OIG Releases Special Fraud Alert About Suspect Payments in Marketing Arrangements Related to Medicare Advantage and Providers

On December 11, 2024, the Office of Inspector General for the U.S. Department of Health and Human Services (“OIG”) issued a special fraud alert warning about certain marketing schemes that involve questionable payments and referrals between Medicare Advantage (“MA”) health plans, health care professionals, and third-party marketers (e.g., agents and brokers) and that can mislead MA enrollees into choosing specific health plans or providers that may not be in the MA enrollees’ best interests or meet their needs (“MA Marketing Alert”). As we have previously advised, special fraud alerts are few and far between—OIG has only issued six in the past 20 years. The importance of the MA Marketing Alert, like its predecessors, should not be taken for granted because it may be instructive as to subsequent enforcement action taken by OIG and/or the U.S. Department of Justice (“DOJ”).

In the MA space, historical enforcement actions taken by both OIG, under their administrative authorities, and DOJ, under the False Claims Act (“FCA”), have related to alleged MA risk adjustment payment inflation schemes. See, e.g., DaVitaSutter HealthBeaver MedicalMartin’s Point, and Cigna. While allegations of this nature continue to be a focus area (e.g., in OIG’s work plans), a light is also now being shone on inappropriate marketing schemes that could violate the Federal anti-kickback statute (“AKS”). And, based on historical empirical data connecting DOJ’s enforcement actions taken subsequent to OIG’s issuance of special fraud alerts, that light may broaden and brighten.

For example, in July 2022, OIG issued a special fraud alert about arrangements involving telemedicine companies. In a footnote, OIG provided three enforcement actions resolved under the FCA as examples of allegedly problematic arrangements. After providing the footnote examples, OIG described bullet-pointed “Suspect Characteristics” that tracked the allegedly inappropriate characteristics of the footnote examples. Since the alert’s issuance, DOJ has recovered millions under the FCA and also criminally charged and convicted many individuals and entities for allegedly submitting or causing the submission of more than $3.1 billion (in 2023 and 2024 pursuant to DOJ’s nationwide takedowns) in allegedly fraudulent Medicare claims resulting from telemedicine schemes.

While the MA Marketing Alert provides footnotes of only two enforcement actions resolved under the FCA as examples of allegedly problematic arrangements, the bullet point list of “Suspect Characteristics” is broader than and reaches beyond the footnote examples. This may signal OIG’s awareness of and current investigations into allegedly inappropriate arrangements relating to “Suspect Characteristics” that have yet to be settled or resolved.

It is possible that there may be forthcoming enforcement actions in these areas. And they may follow the same trend of enforcement actions taken by DOJ relating to telemedicine schemes after OIG’s July 2022 special fraud alert. We also note that the MA Marketing Alert aligns with the Centers for Medicare & Medicaid Services’ recently finalized regulatory updates relating to MA health plan marketing arrangements with agents, brokers, and Third-Party Marketing Organizations, which will be effective January 1, 2025, and prohibit such parties from creating direct or indirect incentives “that would reasonably be expected to inhibit an agent or broker’s ability to objectively assess and recommend which plan best fits the health care needs of a beneficiary.” Proskauer’s Health Care Group will continue to monitor these developments in and provide updates about these areas of scrutiny and enforcement.

FCA Enforcement & Compliance Digest — Fall 2024 False Claims Act Newsletter

Welcome to the Fall 2024 issue of “FCA Enforcement & Compliance Digest,” our quarterly newsletter in which we compile essential updates on False Claims Act (FCA) enforcement trends, litigation, agency guidance, and compliance tips. We bring you the most recent and significant insights in an accessible format, concluding with our main takeaways — aka “And the Fox Says…” — on what you need to know.

In this Fall 2024 edition, we cover:

  1. Enforcement Trends: Manufacturers challenge AKS intent requirement as reflected in recent denials of OIG Advisory Opinion requests.
  2. Litigation Developments: Implications of Florida judge’s ruling that the FCA qui tam provision is unconstitutional.
  3. Compliance Corner: What health care companies need to know about AI.
  4. ICYMI: Federal Court Permits Investors to Resume Kickback Suit Against Teva

1. Enforcement Trends

Do Violations of the AKS Require a ‘Corrupt’ Intent? Manufacturers Challenge the OIG’s Interpretation of the Statute

In a series of recent lawsuits filed by the pharmaceutical industry against the US Department of Health and Human Services (HHS) Office of the Inspector General (OIG), manufactures are challenging the OIG’s interpretation of the Anti-Kickback Statue (AKS), arguing that violations of the statute require a corrupt intent. While courts have so far ruled in OIG’s favor, should a court accept this argument, the AKS regulatory landscape could be upended, providing health care providers and suppliers the opportunity to develop and implement arrangements that have historically been prohibited by the OIG.

The challenges to OIG’s interpretation of the AKS come in the context of OIG Advisory Opinion requests submitted by the manufacturers (or a related charity) proposing various forms of patient assistance programs under which the manufacturers or their related charities offer financial assistance to patients on the manufacturers’ products. The OIG denied each of the Advisory Opinion requests, finding that the proposed forms of patient assistance would constitute remuneration intended to induce patients to purchase the manufacturers’ drugs in violation of the AKS.

The OIG has consistently reiterated its opposition to manufacturer-operated patient assistance programs, with both the OIG’s 2005 Special Advisory Bulletin: Patient Assistance Programs for Medicare Part D Enrollees and the 2014 Supplemental Special Advisory Bulletin: Independent Charity Patient Assistance Programs noting that manufacturers cannot provide co-pay assistance to federal health care program beneficiaries, as doing so would constitute a kickback. However, the guidance also described the parameters under which independent charities can provide co-pay assistance, including assistance to federal health care program beneficiaries (i.e., Medicare beneficiaries). One of the key factors with respect to the operation of charitable patient assistance programs, is the independence of the charities operating the programs. While the independent charities are primarily funded by manufacturers, to be considered independent for OIG’s purposes, the charities must retain independence from donors. This means the donors cannot influence the design or operation of the patient assistance programs, and the programs cannot favor patients on the donor’s drug (e.g., assistance cannot be contingent upon the patient being prescribed a donor’s drug).

In three separate litigations, Pfizer Inc. v. United States Department of Health and Human ServicesVertex Pharmaceuticals Incorporated v. United States Department of Health and Human Services et al., and Pharmaceutical Coalition for Patient Access v. United States of America et al., manufacturers are challenging OIG’s long-held position that manufacturers cannot provide patient assistance, including co-pay assistance, to federal health care program beneficiaries. In doing so, the goal of the manufacturers is to provide assistance to patients, including co-pay support, either directly or through a charity that is not considered independent by OIG’s standards due to the relationship of the proposed charities to the manufactures and the level of influence by the manufacturers over the proposed charities. In each litigation, the manufacturer or, in the case of the Pharmaceutical Coalition for Patient Access (PCPA), the charity controlled by the manufacturers, is challenging an unfavorable Advisory Opinion issued by OIG concluding that the proposed patient assistance programs would constitute remuneration intended to induce patients to use a particular manufacturer’s products.

Under the arrangements proposed by Pfizer and PCPA, the proposed charities would be funded exclusively by manufacturers and would only provide support to patients on those funders’ drugs. In Pfizer’s Advisory Opinion request, the company proposed two potential co-pay assistance programs: (1) a direct co-pay assistance program and (2) a Pfizer-supported charity co-pay assistance program. Similar to the proposed Pfizer-supported charity co-pay assistance program, PCPA, an organization funded by manufacturers of Part-D-covered oncology drugs, proposed to create its own patient assistance program that would provide co-pay assistance to patients who meet certain qualifying criteria and then invoice each participating manufacturer for “the total amount of cost-sharing subsidies provided to eligible Part D enrollees.”

Vertex’s Advisory Opinion request focused on a proposed “Fertility Preservation Program” under which Vertex would pay fertility providers through a third-party vendor for the treatments provided to patients enrolled in the program. While this proposed program involved coverage of related treatment costs (i.e., the costs of the fertility treatments) rather than coverage of the co-pay costs associated with the Vertex drug itself, OIG nonetheless applied the same reasoning as in the Pfizer and PCPA opinions, concluding that the program would constitute remuneration to the patients in violation of the AKS.

In each litigation, the manufacturer (or, in the case of PCPA, the manufacturer-related charity) is challenging OIG’s position that the manufacturer’s subsidies constitute “remuneration” meant “to induce” patients to purchase manufactures’ products. The manufacturers argue that the AKS criminalizes conduct that “leads or tempts to the commission of crime” through “remuneration” that corrupts medical decision-making, as part of a quid pro quo transaction. In other words, according to the manufacturers, “to induce” requires a corrupt intent. Therefore, because the manufactures’ efforts to assist patients with meeting Medicare co-pay obligations or gaining access to Medicare-covered treatments (or treatments otherwise covered by the federal health care programs) are not done with malice or corrupt intent, such programs would not violate the AKS.

To date, no court has agreed with the manufacturers’ position. While Vertex is still pending trial in the District Court for the District of Columbia, the District Court for the Southern District of New York ruled against Pfizer, noting that “the law is clear that absent an express carve-out, the Anti-Kickback Statute prohibits any remuneration intended to induce someone to purchase or receive a drug or medical service.” Similarly, the District Court for the Eastern District of Virginia ruled against PCPA, concluding that HHS OIG’s “interpretation of the AKS adheres faithfully [to] the statute’s plain text, comports with its context, and does not offend its history.” On appeal, the Second Circuit affirmed the District Court’s decision in Pfizer, finding that an AKS violation does not require “corrupt intent.” Pfizer then appealed to the US Supreme Court, which denied certiorari. PCPA’s case is currently on appeal with the Fourth Circuit.

Should the Vertex court or a court of appeals agree that the statutory terms “induce” and “remuneration” should be construed more narrowly and require a corrupt intent to violate the AKS, AKS regulatory interpretation and much of OIG’s guidance could be called into question. Arrangements that have historically been viewed as suspect by the OIG could be considered compliant to the extent the parties lacked a corrupt intent to violate the law.

And the Fox Says… Ongoing efforts challenging OIG’s statutory interpretation of the AKS demonstrate manufacturers’ interests in narrowing the scope of prohibited activities under the law. Providers and suppliers should continue monitoring the ongoing litigation and any future efforts to challenge OIG’s interpretation of the AKS, as any judicial narrowing of the interpretation could provide opportunities to develop innovative arrangements that may be beneficial to patients. Regardless, developing compliant arrangements to benefit patients can be complicated, and legal counsel can help to ensure you remain apprised of all relevant developments and assist in structuring compliant arrangements.

2. Litigation Developments

What Is the FCA Without Its Qui Player? A Look Into Zafirov’s Future Implications and the Enforceability of the FCA Without a Qui Tam Device

As we previously discussed, a Florida federal district court recently held in Zafirov v. Florida Medical Associates LLC that the FCA qui tam provision is unconstitutional. The court reasoned that a relator who litigates an FCA lawsuit on behalf of the United States is not a properly appointed “officer” under Article II of the US Constitution and, thus, does not have the authority to serve in that position. This article examines several questions: What does FCA enforcement look like without a qui tam device? What questions did Zafirov leave unresolved? And what should one expect in the coming years as this issue is litigated on appeal and among other courts?

Can the government successfully enforce the FCA without a qui tam device? If, in the end, the qui tam provision is voided, that does not spell doom for the FCA. This is because the government still has the authority to file FCA actions itself and could hire many more attorneys to investigate and prosecute them. The government also has other mechanisms to entice whistleblowers to come out of the woodwork and inform it of wrongdoing. For example, recently, the US Department of Justice (DOJ) announced the “Corporate Whistleblower Awards Pilot Program.” This enforcement program compensates whistleblowers who inform the DOJ of original and truthful information concerning corporate misconduct. If the information leads to a successful forfeiture of over $1 million, the whistleblower is compensated. Currently, however, the program does not cover FCA claims. But the DOJ or US Congress could theoretically expand this program, or create a new one, to attract whistleblowers who have information concerning FCA violations. Under such a program, the government’s litigation of FCA claims would not be all that different from what happens currently. Rather than intervene in a meritorious FCA case brought by a relator, the government would file its own case based on information provided by a whistleblower. This would avoid the constitutional pitfalls identified in Zafirov. A post-qui tam landscape will certainly see fewer FCA claims being filed overall, but the government would likely file more FCA claims than it does now.

Still, many questions remain unresolved under Zafirov concerning the extent to which relator suits are constitutionally permissible. In Zafirov, the relator was litigating an FCA suit in which the United States declined to intervene. But what happens if the United States does intervene and takes over the case? Are those suits permissible? Does the relator act as an “officer” if her role is just limited to filing a lawsuit? Could the government get around Zafirov by intervening in more cases? Or are all FCA lawsuits filed by a relator invalid ab initio even if the government intervenes? If so, would Congress have to create a mechanism to appoint a relator as an officer for FCA purposes? In short, it is unclear how broadly Zafirov will be read. On one hand, it could be read to only apply to non-intervened cases. On the other hand, the very act of filing a complaint on behalf of the United States may require a constitutional appointment, and the government’s intervention would not cure that taint. These questions will remain unresolved until they are addressed by the Supreme Court.

Only time will tell what will happen as this issue percolates in the courts. Already, several circuit courts have upheld the constitutionality of the qui tam provisions. In the district courts located in circuits that have not yet addressed this issue, defendants are filing dispositive motions arguing that the relator’s appointment is unconstitutional. Though the decision in Zafirov is currently an outlier, it soon may not be as more courts consider arguments that rely on Zafirov’s reasoning.

And the Fox Says… Zafirov is significant because it may be the first blow to a significant enforcement mechanism on which the government heavily relies. But the qui tam provision’s fate is not set in stone. The relator in Zafirov will almost certainly appeal the decision to the Atlanta-based Eleventh Circuit Court of Appeals. That court’s decision may then be appealed to the Supreme Court. The appeals process for Zafirov may take years before the Supreme Court grants certiorari on the issue (if it does at all). In the meantime, the issue is not going away, and Zafirov is unlikely to be a one-off case. Those who are in the throes of an FCA investigation or litigation should raise this issue as a possible litigation risk or as an affirmative defense. The best possible time to raise this issue amid litigation is on a Rule 12(b)(6) motion to dismiss. Even if a case is past this point, Zafirov supports the position that such an argument is not waived, given that the issue goes to the relator’s very authority to bring the suit. So, defendants litigating a case brought by a relator should raise this issue as soon as possible. We at ArentFox Schiff will continue to monitor developments to help our clients navigate this ever-changing legal landscape.

3. Compliance Corner

AI Under the DOJ Microscope: How Health Care Companies Should Respond

Many companies, including health care companies, have incorporated artificial intelligence (AI) into their business practices. While historically, AI has largely been unregulated, that is starting to change. Recently, state governments have begun regulating the use of AI in the health care setting, as our colleagues summarized here regarding recently passed California legislation requiring health care facilities, clinics, and physician practices in the state to disclose the use of AI in communications regarding patient clinical information. Now, AI has the attention of the DOJ.

This past March, Deputy Attorney General Lisa Monaco indicated the DOJ’s interest in AI, stating at the American Bar Association’s 39th National Institute on White Collar Crime that “fraud using AI is still fraud.” Following Monaco’s statement, in September, the Criminal Division of the DOJ updated its Evaluation of Corporate Compliance Programs (ECCP) guidelines to require DOJ prosecutors to consider whether a company’s compliance program safeguards against misuse of AI or other emerging technologies. As a brief primer, the ECCP is a DOJ document that prosecutors use to evaluate the effectiveness of a corporate compliance program in determining whether to criminally charge a company. The document is published publicly and provides helpful insight into the DOJ’s expectations for companies as they build and implement their corporate compliance programs.

Under the updated guidance, the DOJ emphasizes that companies need to assess AI-related risks as part of their overall enterprise risk management systems. Specifically, a corporate compliance program must consider whether it has specific policies and procedures to prevent “any potential negative or unintended consequences” resulting from the use of AI in its business practices and compliance program. Additionally, a company should proactively conduct risk analyses of its use of AI and mitigate the potential for “deliberate or reckless misuse of technologies” by company insiders. Other key considerations are whether the company trains its employees on the use of AI, whether there is a baseline of human decision-making used to assess AI-generated content, and how the company implements accountability over the use of AI.

In its September update, the DOJ also revised a section of the ECCP, asking whether compliance personnel have access to relevant data sources to allow for “timely and effective monitoring and/or testing” of policies, controls, and transactions. A key consideration is whether the assets, resources, and technology available to compliance programs are comparable to those available elsewhere in the company. An imbalance in access to technology and resources may indicate a compliance program’s inability to detect and mitigate risks, particularly if a business unit is given unfettered access to AI tools while compliance lags behind.

Compliance officers at health care companies should take steps now to ensure that the implementation and use of AI within their organizations do not raise any compliance red flags. Consider the recent Texas Attorney General settlement with Pieces Technologies, a company that markets generative AI products, which resolved allegations that the company made misleading statements regarding the accuracy of its products. As part of the settlement, Pieces agreed to provide more explicit disclosures to customers related to how the company’s products should be used and the potential harm that could result from the products.

Providers using such technologies may encounter data privacy and security risks, including cybersecurity risks such as ransomware and malware attacks, bias and fairness concerns with respect to the training of the AI systems that may result in preference for a particular drug or treatment, and reliability and accountability concerns affecting a health care professional’s ability to provide patient care. With that being said, the DOJ could conduct investigations similar to the Pieces investigation against health care providers that use AI without considering these risks.

To help mitigate the risks associated with AI, including in the event of a DOJ investigation, compliance officers should be involved during all stages of discussions around AI initiatives, including through implementation and use. Compliance officers should ensure their companies have appropriate policies and procedures governing the use of AI once it is introduced to their organizations and provide training to employees both on the AI technology and on the policies governing its use. Finally, compliance officers should ensure they have the necessary access to AI systems to conduct compliance oversight measures. Such oversight measures may include assessing AI-related risks as part of their organization’s annual risk assessment, conducting AI-related auditing, and monitoring to help identify potential issues with the technology as they arise.

And the Fox Says… The DOJ’s AI-focused compliance guidance is a call to action for companies to proactively address the legal and regulatory implications of AI technologies, reminding them that the age of AI requires more than just innovation — it demands robust compliance strategies. Companies that conduct regular risk assessments of their practices must consider the use of AI, update policies and procedures to address its use, provide compliance teams with equal data access, and regularly update training on the lawful use of these technologies. Empowering compliance personnel and working with outside compliance experts to make these regular updates will put a company in a good position to meet these new standards. By embracing these guidelines, companies can mitigate legal and regulatory risks while leveraging the capabilities of AI technologies.

4. In Case You Missed It

Our most popular blog post from the last quarter: Federal Court Permits Investors to Resume Kickback Suit Against Teva.

You See Health, Whistleblower Saw Fraud: Uncovering a $23 Million Healthcare Fraud Scheme

A whistleblower’s vigilance has led to the revelation of alleged Medicare and TRICARE fraud involving UCHealth, a healthcare system with locations throughout the state of Colorado. University of Colorado Health agreed to a $23 million settlement to resolve allegations of improper coding for emergency room visits subsequently billed to government-funded healthcare programs. The qui tam provisions of the False Claims Act empower whistleblowers—individuals with non-public knowledge of fraud against the government—to file a lawsuit on behalf of the government. The qui tam whistleblower in this case will receive $3.91 million or 17% of the settlement.

Summary of the Allegations

According to court documents, from November 1, 2017, through March 31, 2021, certain UCHealth hospitals allegedly engaged in a fraudulent practice concerning Evaluation & Management (E/M) emergency department facility claims. These claims, submitted to both Medicare and TRICARE, are intended to compensate hospitals for resources associated with patient visits, including medical evaluations and management.

UCHealth’s alleged fraudulent activity centered around the misuse of Current Procedural Terminology (CPT) codes, specifically CPT 99285. This code represents the “highest level of severity” in emergency department visits and requires comprehensive medical evaluations and examinations, and high-complexity decision-making. However, UCHealth reportedly manipulated the coding process by automatically assigning the highest severity code, CPT 99285, based on the frequency of vital sign monitoring rather than the actual severity of the patient’s condition or resource utilization. According to the settlement agreement, employees had complained about the overuse of the highest severity code, and the hospital system had been flagged by the Centers for Medicare & Medicaid Services (CMS) as being a “High Outlier” for that CPT code as well.

Upcoding Fraud Scheme

Upcoding and improper billing to Medicare and TRICARE are forms of healthcare fraud that involve misrepresenting the services provided to obtain higher reimbursements than justified. Upcoding occurs when a healthcare provider submits claims for more expensive services or procedures than were actually performed, such as billing for a comprehensive exam when only a basic consultation was provided. Improper billing includes practices such as double billing for the same service, billing for services not rendered, or charging for medically unnecessary procedures. These fraudulent activities exploit government-funded programs, increasing costs for taxpayers and undermining the integrity of healthcare systems.

The Whistleblower’s Journey

The case began when Timothy Sanders, a concerned individual, filed a qui tam lawsuit on April 28, 2021, under the False Claims Act. This legal action initiated an investigation into UCHealth’s billing practices. Whistleblowers are integral in exposing fraudulent activities within healthcare systems, as they possess insider knowledge that can lead to substantial recoveries for the government. By filing a qui tam lawsuit, individuals, such as the healthcare fraud whistleblower in this case, can bring fraudulent activities to light, potentially leading to significant financial repercussions for the involved parties. With whistleblowers, as the Principal Deputy Assistant Attorney General said, “We will pursue health care providers that defraud the taxpayers by knowingly submitting inflated or unsupported claims.”

No More Fraud Vampires: Whistleblowers Put a Stake in Phlebotomy Unlawful Kickback Scheme

31 October 2024. Two whistleblowers “stopped the bleeding” caused by an alleged kickback scheme perpetrated by a mobile phlebotomy service based in California. Veni-Express, Inc. and its owners have agreed to pay $135,000 to settle allegations of violating the Anti-Kickback Statute and False Claims Act. While the award for the two whistleblowers has not yet been determined, False Claims Act qui tam whistleblowers may be rewarded between 15-25% of the settlement.

Overview of the Case

According to the allegations, from 2015 to 2019, Veni-Express allegedly submitted false claims to federal health care programs for services that were not actually performed. These services included venipuncture procedures during homebound patient visits and non-reimbursable travel mileage claims for the visits. The fraudulent activities were reportedly conducted with the oversight of the company’s owners, Myrna and Sonny Steinbaum.

Additionally, between July 2014 and June 2015, Veni-Express allegedly paid unlawful kickbacks to Altera Laboratories, also known as Med2U Healthcare LLC, to market their services. These kickbacks were disguised as a percentage of company revenue.

Unlawful Kickbacks and Phantom Billing

The Anti-Kickback Statute (AKS) is a federal law that prohibits healthcare providers from offering, soliciting, or receiving anything of value to induce or reward referrals for services covered by federally funded healthcare programs, such as Medicare and Medicaid. When providers violate the AKS, they compromise patient care by prioritizing financial gain over medical necessity, which can lead to unnecessary, costly, or substandard treatments. Phantom billing, which involves charging Medicare and Medicaid for services never provided, drains funds that could otherwise be used for essential care for beneficiaries. It leads to increased healthcare costs, putting a strain on federally funded healthcare programs and potentially causing cuts or restrictions in services. This fraudulent practice also erodes trust in the healthcare system, which can prevent beneficiaries from seeking the care they need. As the Special Agent in Charge for the Department of Health and Human Services Office of the Inspector General said about the case, “Improper incentives and billing Medicare for services never actually provided divert taxpayer funding meant to pay for medically necessary services for Medicare enrollees.”

Settlement Details

The settlement agreement is based upon the parties’ ability to pay, requiring Veni-Express to pay $100,000, with additional payments contingent upon the sale of company property. Myrna Steinbaum will pay $25,000, while Sonny Steinbaum will contribute $10,000.

Whistleblower Involvement

The whistleblowers in the qui tam actions were a former phlebotomist and a laboratory technical director. The qui tam provision in the False Claims Act allows private citizens with knowledge of fraud to report fraud schemes to the government and share in the government’s recovery.

Implications for Healthcare Professionals

This whistleblower settlement serves as a cautionary tale for healthcare professionals, emphasizing the need for strict adherence to regulatory standards. It underscores the power industry insiders have to speak up and put an end to fraud schemes that taint the healthcare profession.

Unitary Executive Theory Surfaces in Court: District Court Rules Qui Tam Provisions of the False Claims Act Unconstitutional

On September 30, 2024, the United States District Court for the Middle District of Florida ruled that filing claims on behalf of the government under qui tam provisions of the False Claims Act (FCA) is unconstitutional in United States of America ex rel. Clarissa Zafirov v. Florida Medical Associates, LLC, et al. The ruling, made by Judge Kathryn Mizelle, a 33-year-old Trump-appointee, declares that False Claims Act whistleblowers undermine executive power by filing qui tam lawsuits.

The Zafirov decision follows a recent dissent by Supreme Court Justice Clarence Thomas in which he questioned the constitutionality of the FCA’s qui tam provisions. It also follows a political movement pushing the Unitary Executive Theory in the United States judicial courts.

This controversial decision mischaracterizes the qui tam provisions of the FCA and will likely be appealed to the Eleventh Circuit. Should the ruling stand, however, it and other similar challenges to the constitutionality of the FCA’s qui tam provisions will cripple what has been America’s number 1 anti-fraud law. Since the False Claims Act was modernized in 1986, qui tam whistleblower cases have allowed the government to recover more than $52 billion from fraudsters, over $5 billion of which came in cases where the government chose not to intervene.

Applying the ‘Unitary Executive’ Theory to Paint Whistleblowers as ‘Self-Selected Private Bounty Hunters’

Originally passed during the Civil War, the False Claims Act contains qui tam provisions enabling whistleblowers, also known as ‘relators’, to report government contracting fraud and work directly with government investigators. Once the whistleblower brings forward the suit, the government may intervene and continue to prosecute the litigation as the plaintiff. However, in the interest of accountability, the qui tam provision of the FCA permits the whistleblower to pursue a case even if the United States declines prosecution. Whistleblowers who file successful qui tam lawsuits are eligible to receive up to 30% of recovered damages.

The question of the constitutionality of the False Claims Act’s qui tam provisions was notably raised in a dissent by Justice Clarence Thomas in the 2023 Supreme Court case U.S., ex rel. Polansky v. Executive Health Resources. While Polansky discussed the issue of a relator pursuing a lawsuit after the government declines to intervene, Thomas raised a separate issue of constitutionality in his dissent. He stated that “there are substantial arguments that the qui tam device is inconsistent with Article II and that private relators may not represent the interests of the United States in litigation.” In a one-paragraph concurrence, Justice Brett Kavanaugh, joined by Justice Amy Coney Barrett, invited challenges to the constitutionality of the FCA’s qui tam provisions, writing that “In my view, the Court should consider the competing arguments on the Article II issue in an appropriate case.”

Judge Mizelle, a former clerk of Justice Thomas, drew heavily upon Justice Thomas’ dissent in her decision. Echoing Thomas’ dissent in Polansky, JudgeMizelle concluded that the qui tam provision “directly defies the Appointments Clause by permitting unaccountable, unsworn, private actors to exercise core executive power [litigating on behalf of the government] with substantial consequences to members of the public.” The District Court thus agreed with the defendants that the FCA’s qui tam provisions indeed violates the Appointments Clause of Article II of the Constitution.

The Zafirov ruling relies upon the ‘unitary executive theory,’ a constitutional law theory that states the President of the United States has sole authority over the executive branch and that power cannot be limited by Congress.

According to then-Assistant Attorney General William Barr’s 1989 Memo Constitutionality of the Qui TamProvision of the False Claims Actwhich repeatedly cited by both the judgment and the U.S. Chamber of Commerce amicus brief, the move to enable private citizens to file on behalf of the government represents a breach of the separation of powers allowing “Congress to circumvent the Executive’s check.” Barr rebrands whistleblowers as “private bounty hunters” and claims that the 1986 amendments which reincorporated the FCA’s qui tam provisions was a tactic by Congress to override presidential powers. Barr maintains that “only a unitary executive” that is, “only the President” can “take care that the laws be faithfully executed.”

In a dissent in the 1988 Supreme Court case Morrison v OlsenJustice Antonin Scalia interpreted the ‘Unitary Executive’ to have unchecked authority to appoint and remove executive officials, claiming that the firing of an independent counsel without cause falls within the limitless power of the President over the executive.

The Middle District of Florida ruling draws on Scalia’s rationale arguing that the right to pursue a qui tam case denies the President the executive authority of appointment of the relator. Under the FCA, however, whistleblowers are granted certain rights. For example, the executive must guarantee a whistleblower the “right to continue as a party” with or without the United States intervening and wait for the relator’s approval before settling the action.

The court agrees with the defendants’ argument that the FCA therefore “den[ies] the President necessary removal authority and sufficient supervisory control over [the relator].”

The court contends that the physician-turned-whistleblower Zafirov was “an improperly appointed officer” in violation of the Appointments Clause and the Take Care and Vest Clause of the Article. According to the ruling, by filing a qui tam against Medicare fraud, Zafirov was granted “core executive power” without any “proper appointment under the Constitution.”

A Mischaracterization of Qui Tam Whistleblowing

Judge Mizelle’s decision in United States ex rel. Zafirov v. Fla. Med. Assocs. first mischaracterizes the FCA’s qui tam as a breach of presidential power instead of as a provision that strengthens checks and balances. Second, the court ignores case law outlining government prerogatives over relators such that they are not menacing to the core Executive powers.

The revived qui tam provision of 1986 was a legislative move to improve government accountability over fraud—neither expanding Congressional oversight nor the size of government—by mobilizing private citizens rather than public agents. The Florida court wrongfully elevates the status of a relator to an ‘officer’ responsible to the government. A citizen pursuing a claim on behalf of the government is not and does not pretend to be an extension of the Executive Office and, therefore not subject to administrative appointment procedure. Rather the relator is a private person, and the government is a third party to the case. The Vt. Agency of Natural Res. v. United States ex rel. Stevens majority opinion also written by Justice Scalia discussing whether relators have judicial standing under Article III, qualifies that the relator is on “partial assignment of the Government’s damages claim.” A ‘partial assignee’—to which only some rights are transferred—may “assert the injury suffered by the assignor” (the U.S.) so long as the harm done is sufficient. Scalia reiterates the ‘representational standing’ of relators and makes no remarks on its challenge to the Unitary Executive. Judge Mizelle’s reliance on Morrison v Olsen to claim that like an independent counsel, a relator should also qualify as an officer ignores the Stevens Supreme Court ruling distinguishing relators as a type of assignee.

Mizelle also raises that relators seem to enjoy unbridled authority over the Executive by initiating a qui tam suit without government intervention. While Mizelle points to 31 U.S.C. § 3730 (c) to demonstrate the unchecked power of the relator, she neglects the numerous limitations specified in § 3730 (c)(2), including the broad power of the government to dismiss the qui tam action after intervening notwithstanding any objections from the relator. She frames the government intervention as “the government’s ability to pursue a parallel action and to exert limited control [which] does not lessen a relator’s unchecked civil enforcement authority to initiate.” In truth, the statute and years of judicial history maintain the government’s absolute discretion over whether to intervene in or completely stop the case by dismissing the action.

Contrary to Judge Mizelle’s belief, relators are not free from potential government intervention even when independently pursuing the case. On the contrary, relators are not able to independently pursue any binding action on the government unimpeded by the government. While Zafirov independently pursued the claim for five years, the government could have intervened and then dismissed the claim at any time. If the government intervenes, underlined in 31 U.S.C. § 3730 (c)(2), the government is empowered to settle the action with the defendant notwithstanding any objections from the relator and to restrict their participation in the course of the litigation. The fact that the government may choose not to intervene at one point does not divest them of their ability to intervene later and exercise significant authority over the relator.

Implications: Crippling the False Claims Act

Judge Mizelle’s decision seeks to end the historic success of the qui tam provision of the FCA by declaring the government’s most effective mechanism of detecting fraud as unconstitutional. While the decision does not invalidate the FCA nationally, this case could be the first step in a series of appeals that may elevate the issue to the Supreme Court.

The government’s largest obstacle to fighting white-collar crime such as fraud is detection. The diffuse and indirect nature of fraud requires those with insider knowledge to assist the government in pursuing corruption. In terms of the effectiveness of the qui tam provision, between 1987 and 2022, the Department of Justice Civil Fraud Division recovered $22.1 billion without the help of whistleblowers versus $50.3 billion with the help of whistleblower lawsuits. Since the 1986 amendments to the FCA, whistleblowers have been the direct source of approximately 70% of civil fraud recoveries by the federal government. From the Medicare billing fraud committed in Florida Medical Associates to Russian money laundering, the United States may lose its most effective tool to fight fraud fraud if the qui tam provisions of the FCA are ruled unconstitutional.

Federal District Court in Florida Holds FCA’s Qui Tam Provisions Unconstitutional

In the Supreme Court’s 2022 decision in United States ex rel. Polansky v. Executive Health Resources, Inc., three justices expressed concern that the False Claims Act’s qui tam provisions violate Article II of the Constitution and called for a case presenting that question. Justice Clarence Thomas penned a dissent explaining that private relators wield significant executive authority yet are not appointed as “Officers of the United States” under Article II. Justice Brett Kavanaugh and Justice Amy Coney Barrett, concurring in the main opinion, agreed with Justice Thomas that this constitutional issue should be considered in an appropriate case.

Earlier this year, several defendants in a non-intervened qui tam lawsuit in the Middle District of Florida took up the challenge. The qui tam, styled United States ex rel. Zafirov v. Florida Medical Associates, LLC et al., involves allegations of Medicare Advantage coding fraud. After several years of litigation, the defendants moved for judgment on the pleadings, arguing the relator’s qui tam action was unconstitutional, citing Justice Thomas’s dissent in Polansky.

The defendants’ motion prompted a statement of interest from the United States and participation as amici by the U.S. Chamber of Commerce and the Anti-Fraud Coalition. The Court also asked for supplemental briefs on Founding-era historical evidence regarding federal qui tam enforcement.

On September 30, 2024, Judge Kathryn Kimball Mizelle granted the defendants’ motion, agreeing the relator was unconstitutionally appointed and dismissing her complaint. Judge Mizelle, who clerked for Justice Thomas, held a private FCA relator exercises significant authority that is constitutionally reserved to the executive branch, including the right to bring an enforcement action on behalf of the United States and recover money for the U.S. Treasury. In doing so, a relator chooses which claims to prosecute, which theories to raise, which defendants to sue, and which arguments to make on appeal, resulting in precedent that binds the United States. Yet, a relator is not appointed by the president, a department head, or a court of law under Article II, making the qui tam device unconstitutional.

Judge Mizelle distinguished historical qui tam statutes, which were largely abandoned early in our nation’s history, on the ground that few gave a relator the level of authority the FCA does. And while the FCA itself dates back to the Civil War, the statute largely remained dormant (aside from a flurry of use in the 1930s and 40s) until the 1986 amendments set off a new wave of qui tam litigation.

The ruling is significant for the future of the FCA. As Judge Mizelle’s opinion explains, most FCA actions are brought by relators as opposed to the government itself. If the decision is upheld on appeal, a number of outcomes are possible. If the FCA is to continue as a significant source of revenue generation for the government, the DOJ must devote more resources to bringing FCA actions directly. Congress may also consider amending the FCA’s qui tam provisions to limit relators’ authority to conduct FCA litigation, thereby maintaining the statute as a viable avenue for whistleblowing.

One thing is almost certain, however. FCA defendants across the country will likely raise similar arguments in light of Judge Mizelle’s ruling. Whether in Zafirov or another case, it appears the Supreme Court will get to decide the constitutionality of the FCA’s qui tam provisions sooner rather than later.

Is It the End of the False Claims Act As We Know It? District Court Rules Qui Tam Provisions Unconstitutional

In a first-of-its-kind ruling on 30 September 2024, Judge Kathryn Kimball Mizelle of the US District Court for the Middle District of Florida held in United States ex rel. Zafirov v. Florida Med. Assocs., LLC that the qui tam provisions of the False Claims Act (FCA) are unconstitutional. No. 19-cv-01236, 2024 WL 4349242, at *18 (M.D. Fla. Sept. 30, 2024). Specifically, Judge Mizelle found that qui tam relators in FCA actions qualify as executive branch “Officers” who are not properly appointed, thereby violating the Appointments Clause of Article II of the US Constitution.

The holding adopts Appointments Clause arguments that have been gaining traction in recent Supreme Court opinions. It also addresses some of the “serious constitutional questions” that Justice Clarence Thomas had raised regarding the FCA’s qui tam provisions in his dissent in the Supreme Court’s June 2023 decision in United States ex rel. Polansky v. Exec. Health Res., Inc., 599 U.S. 419, 449 (2024) (Thomas, J., dissenting). Notably, Judge Mizelle’s decision in Zafirov is contrary to a number of other decisions post-Polansky that rejected similar constitutional arguments.

The decision is sure to be appealed to the Eleventh Circuit and it remains to be seen whether Judge Mizelle’s rationale will withstand appellate scrutiny. In any event, for the time being, the defense bar has a new tool in its arsenal to seek dismissal of qui tam FCA actions. Moreover, if the decision stands, it will have broad ramifications on the FCA, which has provided for qui tam actions (a form of “whistleblower” activity) since the FCA’s enactment in 1863. Cases filed by qui tam relators have comprised the largest portion of overall FCA recoveries for years, accounting for 87% of FCA recoveries in the most recent fiscal year. For additional data on qui tam cases, see our firms’ recent white paper here.

Summary of the Decision

In 2019, the relator, a board-certified family care physician, filed a qui tam FCA action against her employer and several other providers, as well as Medicare Advantage Organizations (MAOs). The relator alleged that the providers acted in concert with the MAOs to artificially increase the risk adjustment scores of Medicare Advantage enrollees, in turn increasing the defendants’ capitated payments from the government.

After a lengthy procedural history involving multiple rounds of motions to dismiss, in February 2024, the defendants sought judgment on the pleadings, arguing that the FCA’s qui tam provisions violate the Appointments, Vesting, and Take Care Clauses of Article II of the US Constitution. The defendants also argued that historical practice does not cure the qui tam provisions’ constitutional defects. The United States intervened solely to defend the constitutionality of the FCA’s qui tam provisions, with several amici curiae also filing briefs.

The court did not reach the Vesting and Take Care Clause arguments but agreed with defendants that the qui tam provisions violate the Appointments Clause. Analyzing that question, the court first found that qui tam relators are “Officers of the United States” because: (1) relators exercise significant authority by possessing civil enforcement authority on behalf of the United States; and (2) relators occupy a “continuing position” established by law given that the FCA prescribes their statutory duties, powers, and compensation and the position is analogous to other temporary officials that wield core executive power, such as bank receivers and special prosecutors. Second, the court found that Article II of the US Constitution contains no qui tam exception, rejecting arguments that historical practice confirms the qui tam provisions’ constitutionality. The court stated that “[w]hen the Constitution is clear, no amount of countervailing history overcomes what the States ratified.” Third, the court found that because a relator is an Officer, the relator must be appointed by the president, the head of an executive department, or a court. Because relators are self-appointed by initiating their own FCA actions, the court held that the qui tam provisions violate the Appointments Clause and dismissed the action.

Key Takeaways

  • Although noteworthy, Zafirov is an outlier among the multiple decisions pre- and post-Polansky that have addressed the qui tam provisions’ constitutionality. The case is also expected to be appealed by both the relator and the United States to the Eleventh Circuit. Of note, the Eleventh Circuit is currently considering an appeal of a separate Appointments Clause ruling that found a special counsel was improperly appointed in United States v. Trump.
  • This issue could also make its way to the Supreme Court. In addition to Justice Thomas’ comments noted above, Justices Brett Kavanaugh and Amy Coney Barrett (in a concurrence in Polansky) acknowledged that “[t]here are substantial arguments that the qui tam device is inconsistent with Article II” and suggested that the Court consider those arguments in an “appropriate case.” Time will tell whether Zafirov is that case.
  • The anti-whistleblower holding in Zafirov stands in sharp contrast to other recent notable developments that encourage whistleblower activity, including the US Department of Justice’s Corporate Whistleblower Awards Pilot Program and similar initiatives, as well as recent US Securities and Exchange Commission enforcement actions.
  • Despite the expected appeals, the success in Zafirov raises important issues for FCA defendants and the defense bar to evaluate, and the decision may open the door to similar arguments in other FCA qui tam actions. For one, it remains to be seen what impact Zafirov should have where a defendant is considering settling in a nonintervened case and whether a conditional settlement that preserves the right to appeal the constitutional issue is appropriate. Other courts may also draw different lines, including if and how the government’s decision to intervene impacts the constitutional analysis. These will all be important issues for affected companies and FCA practitioners to consider and keep an eye on.

Our Firm’s FCA lawyers will continue to closely monitor these developments.

Former Acadia Employees Received Reward for Blowing the Whistle on Healthcare Fraud

The United States Department of Justice settled a False Claims Act qui tam whistleblower lawsuit against inpatient behavioral health facilities operator Acadia Healthcare Company, Inc. Under the terms of the settlement, the operator paid almost $20 million to the United States and the States of Florida, Georgia, Michigan, and Nevada. The relators, or whistleblowers, who filed suit in 2017, received a reward of 19% of the government’s recovery of misspent Medicare, TRICARE, and Medicaid funds. According to one of the Relators, Jamie Clark Thompson, a former Director of Nursing at Acadia’s Lakeview Behavioral Health facility, “I am passionate about advocating for improved and quality services for individuals living with mental illness. Unfortunately, our communities have seen the devastating impact when this vulnerable population receives inadequate care. I firmly believe that by continuously working to improve our mental health system, we can support recovery and well-being, benefiting our entire community. I hope that my actions have made a difference, and I know that properly allocating funds is crucial to supporting behavioral health services and those working tirelessly to improve them.”

Medicare, TRICARE, and Medicaid Fraud Allegations

According to the settlement agreement, the whistleblowers alleged Acadia and certain of its facilities submitted false claims to Medicare, TRICARE, and Medicaid. Specifically, the facilities allegedly admitted ineligible patients, provided services for longer than was medically necessary or did not provide treatment at all (but still billed the healthcare programs for it), did not provide sufficient care for those who needed acute care or individualized care plans, and hired the wrong people or failed to train their staff to “prevent assaults, elopements, suicides, and other harm resulting from staffing failures.”

Behavioral Health Facility Fraud

Behavioral healthcare facilities provide inpatient, outpatient, and residential care for adolescents, adults, and seniors for mental health conditions. As taxpayer-funded healthcare programs, Medicare, Medicaid, and TRICARE cover behavioral healthcare. Treating mentally ill Medicare, Medicaid, or TRICARE beneficiaries as cash cows, and either under-treating, over-treating, or not treating them at all both robs the individuals of the chance to recover, wastes taxpayer resources, and may even jeopardize their safety and well-being.

The Importance of Medicare, Medicaid, and TRICARE Whistleblowers

Whistleblowers who report behavioral health facility fraud are not only protecting vulnerable patients but also making sure federally funded healthcare dollars are being spent to properly treat adolescent, adult and older patients with significant behavioral health conditions. Three employees at different Acadia facilities came forward, faced retaliation for speaking up, and are now being rewarded for helping to fight fraud and abuse and for their courage.

by: Tycko & Zavareei Whistleblower Practice Group of Tycko & Zavareei LLP

Walgreens Settles for $106.8 Million Over FCA Violations

On September 13, the US Department of Justice (DOJ) announced that Walgreens Boots Alliance Inc. and Walgreen Co. (collectively, Walgreens) agreed to pay $106.8 million to resolve allegations of violating the False Claims Act (FCA) and state statutes. The allegations pertain to billing government health care programs for prescriptions that were never dispensed. The government alleged that from 2009 until 2020, Walgreens submitted claims to federal health care programs for prescriptions that were processed but never picked up by beneficiaries. This resulted in Walgreens receiving 10s of millions of dollars for prescriptions that were never actually provided to health care beneficiaries.

Under the resolution, Walgreens agreed to enhance its electronic pharmacy management system to prevent future occurrences and self-reported certain conduct. In addition, Walgreens refunded $66,314,790 related to the settled claims, which allowed Walgreens to receive credit under the DOJ’s guidelines for taking disclosure, cooperation, and remediation into account in FCA cases.

Under the settlement agreement, the federal government received $91,881,530, and the individual states received $14,933,259 through separate settlement agreements. The settlement will resolve three cases pending in the District of New Mexico, Eastern District of Texas, and Middle District of Florida under the qui tam, or whistleblower, provision of the FCA. Whistleblowers Steven Turck and Andrew Bustos, former Walgreens employees, will receive $14,918,675 and $1,620,000, respectively, for their roles in filing the suits.

The DOJ’s press release can be found here.

CVS Health Subsidiary Settles FCA Allegations for $60 Million

On September 16, Chicago company Oak Street Health, a subsidiary of CVS Health, agreed to pay $60 million to resolve allegations that it violated the FCA by paying kickbacks to third-party insurance agents in exchange for recruiting seniors to Oak Street Health’s primary care clinics from September 2020 through December 2022.

According to the DOJ, in 2020, Oak Street Health developed a program called the Client Awareness Program. Under the program, which was developed to increase patient membership, seniors who were eligible for Medicare Advantage received marketing messages designed to generate interest in Oak Street Health. Upon receipt of these messages, third-party insurance agents organized three-way phone calls with Oak Street Health employees for the interested seniors. Oak Street Health paid agents around $200 per beneficiary referred or recommended as part of this service. Instead of basing referrals and recommendations on the best interest of the seniors, these payments allegedly encouraged agents to base referrals and recommendations on Oak Street Health’s financial interests.

The DOJ’s press release can be found here.

Dunes Surgical Hospital Settles for $12.76 Million Over FCA Violations

On September 16, South Dakota companies Siouxland Surgery Center LLP, d.b.a. Dunes Surgical Hospital, United Surgical Partners International Inc. (USPI), and USP Siouxland Inc. agreed to pay approximately $12.76 million to settle FCA allegations related to improper financial relationships between Dunes and two physician groups. Since July 1, 2014, USPI has maintained partial ownership of Dunes through USP Siouxland, a wholly owned subsidiary of USPI. Following an internal investigation, Dunes and USPI disclosed the arrangements at issue to the government.

From at least 2014 through 2019, Dunes allegedly made financial contributions to a nonprofit affiliate of a physician group whose physicians referred patients to Dunes. According to the complaint, those payments allegedly funded the salaries of referring employees. Other allegations include that Dunes provided a different physician group with below-market-value clinic space, staff, and supplies. The DOJ alleged that these arrangements violated both the Anti-Kickback Statute and the Stark Law, which are “designed to ensure that decisions about patient care are based on physicians’ independent medical judgment and not their personal financial interest.”

Following Dunes’ and USPI’s internal compliance review and independent investigation, the companies promptly took remedial actions and disclosed such arrangements to the DOJ. The companies also provided the government with detailed and thorough written disclosures and cooperated throughout its investigation, resulting in cooperation credit for the companies.

Under the settlement, Dunes and USPI will pay $12.76 million to the federal government for alleged violations of the FCA, and approximately $1.37 million to South Dakota, Iowa, and Nebraska for their share of the Medicaid portion of the settlement.

The DOJ’s press release can be found here.

California Man Convicted for Paying Illegal Kickbacks for Patient Referrals to Addiction Treatment Facilities

On September 11, a federal jury convicted Casey Mahoney, 48, of Los Angeles, for paying nearly $2.9 million in illegal kickbacks for patient referrals to his addiction treatment facilities in Orange County, California. The facilities involved are Healing Path Detox LLC and Get Real Recovery Inc.

According to court documents and evidence presented at trial, Mahoney paid illegal kickbacks to “body brokers” who referred patients to his facilities. These brokers appeared to pay thousands of dollars in cash to patients to induce them to procure treatment at Mahoney’s facilities. Mahoney allegedly concealed these illegal kickbacks through sham contracts with the body brokers. The contracts purportedly required fixed payments and prohibited payments based on the volume or value of patient referrals, when in reality, payments were negotiated based on patients’ insurance reimbursements and the number of days Mahoney could bill for treatment. Mahoney also allegedly laundered the proceeds of the conspiracy through payments to the mother of one of the body brokers, falsely characterizing them as consulting fees.

The Eliminating Kickbacks in Recovery Act formed the basis of the charges against Mahoney. He was convicted of one count of conspiracy to solicit, receive, pay, or offer illegal remunerations for patient referrals, seven counts of illegal remunerations for patient referrals, and three counts of money laundering. He is scheduled to be sentenced on January 17, 2025, and faces a maximum penalty of five years in prison for the conspiracy charge, 10 years in prison for each illegal remuneration count, and 20 years in prison for each money laundering count.

The DOJ’s press release can be found here.

© 2024 ArentFox Schiff LLP

by: D. Jacques SmithRandall A. BraterMichael F. DearingtonNadia PatelHillary M. Stemple, and Rebekkah R.N. Stoeckler of ArentFox Schiff LLP

For more news on FCA Violations visit the NLR Criminal Law Business Crimes section.

Litigation Against Pharmacy Benefit Managers

Pharmacy Benefit Managers (PBMs) play a large role in the pharmaceutical medication distribution industry and have faced a great deal of litigation in recent years. This blog entry looks at cases against PBMs brought under the U.S. False Claims Act (FCA), as well as those brought as class actions on behalf of various kinds of groups.

FCA Actions

Cases brought against PBMs under the FCA typically involve allegations of fraudulent billing practices, false statements, and kickback schemes. These cases often address whether PBMs have caused false claims to be submitted to government healthcare programs, such as Medicaid, and whether they have engaged in practices that violate the FCA and other related statutes.

First, PBMs may violate the FCA by failing to pay reimbursements to individuals, other business entities, and/or state or federal agencies. In United States v. Caremark, Inc., the U.S. Court of Appeals for the Fifth Circuit held that the district court erred in finding that the Defendant PBM did not impair an obligation to the government within the meaning of the FCA by unlawfully denying reimbursement requests from state Medicaid agencies.

Second, PBMs may violate the FCA by billing individuals, other business entities, and/or state or federal agencies for services that were never rendered. In United States ex rel. Hunt v. Merck-Medco Managed Care, L.L.C., the U.S. District Court for the Eastern District of Pennsylvania addressed allegations that the PBM billed for services not rendered and fraudulently avoided contractual penalties it would otherwise have had to pay. The Court found that the Complaint sufficiently alleged that the PBM caused false claims to be presented to an agent of the United States, satisfying the statutory requirements of the FCA.

Third, PBMs may violate the FCA by overcharging individuals, other business entities, and/or state or federal agencies for services. For example, in two cases that were settled in 2019 in the Western District of Texas and the Northern District of Iowa, two subsidiaries of Fagron Holding USA LLC settled with the U.S. for over $22 million in connection with such a scheme. In the first, Fagron subsidiary Pharmacy Services Inc. (PSI) and its affiliates were accused of submitting fraudulent compound prescription claims to federal healthcare programs, manipulating pricing through sham insurance programs, paying kickbacks to physicians, and illegally waiving copays. In the second, Fagron subsidiary B&B Pharmaceuticals Inc. faced claims under the FCA for setting an inflated average wholesale price for Gabapentin.

Finally, PBMs may violate the FCA by engaging in kickback schemes with drug manufacturers or other entities. These schemes may also involve waiving copays and the provision of unnecessary services to patients. One notable case involves AstraZeneca LP, a pharmaceutical manufacturer, which agreed to pay $7.9 million to settle allegations that it engaged in a kickback scheme with Medco Health Solutions, a PBM. The allegations included providing remuneration to Medco in exchange for maintaining exclusive status of AstraZenica’s heartburn relief drug Nexium on certain formularies, which led to the submission of false claims to the Retiree Drug Subsidy Program. Similarly, Sanford Health and its associated entities agreed to pay $20.25 million to resolve FCA allegations related to false claims submitted to federal healthcare programs. The allegations included violations of the Anti-Kickback Statute and medically unnecessary spinal surgeries, with one of Sanford’s top neurosurgeons receiving kickbacks from his use of implantable devices distributed by his physician-owned distributorship.

Class Actions

Class action cases against pharmacy benefit managers (PBMs) often involve allegations of deceptive practices, breach of fiduciary duty, and violations of contractual obligations. These cases typically involve issues such as the improper handling of rebates, kickbacks, inflated drug costs, and the failure to act in the best interest of plan participants.

First, PBMs may subject themselves to liability by failing to pass on negotiated rebates or other types of savings to their members. In Corr. Officers’ Benevolent Ass’n of the City of N.Y. v. Express Scripts, Inc., a union alleged that PBM managers failed to pass on negotiated rebates to its members, instead keeping them for their own benefit. The court found sufficient allegations to support claims of deceptive practices and breach of fiduciary duty, allowing these claims to proceed.

Second, and far more commonly, PBMs face liability for engaging in antitrust violations. Such liability typically arises when PBMs collude with one another to fix drug processes or otherwise improperly influence the market for medications and/or other medical services. For example, in In re Brand Name Prescription Drugs Antitrust Litig., a class of retail pharmacies alleged that drug manufacturers and wholesalers conspired to deny them discounts. The court found sufficient evidence of violations to proceed to trial. Similarly, in Independent Pharmacies vs. OptumRx, more than 50 independent pharmacies filed a class action lawsuit against OptumRx, a division of UnitedHealth Group, alleging that OptumRx failed to comply with state pharmacy claims reimbursement laws, leading to illegal price discrimination and reimbursement violations. Lastly, in Elan and Adam Klein, Leah Weav, et. al v. Prime Therapeutics, Express Scripts, and CVS Health, the Plaintiffs brought a action lawsuit against three major PBMs – Prime Therapeutics, Express Scripts, and CVS Health – on behalf of EpiPen purchasers with ERISA health plans for contributing to EpiPen price inflation through rebates and breaching their fiduciary duty to plan members.

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In short, because PBMs play such a large role in the pharmaceutical medication distribution industry, there are many ways that they can subject themselves to liability under the FCA, pursuant to a class action, or otherwise. As the place of PBMs in this marketplace continues to grow, we can expect that litigation against them will do likewise. Potential plaintiffs seeking to bring claims against a PBM should consult with an experienced attorney in order to determine all of the causes of action that may be available to them.

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1United States v. Caremark, Inc., 634 F.3d 808 (5th Cir. 2011).
2United States ex rel. Hunt v. Merck-Medco Managed Care, L.L.C., 336 F. Supp. 2d 430 (E.D. Pa. 2004).
3 Corr. Officers’ Benevolent Ass’n of the City of N.Y. v. Express Scripts, Inc., 522 F. Supp. 2d 1132.
4In re Brand Name Prescription Drugs Antitrust Litig., 123 F.3d 599.