United States ex rel. Streck v. Bristol-Myers Squibb Co., CIVIL ACTION NO. 13-7547
| Decision Date | 29 November 2018 |
| Docket Number | CIVIL ACTION NO. 13-7547 |
| Parties | UNITED STATES OF AMERICA ex rel. RONALD J. STRECK v. BRISTOL-MYERS SQUIBB COMPANY |
| Court | U.S. District Court — Eastern District of Pennsylvania |
In this qui tam action brought under the False Claims Act (FCA), 31 U.S.C. § 3729-33, and various state false claims laws,* relator Ronald J. Streck, a pharmacist and lawyer who once served as the chief executive officer of an association of prescription drug manufacturers,1 alleges that Bristol-Myers Squibb (BMS) fraudulently manipulated the calculation of the Medicaid rebate it owed. As a result, BMS paid substantially less than it owed from 2007 to 2016.
In moving to dismiss, BMS argues that Streck fails to state an FCA claim because he offers no plausible basis for concluding that (1) it violated any regulatory requirement; (2) it acted with the requisite scienter; and (3) any purported violations were material. Alternatively, BMS contends that Streck's allegations of fraud do not satisfy Rule 9(b)'s heightened pleading requirements.2
We conclude that Streck has alleged sufficient facts to state a false claims cause of action. He alleges facts which, if proven, will establish that BMS knowingly or, at least, recklessly reported and paid lower rebates than it owed. Therefore, we shall deny BMS's motion to dismiss.
The purpose of the Medicaid Drug Rebate Program (Program) is to ensure that Medicaid "should have the benefit of the same discounts on single source drugs that other large public and private purchasers enjoy." H.R. REP. NO. 101-881, at 96 (1990), reprinted in 1990 U.S.C.C.A.N. 2017, 2108. The Program provides for "a rebate mechanism in order to give Medicaid the best price for which a manufacturer sells a prescription drug to any public or private purchaser." Id. To qualify for Medicaid payments, drug companies must provide rebates to state Medicaid programs on the companies' Medicaid sales of outpatient prescription drugs. Pharm. Research & Mfrs. of Am. v. Walsh, 538 U.S. 644, 652 (2003).
The crucial component of the rebate calculation is the Average Manufacturer Price ("AMP"). AMP is the price a wholesaler pays the manufacturer on a per-unit basis for a drug. 42 U.S.C. § 1396r-8(k)(1)(A) (2010). See also United States ex rel. Streck v. Allergan, Inc. (Streck I), 894 F. Supp. 2d 584, 588 (E.D. Pa. 2012). The manufacturer calculates the AMP for each drug and reports it to the Center for Medicaid and Medicare Services (CMS) on a quarterly basis.3 CMS relies on the AMP provided by the manufacturer to determine the amount of the rebate the manufacturer owes the states.4
For brand name drugs, the rebate is calculated as the greater of (1) the difference between the "best" or lowest price other purchasers pay the manufacturer for the drug and the AMP, or (2) a percentage of the AMP. 42 U.S.C. § 1396r-8(c)(1)(A)(ii). The generic drug rebate is a percentage of the AMP. Id. § 1396r-8(c)(3)(A)(i)-(ii). The percentage for brand name drugs is currently 23.1 percent, and for generic drugs, 13 percent.5 Id. § 1396r-8(c)(1)(B)(i)(6), (3)(B)(iii).
In calculating AMP, a manufacturer must include all discounts offered to distributors. Id. § 1396r-8(k)(1)(B)(ii). A discount decreases AMP, reducing the difference between AMP and the best price and resulting in a lower rebate the manufacturer must pay.6 A manufacturer must also include additional payments from distributors in calculating AMP. Id. § 1396r-8(k)(1)(B)(ii). See also Medicaid Program; Covered Outpatient Drugs, 81 Fed. Reg. 5170, 5228 (Feb. 1, 2016). Additional payments raise AMP, increasing the difference between AMP and the best price and resulting in a greater rebate.7
Streck contends that BMS engaged in two practices, each at a different time, that fraudulently lowered the AMP it reported. The schemes were embodied in its distribution service agreements. These agreements required the distributors to perform various services for BMS in the distribution process.8 In return, BMS paid them a percentage of the total sales price of all drugs they purchased, reducing the AMP.9
Through the discount scheme, BMS underreported AMP by mischaracterizing service fees as discounts in order to deduct them from AMP. Through the service fee scheme, BMS underreported AMP by offsetting price increases against service fees owed to distributors in order to avoid including the increases in AMP.
According to Streck, from January 1, 2007, through December 31, 2013, BMS fraudulently underreported AMP by improperly deducting service fees from the price.10 The agreements described services provided by the distributors, including inventory management, warehousing goods, distributing products, accounting and other services,11for which BMS paid a percentage of the total sales of drugs purchased from BMS.12 The parties calculated this fee as a 1.33% reduction of the invoice price.13
Streck contends these discounts were "bona fide service fees."14 Unlike discounts and price increases, bona fide service fees are excluded from AMP. 42 C.F.R. § 447.504(c)(14) (2007). Thus, by characterizing fees paid for inventory, warehousing, distribution, and accounting services as discount fees rather than bona fide service fees, BMS reported lower AMPs because it deducted the amount of the fee from the price the distributors paid for the drug, reducing the rebate.15
From January 1, 2014, through March 31, 2016, BMS employed "price appreciation" clauses in its service agreements to disguise its price increases as service fees.16 These provisions required distributors to reduce the service fee they charged BMS by the amount of additional revenue they realized by selling already purchased stock at the new higher price.17 If BMS increased the price of a drug, the agreements required the distributor to credit BMS for "any value realized by Distributor as a result of that change (e.g., appreciation on Distributor's Actual Inventory based on any change in [price].)"18 In other words, when BMS increased the price of a drug, BMS decreased the service fee it owed by the amount of the distributor's units of inventory of that drug, multiplied by the amount of the price increase.19 Streck avers that instead of factoring price increases into AMP, BMS defined them as service fees in order to underreport AMP.20
A Rule 12(b)(6) motion tests the sufficiency of the allegations contained in the complaint. To survive a Rule 12(b)(6) motion, "a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678.
A conclusory recitation of the elements of a cause of action is not sufficient. Phillips v. Cty. of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008). The plaintiff must allege facts necessary to make out each element. Id. (quoting Twombly, 550 U.S. at 563 n.8). In other words, the complaint must contain facts which, if proven later, support a conclusion that a cause of action can be established.
In considering a motion to dismiss under Rule 12(b)(6), the court must first separate the factual and legal elements of a claim, accepting the well-pleaded facts as true and disregarding legal conclusions. The court next determines whether the facts alleged, if proven, show that the plaintiff has a plausible claim for relief. Fowler v. UPMC Shadyside, 578 F.3d 203, 210-11 (3d Cir. 2009) (quoting Iqbal, 556 U.S. at 679). In making this determination, all well-pleaded allegations of the complaint must be accepted as true and interpreted in the light most favorable to the plaintiff, and all inferences must be drawn in the plaintiff's favor. See McTernan v. City of York, 577 F.3d 521, 526 (3d Cir. 2009).
A court may consider only the complaint, exhibits attached to the complaint, matters of public record and undisputedly authentic documents to the extent the plaintiff bases its claims upon them. Hartig Drug Co., Inc. v. Senju Pharm. Co., Ltd., 836 F.3d 261, 268 (3d Cir. 2016) (citing Mayer v. Belichick, 605 F.3d 223, 230 (3d Cir. 2010)).
In the context of an FCA claim, a plaintiff must allege "particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong inference that claims were actually submitted." Foglia v. Renal Ventures Mgmt., LLC, 754 F.3d 153, 156 (3d Cir. 2014) (). It is not enough to describe "a mere opportunity for fraud." Id. at 158. The plaintiff must allege sufficient facts to establish "a plausible ground for relief." Id. (quoting Fowler, 578 F.3d at 211).
Legislative and regulatory history reveals that the government has been concerned with manufacturers seeking ways to artificially reduce rebates. To curb drug manufacturers' persistent efforts to manipulate the calculation of AMP to reduce rebates, Congress has tightened the definition of AMP and CMS has issued regulations limiting what can be deducted from AMP.
Prior to 2007, Congress had defined AMP as follows:
The term "average manufacturer price" means, with respect to a covered outpatient drug of a manufacturer for a rebate period, the average price paid to the manufacturer for the drug in the United States by wholesalers for drugs distributed to the retail pharmacy class of trade, after deducting customary prompt pay discounts.
42 U.S.C. § 1396r-8(k)(1) (1997).
In 2007, Congress eliminated customary prompt pay discounts as a deduction:
Subject to subparagraph (B)...
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