Face Challenges Confidently

Whistleblower Case: Lessons for Pharmacies

Monday, April 2nd, 2018

By: Jeffrey S. Baird, Esq.

There is an ongoing whistleblower case involving a pharmacy that reads like a law school exam. In a typical law school exam, a hypothetical set of facts are given and the student must pick out the legal issues and discuss them. Often, there are multiple legal issues that arise from the set of facts.

Recently, the Department of Justice (“DOJ”) intervened in a False Claims Act (“FCA”) suit alleging that a pharmacy and its private equity fund owner ran a kickback arrangement that induced TRICARE to pay more than $55 million for medically unnecessary prescriptions. According to the suit, the pharmacy, its ultimate owner (a private equity fund), and several pharmacy executives paid kickbacks to marketing companies to recruit TRICARE beneficiaries to obtain prescriptions for compounded treatments that were not medically necessary.

According to the whistleblower suit, the alleged kickback arrangement was facilitated by the pharmacy and several marketing firms in which telemedicine physicians signed prescriptions without actually seeing patients. According to the Complaint, in some cases the marketing firms misled or harassed TRICARE beneficiaries into participating in the arrangement, or covered beneficiaries’ copayments in order to encourage their participation…while hiding the payments by using a “sham charitable organization.” According to the Complaint, rather than being picked to address beneficiaries’ individual needs, compounds for various pain and scar creams and vitamins prescribed under the arrangement were instead chosen to ensure the highest possible reimbursement from TRICARE. As such, according to the suit, more than $55 million in claims were submitted to TRICARE over an eight month period. According to the Complaint, these claims accounted for the vast majority of the pharmacy’s income at that time and profits were split between the pharmacy and the marketing firms.

Let’s assume that the facts set out above constitute a law school exam question. Here are the legal issues that immediately stand out:

Kickbacks to Marketing Companies

The federal anti-kickback statute (“AKS”) makes it a felony for a provider to “give anything of value” to a person or entity in exchange for referring (or arranging for the referral of) patients covered by a government health care program (including TRICARE), or for recommending the purchase of products covered by a government health care program.

There are a number of “safe harbors” to the AKS. If an arrangement falls within a safe harbor, then as a matter of law the arrangement does not violate the AKS. If an arrangement does not fall within a safe harbor, then it does not mean that the AKS is automatically violated; rather, it means that the arrangement needs to be more closely examined.

One safe harbor is the Personal Services and Management Contracts safe harbor. Under this safe harbor, a provider can pay compensation to a 1099 independent contractor for marketing services…so long as a number of requirements are met, including the following: (i) the parties must sign a written contract with a term of at least one year; (ii) the compensation paid to the independent contractor must be fixed one year in advance (e.g. $48,000 over the next 12 months, or $4000 per month), and (iii) the compensation paid must be fair market value (“FMV”). In the pharmacy’s case marketing companies were 1099 independent contractors. Unfortunately, the payments to them were not fixed one year in advance; rather, the payments were production-based.

And so, according to the DOJ, the arrangements between the pharmacy and the marketing companies violated the AKS.

Those Responsible for Kickback Violations

In the whistleblower case, the defendants are not only the corporate entity (the pharmacy) but those that allegedly (i) were aware of the arrangement and (ii) benefitted from the arrangement. These include the executives, the private equity fund that owns all or a portion of the pharmacy, and the marketing companies. The message is that if the pharmacy is involved in a kickback arrangement, then not only is the pharmacy liable, but so are others that are aware of and/or benefit from the arrangement (owners of the pharmacy, officers, and marketing reps).

Medically Unnecessary Products

Government program payors (e.g., Part D Plans, TRICARE, State Medicaid Programs) are on the lookout for the following types of submitted claims:

  • Claims pertaining to products that are unique and, relatively speaking, are rarely used by patients. If a provider is consistently submitting a large number of claims for a unique product, then such claims submissions will be flagged and the payor will examine whether products being sold are (i) truly needed by the patient or (ii) being provided only because of high reimbursement for the products.
  • Spike in claims. The pharmacy in the whistleblower case submitted over $55 million in claims in a relatively short period of time. Anytime the claims from a pharmacy “spike” over a short period of time, then third party payors (“TPPs”) and/or governmental programs will take notice and investigate/audit the claims.

In short, when a provider submits claims that are out-of-the-ordinary, then the provider might as well hold up a big sign that says “Hey, look at me.”

Use of “Telemedicine Physicians”

According to the Complaint, the prescriptions were from “telemedicine physicians” who never saw the TRICARE patients. Telemedicine is not, in and of itself, bad. In fact, telemedicine is good…many facets of health care are gravitating toward telemedicine. Telemedicine is less expensive, less time consuming, more efficient, and in many cases just as effective as a face-to-face encounter with the physician.

Generally a prescription based on a telehealth visit is acceptable if (i) state law says it is acceptable and (ii) the TPP (Part D Plan, TRICARE, state Medicaid program, etc.) says it is acceptable.


In the whistleblower case, marketing companies allegedly paid the TRICARE beneficiaries’ copayments under the guise of a “sham charitable organization.” The law is clear that a provider must make a reasonable effort to collect copayments from patients. The provider cannot (i) routinely waive copayments, (ii) routinely reduce copayments, (iii) advertise that it waives/reduces copayments, or (iv) in advance of a sale, tell the patient that if he believes he cannot pay the copayment, then he can fill out a Financial Hardship Form and ask the provider to waive or reduce the copayment. If the provider engages in any of these activities, then the provider runs the risk of violating the AKS, the federal beneficiary inducement statute, and the FCA.

The provider must expect the patient to pay the copayment in full. Only if the patient volunteers that he cannot pay the copayment can the provider suggest that the patient complete the Financial Hardship Form. On a patient-by-patient basis, the provider can determine whether or not to waive or reduce the copayment.

Use of a “Sham” Arrangement

It is bad enough for a provider to engage in an activity that turns out to be fraudulent. Even in this scenario, the provider might be able to credibly argue that it was not aware that what it was doing was wrong. This is the classic “I am stupid” defense.

However, when a provider tries to conceal a fraudulent activity by adopting a sham arrangement that on its face appears to be legitimate, then this is clear evidence that the provider knew that what it was doing was wrong…and tried to hide it. This is evidence of “intent”…and the government will come down hard on the provider. In the whistleblower case, the marketing companies allegedly attempted to conceal the payments of copayments by running the payments through sham charitable organizations. Other types of sham arrangements include (i) sham clinical studies whose purpose is to funnel money to referring physicians, (ii) sham copayment insurance programs whose purpose is to pay copayments for patients, (iii) sham speaker fees to physicians when the physicians do not earn the fees – but rather – the fees are remuneration to the physicians for referrals, and (iv) sham medical director agreements in which the physicians do not render substantive services for the payments they receive – but rather – the payments are remuneration for referrals.

Focusing on High Reimbursement

In most product categories, some products have higher reimbursement while other products have lower reimbursement. If the provider consistently bills for the higher reimbursed product, then this is a “flag” to the TPP/government program that the provider is pushing products on patients on the basis of the amount of reimbursement…rather than on what is best for the patient.


As previously stated, the whistleblower case reads like a law school exam. If the allegations are true, then the pharmacy and the marketing companies did everything wrong. If pharmacies can avoid the problems implicated in the whistleblower case, then the risk of finding themselves in the government’s crosshairs will be substantially reduced.

Jeffrey S. Baird, Esq. is Chairman of the Health Care Group at Brown & Fortunato, P.C., a law firm based in Amarillo, Texas. He represents pharmacies, home medical equipment companies, and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization. He can be reached at (806) 345-6320 or jbaird@bf-law.com.