Recently, the Seventh Circuit, in Proctor v. Safeway, Inc., clarified what it means to act with reckless disregard in respect to claims brought under the False Claims Act (“FCA”). __ F.4th __, No. 3:11-CV-3406, 2022 WL 1012256, (7th Cir. 2022). In doing so, the court stated that authoritative guidance must be truly authoritative in context and must come from an actual authority.
Background
In 2021, the Seventh Circuit Court, in United States ex. rel. Schutte v. SuperValu Inc., held that the scienter requirement articulated by the Supreme Court of the United States in Safeco Ins. Co. of America v. Burr was applicable to lawsuits brought under the False Claims Act. 9 F.4th 455 (7th Cir. 2021); 551 U.S. 47 (2007). In Safeco, the Court held that a defendant does not act with “reckless disregard” if (1) its interpretation of the applicable statute or regulation is objectively reasonable, and (2) there is no authoritative guidance contrary to the defendant’s interpretation. However, in adopting Safeco to FCA cases, the Seventh Circuit Court in SuperValu did not provide guidance as to what qualifies as authoritative guidance.
Guidance Must Be Truly Authoritative and Must Come from An Actual Authority
Turning to the present case, in Safeway, the relator alleged that the defendant engaged in the submission of false claims to the government when it “reported its ‘retail’ price for certain drugs as its ‘usual and customary’ price.” However, some of the defendant’s customers typically paid less than the retail price for their medications through several discount programs that the defendant offered between 2006 and 2015. Customers could save money on their prescriptions by (1) requesting a “price match,” (2) enrolling in the “$4 Generics Program,” and (3) enrolling in the “Matching Competitor Generic Program.” This third program was only available to those who chose to enroll in the program. Customers may have utilized any of these three programs to save money, the defendant continued to report its retail price—the price of the medication without these discounts applied—to CMS. The relator alleged that these programs and subsequent reporting of the retail price, and not the discounted price, violated Medicare Part D’s requirement that a pharmacy must report the usual and customary price charged for the drugs.
The relator argued that the defendant showed reckless disregard in its reporting and running of these three programs because there was guidance contrary to the use of such program. First, the relator pointed to a statement found within a footnote of a CMS manual stating essentially that the prices offered to customers through these types of programs do qualify as the “usual and customary” prices. This footnote originated as a footnote in a memorandum issued by CMS in October of 2006. Subsequently, it was incorporated into the CMS’s Medicare Prescription Drug Benefit Manual (“Manual”) in December of 2006.
Second, the relator pointed out that Pharmacy Benefit Managers (“PBMs”) adopted and incorporated this definition of the “usually and customary” pricing into their agreements with pharmacies. Notably, these PBMs are directly contracted with pharmacies such as the defendant and pay these pharmacies directly with money from CMS. Third and finally, the relator pointed out that around the same time that CMS issued its 2006 Manual and memorandum, many state-run Medicaid plans adopted CMS’s definition of “usual and customary” pricing. Collectively, the relator argued that this qualified as authoritative guidance that was contrary to the defendant’s interpretation of what constitutes the “usual and customary” pricing of medications.
The Seventh Circuit disagreed and upheld the district court’s dismissal of this case. With respect to the footnote, the Court stated that while the holding in Safeco did not require that agency guidance be binding on the agency, dicta suggests that this may be a requirement. Further, a single footnote in a fifty-seven-page chapter does not qualify as authoritative. This text within this footnote was not repeated anywhere within the main body of the manual. Additionally, the Court noted that the footnote did not consistently appear in the Manual. The fact that CMS removed the footnote without explanation cuts against any argument that it was truly an authoritative mandate from CMS.
Regarding the PBM’s adoption of this definition, the Court stated that this may not serve as the basis of a fraud claim under the FCA. Rather, this potentially qualifies as a breach of contract between the PBM and the pharmacy.
Finally, and with respect to Medicaid’s use of the definition, the Court stated that this did not qualify as an authoritative guidance because a State Medicaid program is not an authoritative figure for a Medicare Plan.
Practical Takeaways
Medical providers who submit Medicare claims must both (1) have objectively reasonable interpretations of the law and (2) ensure that there is no authoritative guidance that contradicts that interpretation. In establishing these requirements, it is critical that providers work with counsel who can ensure compliance and provide validation and support to justify the reasonableness of the provider’s interpretation.
If you have any questions, please contact:
- David Honig at (317) 977-1447 or dhonig@wp.hallrender.com;
- Jessica Biondo at (248) 519-3093 or jbiondo@wp.hallrender.com; or
- Your primary Hall Render contact.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
