor that the government failed to adequately allege that it "knew of, directed, or profited from" the alleged fraud. The opinion concluded that an allegation the fund communicated to a pharmacy manager that "routine copayment waivers could violate the AKS" – without more evidence – is insufficient to establish the fund's intent to violate the False Claims Act. However, the opinion cited allegations that the fund received legal advice that "paying commissions to marketers could violate the AKS", that the fund approved of the pharmacy's decision to "use marketers to generate referrals", knew of the commissions paid to the marketers and funded commissions paid to marketers as to adequately allege the fund's knowledge of the submission of false claims. The magistrate concluded that the complaint had adequately alleged that the fund had caused the submission of the claims to be rendered false by the alleged marketer kickback scheme. The opinion thus provides further guidance as to the circumstances under which a private equity fund investor may incur False Claims Act liability as a result of its active involvement in a portfolio healthcare company that submits allegedly false claims.
While the magistrate recommended that the False Claims Act claims be dismissed due to the government's failure to adequately plead a false certification, the recommendation is that the government be granted leave to amend. Assuming that the district court adopts the recommendation, the government may be able to cure the pleading deficiencies by pleading additional certifications and details of the claims submitted by the pharmacy. If that occurs, the magistrate would allow the case to proceed to discovery against both the pharmacy and the private equity fund investor, in a first-of-its-kind suit.
For further information on this topic please contact Jaime L M Jones at Sidley Austin LLP by telephone (+1 202 736 8000) or email (firstname.lastname@example.org). The Sidley Austin LLP website can be accessed at www.sidley.com.
(1) US Medrano v Diabetic Care Rx, LLC, Case 15-62617-CIV-BLOOM, SDFl.
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