US Pharm. 2023;48(9):7-12.
In United States ex rel. Proctor v. Safeway Inc., and United States ex rel. Schutte, et al. v. SuperValu Inc. et al., the U.S. Supreme Court held that that “[t]he False Claims Act’s scienter element refers to the pharmacies’ knowledge and subjective beliefs (not to what an objectively reasonable person may have known or believed).1,2 The Supreme Court further opined that the basis for determining the parties’ “subjective knowledge” should be an analysis of what the defendant thought when submitting a claim, rather than what a defendant could have thought after submitting it.3
The pharmaceutical industry, pharmacy chains, and individual pharmacies have all come under scrutiny using the Federal False Claims Act (FCA).4 The Department of Justice (DOJ) recently noted that over the past 10 years, the pharmaceutical industry was one of the largest business categories to enter into FCA settlements.5 FCA enforcement priorities encompass all sectors of the pharmaceutical industry and create significant risk areas of concern for retail pharmacies and pharmaceutical manufacturers, including but not limited to the following: patient-assistance programs; falsifying prior authorizations and prior authorization support services; specialty pharmacy arrangements; speaker programs; illegal drug switching; product pricing, including price reporting, discounts, copayment waivers, and rebates; illegal kickback schemes; Controlled Substances Act violations; improperly manufactured compound drugs; Good Manufacturing Practices Violations; and Medicare Part D and 340B drug discount program fraud.6
After years of the DOJ and Office of Inspector General (OIG) targeting pharmacies and pharmaceutical device manufacturers, ongoing DOJ and OIG investigations appear to indicate that the government will continue to focus on the pharmaceutical industry. Therefore, pharmacies should prepare to deal with future allegations of FCA wrongdoing.7
Case Background
Medicare and Medicaid provide prescription-drug coverage for beneficiaries and contract with pharmacies that limit reimbursement to the pharmacy’s “usual and customary” price. In 2006, Wal-Mart decided to undercut competitor’s pricing by offering popular generic drugs for $4.8 The Centers for Medicare and Medicaid Services (CMS) subsequently issued guidance, which was incorporated into CMS’s Prescription Drug Benefit Manual, explaining that “where a [Medicare Part-D] pharmacy offers a lower price to its customers throughout a benefit year” that discount price becomes the pharmacy’s “usual and customary” price.9
In response to the Wal-Mart program, SuperValu and Safeway developed and implemented price-match programs, and Safeway had a membership discount program through which customers could purchase drugs at reduced prices.10,11
The Qui Tam Lawsuit
Whistleblowers sued SuperValu and Safeway under the FCA.12 The FCA permits private parties (“whistleblowers”) to bring lawsuits in the name of the United States against those who they believe have defrauded the federal government. The FCA imposes liability on anyone who “knowingly” submits a “false” claim to federal governmental payors.13 The whistleblowers claimed that the pharmacies violated the FCA by offering prescription drugs at discounted prices to customers while improperly charging higher rates to governmental payors (Medicare, Medicaid, and Federal Employee Health Benefits Program) in violation of federal law, which requires pharmacies to bill Medicare and Medicaid at the pharmacy’s “usual and customary” rate.”14 The whistleblowers alleged that the pharmacies’ discounted price was their “usual and customary” price and that the pharmacies intentionally failed to disclose or charge the government the discounted price.15 The whistleblowers further alleged that the pharmacies knew that their discounted prices were their “usual and customary prices” but concealed that information from governmental payors because the price-match and discount programs were generating significant profits for the pharmacies.16
District Court and Federal Court Ruling
At trial, the pharmacies claimed that price matches were, by definition, an exception to their usual and customary retail price for drugs. The pharmacies stated that they did not set the price in such transactions; the price was the one the customer requested, based on a local competitor’s price, which the pharmacies honored only on an individualized, patient-specific transaction. The pharmacies further stated that the Medicare and Medicaid billing requirements were unclear, and their conduct was supported by an “objectively reasonable” reading of the law.17
Legal counsel for the pharmacies argued that the pharmacies did not “knowingly” submit false claims because, objectively, the phrase “usual and customary” could mean the pharmacies’ drugs’ full retail price regardless of their actual discounted sales price.18 The Seventh Circuit agreed and found that neither pharmacy acted with knowledge because their conduct was consistent with an “objectively reasonable” interpretation of an ambiguous policy, adopting the “willfully” standard from Safeco Insurance Co. of America v. Burr.19,20
Supreme Court Decision
In a unanimous decision written by Justice Clarence Thomas, the Supreme Court reviewed and analyzed whether the FCA requires that the pharmacies subjectively believed their claims were false, or whether the pharmacies needed to only have an objectively reasonable interpretation of law or regulation to negate intent.21 The Supreme Court held that “what matters for an FCA case is whether the pharmacies knew the claim was false,” thus determining that the subjective (rather than the objective) standard applies.22
The Supreme Court agreed that the terms “usual and customary” are ambiguous and “less than perfectly clear” but concluded that ambiguity does not rule out a finding of scienter (knowledge) in rejecting the pharmacies’ argument that “facial ambiguity alone” can be sufficient “to preclude a finding that [the pharmacies] knew their claims were false.”23 The “usual and customary” term’s ambiguity “does not preclude the pharmacies from having learned their correct meaning or becoming aware of a substantial likelihood of the ‘usual and customary’ term’s correct meaning.”24
The Court determined that the pharmacies were on notice of the ambiguous term’s “correct meaning,” finding that even though “usual and customary” could be considered ambiguous, (1) the pharmacies could not claim the ambiguity precluded a finding of scienter where evidence had been entered that the pharmacies received notices from government regulators, pharmacy benefit managers, and others of the correct interpretation, and (2) the pharmacies received and understood those notices, because the pharmacies tried to hide evidence that their claims submitted were higher than their price-match discounted prices.25
The Court further explained that the pharmacies erroneously relied on the “willful” scienter standard in Safeco and distinguished Safeco by noting that different scienter standards apply to the FCA (“knowingly”) and FCRA (“willingly”).26
In rejecting the Seventh Circuit’s conclusion, Justice Thomas analyzed the text of the FCA and noted that the FCA’s definition of “knowingly” requires a showing of “either actual knowledge, deliberate ignorance, or recklessness.”27-29 Justice Thomas indicated that (1) the FCA’s plain text requires that the pharmacies’ knowledge turns on the pharmacies’ subjective beliefs and (2) the objective ambiguity of the term “usual and customary” is insufficient to preclude the possibility that the pharmacies knew their interpretation was wrong at the time they presented the claims at issue.30
The Court held that when a pharmacy becomes subjectively “aware of a substantial likelihood” of an ambiguous term’s “correct meaning” and then disregards that meaning, it knowingly submits a false claim.31 Justice Thomas further stated that for the purposes of the FCA, “knowingly” refers to the pharmacies’ subjective knowledge and beliefs at the time the pharmacy submits a claim for payment and explained that “ambiguity alone is not sufficient to preclude a finding of scienter” and the focus must be “on what the pharmacy knew when presenting the claim.”32
Justice Thomas stated that under the FCA, the plaintiffs could establish scienter by showing that the pharmacies either (1) actually knew that their reported prices were not their “usual and customary” prices when they reported those prices; (2) were aware of a substantial risk that their higher retail prices were not their “usual and customary” prices and intentionally avoided learning whether their reports were accurate; or (3) were aware of such a substantial and unjustifiable risk but submitted the claims anyway.33 In his opinion, he stated, “If petitioners can establish scienter, then it does not matter whether some other, objectively reasonable interpretation of ‘usual and customary’ was possible if the pharmacies believed that their claims were not accurate.”34
The Court did not interpret the meaning of “usual and customary,” nor did it conclude whether the pharmacies subjectively believed that “usual and customary” referred to discounted drug prices or decide any other factual disputes, as those questions will be decided by the lower courts on remand for further proceedings.
Future Impact on Pharmacy and Healthcare Provider FCA Litigation
General: The SuperValu case will make it more difficult to resolve questions regarding a pharmacy’s knowledge. The knowledge inquiries will be more fact-intensive and will require litigation beyond summary judgment. The case will increase the number of settlements involving pharmacies that cannot risk proceeding to trial with the risk of a potentially catastrophic adverse judgment.35
Motions to Dismiss: Factual inquiries on scienter may make a motion to dismiss more challenging for pharmacies, as plaintiffs are likely to allege actual knowledge or recklessness, and pharmacies will have difficulty in demonstrating lack of subjective intent prior to discovery.36
Discovery: FCA plaintiffs are likely to seek extensive discovery regarding pharmacies’ subjective knowledge to create issue of fact on scienter. The goal and objective of the discovery will be to demonstrate the pharmacies’ knowledge and beliefs, and whether the pharmacies (1) had actual knowledge, (2) were aware of a substantial risk that their higher, retail prices were not their “usual and customary” prices and intentionally avoided learning whether their reports were accurate, or (3) were aware of such a substantial and unjustifiable risk regarding such laws and regulations.37 Plaintiffs may also seek evidence of concealment of such knowledge in any form or fashion.
Summary Judgment Motions: Summary judgment motions will be more difficult to win; however, pharmacies that can demonstrate good faith in their decision-making process may still be able to have success at summary judgment since plaintiffs will have to provide evidence supporting their scienter allegations.38
Compliance Best Practices to Address Pharmacy FCA Risks
If a pharmacy or healthcare provider is aware it is submitting a false claim under Medicare or Medicaid, has deliberately avoided taking steps to determine whether the claim is false, or is aware of a substantial and unjustifiable risk that the claim is false but submits it anyway, the scienter element for a violation under the FCA would be met and the pharmacy or healthcare provider has submitted a false claim.
Considering the above, if a law, rule, or regulation is ambiguous, pharmacies and healthcare providers should seek advice of governmental agencies and legal counsel to attempt to resolve that uncertainty rather than rely on that ambiguity when submitting a questionable claim. As a result of this decision, pharmacies and healthcare providers that do business with the government (directly or indirectly) should consider adopting the following compliance best practices:
Review and Revise Existing Compliance Program: Considering the SuperValu decision, pharmacies and healthcare providers should consider reviewing their billing practices, policies and procedures, and compliance program. In addition, such pharmacies and healthcare providers should assess their interpretations of confusing or ambiguous regulations as well as the compliance of any programs that are governed by such regulations.
Pharmacies and healthcare providers should implement and/or revise policies and procedures that address government claims and reimbursement processes. A risk assessment should focus on policies and procedures necessary to ensure the compliant processing of government claims, including a comprehensive analysis of any current or proposed coupon, discount, or patient financial assistance programs.
Know the Healthcare Laws Applicable to Your Business: Pharmacy and healthcare provider compliance departments should evaluate ambiguous legal interpretations of relevant statutes and regulations prior to the submission of claims and bring such to the attention of management so that they may obtain clarification from governmental agencies or legal counsel.
Pharmacies and healthcare providers should take steps to know the applicable laws and regulations that impact their business operations and should be vigilant in tracking and understanding updates and changes to sure rules and applicable governmental agency guidance and comments.
Seek Government Agency Clarification of Ambiguous Healthcare Laws: Pharmacies and healthcare providers should attempt to resolve regulatory or contractual ambiguities by actively seeking clarification with guidance from the agencies with which they contract or by which they are regulated before submitting a claim. Good faith attempts to seek clarification provide compelling evidence of a party’s intent to comply.
Obtain Advice of Legal Counsel Regarding Uncertainty: If uncertainty exists whether the provider is submitting an accurate claim to the government, the pharmacy or healthcare provider should seek advice of competent and knowledgeable legal counsel to attempt to resolve that uncertainty. The pharmacy or healthcare provider should then adopt an interpretation of the ambiguous legal requirement based on the legal advice obtained from counsel.
Develop a Process for Determining Facts and Beliefs: Pharmacies and healthcare providers should identify ambiguous regulatory, contractual, and other legal requirements and create a written process for interpreting the requirements based on governmental agency guidance and advice from legal counsel and implementing that interpretation. A good benchmark would be to ensure that business operations are consistent with governmental guidance, industry guidance, and industry practices.
Documentation: Pharmacies and healthcare providers should document their analysis and understanding of ambiguous regulatory requirements and the basis for their interpretation of ambiguous laws and subjective beliefs related thereto to demonstrate that the company’s actions were taken in good faith and in reliance on the opinion of legal counsel, government guidance, or some other basis. Documentation of legal interpretations in the form of written policies and procedures may be useful in ensuring compliance and demonstrating good faith.39
Conclusion
Pharmacies and healthcare providers that are aware they are submitting a false claim and have consciously avoided taking steps to determine whether the claim is false or have knowledge of a substantial and unjustifiable risk that the claim is false but submit it anyway are at risk of governmental enforcement actions that could cause catastrophic financial losses. Pharmacies and healthcare providers should take affirmative steps to manage FCA compliance risk.
REFERENCES
1. No. 22-111 and 21-1326 United States ex rel. Schutte v. SuperValu Inc. and Safeway, Inc. (June 1, 2023).
2. Id.
3. Id.
4. Fink JL III. Pharmacy Law Brief: the Federal False Claims Act. Kentucky Pharmacist. 2014;9(4):40-41.
5. Id.
6. Ogrosky K, Shuren AW. The most challenging compliance arena in healthcare: pharmaceutical and medical device manufacturing compliance: professionals can take steps to better prepare themselves and their companies to deal with allegations of wrongdoing. J Health Care Compliance. 2017;19(4):5-15.
7. Id.
8. Schutte Pet. App. 33a; JA222 n.1.
9. Proctor Pet. App. 10a; SJA239-40 n.1.
10. SuperValu and Safeway are grocery store chains that operate pharmacies inside many of their stores.
11. Note 1, supra pages 4-5.
12. 31 U. S. C. §3729 et seq.
13. 31 U. S. C. §3729(a) and §3730(b).
14. Note 1, supra pages 3-5.
15. Id.
16. Id.
17. United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455, 08-12-2021; United States ex rel. Proctor v. Safeway, Inc., 30 F.4th 649, 04-05-2022
18. Id.
19. Id.
20. 551 U.S. 47 (2007).
21. Nora 1 supra, Slip Opinion page 2.
22. Id.
23. Note 1 supra, Slip Op. 8.
24. Note 1 supra, Slip Op. 12.
25. Note 1, supra Slip Op. 12-13. In addition, in United States ex rel. Garbe v. Kmart Corp., 824 F.3d at 645 (2016), 73 F. Supp. 3d 1002, 1017 (S.D. Ill. 2014), the Seventh Circuit held that a pharmacy presents false claims when it fails to account for widely available discounts in its usual and customary price reporting. In Garbe, “Kmart offered low prices to discount-program cash customers, while submitting higher ‘usual and customary’ prices for prescriptions reimbursed by third-party insurers and some non-program cash customers.” Id. at 636. The district court held that “the members of Kmart’s generic discount programs are part of the ‘general public’ (as opposed to a private group or club) because of the open eligibility of the programs, i.e., anyone is eligible to join the program,” and because of the minimal barriers to entry. The court accordingly held that by not reporting its discount prices as usual and customary, Kmart had presented false claims.
26. Note 1, supra Slip Op. 2-3.
27. The court explained that “actual knowledge” refers to a person’s perception of the truth or awareness of information. Note 1, supra Slip Op. 9.
28. “Deliberate indifference” refers to those who “are aware of a substantial risk that their statements are false, but intentionally avoid taking steps to confirm the statement’s truth or falsity.” Note 1 supra Slip Op. 10.
29. The Court also explained that “reckless disregard,” the lowest bar for scienter under the FCA, refers to those “who are conscious of a substantial and unjustifiable risk that their claims are false, but submit the claims anyway.” Note 1 supra Slip Op. 10.
30. Note 1, supra Slip Op. 8 and 13.
31. Note 1, supra Slip Op. 3, 12 and 14.
32. Note 1 supra, Slip Op. 11.
33. Note 1, supra Slip Op. 2, 10 and 16.
34. Note 1 supra, Slip Op. 11.
35. Barnes & Thornburg LLP. U.S. Supreme Court unanimously finds subjective intent controls in determining scienter under the False Claims Act. June 2, 2023. https://btlaw.com/insights/alerts/2023/us-supreme-court-unanimously-finds-subjective-intent-controls-in-determining-scienter. Accessed August 18, 2023.
36. Acker GN III, Higdon R Jr, Lawrence JH, et al. Supreme Court issues decision regarding False Claims Act’s scienter element. K&L Gates. June 8, 2023. https://www.klgates.com/Supreme-Court-Issues-Anticipated-Decision-Regarding-False-Claims-Acts-Scienter-Element-6-8-2023. Accessed August 18, 2023.
37. O’Connell SB, Barnard TH, Kuprovska K. Supreme Court holds that FCA requires subjective intent. Baker Donelson. June 8, 2023. https://www.bakerdonelson.com/supreme-court-holds-that-fca-requires-subjective-intent#:~:text=Is%20subjective%20intent%20relevant%20to,reasonable%20person%20may%20have%20believed. Accessed August 18, 2023.
38. Supreme Court rules FCA liability turns on subjective belief, not objective reasonableness. Cooley alert. June 5, 2023. https://www.cooley.com/news/insight/2023/2023-06-05-supreme-court-rules-fca-liability-turns-on-subjective-belief-not-objective-reasonableness. Accessed August 18, 2023.
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