United States ex rel. Rostholder v. Omnicare, Inc.
| Decision Date | 14 August 2012 |
| Docket Number | Civil No. CCB-07-1283 |
| Parties | UNITED STATES OF AMERICA, ex rel. BARRY ROSTHOLDER, ET AL. v. OMNICARE, INC., ET AL. |
| Court | U.S. District Court — District of Maryland |
Barry Rostholder ("Relator"), a former employee of Heartland Repack Services, LLC ("Heartland Repack"), brings this claim against Heartland Repack and its parent company, Omnicare Inc. ("Omnicare"), as a qui tam relator on behalf of the United States under the federal False Claims Act, 31 U.S.C. §3730(b)(1). Relator also includes claims under state and local false claims laws on behalf of 22 states; the District of Columbia; Cook County, Illinois; and the cities of Chicago and New York. Defendants Heartland Repack and Omnicare have jointly filed a motion to dismiss for lack of subject matter jurisdiction and for failure to meet the pleading standards of Fed. R. Civ. P. 9(b) and Fed. R. Civ. P. 12(b)(6). A hearing was held on June 28, 2012. For the following reasons, the defendants' motions to dismiss will be granted.
The federal False Claims Act ("FCA" or "the Act"), 31 U.S.C. §§ 3729-3733 (2006), prohibits persons and entities from knowingly presenting, or "caus[ing] to be presented," false or fraudulent claims to the federal government for payment or approval. Id. § 3729(a)(1). The FCA may be enforced directly by the Attorney General, but it also contains an alternative privateenforcement mechanism. This "qui tam" provision allows private individuals—often, but not always, whistleblowers with inside information about fraud—to bring suit on behalf of the United States. See id. §§ 3730(b), (e). The private individual, called a "relator," must file suit under seal, giving the United States government time to investigate the claim and choose to either intervene in the action or allow the relator to proceed on his own. Id. § 3730(b)(4). The action is then unsealed and notice provided to the defendant. If the action is successful, the relator receives a percentage of any proceeds. Id. § 3730(d).
This FCA case involves Medicare and Medicaid billing for Heartland Repack pharmaceutical products that may have been exposed to penicillin cross-contamination in violation of Food Drug and Cosmetics Act (FDCA) regulations. See 21 C.F.R. §§ 211.42(d), 211.176. According to relator, between 2001 and 20071 Heartland Repack sold the products to Omnicare pharmacies and other pharmacies jointly owned by Omnicare, knowing that the products were adulterated. These pharmacies then allegedly billed state Medicaid programs for reimbursement or resold the products to unrelated long-term care facilities which either directly or indirectly billed Medicare for the products. Relator argues that the United States and various states and localities did not get the benefit of the bargain when they reimbursed Omnicare and its clients for the allegedly adulterated products. Thus, relator argues, Heartland Repack and Omnicare should be liable under the federal False Claims Act and similar state and local laws.
Omnicare is a Delaware corporation with its principal place of business in Covington, Kentucky. The corporation provides pharmacy services to patients and residents of long-term care facilities. During the claim period, Omnicare operated approximately three hundred "long-term care pharmacies" that serviced skilled nursing facilities and long-term care facilities in forty-seven states. (Second Am. Compl. ¶ 67 ("SAC").) In 2006, the last year before this suit was filed, Omnicare reported $6.5 billion in net sales revenue. (Id. at ¶ 71.)
Heartland Repack is a wholly-owned subsidiary of Omnicare. In 1994, Omnicare entered into a 50-50 partnership with a long-term care provider, Health Care Resources, n/k/a HCR Manor Care ("HCR"), to form Heartland Healthcare Services. Heartland Healthcare Services was located in a warehouse in Toledo, Ohio, and was comprised of several units, including wholesale and distribution, repackaging, and a pharmacy. In 2001, Omnicare acquired HCR's ownership stake in the wholesale and distribution and repackaging units of Heartland Healthcare Services. With these units, Omnicare formed Heartland Repack.2
"Repackaging" was an important part of Omnicare's vertically-integrated business model. Most patients or residents of long-term care facilities are prescribed a regimen of various medications. Heartland Repack utilized a repackaging method through which the exact medications a patient needed at a certain time of day would be segregated into "sealed cells or 'blisters.'" (Id. at ¶¶ 73-75.) Heartland Repack would purchase bulk pharmaceutical products (mainly generic drugs) and then repackage them into "bingo cards" with plastic bubbles full of the appropriate medication or "unit doses" that were smaller versions of bingo cards. (Id. at ¶¶ 69, 76.) The repackaged drugs were sold to Omnicare's three hundred long-term care pharmacies as well as to the three Heartland Healthcare Services pharmacies. (Id. at ¶ 68.)
After the formation of Heartland Repack, the Heartland Healthcare Services pharmacy unit continued to be owned jointly by Omnicare and HCR, and the Heartland Repack repackaging unit and the Heartland Healthcare Services pharmacy unit continued to jointly occupy the original warehouse. (Id. at ¶ 61.)
Heartland Repack was a large facility. The company employed "over 100 individuals on a regular basis," (id. at ¶ 85), and by 2005 Heartland Repack was repackaging "over 200 million doses" annually. (Id. at ¶ 69.) According to relator, Heartland Repack was one of only two repackaging facilities owned by Omnicare, (id. at ¶ 72), with the other facility, Vanguard Repack, located in Glasgow, Kentucky. (Relator's Opp. to Def.'s Mot. Dismiss 25, ECF No. 87). At first, Heartland Repack was the larger of the two facilities, though they eventually became the same size "in later years." (SAC ¶ 72.) Heartland Repack and Vanguard Repack together provided a substantial percentage—or perhaps all—of the drugs for Omnicare's three hundred long-term care pharmacies.3
Reimbursement from Medicaid and Medicare has been an important source of sales revenue for Omnicare. According to Omnicare's 10-K filings with the SEC, as relator notes in the SAC, "historically approximately one half of [Omnicare's] revenue was derived 'directly from government sources, principally state Medicaid programs and to a lesser extent the federal Medicare program.'" (Id. at ¶ 70 (quoting Omnicare's Mar. 16, 2006, 10-K filing).) The SAC provides specific numbers from 2005 and 2006. In 2005, 46% of Omnicare's $5.3 billion in netsales revenue was "derived from beneficiaries covered under state Medicaid programs." (Id.) After Medicare Part D became effective on January 1, 2006, the sources of Omnicare's revenue shifted toward Medicare. In 2006, 42% of the company's $6.5 billion in net sales came from Medicare and only 12% from Medicaid. (Id. at ¶ 71 (citing Omnicare's Mar. 1, 2007 10-K filing).)
The SAC provides a description of how the products were ordered from Heartland Repack and how government program reimbursement functioned. Heartland Repack would receive "an order for bingo cards or unit doses from an Omnicare [or presumably a Heartland Healthcare Services] pharmacy." (Id. at ¶ 77.) When the order was processed, Heartland Repack would "inscribe each bingo card or unit dose with a Lot Number, a Heartland Repack Services National Drug Code ("NDC") number, and the drug manufacturer's NDC number." (Id.) NDC numbers are unique three-segment numbers required by FDCA regulations.4 The first segment of the number, the "labeler code," identifies the specific manufacturer or distributor (including repackers) of the drug product. See 21 C.F.R. § 207.35(b)(2)(i).
After repackaging, drugs were sent to Heartland Repack's wholesale and distribution unit, which "kept records of the drugs and lot numbers received." (SAC ¶ 78.) The wholesale and distribution unit then sold and shipped the products to the Omnicare and Heartland Healthcare Services pharmacies. These pharmacies "in turn provided repackaged drugs to HCR Manor Care Nursing Homes and other long-term care facilities." (Id. at ¶ 79.) As relator describes in the SAC:
Specifically, HCR Manor Care Nursing Homes and other SNFs/ALFs would submit patient pharmaceutical orders to their regional Heartland Healthcare Services or Omnicare pharmacy for processing. The orders would then be processed by the pharmacy intake department (which verifies all patient payor sources such as Medicare, Medicaid, private insurance, etc.), packed into a plastic "tote bag" for each patient, and shipped to the appropriate care facility.
Heartland Repack thus did not itself receive payments directly from government sources. The company's only income, as described by relator, came from sales of repackaged pharmaceuticals to Omnicare and Heartland Healthcare Services pharmacies. Whether and how government program reimbursement to these pharmacies took place depended on each patient, or the mix of patients, at a nursing home or SNF and their respective eligibility. Relator includes short descriptions of the various programs under which he alleges that the government provided reimbursements for Heartland Repack drugs.
Under Medicare, the Centers for Medicare and Medicaid Services ("CMS"), a division of the United States Department of Health and Human Services, provides reimbursements for the use of approved prescription drugs under the different relevant sections of the program. Medicare Part A uses a "Prospective Payment System" ("PPS") to pay for services provided to hospital inpatients, home health care patients, and patients of Skilled Nursing Facilities ("SNFs"). (Id. at ¶ 19.)5 This system means that providers do not bill Medicare for specific drugs necessary for specific patients. Rather, as described in the SAC:
[A] skilled nursing facility receives a "bundled" payment for all services...
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