On June 12, 2020, the United States District Court for the Central District of Illinois granted a pharmacy's motion for summary judgment in a False Claims Act (FCA) qui tam lawsuit involving the pharmacy's usual and customary (U&C) pricing in the case U.S. ex. rel. Proctor v. Safeway. The relator, a former pharmacist for Safeway, alleged that Safeway overbilled federal and state health care programs by knowingly failing to include the pharmacy's generic drug discount price into the pharmacy's U&C price.
As a threshold matter, proof of specific intent in not required under the FCA. Rather, the FCA imposes liability on a healthcare provider if the provider "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." A person acts "knowingly" for purposes of the FCA if they: "[have] actual knowledge of that information;" "acts in deliberate ignorance of the truth or falsity of the information"; or "acts in reckless disregard of the truth or falsity of the information."
Federal Courts around the country continue to address the knowledge/scienter requirement. This latest opinion continues that trend and offers potential defenses for healthcare providers in FCA lawsuits.
The District Court cited to the Seventh Circuit Court of Appeal's May 2016 opinion in U.S. ex. rel. Garbe v. Kmart Corp by stating Garbe "definitively answered the question as to the impact of discount and price matching programs and U&C price." Importantly for Safeway however, the court concluded that between 2006 and 2015, there was some authority to support both positions that created uncertainty whether to include a pharmacy's discount pricing in the U&C price. Safeway contended that the industry's practice understood U&C to mean the retail cash price that the pharmacy charged to the "general public". The United States and relator contended that the pharmacy benefit management companies and CMS guidance clearly informed the industry that the discount prices should be included in the pharmacy's U&C price.
Without guidance from the courts or binding authority from an applicable agency, the relator cannot establish the "knowing" element required by the FCA, according to Judge Richard Mills. The court noted that before Garbe, there was no sufficient authoritative guidance that warned Safeway away from what was an objectively reasonable position (i.e. it did not have to include discount prices in its U&C price). Judge Mills applied the "objective scienter standard" for knowledge established by the Supreme Court in Safeco Insurance Co. of Am. v. Burr, 551 U.S. 47 (2007). Under Safeco's "objective scienter standard," the conduct of an actor cannot meet a statute's scienter requirement absent an "objectively unreasonable" interpretation of the statute's legal requirements. While Safeco originally applied this reasoning to the Fair Credit Reporting Act (FCRA), the standard has been applied to FCA cases in the D.C., Third, Fifth, Eighth, and Ninth Circuits to assess whether a defendant "knowingly" engaged in making a false claim.
Judge Mills found that Safeway's position during the time period in question was objectively reasonable because there was no authoritative guidance warning Safeway away from its interpretation of U&C prior to the Seventh Circuit's opinion in Garbe. "Safeway did not violate the FCA by 'act[ing] in reckless disregard of the truth or falsity of the information,' unless there was authoritative guidance at the time that its interpretation of 'usual and customary price' was incorrect." Judge Mills' opinion continues another trend that, in most cases, agency guidance is not authoritative and the particular CMS Manual does not constitute "authoritative guidance" because such guidance usually does not go through the notice and comment rule-making process and is not binding as a matter of law. As a result, the relator could not meet the scienter requirement under the FCA since it could not establish that Safeway "knowingly" made false claims. Consequently, Safeway was entitled to summary judgment.
The District Court's ruling in Proctor further helps develop a possible defense where courts and regulatory agencies have yet to adopt authoritative positions on pharmacy discounts and U&C.
Jim Hoover is a partner at Burr & Forman LLP and works exclusively within the firm's Health Care Practice Group and predominantly handles healthcare litigation.
