By Sheryl Allenson, J.D.
A former pharmacy benefit manager employee’s Fourth Amended Complaint against Medco Health Solutions, Inc. and its parent company, Express Scripts Holding Co. (collectively, Medco) alleging violations of the False Claims Act (FCA) (31 U.S.C. §3729 et seq.) was dismissed, after a federal district court in Delaware applied a bifurcated approach to analyze the claims before and after the 2010 amendment to the FCA’s public disclosure bar. The court dismissed the claims based on the pre-2010 amendments for lack of subject matter jurisdiction and the claims based on the post-2010 conduct for failure to state a claim (U.S. ex. rel. Denis v. Medco Health Solutions, Inc., October 26, 2017, Andrews, R.).
Procedural background. The relator initially brought a qui tam action against Medco alleging violations of the FCA. Specifically, he claimed that Medco defrauded the government by favoring certain drugs in exchange for kickbacks from AstraZeneca disguised as a discount. Most recently, the court dismissed the relator’s Third Amended Complaint for lack of subject matter jurisdiction, with leave to amend (see Public disclosure bar and first-to-file rule stop claims against Medco, January 6, 2017).
Relator’s role. The relator was hired by Medco in 1992 and remained there in various capacities, ultimately serving as a Vice President of Employer Sales until he departed in 2008. Medco is a pharmacy benefit manager (PBM), providing services to health plans and the plans’ enrollees by administering pharmacy benefits, processing pharmacy claims, developing formularies, and negotiating with pharmaceutical manufacturers to obtain rebates for health plan sponsors.
Allegations. The relator claimed that in 2005 Medco entered two agreements with AstraZenica that artificially divided the price reductions for a drug. The first agreement provided that the AstraZenica would pay rebates to Medco customers who placed the drug on their formularies. The second agreement separated out a portion of the rebates and re-characterized them as "purchase discounts," which Medco retained for itself. The Fourth Amended Complaint was largely identical to the prior complaint, but alleged that the same conduct continued after the relator left Medco in 2008.
Prior suits. Before the relator filed suit, there had been multiple civil claims against PBMs, including Medco, alleging that pharmaceutical manufacturers paid kickbacks, in exchange for PBMs favoring certain drugs. The scheme also allegedly involved the PBMs disguising the kickbacks as something other than rebates to avoid sharing the disguised rebates with clients, as required.
Public disclosure bar. At issue was whether the pre-2010 or post-2010 public disclosure bar was to be applied. Under the pre-2010 statute, the public disclosure bar deprives the court of subject matter jurisdiction if: 1) the public disclosure appear in certain enumerated sources; 2) the publically disclosed information constitutes allegations or transactions of fraud; 3) the relator’s complaint is "based on" the public disclosure; and 4) the relator is not an "original source." This version of the public disclosure bar defines "original source" as "an individual who has direct and independent knowledge of the information on which the allegations are based.
The post-2010 amendment to the public disclosure bar differs. Under the amendment, the court is directed to "dismiss an action or claim" if 1) the public disclosures appear in certain enumerated sources; 2) the publically disclosed information contains "substantially the same allegations or transactions as alleged in the action or claim;" and 3) the relator is not an "original source." Notably, the 2010 amendment defines "original source" as an individual who has voluntarily disclosed information to the government or one "who has knowledge that is independent or materially adds to" information already publically disclosed.
Bifurcation. The court was required to decide how to apply the pre- and post-amendment rules when deciding whether the claims could survive the motion to dismiss. Because the relator’s claims spanned a period both before and after the 2010 amendment, the court noted that the post-2010 amendment is not retroactive.
When the court considered the motion to dismiss the Third Amended Complaint, it applied the pre-2010 public disclosure bar standard because the relator failed to allege any specific facts of post-2010 conduct, and therefore, the court could not make any inferences. The Forth Amended complaint also alleged that post-2010 conduct is a continuation of pre-2010 fraud. The relator also alleged that Medco renewed its contract with Astra Zeneca in 2011.
Although it expressed hesitation, the court found that it was required to bifurcate its decision and apply one standard to the pre-amendment allegations and another to the post-amendment allegationsAlthough the court stated that the better approach would be to apply the pre-2010 public disclosure bar to the entire continuing fraudulent scheme, it sided instead with reliance upon prior cases.
Pre-2010 amendment. The court reviewed the pre-2010 claims and re-adopted its reasoning for dismissing the Third Amended Complaint, indicating that the most recent complaint alleged the same fraudulent scheme as the Third Amended Complaint. The court emphasized that under the pre-2010 public disclosure bar the relator was not an original source because he lacked direct knowledge. Accordingly, the court dismissed the pre-2010 claims for lack of subject matter jurisdiction pursuant to the pre-2010 public disclosure bar.
Post-2010 amendment. The court reviewed the claims that the fraudulent scheme continued after 2010, focusing on the issue of whether the relator was an original source, taking into account that the definition was changed in the 2010 amendment. Specifically, the element of direct knowledge was removed from the public disclosure bar.
Under the definition of an original source, the court cited that a relator materially adds to already publically disclosed allegations of fraud when the new information if distinct from what wad publicly disclosed and adds in a significant way to the essential factual background. Essentially, the court must employ the journalistic doctrine of who, what, why, where and how to the events at issue.
In his Fourth Amended Complaint, the only allegation of conduct the relator makes in support of the post- 2010 claims is that Medco renewed the agreements with AstraZeneca in 2010, which remained in effect to 2013. The court held that those allegations did not add anything significant to the who, what, why, where or how of the fraudulent scheme. Accordingly, the court dismissed the claims with prejudice.
The case is Civ. No. 11-684-RGA.
Attorneys: Shannon Thee Hanson, U.S. Attorney's Office, for the United States. Rodger Dallery Smith, II (Morris, Nichols, Arsht & Tunnell LLP) for Medco Health Solutions Inc. and Express Scripts Holding Co.
Companies: Medco Health Solutions Inc.; Express Scripts Holding Co.
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