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United States ex rel. Stepe v. RS Compounding LLC

United States District Court, M.D. Florida, Tampa Division

December 4, 2017

UNITED STATES OF AMERICA, ex rel. MCKENZIE STEPE, Plaintiffs,
v.
RS COMPOUNDING LLC d/b/a ZOE SCRIPTS LABORATORY SERVICES, LLC and d/b/a WESTCHASE COMPOUNDING PHARMACY, and RENIER GOBEA, Defendants.

          ORDER

          VIRGINIA M. HERNANDEZ COVINGTON UNITED STATES DISTRICT JUDGE.

         This matter comes before the Court pursuant to Defendants Renier Gobea's Motion to Dismiss the United States' Amended Complaint in Partial Intervention (Doc. # 74) and RS Compounding LLC's Motion to Dismiss the United States' Amended Complaint in Partial Intervention (Doc. # 75), both filed on October 31, 2017. The United States responded on November 21, 2017. (Doc. # 85). For the reasons that follow, the Motions are denied.

         I. Background

         A. The Parties

         Gobea “co-founded RS Compounding . . . with Dr. Stephen Caddick in 2004 . . . . Gobea is the current owner and director of RS Compounding.” (Doc. # 42 at ¶ 10). RS Compounding is a compounding pharmacy that does business as Zoe Scripts and Westchase Compounding Pharmacy. (Id. at ¶¶ 8, 35). RS Compounding's products were prescribed to uninsured patients, patients covered by private insurance, and those covered by federal healthcare programs, such as TRICARE. (Id. at ¶¶ 12, 45).

         TRICARE is the federal healthcare program that “provides coverage for approximately 9 million active duty military personnel and their families.” (Id. at ¶ 12). “TRICARE's regulations prohibit fraudulent and abusive billing relationships.” (Id. at ¶ 27). One type of abuse is “charging [TRICARE] beneficiaries rates for services and supplies that are in excess of those charges routinely charged by the provider to the general public.” (Id.).

         Express Scripts, Inc., is “the TRICARE retail and mail order pharmacy services contractor for all TRICARE beneficiaries.” (Id. at ¶ 21). In turn, Express Scripts has a contract with “the Strategic Health Alliance, the Pharmacy Services Administrative Organization that assists pharmacies like RS Compounding with negotiating representation with Express Scripts.” (Id. at ¶¶ 22, 24). “RS Compounding agreed to the terms in the contract between Express Scripts and its Pharmacy Services Administrative Organization when it became a TRICARE provider on June 5, 2009.” (Id. at ¶ 25).

         The United States alleges that “[f]rom January 1, 2012 to January 31, 2014, the Defendants knowingly submitted, or caused to be submitted, thousands of false claims to TRICARE, which resulted in millions of dollars of reimbursement that would not have been paid but for the Defendants' misconduct.” (Id. at ¶ 3). This alleged fraud was brought to the United States' attention by Relator McKenzie Stepe, who worked for RS Compounding as a sales representative from November 2011 to February 2013. (Id. at ¶ 7).

         B. The Alleged Fraud

         “In a break with the traditional use of compounded drugs, Defendants took advantage of the high reimbursement rates for compounded prescriptions by mass-producing these compounds and eliminating, or at least sharply reducing, the individualization of the compounds.” (Id. at ¶ 35). When wholesale companies sold medications to RS Compounding, they “reported to RS Compounding two prices: the Average Wholesale Price and the acquisition price.” (Id. at ¶ 36). While the “acquisition price was the price RS Compounding actually paid for the medication, ” the Average Wholesale Price was higher and “was reported to nationally recognized pricing sources and third party payors, including TRICARE.” (Id. at ¶ 37). TRICARE “used the reported prices to set reimbursement rates.” (Id.).

         Indeed, TRICARE “limits the amount it will pay for compound formulations to ‘the lesser of the usual and customary price or the maximum allowable cost.'” (Id. at ¶ 23). “[T]he maximum allowable cost for compounded prescriptions is the ‘Average Wholesale Price' of the ingredients, ” meaning “the average price at which wholesalers sell drugs to their customers, including physicians and pharmacies.” (Id. at ¶ 26). Under the Express Scripts manual for pharmacies, the usual and customary price is the cash price for a compound: the “retail price of a Covered Medication in a cash transaction at the Pharmacy dispensing the Covered Medication (in the quantity dispensed) on the date that it is dispensed, including any discounts or special promotions offered on such date.” (Id. at ¶ 24). “The Express Scripts Manual states that ‘[a]ll claims submitted must include the Pharmacy's Usual and Customary retail price, including all discounts on applicable date of fill'” - a requirement to which RS Compounding is allegedly bound. (Id. at ¶¶ 24-25).

         Using the pharmacy's “Compounder” software system, RS Compounding “reported the Average Wholesale Price . . . instead of its acquisition cost” in its records. (Id. at ¶¶ 38-39). And, “rather than separately calculating or computing the Usual and Customary cost of [each compounded prescription], the Compounder software had an ‘Equalizer' button that made the Usual and Customary cost of the compound equal to the Average Wholesale Price.” (Id. at ¶ 40). Thus, when it requested reimbursement for “each compounded prescription, RS Compounding reported to TRICARE both an Average Wholesale Price and a Usual Customary Price, ” which “[w]ith few, if any exceptions” were the same price. (Id. at ¶ 42). As a result, the United States alleges, “RS Compounding did not separately report to TRICARE the true Usual and Customary price - that is, the price paid by cash paying patients.” (Id. at ¶ 43). “Since TRICARE pays the lesser of the Average Wholesale Price and the Usual and Customary Cost, by equalizing the two amounts Defendants guaranteed payment of the inflated Average Wholesale Price.” (Id. at ¶ 44).

         In short, the United States alleges that, “[f]rom January 1, 2012 until January 31, 2014, RS Compounding sold the exact same compounds to government and cash payors for drastically different prices.” (Id. at ¶ 45). The United States provides charts indicating the different rates charged for two of RS Compounding's medications, with the price per gram charged to TRICARE far exceeding the price per gram paid by cash buyers. (Id. at ¶¶ 54, 61). For those two compounded medications, the United States alleges RS Compounding charged between 2, 000 and 2, 100% “more for the exact same compound than it charged cash payors.” (Id. at ¶¶ 55, 62).

         The United States also provides charts listing sample claims for drugs with inflated prices that were actually submitted to TRICARE. (Id. at ¶¶ 58, 65). For example, the United States identifies a prescription dispensed on August 15, 2012, for patient C.E. (Id. at ¶ 65). Although the cash price for the 240mg compound prescribed was $30.00, RS Compounding charged TRICARE $990.00. (Id.). According to the United States, “[i]f TRICARE knew it was paying over 2, 000% more than cash payors, it would not have paid such high reimbursements to RS Compounding.” (Id. at ¶ 57).

         Then, “[e]ffective February 1, 2014, RS Compounding altered its reimbursement scheme to stop offering the same formulations to cash payors and TRICARE.” (Id. at ¶ 47). This change was made because, on January 27, 2014, “Silas Raymond, RS Compounding's head pharmacist, was notified that RS Compounding could not seek reimbursement for formula it provided to cash-paying patients at a discounted price.” (Id. at ¶ 48). At Raymond's request, Megan Stead, a pharmacy technician and Manager of Customer Service, drafted a new policy. (Id. at ¶ 49). “Instead of extending the same discounts offered to cash paying customers to government payors (like TRICARE), RS Compounding's new policy instead ceased offering the same compounds to cash and insured payors.” (Id.). A new formulation was created just for cash payors and “offered cash payors the same low costs.” (Id. at ¶ 50). “At that same time [RS Compounding] continued offering its ‘custom' formulations to insured patients at inflated rates.” (Id.).

         According to the United States, the means by which RS Compounding changed its billing practices - i.e. no longer providing the exact same formulations to cash payors and TRICARE, rather than charging TRICARE the lower prices previously charged to cash payors - is meaningful. In the United States' eyes, this decision to continue charging TRICARE high rates confirms that RS Compounding knew “of the unlawfulness of its disparate pricing scheme.” (Id. at ¶ 52). And the United States alleges that, “[d]espite this knowledge, neither Gobea nor RS Compounding made any attempt to refund the difference between the price paid by cash payors and the amount submitted for reimbursement to TRICARE.” (Id. at ¶ 53).

         C. Gobea's Alleged Personal Involvement

         The United States alleges “Gobea knowingly participated in determining the disparate amounts charged for RS Compounding's products and, as such, the amounts for which Defendants submitted claims to the government” and “knowingly participated in falsely certifying the Usual and Customary price to TRICARE.” (Id. at ¶¶ 80-81). The United States emphasizes that Gobea is the owner and sole shareholder of RS Compounding, and that “RS Compounding has no recorded officers or directors besides Gobea.” (Id. at ¶¶ 66, 86). Gobea was also RS Compounding's highest-paid employee, receiving a monthly salary of up to $120, 000 and taking “shareholder distributions from the company whenever he pleased” without a “set schedule or procedure for these distributions.” (Id. at ¶¶ 83-85). The “salary and distributions Gobea gave himself have significantly impaired RS Compounding's ability to pay its obligations under the [FCA].” (Id. at ¶ 85).

         According to the United States, “[f]ew details about Gobea's business were too small to merit his attention.” (Id. at ¶ 73). He hired and fired employees, approved the costs of renewing pharmacy licenses, and approved the use of “a different type of compound base that had a ‘significantly higher' Average Wholesale Price.” (Id. at ¶¶ 73, 75-76). Gobea “requested that he see every audit response before it was submitted to Express Scripts” and “became involved when legal and regulatory matters arose.” (Id. at ¶¶ 75, 77). Gobea was informed by Stead “of the policy change to cease offering identical formulations to TRICARE and cash payors.” (Id. at ¶ 82). But, “[d]espite Gobea's knowledge that RS Compounding's prior practices were unlawful, he made no effort to return the exorbitant amounts his company had charged TRICARE.” (Id.).

         Alternatively, the United States alleges that Gobea at least “deliberately ignored and/or recklessly disregarded the falsity of the information RS Compounding submitted to TRICARE” and “the fraudulent practices of his employees.” (Id. at ¶ 68).

         D. Procedural History

         On December 16, 2013, Relator Stepe filed her Complaint against RS Compounding and John Doe Corporations 1-10 under seal, alleging violations of the False Claims Act (FCA), 31 U.S.C. § 3729(a), and Florida's state equivalent of the FCA. (Doc. # 1). On April 28, 2017, the Government elected to intervene in part as to the fraudulent pricing allegations, but not as to the “remaining allegations (including [Stepe's] fraudulent marketing and promotional allegations).” (Doc. # 33). The Government filed its Complaint in partial intervention on June 30, 2017, and subsequently filed its Amended Complaint in partial intervention on September 9, 2017, against ...


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