AMARILLO, TX – DME suppliers understand that if a supplier commits fraud pertaining to patients covered by a federal health care program (“FHCP”), then the supplier is potentially criminally liable under federal anti-fraud laws such as the federal anti-kickback statute (“AKS”), federal False Claims Act (“FCA”), mail and wire fraud, and related federal laws (e.g., conspiracy and money laundering). Most suppliers understandably (but mistakenly) also believe that if a supplier commits fraud against a third party payor (“TPP”) not connected to an FHCP (“private payor”), then there is no federal criminal liability. This is an illusory belief. As will be discussed below, a federal criminal statute extends to health care fraud involving private payors.
Early this year, a criminal “Information” was filed in federal district court against an individual (I will call him “John Smith”) and others. An Information sets out the criminal charges that the U.S. Department of Justice (“DOJ”) asserts against individuals and companies. An Information is similar, but not the same as, an Indictment.
The Information focuses on (i) Smith, owner and manager of a company I will call “ABC,” and (ii) ABC’s relationship with a pharmacy I will call “XYZ.” The Information also focuses on two other unidentified pharmacies.
The alleged criminal arrangement was complex as there were various steps for each process and alleged multiple attempts to “hide and/or fix the paper trail” that the arrangement was leaving. Allegedly, ABC and XYZ created a sham manufacturer “coupon” system that was intended to remove beneficiary copayment obligations. Most, if not all, PBMs require participating pharmacies within their network to make a reasonable attempt to collect copayments from patients. PBMs prohibit pharmacies from waiving or reducing the patient copayment requirement…unless the patient can establish a financial inability to pay. This prohibition is contained in the agreements that pharmacies enter into with PBMs. If a pharmacy routinely waives/reduces copayments, then it is at risk for (i) a PBM audit and (ii) possible termination of the pharmacy’s contract with the PBM. In addition, as shown by the Information, implementing an arrangement designed to avoid collecting copayments can lead to criminal liability.
The ABC/XYZ arrangement departs from most known copayment arrangements because ABC and XYZ were implementing the arrangement allegedly to defraud private payors such as Aetna and Blue Cross Blue Shield. Contrary to common belief, arrangements within the private, third party payor sphere are not immune from federal government scrutiny or enforcement. This can be seen in the Information…as the DOJ is focusing on broad definitions of health care programs and health care fraud under 18 U.S.C. 1347.
The specific charge against Smith reads as follows: “[T]he defendant, [Smith], did knowingly and willfully, that is, with the intent to further the object of the conspiracy, combine, conspire, confederate, and agree with [the owner of XYZ] and other persons known and unknown to the United States Attorney, to knowingly and willfully execute a scheme and artifice to defraud a health care benefit program affecting commerce, that is, as defined in Title 18, United States Code, Section 24(b), and to obtain, by means of materially false and fraudulent pretenses, representations, and promises, money and property owned by, and under the custody and control of such health care benefit programs, in connection with the delivery of and payment of health care benefits, items and services, in violation of Title 18, United States Code, Section 1347.”
The DOJ is alleging that Smith created a platform where pharmacies could apply a manufacturer’s coupon towards the beneficiary’s co-payment. ABC served as the prescription benefit administrator to adjudicate the copayment portion of the cost of a prescription. This arrangement took place from June 2014 through January 2016, and the DOJ is alleging that the purpose of the arrangement was to submit or cause to submit false and fraudulent claims to health care benefit programs.
The Alleged Arrangement
Smith allegedly used ABC to obtain a prescription bank identification number (“Rx BIN”), which identified ABC as the entity receiving claims for payments from other pharmacies. XYZ allegedly created and marketed compound medications specifically designed with an eye on high reimbursement with no thought given to actual patient need. The arrangement allegedly incentivized pharmacies to waive or reduce copayments because without the copayment waiver, patients would likely make the decision to not receive the medications (i.e. the copayment would be so high as to dissuade a patient from receiving the medicine).
Pharmacies would pay ABC a subscription fee each month. This fee allowed pharmacies to “electronically adjudicate copayments using the Rx BIN associated with [ABC].” The adjudication created an electronic record to make it appear that ABC paid the patient copayment to the pharmacies. However, there was no actual, financial transaction to shore up the electronic record. The pharmacies collected no actual co-payment from ABC.
If there was a PBM audit, ABC and XYZ would allegedly create false paperwork to show that ABC was paying co-payments. This paperwork included (i) an alleged fake explanation of benefits and (ii) backdated checks.
In a later version of the arrangement, ABC and XYZ allegedly set up a “Sponsor” for the ABC coupon program. XYZ allegedly served as the “Sponsor” and collected the amount of the coupon value from pharmacies to send to ABC…to send back to the pharmacies…which created an appearance that pharmacies were collecting copayments. According to the DOJ, this was just a financial cycle in which pharmacies would pay out and then receive the same money back. Further, ABC and XYZ allegedly started to use a separate (XYZ-affiliated) pharmacy to set up a circular transfer of funds. According to the Information: “[t]he pharmacy would submit a claim for the copayment to [ABC]. [ABC] would bill the copayment to [XYZ and its affiliated pharmacy]. In turn, [XYZ and its affiliated pharmacy] would invoice the pharmacies for the amount of the copayment. [XYZ and its affiliated pharmacy] would pay [ABC] for the copayment only after being reimbursed by the pharmacies, and then [ABC] would return the money to the pharmacies.”
These circular fund flows allegedly resulted in ABC and XYZ, and their network of pharmacies, to submit false and fraudulent claims to PBMs because they were representing that the copayments had been collected. The DOJ asserts that Smith facilitated the concealment of at least $56,957,295 in fraudulent billings to health care benefit programs.
18 U.S.C. 24(b) à The term “health care benefit program” means any public or private plan or contract, affecting commerce, under which any medical benefit, item, or service is provided to any individual, and includes any individual or entity who is providing a medical benefit, item, or service for which payment may be made under the plan or contract.
18 U.S.C. 1347 àHealth care fraud: (a) Whoever knowingly and willfully executes, or attempts to execute, a scheme or artifice—
(1) to defraud any health care benefit program; or
(2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any health care benefit program, in connection with the delivery of or payment for health care benefits, items, or services, shall be fined under this title or imprisoned not more than 10 years, or both. If the violation results in serious bodily injury (as defined in section 1365 of this title), such person shall be fined under this title or imprisoned not more than 20 years, or both; and if the violation results in death, such person shall be fined under this title, or imprisoned for any term of years or for life, or both.
(b) With respect to violations of this section, a person need not have actual knowledge of this section or specific intent to commit a violation of this section
18 U.S.C. 1349 àAny person who attempts or conspires to commit any offense under this chapter shall be subject to the same penalties as those prescribed for the offense, the commission of which was the object of the attempt or conspiracy.
Applicability to DME Suppliers
The above-described case shows that the federal government can reach beyond federal health care programs to police the entirety of the health care industry. Section 18 of the United States Code is aptly named “Crimes and Criminal Procedure”, and the government use of the specific health care provision Section 1347 demonstrates the government’s willingness to proceed against providers and suppliers that defraud commercial insurers. By definition, a health care benefit program includes private insurance plans (e.g., Blue Cross Blue Shield) affecting commerce and supplying health care items or services. Section 1347 makes it illegal to defraud such a program. Violations of this particular section can result in fines or imprisonment (up to 20 years) or both. It is also important to note that a person does not need “actual knowledge” or intent to commit a violation of this section to be prosecuted under it.
For many reasons, it is important that the DME supplier be legally compliant in everything it does. It is important that the supplier understand that if it “proceeds down the slippery slope” and engages in actions that, if a FHCP was involved, would clearly violate a federal anti-fraud statute, such actions can nevertheless result in criminal liability even if no FHCP is in the picture. In the Information, ABC and XYZ allegedly implemented an arrangement (a “scheme” in the eyes of the DOJ) that defrauded commercial insurance companies. In working with private payors, DME suppliers should not engage in acts that, if a FHCP was involved, would violate a federal anti-fraud statute.
Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Tex. He represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization, and can be reached at (806) 345-6320 or firstname.lastname@example.org.
Erica L. Beacom, JD, is an attorney with the Health Care Group at Brown & Fortunato, PC, a law firm based in Amarillo, Tex. She represents pharmacies, infusion companies, HME companies and other health care providers throughout the United States. Beacom can be reached at (806) 345-6360 or email@example.com.