Thulin v. Shopko Stores Operating Co., 13–3638.

• Decision Date: 12 November 2014
• Docket Number: No. 13–3638.,13–3638.
• Citation: 771 F.3d 994
• Parties: Carl E. THULIN, Plaintiff–Appellant, v. SHOPKO STORES OPERATING CO., LLC, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

771 F.3d 994

Carl E. THULIN, Plaintiff–Appellant

v.SHOPKO STORES OPERATING CO., LLC, Defendant–Appellee.

No. 13–3638.

United States Court of Appeals, Seventh Circuit.

Argued April 25, 2014.

Decided Nov. 12, 2014.

Ross Begelman, Begelman, Orlow & Melentz, Cherry Hill, NJ, for Plaintiff–Appellant.

Matthew J. Splitek, Quarles & Brady LLP, Madison, WI, Thomas S. Crane, Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, Boston, MA, for Defendant–Appellee.

Before KANNE and ROVNER, Circuit Judges, and DOW, District Judge.^*

Opinion

DOW, District Judge.

Relator Carl E. Thulin worked as a pharmacist at a Shopko retail store in Idaho from 2006 to 2009. During his tenure, Thulin observed what he believed to be a fraudulent billing scheme in which Shopko submitted inflated claims for prescription drugs to the federal Medicaid program. Thulin filed a qui tam complaint against his former employer in its home state of Wisconsin, alleging that Shopko violated the federal False Claims Act by overbilling Medicaid. Thulin also asserted analogous claims under the laws of eight different states in which Shopko does business. Shopko moved to dismiss Thulin's federal claim under Federal Rules of Civil Procedure 9(b) and 12(b)(6). The district court granted the motion and declined to exercise supplemental jurisdiction over Thulin's state law claims. Finding no error, we affirm.

I.

Because this appeal comes to us from the grant of a motion to dismiss, we accept all facts alleged in Thulin's complaint as true and draw all reasonable inferences in his favor. Shopko is a multi-regional retail pharmacy corporation headquartered in Green Bay, Wisconsin, that operates nearly 300 stores in 24 states. Thulin is a licensed pharmacist who at all relevant times worked as a full-time pharmacist at a Shopko retail store in Idaho.

Some of Shopko's pharmacy customers have prescription coverage through both private insurance and Medicaid, a federal program administered by the states that provides the poor, disabled, and elderly with medical and pharmaceutical insurance coverage. We follow the parties' convention of referring to these individuals as “dual-eligibles.” For dual-eligibles, Medicaid acts as a “payer of last resort,” which means that it picks up any tab remaining after the dual-eligible's private insurer has paid the amount that it has contracted to pay Shopko for a particular prescription.

According to Thulin, an excess tab almost always exists. Both Medicaid and private insurers strive to negotiate pharmaceutical discounts and purchasing agreements for their members, but Thulin asserts that private insurers are much better at playing ball than are the government agencies administering Medicaid. The private insurers' negotiating prowess “results in better pricing of prescriptions for the [privately] insured patients.” Thulin alleges that this disparity exists in all of the states in which Shopko does business. Thus, when Shopko enters into provider contracts with private insurers, it typically agrees to accept payment in full lesser amounts than it agrees to accept from Medicaid for any given drug. The amount that Shopko agrees to accept is composed of some payment by the insurance company and a co-pay or deductible paid by the patient at the point of sale. The size of the patient's co-pay depends on his or her contract with the private insurance company, to which Shopko is not a party. Privately insured patients, including dual-eligibles, are not parties to the contracts that Shopko signs with their private insurers.

Thulin alleges that when dual-eligibles apply for Medicaid, they are required by 42 U.S.C. § 1396k(a)(1)(A) and 42 C.F.R. § 433.145 to assign to the state any rights they have under their private insurance plans. Thulin alleges that one of these assignable rights is the right to purchase prescription drugs at the lower price that their private insurer negotiated with Shopko. Because dual-eligibles are not parties to the contracts that Shopko signs with their private insurers, however, they do “not know the price they have legally assigned to the state Medicaid agency.” Likewise, Thulin alleges, state Medicaid agencies “do not know the price benefit that the dual-eligible patient assigns to the government.” In other words, both Medicaid agencies and dual-eligibles rely on Shopko to accurately calculate and assign the benefits to the government.

According to Thulin, this reliance was misplaced. Shopko programmed its computer system, PDX Adjudication Software System, to systematically exploit the disparity between the pharmaceutical prices negotiated by private insurers and those negotiated by Medicaid. The PDX system (and the apparently identical system, Condor, used by Shopko's subsidiary Pamida) submits claims to a dual-eligible's private insurer first, at the low negotiated rate. PDX subsequently but virtually simultaneously adjusts the initial price upward to the higher one negotiated by Medicaid and bills Medicaid for any unpaid differential, not just the co-pay that the dual-eligible owes under his or her private insurance contract.

An example similar to that provided by Thulin during oral argument helps illustrate the scheme. Assume for instance that a dual-eligible has a prescription for Drug A, which has a list price of $50. Her private insurer has an agreement with Shopko pursuant to which Shopko has agreed to accept $25 as payment in full for Drug A: $20 from the private insurer and a $5 co-pay from the dual-eligible. Under Medicaid's less favorable agreement with Shopko, Medicaid has agreed to pay $30 for Drug A. The dual-eligible submits her prescription to Shopko and pays nothing at the point of sale. Shopko fills the prescription and then bills the private insurer $25 using PDX. The private insurer remits payment of $20, the agreed amount of its payment less the dual eligible's unpaid co-pay. Shopko then bills Medicaid, the “payer of last resort,” but not only for the $5 that remains unpaid under its contract with the dual-eligible's private insurer. Instead, Shopko bills Medicaid $10, the difference between the $20 that the private insurer already has paid and the $30 that Medicaid has agreed to pay for the drug.

Thulin alleges that this “internal program of the two systems bills more for dual eligible patients than was allowed under the assignment of rights and benefits provisions of federal law and contract provisions of private insurance companies.” That is, Shopko committed fraud by billing Medicaid an amount in excess of the co-pay that the dual-eligibles owed under their private insurance contracts. Shopko compounded this alleged fraud by omitting from its invoices to Medicaid the amount of dual-eligibles' co-pays. By omitting this information, Thulin alleges, “Shopko failed to report truthfully to Medicaid the nature and extent of [its] obligation.”

Thulin discovered the alleged fraud by observing “that there is potential for fraudulent billing involving dual eligible patients” and “that the PDX pharmacy system used by Shopko does not present the billing and payment amount information on the patient bag receipts and it does not make it available to the pharmacist or technician processing prescriptions.” Thulin nonetheless managed to obtain and attach to his complaint 31 printouts from the PDX system that allegedly demonstrate the two-pronged fraud. All 31 exhibits concern transactions performed in Idaho.

Yet Thulin filed his suit not in Idaho but in the Western District of Wisconsin, and did not bring any claims under Idaho law. Instead, he filed one claim under the federal False Claims Act (“FCA”), 31 U.S.C. § 3729, et seq., and eight analogous state law claims under the laws of California, Illinois, Indiana, Michigan, Minnesota, Montana, Tennessee, and Wisconsin. The attorneys general of the affected states and the federal government declined to intervene in Thulin's qui tam suit. Thulin then elected to continue the suit on their behalf, see 31 U.S.C. § 3730(c)(3), and Shopko moved to dismiss all of his claims.

The district court granted Shopko's motion to dismiss Thulin's federal claim with prejudice. The district court first concluded that Thulin failed to allege the requisite falsity to state a claim under the False Claims Act because neither 42 U.S.C. § 1396k(a)(1)(A) nor its related regulations were applicable to Shopko and Thulin “fail[ed] to explain how the assignment law applies to Shopko in the first instance or provide any support for his legal claim.”

The district court also concluded that Thulin's allegations pertaining to the knowledge element of the claim failed to meet the requirements of Federal Rule of Civil Procedure 8, let alone Rule 9(b). The court concluded that “[t]o the extent plaintiff is alleging that Shopko knows that the assignment law applies to it as a provider (rather than pleading that it knows the prices it negotiates with private health insurers), the pleading is not at all clear.” Moreover, “[n]either does plaintiff allege facts to support how Shopko knows of such an obligation, nor who in the organization has actual knowledge.” The district court further faulted Thulin for pointing to a Minnesota regulation in his complaint but not “alleg[ing] any individual transactions in Minnesota as required to meet the pleading requirement of Rule 9(b).”

The district court declined to exercise supplemental jurisdiction over Thulin's state law claims and dismissed them without prejudice. Thulin timely appealed.

II.

We review de novo the district court's grant of a motion to dismiss. Camasta v. Jos. A. Bank Clothiers, Inc., 761 F.3d 732, 736 (7th Cir.2014). To survive a motion to dismiss under Rule 12(b)(6), a complaint must provide enough factual information to “state a claim to relief that is plausible on its face” and “raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929, (2007). Whether a complaint states a claim upon...