The district court denied the defendant’s motion to dismiss a qui tam case alleging healthcare fraud, finding that the claims were not precluded by the public disclosure bar. The defendant argued that a previous qui tam case made similar allegations about the company’s process for filling and billing for prescriptions, but the court found the relators in this case alleged an entirely different scheme through which the defendant fraudulently altered prescriptions to provide more expensive medications and thereby increase its billings. The relator also argued that the case should be dismissed because two allegedly false claims were not false, but the court declined to dismiss a case alleging hundreds of fraudulent claims merely because the defendant could show that two prescriptions were not improperly altered. However, the court dismissed two reverse false claims allegations, finding that potential penalties under a corporate integrity agreement did not create an affirmative obligation to pay the government, because the penalties are levied at the government’s discretion and therefore are speculative. The court also held that the relators’ allegation that the defendant failed to repay the government for overpayments was redundant of the false claim complaint.
Relators Lena Sturgeon, Anthony Ferrante, Anthony Sciole, and Nathan Niles brought a qui tam action against PharMerica Corporation alleging violations of the federal False Claims Act and the false claims statutes of twenty-six states. The relators alleged PharMerica submitted claims for prescriptions it illegally altered without physician consent. Sturgeon alleged PharMerica retaliated against her after she expressed her concerns about this activity. The federal and various state governments declined to intervene and PharMerica moved to dismiss.
PharMerica is an institutional pharmacy that fills prescriptions for nursing homes and other long-term care facilities.
While employed as an executive vice president at PharMerica, Sturgeon investigated a complaint from a health management system about an increase in its pharmacy costs. The company noticed that after switching to PharMerica for its prescription fulfillment, its costs increased by several dollars per patient per day. When she investigated, Sturgeon found discrepancies between prescription orders and prescription fulfillment notes. In other words, it appeared PharMerica provided different medications than those prescribed, to PharMerica’s financial benefit.
Sturgeon brought her concerns to multiple executives, none of whom addressed the issue. Soon after, her duties and responsibilities were diminished. Believing this negative action was retaliatory, Sturgeon resigned. She then accepted a position with the health management system who complained about their pharmacy billings and was tasked with auditing the company’s relationship with PharMerica. The other relators also were involved in the audit from the customer’s side. During the audit, Sturgeon confirmed the discrepancies she previously identified and discovered the alleged scheme to alter prescriptions systematically so as to increase reimbursements.
The relators alleged that clerks were directed to alter prescriptions manually. They also alleged that when a medication was temporarily out of stock, PharMerica would substitute the most expensive alternative. According to the relators, these alterations included the drug itself, the dosage, and the form of the medication. The relators alleged they found many thousands of instances where PharMerica altered the drug dispensed or the dosage, without consent of a physician. They asserted this conduct resulted in the submission of false claims.
As an initial matter, PharMerica asked the court to take judicial notice of four filings from a prior FCA case, United States ex rel. Denk v. PharMerica, which the defendant argues precludes the relators’ claims. The documents included the original and first amended complaints, the government’s notice of election to intervene in part and decline to intervene in part, and the government’s own complaint. PharMerica also asked for judicial notice of four filings from relator Sturgeon’s prior employment action against PharMerica, which it argued precluded her retaliation claims here. Those filings included the complaint, the verdict slip, and the judgment. The defendant also requested judicial notice of various CMS guidance documents. The court agreed to accept these documents for the limited purposes of judicial review.
However, the court declined to accept materials showing how PharMerica’s prescription fulfillment system works. The court explained that the narrow exception for considering documents not in evidence is limited to cases where a claim is based on an extrinsic document, and does not apply where the complaint merely cites an extrinsic document. In this case, the court concluded the plaintiff had not based their complaint on the working of PharMerica’s prescription system. Although the way the system functions is relevant to the complaint, the relators based their case on their investigation and first-hand knowledge, not promotional brochures.
In its motion to dismiss, PharMerica argued that the current complaint was precluded by both the government action bar and public disclosure bar. The defendant referenced the documents in U.S. ex rel. Denk v PharMerica, which it argued presented substantially the same claim that PharMerica sought reimbursement for prescriptions that were not validly dispensed.
However, while Denk brought fraud claims against PharMerica, the court found the claims brought by the relators to be sufficiently distinct as to avoid the public disclosure bar. In Denk, the relator alleged PharMerica failed to secure written prescriptions after dispensing medications based on an oral prescription; that PharMerica dispensed narcotics on an emergency basis without even an oral prescription, instead using old prescriptions and order forms; and (3) that PharMerica dispensed narcotics on an emergency basis without indicating the justification for an emergency dispense and/or without verifying that an emergency in fact existed. The court concluded these claims were not substantially similar to those in the current complaint and therefore the public disclosure bar did not apply.
PharMerica has also moved to dismiss for failure to state a claim and for failure to satisfy the heightened pleading standard. In their complaint, the relators alleged that PharMerica sought and received reimbursement upon falsely certifying that it had complied with the applicable laws and regulations governing its dispensation of medications. Because PharMerica substituted medications without physician approval, as required by CMS and state health insurance programs, and then certified that they had complied with these rules, the relators alleged their claims for payment were false.
First, PharMerica argued that this claim should be dismissed because there is no federal law that governs the prescribing of non-controlled drugs. Rather, PharMerica argued that state pharmacy laws govern the dispensing of these non-controlled substances. Under Pennsylvania law, the form of a non-controlled drug—tablet v. capsule—is not an essential element of a prescription, and therefore a substitution of this nature could not form the basis of an FCA complaint.
First, the court questioned why PharMerica relied on Pennsylvania law alone, when the qui tam suit alleged conduct that occurred nationwide and implicated federal health insurance programs. Further, even in Pennsylvania law were controlling here, the court noted that the relators also alleged PharMerica altered dosages, quantities, and the actual medications, and with specificity. The court found the relators met the standard for pleading their claims with particularity.
PharMerica also argued the relators erred in describing the process a pharmacist must use to obtain a new prescription, but the court found this unavailing. The court noted the relators argued the defendant did not obtain any physician approval, regardless of process. Even if a certain process was not legally required, the relators still adequately alleged PharMerica violated state and federal law by not obtaining physician consent before altering a prescription.
Finally, PharMerica argued the relators did not plead their case with sufficient detail, but the court noted the relators alleged the specific time frame of the scheme and the number and type of alterations their audit revealed, with some specific examples identified by RX number. They also alleged that PharMerica did not obtain the prescribing physician’s consent before altering prescriptions. The court found this enough to survive a motion to dismiss.
PharMerica also argued that because two specific prescriptions were either not altered or were altered legally, but even accepting this as true, the court found no reason to dismiss a complaint alleging hundreds of false claims for prescription reimbursement because two may have been not false. The court also reiterated that the relators did not need to identify any specific claims at this juncture, only reliable indicia that false claims had been submitted.
Next, the court considered the claim of reverse false claims. Based on the alleged prescription alteration scheme, the relators alleged PharMerica violated a previous Corporate Integrity Agreement entered into following the Denk case and concealed its violations to avoid paying the ensuing penalties to the government. Second, they alleged that PharMerica improperly retained the same payments it received as a result of the prescription alteration scheme.
PharMerica’s CIA with the Department of Health and Human Services OIG required the defendant to bring itself into compliance with various federal rules and regulations. Instead, the relators alleged the defendant crafted a new scheme. According to the relators, this conduct not only violated the FCA but also the CIA, creating an obligation to pay penalties to the government. PharMerica argued that penalties under a CIA are contingent obligations that cannot form the basis of an FCA claim, and that the complaint did not identify any violations of the agreement.
However, the court found the definition of “obligation” under the FCA to be expansive, and included at least some contingent, non-fixed obligations. The court noted that this definition must be reasonable, however; future duties to pay that are speculative may not form the basis of an FCA complaint. Instead, the obligation to pay must have existed at the time of the misconduct, even though the amount need not have been fixed. The court reasoned that because the future obligation was contingent on the exercise of the government’s discretion, it was not a hard obligation.
The court acknowledged the Catch-22 of the situation. Defendants should not be liable for reverse false claims for possibly avoiding a penalty that is contingent on government discretion, but the government cannot enforce these penalties without notice that a Corporate Integrity Agreement has been violated. Where a party to a CIA fails to give notice voluntarily, it may be that a qui tam action under the reverse false claims provision is the only mechanism for recovering the stipulated penalties due. The court noted that shielding a repeat defendant from qui tam liability for improperly avoiding penalties may not be desirable. However, until the government structures its agreements in a different manner, the court felt its hands were tied, and therefore dismissed this allegation for failing to state an actionable claim.
Next, the court considered whether the defendant’s knowing retention of funds that it had received based on a false certification represented an obligation to repay the government and that avoiding this obligation amounted to a reverse false claim. PharMerica argued that this allegation essentially repeated the main point of the complaint, that it had made false claims for payment. However, the court noted that the Patient Protection and Affordable Care Act defined an overpayment as any payment a recipient received improperly and defined those overpayments as obligations to the government that are actionable under the FCA. Nonetheless, the court concluded that the language in the Affordable Care Act was intended to establish liability for situations not clearly covered by the FCA, and therefore reasoned that the redundancy rule still applied. The court dismissed these allegations as well.
Finally, the court considered Sturgeon’s claim of unlawful retaliation. The court found that Sturgeon sufficiently alleged that she engaged in protected conduct when she raised concerns about PharMerica’s prescription fulfillment practices and reported her findings to her superiors on multiple occasions. The court also found that Sturgeon demonstrated that she had been discriminated against because of her activity, given her claims of diminished job responsibility, public upbraiding, and orders to cease her investigation into the alleged fraud.
PharMerica argued that this claim was collaterally estopped because it was adjudicated in an earlier action. Sturgeon previously sued PharMerica for breach of her employment agreement as well as violation of the Pennsylvania Wage Payment and Collection Law. That employment action was resolved by jury trial, at which the jury concluded that Sturgeon had not resigned her position due to the retaliatory actions of PharMerica. According to the defendant, that decision precluded Sturgeon from pursuing the matter further.
However, the court disagreed. The question put to that previous jury was whether or not Sturgeon had resigned her position due to the diminution of her job responsibilities. The jury was not asked whether she had experienced a material diminution of her duties, only if that were the reason for her resignation. The court found the distinction sufficient to allow Sturgeon to continue to pursue her claims.
