A qui tam action alleging that Safeway, Inc. and pharmacies under its operation and control knowingly perpetrated a false "usual and customary" pricing fraud scheme against government health programs as company policy to increase profits was allowed to continue. According to a federal district court, the relator’s actions were sufficient to assert claims under the federal False Claims Act (FCA) and applicable state laws. The information was not illegally obtained under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) (P.L. 104-191). The court also rejected Safeway’s assertion that the relator’s allegations fell under the public disclosure bar; the relator was an original source. Safeway’s motion to dismiss and motion to strike was denied (U.S. ex rel Proctor v. Safeway, Inc., November 30, 2016, Mills, R.).
Background. Safeway is one of the largest food and drug retailers in the United States. The relator alleged Safeway violated the FCA by routinely charging government health programs more than the general public for the same drugs. The scheme was conceived and directed by Safeway to fraudulently report inflated prices for prescription drugs sold to government health plan beneficiaries. The relator asserted violations of the federal False Claims Act (FCA).
According to the complaint, Safeway knowingly failed to report its actual low drug prices in order to obtain higher reimbursements from federal and state government health programs, including Medicare, Medicaid, and TRICARE. After a lengthy investigation, the federal government declined to intervene.
Discount programs. The relator alleged that beginning in or about 2007, Safeway, through its pharmacies, knowingly perpetrated a false usual and customary pricing fraud scheme against government health programs as corporate company policy. To stay competitive, Safeway created "membership clubs," that were free to join, offering across the board percentage discounts.
Government health program reimbursement rules and regulations prohibit pharmacy providers from being reimbursed at amounts greater than what they otherwise charge members of the general public. As such, the discounts offered to the general public at the point of sale must also be provided to government health program beneficiaries. Safeway argued that its discount drug programs were point of sale discounts, not insurance. The relator contended that Safeway did not offer government health program beneficiaries or other third party payers the benefit of the discount price unless their copayment exceeded the discount price and the customer asked for the lower price. As a result, claims were paid by insurance, including government health programs, at inflated prices.
The relator sufficiently alleged that Safeway’s internal communications demonstrated that its directors understood the alleged scheme as a means to manipulate the usual and customary price and charge government health programs more than the general public, in violation of the FCA.
Disclosures to attorneys. Safeway alleged that 18 of the claims, which relied on personal health information, were obtained and disclosed by the relator to his attorney’s in violation of HIPPA and could not be used to support claims of an FCA violation. The court disagreed, finding the information in the amended complaint did not qualify as individually identifiable health information or protected health information. As such, there was no HIPAA violation even if the relator qualified as a covered entity under the statute. Under the HIPAA whistleblower exception the relator was authorized to disclose protected health information to his attorneys.
Public disclosure bar and original source. The public disclosure bar applies only when information exposing the fraud has already entered the public domain prior to the relator’s suit. The district court stated that the relator’s original complaint that first alleged, on a general basis, the relevant fraud claim. Although a subsequent, separate action in a different state included more specificity, it did not constitute a prior public disclosure. The court concluded that the public disclosure bar did not preclude the relator from proceeding.
In order to be an original source, the relator did not need to have seen the claims submitted to the government, but needed to know enough to make fraud a likely explanation for the overbilling. In the original complaint, the relator alleged that Safeway knowingly presented or caused to be presented false or fraudulent claims for payment. The court found that the relator was the original source, as his claims were supported by information on which his allegations were based, including specific details of the alleged fraud, internal communications from Safeway officials and specific false claims showing the scheme was being carried out.
The case is No. 11-3406.
Attorneys: Gail Linn Noll, U.S. Attorney's Office, for the United States. Carolyn Fitzhugh McNiven (Greenberg Traurig LLP) for Safeway, Inc.
Companies: Safeway, Inc.
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