No Safe Harbor for Defendants in Massive Medicare Kickback Scheme; United States District Court for the Northern District of Texas, Dallas Division, No. 3:17-cv-02977-M, U.S. et al. v. Medoc Health Services LLC, et al.


The district court dismissed the defendants’ motions to dismiss the government’s claims that they violated the FCA and Anti-Kickback Statute by soliciting and accepting kickbacks from pharmacies in exchange for referring the prescriptions to those pharmacies for fulfillment. The court held the complaint adequately alleged the conspiracy, the kickback exchange, materiality, and the defendants’ knowledge. The court rejected the defendants’ assertion that kickback could not form the basis of an FCA claim, because a different court had invalidated the Patient Protection and Affordable Care Act, which provides that claims tainted by kickbacks are false by definition. The court noted that decision had been vacated and remanded, and that the government’s claims pre-dated the original court decision. The court also rejected the defendants’ attempt to duck under two safe harbors, first noting that “safe harbor” is an affirmative defense inappropriate for a motion to dismiss. Next, the court explained that an employment arrangement that paid one of the defendants based on referrals of federal prescriptions did not create a bona fide employee/employer relationship. The court also found the management services safe harbor did not apply, because the defendants didn’t come close to meeting all the requirements.

Multiple defendants filed motions to dismiss various claims in a qui tam action alleging they committed Medicare fraud by referring prescriptions paid for by federal government healthcare programs—such as Medicare, Tricare, and Department of Labor programs—to pharmacies that paid kickbacks.

Kevin Kuykendall, Sabrina Kuykendall, Mark Schneider, and Michael Schneider were owners or officers of Medoc Health Services LLC during the time period covered by the allegations. The government alleged Medoc created and owned management services organizations (MSOs) to provide services to pharmacies in return for service fees. According to the government, Medoc co-owned the MSOs with physicians willing and able to refer their patient prescriptions to Medoc for routing and fulfillment by Medoc-associated pharmacies. Through their ownership in the MSOs, the physicians then received a percentage of the profits earned from the private-pay prescriptions written by the physicians in the MSO.

The complaint alleged that Medoc encouraged physicians to increase the number of prescriptions they sent to Medoc by placing physicians with a high number of prescriptions in the more lucrative MSOs, while eliminating or transferring to lower volume MSOs physicians who wrote fewer prescriptions. The government argued this arrangement gave the defendants power over which pharmacy would fill prescriptions, and that they used this power to elicit kickbacks from pharmacies.

For example, the government alleged that Medoc signed a “sales representation” agreement with Total RX Care LLC, which entitled Medoc to 50 percent of the profits from Total RX’s prescriptions paid for by third-party private insurance. Soon after, Total RX added defendant Michael Schneider to its payroll and paid him a percentage of profits from federal prescriptions referred to the provider. This resulted in the payment of hundreds of thousands of dollars to Michael Schneider, even though he performed no services for Total RX. The funds paid to Michael were allegedly divided up among the other defendants.

The government alleged the defendants repeated this arrangement with other prescription providers and maintained spreadsheets tracking the number of prescriptions referred to providers and the payments they expected. The government also alleged the defendants created new arrangements and moved business when concerns were raised about possibly illegal kickbacks.

In their motion to dismiss, the defendants argued the complaint did not adequately allege that any payments were “in return for” a federal prescription referral, because the alleged kickbacks at issue were not paid to physicians who wrote the prescriptions. In response, the government noted that the AKS prohibits “any person,” not just physicians, from soliciting or receiving kickbacks. The court agreed.

The court also found the complaint met the relevant standard. The complaint alleged the defendants pressured physicians to send their federal referrals to Medoc for fulfillment and controlled where the prescriptions were sent. According to the government, they did so by switching physicians from MSO to MSO based on the number of referrals they made. Medoc also denied the MSO physicians and their patients the ability to choose where to fill their prescriptions. Instead, Medoc retained control over the referrals and prevented the patients from choosing their usual pharmacy.

Further, the defendants changed which pharmacy they used based on which paid kickbacks. The complaint included a chart showing spikes in government-paid prescriptions during the periods the pharmacies paid kickbacks and internal communications among the defendants in which they discussed their ability to transfer prescriptions from place to place.

Nevertheless, the defendants argued that Medoc’s alleged control of prescription referrals is irrelevant, because the complaint did not plead specific facts about how the alleged kickback payments filtered back down to result in referrals by Medoc. However, the court found that argument factually incorrect, as the complaint described how the kickbacks were distributed.

Some of the individual defendants made similar arguments contesting the alleged lack of their personal involvement with prescription referrals, but the court found those arguments unpersuasive for generally the same reasons. The court noted the complaint made credible allegations about the roles each played in the scheme. Further, the court noted the complaint did not need to allege that any of the individual defendants had the power to actually refer a prescription in return for a kickback, as long as it alleged that they solicited or received kickbacks with the necessary intent. The court found the complaint adequately spelled out how the defendants concocted and communicated the scheme, demanded payments, and received and disbursed the funds, and that they knew the kickbacks were related to federal prescriptions.

Next, the defendants argued the alleged kickbacks fell within a safe-harbor provision of the AKS, including the bona fide employee and management services safe harbor. In response, the government argued that the AKS safe harbors are affirmative defenses on which the defendants bear the burden of proof, and therefore are inappropriate for a motion to dismiss. The court agreed and declined to revisit its earlier holdings on the matter.

Further, even if the defendants were right, the court held the complaint was sufficient to overcome the argument. The court explained that the employee safe harbor applies only if the employer and employee have a bona fide employment relationship. In this case, the complaint sufficiently alleged that Michael Schneider was not a bona fide employee of Total RX or MidCities, and that his employment was cover for illegal payments. For example, the government alleged Michael did not perform any services for these purported employers, was paid only based on federal prescriptions referrals, and was not involved in his employment or salary negotiations. Taken together, those facts adequately alleged that Michael was not a bona fide employee of either Total RX or MidCities.

Next, the court explained that the management services safe harbor applies only if “all” of the seven requirements laid out in the applicable regulation are met. The defendants all but admitted that they did not meet that requirement, writing that the “arrangement satisfied almost every element of the safe harbor.” As relevant, the court noted that the aggregate compensation paid must be “set in advance,” be “consistent with fair market value in arms-length transactions,” and must not be “determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs.” Further, the court held the government’s complaint alleged the agreements did not meet most of the safe harbor requirements.

Next, the defendants argued the complaint did not adequately plead any false claims. First, they argued the complaint did not allege that any defendant certified compliance with the FCA or that any false statement was material, so even if there was an FCA violation, there was no false statement. However, the government noted that the 2010 Patient Protection and Affordable Care Act amended the AKS to provide that any claim tainted by an illegal kickback is by definition false.

In response, the defendants asserted that another district court held that the entire ACA, including the AKS amendments, was rendered unconstitutional when Congress eliminate the individual mandate shared responsibility payment. However, the court noted that the Fifth Circuit vacated and remanded the portion of that decision. Further, the court noted that it had previously held that the individual mandate was severable from the rest of the ACA, including those provisions that amend the AKS. The court declined to diverge from that position. Finally, the court noted the allegations precede the date of the ruling that rendered the ACA unconstitutional. Because all of the allegedly false claims were submitted in 2015 and 2016, even under the reasoning of the district court in Texas v. United States, the amendments to the AKS did not become unconstitutional until 2019, and thus they would apply to the allegations in this case.

The court also found the complaint adequately alleged that the AKS violations were material, because the government would not have paid the claims had it known about the financial arrangements between the defendants and pharmacies.

Some of the individual defendants also argued that they were not personally involved in the submission of any claims to the government, false or otherwise, but the court was not persuaded. According to the complaint, the claims submitted for payment were false because they were tainted by kickbacks. Thus, the court reasoned that allegations that the individual defendants solicited or received a kickback, knowing that the payments were the result of prescriptions paid for by the federal government, were sufficient to state a claim. The complaint made such allegations with respect to each defendant.

Next, the defendants argued the government did not adequately allege that they knowingly or willfully violated the FCA or the AKS, but rather made only conclusory statements to that effect. The defendants maintained that they believed their actions were perfectly legal. However, the court found otherwise, finding multiple examples where it alleged the defendants knew they were engaged in unlawful activity. For example, the complaint alleged that each of the Medoc defendants knew about the AKS’s restrictions on payments for federal referrals due to their previous involvement with a company that used commission agreements referencing the AKS, and because they ended the Total RX agreement after a contractor expressed AKS-related concerns. At least one defendant had been warned by an attorney that Medoc’s MSO model appeared to violate the FCA. Finally, the complaint alleged that Medoc’s agreements with pharmacies and the arrangements with MSO physicians expressly excluded payments for federal prescriptions, suggesting they knew such payments were unlawful.

The defendants also argued the complaint contained improper “group pleading” because it failed to establish the requisite scienter regarding each defendant individually. However, the court was not persuaded, finding ample allegations about each individual defendant. The court found that the facts alleged in the complaint—claiming that the Medoc Defendants were familiar with anti-kickback laws, recognized that they were receiving payments for federal referrals, and funneled the payments through other corporate entities to disguise them—adequately allege the necessary scienter.

Next, the defendants argued the conspiracy claim should be dismissed because the complaint did not adequately allege that the defendants entered into an unlawful agreement. However, the court found no question that it had. The defendants also argued that the complaint impermissibly alleged that the Medoc defendants conspired with themselves, and a legal entity cannot conspire with its officers or agents under the intra-corporate conspiracy doctrine.

However, the court found this argument ignored the fact that the complaint also alleged the defendants conspired with other entities to bring about the scheme. Additionally, the court identified several exceptions to the intra-corporate conspiracy doctrine exist, including an exception when the alleged conspirators have an independent stake in achieving the object of the conspiracy. The court found the government claimed that each Medoc defendant personally received kickbacks through their other companies, and therefore that they had a personal stake in the conspiracy separate from Medoc.

Finally, the defendants moved to dismiss the three common law claims, arguing that they were not plausible on their face. The court explained that common law fraud differs from the FCA because the latter lacks the elements of reliance and damages. In this case, the court found the government adequately alleged these elements, because it identified numerous examples of claims the government would not have paid had it known about the alleged kickbacks. In other words, the Complaint alleges that the Government relied on the truth of the claims, and paid them as a result.

The defendants also challenged the Government’s claim for unjust enrichment, but the only argument they make is that the claim cannot survive in the absence of a violation of the AKS, the FCA, or common law fraud. Because the complaint adequately alleged an FCA claim, the court rejected this argument.