Reverse False Claims: Government Can Show Obligation To Repay Even if Presentment Claims Should Fail; United States District Court for the Southern District of New York No. 1:15-cv- 4179 (CM), U.S. ex rel. Uri Bassan v. Omnicare Inc., CVS Health Corp.


The district court denied the defendants’ motions to dismiss the government’s lawsuit alleging they dispensed medications without valid prescriptions. The government alleged the defendants knowingly manipulated their internal systems to allow multiple prescription refills, regardless of whether the prescription had expired or even if there was any prescription at all. The defendant argued that prior to 2013, there was no regulation prohibiting the submission of claims for prescriptions that did not comply with relevant state and federal law. However, while one new law went into effect in 2013, the court found other relevant statutes and noted that the government alleged that the misconduct continued past 2013. The court found it was never ok to submit noncompliant claims or to submit claims where no prescription was issued at all. The defendants argued that the government should be required to separately prove claims involving Medicare, Medicaid, and TRICARE, but the court reasoned that an exhibit listing more than 4,000 false claims to Medicare was a sufficient sample. The court also found that the government had adequately alleged knowledge, finding the evidence demonstrated that the defendants were put on notice of their wrongdoing by internal and third-party audits and by state investigations that uncovered violations. The court also declined to dismiss the count of reverse false claims, finding that the government could argue that even if the defendants did not knowingly submit false claims, they had been put on notice of the improper payments and failed to reimburse them.

Relator Uri Bassan filed a qui tam case alleging that his former employers, Omnicare Inc., dispensed medications that were not supported by valid prescriptions. CVS Health Corp. was named as a defendant when the government intervened in the complaint, as the company had finalized its acquisition of Omnicare after the initial action was filed. The defendants filed three motions to dismiss.

The heart of the complaint is that Omnicare dispensed medications without a valid prescription, often the prescription had expired. For skilled nursing facilities, pharmacies may fill prescriptions based on standing orders without a set quantity or set number of allowable refills, because a physician is available to monitor the patient’s intake of the drug. However, for other facilities, such as assisted-living or independent living facilities, residents require prescriptions that specify the number of doses and refills. Such prescriptions are also generally time-limited and must be renewed, usually annually.  The government alleged that Omnicare treated prescriptions for patients living at unskilled facilities as though they were meant for patients at SNFs, and consistently refilled prescriptions without ever verifying or confirming whether the prescription had expired or was otherwise invalid.

The government attributed this situation to poor training and heavy workloads. The government alleged that Omnicare failed to adequately train its pharmacists, who then allowed expired prescriptions to “roll over” and continued to dispense drugs without a valid prescription.

The complaint alleged this occurred in three ways: through Omnicare’s OmniDX dispensing system; through its “cycle fill” dispensing option: and through its Oasis dispensing system. For all three theories, the government alleged Omnicare manipulated its systems by manipulating certain fields to allow dispensations to automatically occur even after a prescription had expired. Omnicare would then assign a new prescription number to the expired orders and just continue dispensing.

For example, the government alleged Omnicare would identify non-skilled nursing facilities as SNFs, so that its ordering systems would allow for automatic refills of prescriptions. Omnicare also would set the number of refills allowed to 99, allowing it to refill prescriptions long after they’d expired, and would often generate new prescription numbers for the same patient and prescription, meaning the number of allowable refills would be reset back to 99. Misidentifying non-skilled facilities also allowed the system to bypass notifications of expired prescriptions and to generate a new prescription number that made it appear that the original prescription had been replaced. This permitted the system to continue dispensing drugs long after the original prescription had expired.

The government also alleged that Omnicare misused an option to fill prescriptions on a certain scheduled cycle, rather than on demand. According to the government, prescriptions that were set to be “cycle filled” were automatically programmed to “roll over” – meaning that they were automatically refilled, regardless of whether the prescription had expired or not. Instead of requiring confirmation that mediations were needed, Omnicare filled prescriptions until a facility canceled them, again without regard to whether the prescription had expired.

In total, the government alleged that Omnicare submitted false claims based on illegal dispensations for residents in over 3,000 unskilled residential facilities. It attached exhibits detailing the names and locations of each of these facilities, as well as an exhibit detailing over 4,000 specific claims submitted from various Omnicare facilities that were alleged to be false.

In its first motion to dismiss, Omnicare argued that Bassan’s underlying complaint should be dismissed, because it had been superseded by the government’s complaint in intervention. However, while other courts have dismissed a relator’s complaint once the government intervenes, the court found the FCA contemplates relators continuing as a party to the action. While the court found little difference in whether or not Bassan’s underlying complaint was dismissed, it declined to do so.

Next, Omnicare moved to dismiss the government’s complaint for failure to state a claim. In Counts One and Two, the government alleged that Omnicare and CVS submitted claims for reimbursement that were both legally and factually false, and relied on false statements and records to make those claims.

The government alleged that the defendants’ claims to Medicare and Medicaid were expressly false because those claims require applicants to certify that the dispensations for which they were seeking reimbursement were made in compliance with federal law. The government also alleged that the claims to TRICARE were impliedly false because Omnicare submitted claims without disclosing that the dispensation was made without a valid prescription. Obviously, the government would not have reimbursed for these claims had it known that they were dispensed without valid prescriptions.

Omnicare argued that the government did not plead these counts with particularity. According to Omnicare, the regulation prohibiting the submission of prescriptions that fail to comply with all applicable requirements for valid prescriptions did not take effect until January 1, 2013. Therefore, any claim submitted to Medicare before that date could not have been false.

The court was not persuaded, first noting that the rule quoted by Omnicare pertained only to Medicare reimbursements, not to Medicaid or TRICARE, which were also covered by the government’s allegations. Second, the government alleged that the conduct continued after January 1, 2013.

Finally, the court patently rejected Omnicare’s assertion that it was legal for it to dispense medications without a valid prescription prior to 2013. The government provided CMS guidance to the contrary, as well as federal statutes. According to the court, these laws were more than adequate to put any pharmacy on notice that it was prohibited from submitting claims for reimbursement without valid prescriptions. Omnicare’s arguments to the contrary are meritless.

Nonetheless, Omnicare asserted that many states actually permitted unskilled residential facilities to dispense drugs without a prescription specifying the quantity or number of refills allowed. However, the court found that Omnicare misstated the laws. For example, Omnicare cites to a Wyoming regulation which purportedly states that drug orders to all long-term care facilities (including unskilled ones) need not specify drug quantities. But the court found the regulation specifically carved out adult day care facilities and assisted living facilities from the definition of long-term care facilities. These types of facilities were exactly where the government alleged the misconduct occurred. The court found the rest of the defendant’s citations similarly unavailing.

Further, the court found Omnicare ignored the allegation that it dispensed drugs when no prescription was issued at all. The government claimed that Omnicare filled medications based solely on receipt of a resident’s Medical Administration Record, which was not a valid prescription and was not typically signed by a doctor, or based on copies of medication lists and reports from a hospital or facility where a resident had resided previously. The complaint also alleged that Omnicare would even dispense drugs based on faxes or verbal refill requests from facilities, even when there was no valid underlying prescription authorizing the fill. In sum, the court found the allegations more than sufficient.

The court also found the government adequately alleged that the claims were factually false—that they contained details about the drug’s supposed prescriber, the number of refills allowed, and other assorted information that were wholly untrue because there was no underlying prescription at all to support the reimbursement. For example, prescriptions that were “rolled over” were wholly invalid, but Omnicare submitted reimbursement claims for them anyway, essentially fabricating the information included on the PDEs and other data submitted to the government. The court agreed these claims were factually false because all of the information contained within them were untrue since a real prescription did not exist.

Omnicare argued that the government fails to plead any false claims with particularity, but the court found the complaint outlined specific conduct observed by Omnicare employees, including how Omnicare consistently failed to distinguish between SNFs and unskilled facilities in processing orders at pharmacies using both the Oasis and OmniDX systems, and how the “cycle fill” option was abused at specific locations.

Further, the exhibits attached to the complaint identified 4,000 Medicare claims from 3,000 facilities. Omnicare argued that the government should have attached similar exhibits for Medicaid and TRICARE, but the court disagreed, finding the government provided sufficient representative samples.

Finally, Omnicare argued that the complaint failed to show that it “knowingly” submitted false claims, but the court again disagreed. The court found the complaint stated numerous times that Omnicare and CVS executives knew that they could not dispense drugs without valid prescriptions, that they knew many of their facilities did so anyway, and that this conduct continued even after they were alerted to that fact. The government alleged that Omnicare was alerted to the conduct by the results of multiple internal and third-party audits and by investigations by state boards of pharmacy.

Next, Omnicare argued the government failed to adequately plead the count of reverse false claims. The government theorized that Omnicare failed to repay the funds that it received from the false reimbursement requests. The parties disputed the underlying pleading that Omnicare had an obligation to pay, with which it failed to comply.

The government cited to the Affordable Care Act, which requires entities to return any overpayments received from Medicare or Medicaid within 60 days after the overpayment is identified, including payments to which the recipient is not entitled. Omnicare argued that the government failed to plead that there had been any “applicable reconciliation,” and so any funds Omnicare received from its allegedly fraudulent claims were not “overpayments” as contemplated by the statute and were not retained in knowing violation of any obligation.

The court found the defendant’s argument without merit. Prior courts and CMS have found that the “applicable reconciliation” modifier refers simply to an event or events after which an overpayment can exist. For the purposes of the FCA, the court found no reason to scrutinize the exact dates of payment submissions, because the complaint more than sufficiently alleged that Omnicare had notice of its violations and thus that it needed to repay the reimbursements it improperly received. In addition to the audit reports, several state agencies transmitted notices of violation during the relevant period. The court found the government established that Omnicare had a duty to repay, with which it failed to comply.

Finally, Omnicare argued that this count was duplicative of the other FCA claims and that the government could not merely recast the affirmative false claims as reverse false claims simply because Omnicare failed to reimburse the government for improperly obtained payments. However, at this stage of the litigation, the court held the government could plead alternative theories. The court reasoned that if discovery demonstrated that Omnicare failed to knowingly submit false claims to the government for reimbursement – as Omnicare contends was the case – then it may not be liable for the two conventional FCA counts. However, if discovery also revealed that Omnicare improperly kept the reimbursements after the payments were determined to have been made in error, then the government’s reverse false claim would take on independent significance, as Omnicare could still be liable based only on that theory of liability.

Next, Omnicare sought to dismiss the government’s common law claims for payment by mistake and for unjust enrichment. Omnicare argued that federal common law cannot be the basis for these causes of action after Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938). The court disagreed, explaining that federal law governs questions involving the rights of the United States arising under nationwide federal programs. No statute is necessary to authorize the government to sue to recover funds that its agency have wrongfully or illegally paid. Therefore, the court held that federal common law claims are available to the government and can coexist with FCA claims. While the government could not double its potential recovery, it could pursue multiple theories of liability.

Finally, CVS filed a separate motion to dismiss all counts asserted against it, for the same reasons put forth by Omnicare. For the same reasons, the court denied the motion.

CVS also advanced two unique theories. First, it argued that the government failed to allege any type of veil-piercing or that CVS directly participated in the allegedly unlawful scheme perpetrated by Omnicare. The government conceded that its theory did not depend on a veil-piercing or alter-ego theory. However, the court found the complaint sufficiently alleged that CVS directly participated in the scheme.

The complaint made numerous specific allegations against CVS. For example, the complaint asserted that after CVS acquired Omnicare, CVS assumed an active role in overseeing Omnicare’s operations, including pharmacy dispensing practices and systems. It further alleged that CVS became aware that Omnicare had been “rolling over” prescriptions without valid authorization shortly after it acquired Omnicare and assumed control over Omnicare’s Operations and Compliance departments. Though CVS discussed this issue with Omnicare senior management, it took no substantive steps to address it. Specifically, the government alleged that CVS’s Director of Regulatory Affairs was made aware of a New Mexico Board of Pharmacy investigation that had alerted Omnicare and CVS of medications being dispensed without valid prescriptions, and that they were serious violations of state law. The court found these allegations more than sufficient to survive a motion to dismiss.

Omnicare also moved to dismiss Bassan’s state law claims. In response, Bassan asked the court to stay the claims under the federal FCA case is resolved. While the federal and state governments declined to intervene in the state claims, the court stayed the claims pending resolution of the government’s complaint.

FCA - Bassan v Omnicare