Health Plans Facing More Kickback Risk

Humana is accused of placing Roche diabetes products on its formulary in exchange for compensation. This is a new avenue for kickback charges.

Health plans must now contend with a greater risk of being sued for millions of dollars under the False Claims Act and anti-kickback statutes after a court ruled that the type of "creative" business deals that were accepted in the past could now land them in court.

Granting pharmaceutical companies placement on their formularies could yield charges of fraud against the health plans and everyone else involved if it looks like there was any form of compensation, the court determined.

In United States of America ex rel. Crystal Derrick v. Hoffman-La Roche LTD et al., a U.S. District Court judge in Illinois recently allowed an FCA case to move forward, sending a message that insurance companies, pharmaceutical companies, and pharmacy benefit managers are not immune from FCA and anti-kickback statutes.

The complaint alleges that Roche paid Humana a kickback in exchange for Humana placing Roche’s diabetes testing products on its Medicare Advantage formularies. It also claims that the plaintiff was fired after objecting to the fraud. 

The court denied two motions to dismiss the False Claims Act lawsuit against Humana, Humana Pharmacy, Roche Diagnostics, and Roche Diabetes Corp.

The FCA imposes treble damages, in addition to civil penalties and attorneys’ fees on defendants. The whistleblower plaintiff is entitled to a percentage of the treble damages, which can come to tens of millions.

Drug Rebates Overpaid

United States District Court Judge Elaine E. Bucklo found that whistleblower Crystal Derrick had properly alleged fraudulent conduct and retaliation by her employer Roche Diagnostics. Derrick doesn't allege there was a direct payment for access to the formulary, however.

Instead, the lawsuit alleges that Roche Diagnostics overpaid Humana $45 million in drug rebates, then offered to accept a $27.5 million refund and allow Humana to keep the other $17.5 million.

Humana negotiated and managed to retain $34 million of the $45 million overpayment, using the formulary access as leverage, Derrick contends.

Though the case is still being litigated, the judge's decision sends a clear signal to health plans, says Ross Brooks, cochair of the whistleblower practice at the Sanford Heisler Sharp, LLP law firm in New York City, which represents Derrick.

One party's forgiveness of another's debt can be considered a kickback, he says.

The negotiations came at the end of a contract between Roche and Humana, and the health plan was planning to change its formulary and the favorable copays it allowed for Roche products.

"Roche used that as an opportunity to try to lend Humana a favor, in the form of forgiveness for overpayment of the rebates," Brooks says. "The court found that type of deal in the form of debt forgiveness would constitute a kickback."

No Safe Harbor

That was hardly the first time a company offered debt forgiveness in exchange for something of value, Brooks notes. Humana and Roche had argued that the managed care safe harbor in the FCA protected them from liability, but the court disagreed.

This was a major clarification that should cause health plans and other companies to reassess their working relationships, Brooks says.

"That should lead them to scrutinize these business arrangements, now that they know the safe harbor does not necessarily insulate them from a false claim allegation," he says. "The safe harbor was intended to address what was, at the time of the passage of the safe harbor, an unusual type of entity, the managed care organization."

There was less enforcement of the False Claims Act with managed care groups, in part because of the safe harbor protections, but over time the industry grew and the Department of Justice focused more on their dealings with pharmaceutical and other companies.

Some of the more recent opinions related to risk adjustment payments, in which managed care organizations were accused of overstating the poor health of patients in order to collect higher capitated payments, Brooks says.

"But this was the first opinion in which the placement of a product on a formulary satisfied the anti-kickback statute for the purposes of False Claims Act litigation," he says. "The forgiveness of debt was an inducement to receive placement on a Medicare Advantage formulary, so that's a relatively new form of alleged kickback that had not been addressed in prior opinions."

That new angle, along with the limitations on the managed care safe harbors, creates much more FCA vulnerability for insurance companies, Brooks says. Whistleblowers and prosecutors probably will be emboldened by the ruling, he says.

"It's a significant opinion because of the court's interpretation of the managed care safe harbor. Historically, managed care plans have been able to rely on that safe harbor to insulate many different forms of creative business arrangements," he says. "But the government and whistleblowers will be able to invoke this opinion to challenge arrangements that might have historically been acceptable in the industry."