BEHNKE v. CVS CAREMARK CORPORATION

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

:

UNITED STATES OF AMERICA :

ex rel. SARAH BEHNKE, : CIVIL ACTION

:

Plaintiffs, :

: No. 14-824

v. :

:

CVS CAREMARK CORPORATION, et al., :

:

Defendants. :

:

Goldberg, J. April 23, 2020

MEMORANDUM OPINION

This is a qui tam action brought on behalf of the United States of America under the False

Claims Act (“FCA”). Relator Sarah Behnke (“Relator”) alleges that Defendants CVS Caremark

Corporation, CVS Caremark Rx, LLC, CaremarkPCS Health LLC (“Caremark”) (collectively, the

“Caremark Defendants”), and SilverScript Insurance Company (“SilverScript”), engaged in a

scheme to defraud the government by falsely reporting certain price information for prescription

drugs subsidized by the government under Medicare Part D. Defendants have moved to dismiss

all claims pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), contending that the

Complaint fails to meet threshold pleading requirements.

For the reasons stated below, Defendants’ motion to dismiss is granted as to Counts I and

II against SilverScript and as to Count III against all Defendants. The motion is denied as to

Counts I and II against the Caremark Defendants.

I. FACTUAL AND PROCEDURAL BACKGROUND

At this stage of the litigation, I take the facts directly from the Complaint.1

A. Relevant Background Regarding Medicare Part D

To understand Relator’s allegations, it is necessary to explain—as the Complaint does—

the regulatory structure of the Medicare Part D Program, out of which this dispute arises.

Medicare Part D was established by the Medicare Prescription Drug, Improvement and

Modernization Act of 2003, for the purpose of providing prescription drug coverage to individuals

qualified for Medicare. Unlike Parts A and B of the Act, Part D is a private-market-based program,

in which the costs are shared between the government and private health insurers who offer plans,

provided those plans meet the requirements of the Medicare Part D Act and its regulations. Private

health insurers that offer such plans are referred to as Part D Plan Sponsors (“Plan Sponsors”), and

their Medicare Part D plans are referred to as Part D Plans. The government agency responsible

for administration of the Medicare Part D Program is the Centers for Medicare and Medicaid

Services (“CMS”), which is under the aegis of the U.S. Department of Health and Human Services.

(Compl. ¶¶ 28–32.); see also 42 U.S.C. § 1395w-101, et seq.

Critical to understanding this case are the ways in which costs are shared between the

government and Plan Sponsors. Another judge in this district has summarized this process—

consistent with the allegations in the Complaint before me—as follows:

A Part D sponsor submits a bid in the year prior to the calendar year in which Part

D benefits will actually be delivered. The bid contains a per member per month

(“PMPM”) cost estimate for providing Part D benefits to an average Medicare

beneficiary in a particular geographic area. From the bids, CMS calculates

nationwide and regional benchmarks which represent the average PMPM cost. If

the Part D plan sponsor’s bid exceeds the benchmark, the enrolled beneficiary must

1 When deciding a motion to dismiss for failure to state a claim pursuant to Federal Rule of Civil

Procedure 12(b)(6), a district court must assume the veracity of all well-pleaded facts found in the

complaint. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). Thus, I will assume that all the facts found in the

Complaint are true for purposes of Defendants’ Rule 12(b)(6) and 9(b) arguments.

pay the difference as part of a monthly premium. CMS then provides each Part D

plan sponsor with advance monthly payments equal to the Part D plan sponsor’s

standardized bid, risk adjusted for health status, minus the monthly beneficiary

premium, estimated reinsurance subsidies for catastrophic coverage, and estimated

low-income subsidies.

When a pharmacy dispenses drugs to a Medicare beneficiary, it submits an

electronic claim to the beneficiary’s Part D plan and receives reimbursement from

the plan sponsor for the costs not paid by the beneficiary. The Part D plan sponsor

then notifies CMS that a drug has been purchased and dispensed through a

document called a Prescription Drug Event (“PDE”) record, which includes the

amount paid to the pharmacy. The PDE is an electronically created document that

includes at least thirty-seven fields of information about a specific drug transaction.

CMS uses the information in the PDE at the end of the payment year to reconcile

its advance payments to the sponsor with actual costs the plan sponsor incurred. If

a Part D Plan sponsor’s actual costs exceed the estimated costs, the plan sponsor

may be able to recoup some of its losses through a risk sharing agreement with

CMS. If a Part D Plan sponsor’s estimated costs exceed its actual costs by a

specified amount, payments to the Part D Plan sponsor for the year are reduced and

the Plan sponsor will have to pay back some its estimated payments.

Part D Plan sponsors subcontract with many entities to provide drugs to the

Medicare Part D beneficiaries enrolled in their plans, including subcontracts with

pharmacy benefit managers (“PBM”) who provide drugs through mail order and

pharmacies. As a condition for receiving its monthly payment from CMS, a Part D

Plan sponsor must certify the accuracy, completeness and truthfulness of all data

related to the payment, which may include enrollment information, claims data, bid

submission data, and any other data specified by CMS. If the claims data has been

generated by a subcontractor of a Part D plan sponsor, such as a PBM, that entity

must “similarly certify” that the claims data it has generated is accurate, complete

and truthful, and must acknowledge that it will be used to obtain federal

reimbursement. Part D Plan sponsors must also certify in their contracts with CMS

that they agree to comply with all federal laws and regulations designed to prevent

fraud, waste, and abuse. CMS regulations require that all subcontracts between

Part D plan sponsors and downstream entities, including pharmacies and PBMs,

contain language obligating the pharmacy to comply with all applicable federal

laws, regulations, and CMS instructions.

U.S. ex rel. Spay v. CVS Caremark Corp., 913 F. Supp. 2d 125, 132–33 (E.D. Pa. 2012); (see

also Compl. ¶¶ 36–43, 45–53, 79–85.)

In addition to the PDE reporting requirements described above, “[f]ees, payments, or

payment adjustments made after the point-of-sale that change the cost of Part D covered drugs

for Part D sponsors or PBMs must be reported to CMS as Direct or Indirect Remuneration

[(“DIR”)].”2 (See Compl. ¶¶ 54, 57, 65–66.) CMS relies on this dual-reporting system in order

to make sure its payments to Plan Sponsors are accurate:

The Part D reconciliation process, in particular, is dependent on transaction data

summarized on [PDE] records. . . . [but] [o] ften, the Part D sponsor or its pharmacy

benefits manager (PBM) receives additional compensation after the point-of-sale

that serves to change the final cost of the drug for the payer, or the price paid to the

pharmacy for the drug. Examples of such compensation include rebates provided

by manufacturers and concessions paid by pharmacies. Under Medicare Part D,

this post point-of-sale compensation is called Direct and Indirect Remuneration

(DIR) and is factored into CMS’s calculation of final Medicare payments to Part D

plans. . . .

Part D sponsors and PBMs are engaging to a greater extent in arrangements that

feature compensation after the point-of-sale, and the value of such compensation is

also generally increasing. As a result, CMS has observed a growing disparity

between gross Part D drug costs, calculated based on costs of drugs at the point-of-

sale, and net Part D drug costs, which account for all DIR.

DIR results from payment arrangements negotiated independent of CMS, between

Part D sponsors, PBMs, network pharmacies, drug manufacturers, and other parties

involved in the administration of the Part D benefit. . . .

The final plan payments by CMS are, per statute, to be based on the costs actually

incurred by Part D sponsors. These actual costs must reflect any applicable DIR.

DIR is apportioned only between Medicare and the Part D plan, generally based on

the share of the total Part D drug costs that each is responsible for over the course

of the payment year.3

B. The Alleged Fraud

At the time the Complaint was filed, Relator was employed as Senior Actuary/Head

Actuary Medicare Part D for Aetna Life Insurance Company (“Aetna”), a Part D Plan Sponsor.

Aetna is not a party to this action. In 2010, Aetna entered into an agreement with the Caremark

Defendants, in which Caremark agreed to serve as a PBM for Aetna. (Compl. ¶ 89.) Pursuant to

2 Fact Sheet, Medicare Part D—Direct and Indirect Remuneration (DIR), CMS.gov (Jan. 19, 2017),

https://www.cms.gov/newsroom/fact-sheets/medicare-part-d-direct-and-indirect-remuneration-dir.

3 Id.

this agreement, which became effective on January 1, 2011, Caremark agreed to create, contract

with, and administer “a network of retail pharmacies . . . to dispense prescriptions to Aetna Part D

beneficiaries.” (Id.) As permitted by the contract, Caremark set Maximum Allowable Costs

(“MAC”) prices to be paid by Aetna for multi-source generic drugs dispensed by these pharmacies.

(Id. ¶ 94.) The MAC price is the “price Aetna agrees to pay for a prescription for a particular

drug,” as well as “the price a beneficiary is told is the charge for each specific drug and is the price

charged by the pharmacy for the drug when a beneficiary goes to the pharmacy to fill the

prescription.” (Id. ¶ 94.) Caremark had the ability under the contract to change the MAC prices.

(Id. ¶ 95.)

The Agreement also included a list of “retail discount guarantees” for the years 2011

through 2022. (Id. ¶ 96.) These guarantees are “discounts off of reported Average Wholesale

Prices (‘AWP’ or ‘AWPs’), an industry benchmark price.” (Id.) “[F]or example, in 2011

Caremark guaranteed Aetna would pay no more in the aggregate than 25% of AWP (the flip side

of 75% off AWP) for qualifying generic prescriptions.” (Id.)

Relator alleges that, over the course of the contract between Aetna and Caremark,

Caremark “adjusted the MAC Prices they set for Aetna’s Part D business so that the drug prices

for Aetna Part D beneficiaries precisely met, but did not exceed, the retail discount guarantees in

the contract between Aetna and Caremark.” (Id. ¶ 99.) In other words, Caremark set its MAC

prices at the maximum allowable under the contract.

Relator claims that she did an investigation of Aetna’s arrangement with Caremark and

discovered that the MAC prices being charged to Aetna “were significantly higher than prices

being charged by other Part D Sponsors to their beneficiaries for the same drugs.” (Id. ¶ 101.)

Relator allegedly brought this concern to the attention of other employees of Aetna, and Aetna, in

turn, brought this to the attention of the Caremark Defendants during telephone conferences on

February 11, 2013 and February 14, 2013. (See id. ¶¶ 102–105.)

During those conferences, Relator allegedly asked representatives of the Caremark

Defendants whether they could “negotiate lower pricing with pharmacies or if Caremark had

already negotiated discounts similar to what Aetna’s competitors had negotiated but were not

passing through to Aetna.” (Id. ¶ 106.) According to the Complaint, CVS Caremark Corporation’s

Senior Vice President, Allison Brown, “responded that [Caremark] had negotiated lower prices on

Aetna’s behalf but it was not required under the contract to provide those prices to Aetna.” (Id.)

Relator characterizes this as a “virtual admission” that the prices reported by Caremark to CMS

were not the prices that Caremark had negotiated with the pharmacies because, “[a]s was clearly

understood by the parties, . . . the prices provided to Aetna were also the prices that Aetna reported

to CMS as the negotiated prices [with pharmacies].” (Id.) The Caremark Defendants allegedly

argued that, “if the Caremark defendants passed better pricing onto Medicare, it would require a

concession from Caremark, rather than a concession from the retail pharmacies” and that

“improving or increasing the discounts Aetna received would adversely impact the Caremark

defendants’ earnings due to the Caremark defendants’ retail contracting methodology.” (Id. ¶

107.)

Relator further asserts that, after these initial discussions, Aetna informed the Caremark

Defendants of its intention to perform a “market check, in order to decide if it would contract with

a PBM offering lower drug prices.” (Id. at ¶ 112.) In response, the Caremark Defendants allegedly

offered to lower Aetna’s drug prices by 100 basis points, starting in 2013. (Id.) And, after Aetna

initiated the market check anyway, the Caremark Defendants offered to lower Aetna’s prices again

by 150 basis points for 2014. (Id.) When the market check was complete, Relator alleges that

Aetna and Caremark began negotiating a new contract. (Id. at ¶ 117.)

In these negotiations for a new contract, the Caremark Defendants allegedly offered the

addition of a “risk share provision” in which the Caremark Defendants would “reset” the Medicare

Part D discount guarantees in the agreement, so that “Aetna would receive 75% of the

improvement.” (Id. ¶ 117.) When Relator allegedly advised the Caremark Defendants that the

25% that they would retain under this provision “would create an administrative cost that would

have to be reported to CMS,” “Caremark then stated that it would no longer offer the split it had

proposed.” (Id. ¶ 118.)

C. Procedural Background of This Action

Relator initiated this action on February 6, 2014, alleging violations of the following

provisions of the FCA: 31 U.S.C. § 3729(a)(1)(A) (Count I), 31 U.S.C. § 3729(a)(1)(B) (Count

II), and 31 U.S.C. § 3729(a)(1)(G) (Count III).4 As permitted by the FCA, Plaintiff did so ex parte

and under seal, allowing the Government the opportunity to investigate.

In April 2018, the Government filed its Notice of Non-Intervention, reserving its right to

intervene at a later date and to be provided with a copy of all pleadings and orders in this case until

that time. Thereafter, I unsealed the case and the Complaint and ordered it served on Defendants.

I have temporarily placed the Complaint back under seal, pending my decision on Defendants’

4 Under these provisions, Defendants will be held liable if I find that they (1) “knowingly present[ed],

or cause[d] to be presented, a false or fraudulent claim for payment or approval” (Count I); (2)

“knowingly ma[de], use[d], or cause[d] to be made or used, a false record or statement material to a false

or fraudulent claim” (Count II); and/or (3) “knowingly ma[de], uses[d], or cause[d] to be made or used, a

false record or statement material to an obligation to pay or transmit money or property to the Government,

or knowingly conceal[ed] or knowingly and improperly avoid[ed] or decrease[d] an obligation to pay or

transmit money or property to the Government” (Count III). See 31 U.S.C. § 3729(a)(1)(A)–(B), (G).

unrelated Motion to Seal the Complaint, which the Relator opposes. I will address this motion in

a separate Order.

Defendants have moved to dismiss the Complaint pursuant to Federal Rules of Civil

Procedure 12(b)(6) and 9(b). For the following reasons, I will grant in part and deny in part

Defendants’ motion.

II. LEGAL STANDARD

To survive a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), a

complaint must “contain sufficient factual matter, accepted as true, to ‘state a claim for relief that

is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp.

v. Twombly, 550 U.S. 544, 570 (2007)). The plausibility standard requires more than a “sheer

possibility that a defendant has acted unlawfully.” Id. To determine the sufficiency of a complaint

under Twombly and Iqbal, a court must (1) “tak[e] note of the elements a plaintiff must plead to

state a claim”; (2) identify the allegations that, “because they are no more than conclusions, are

not entitled to the assumption of truth”; and (3) “where there are well-pleaded factual allegations,

. . . assume their veracity and then determine whether they plausibly give rise to an entitlement for

relief.” Burtch v. Milberg Factors, Inc., 662 F.3d 212, 221 (3d Cir. 2011) (internal quotation marks

omitted).

It is well-established, however, that qui tam actions brought under the FCA must be pled

with particularity pursuant to Federal Rule of Civil Procedure 9(b). U.S. ex rel. Schmidt v.

Zimmer, Inc., 386 F.3d 235, 242 n.9 (3d Cir. 2004) (citing U.S. ex rel. LaCorte v. SmithKline

Beecham Clinical Labs., Inc., 149 F.3d 227, 234 (3d Cir. 1998)); U.S. ex rel. Spay v. CVS

Caremark Corp., 913 F. Supp. 2d 125, 143 (E.D. Pa. 2012). Rule 9(b) states that “[i]n alleging

fraud or mistake, a party must state with particularity the circumstances constituting fraud or

mistake. Malice, intent, knowledge, and other conditions of a person’s mind may be alleged

generally.” This heightened pleading standard requires plaintiffs to “plead with particularity

precise misconduct with which they are charged [in order] to safeguard defendants against spurious

charges of immoral and fraudulent behavior.” Seville Indus. Mach. Corp. v. Southmost Mach.

Corp., 742 F.2d 786, 791 (3d Cir. 1984). “Thus, Rule 9(b) requires, at a minimum, that plaintiffs

support their allegations . . . with all of the essential factual background that would accompany the

first paragraph of any newspaper story—that is, the who, what, when, where and how of the events

at issue.” In re Rockefeller Ctr. Properties, Inc. Sec. Litig., 311 F.3d 198, 217 (3d Cir. 2002)

(internal quotation marks omitted). However, courts will accept allegations on information and

belief when “the facts at issue are peculiarly within the defendant’s possession.” See Lincoln

Benefit Life Co. v. AEI Life, LLC, 800 F.3d 99, 107 n.31 (3d Cir. 2015); Rockefeller, 311 F.3d at

216.

III. DISCUSSION

First, I note that Defendants do not challenge that PBMs, like Caremark, are required to

certify the “accuracy, completeness, and truthfulness of [price data reported to CMS] and

acknowledge that the data will be used for the purpose of obtaining Federal reimbursement.” (See

Compl. ¶ 84.) In fact, Caremark does not challenge the allegation that it certified the data

submitted on behalf of Aetna as complete. (See Compl. ¶¶ 125–128.) As such, this Opinion

focuses solely on the sufficiency of the Complaint as to the alleged falsity of Defendants’

submission of claims to CMS and the records material to those claims.

A. Counts I and II Against CaremarkPCS Health LLC

1. Fed. R. Civ. P. 9(b)

Defendants first argue that Relator’s allegations lack the specificity required by Fed. R.

Civ. P. 9(b). Defendants contend that Relator has failed to allege facts regarding Caremark’s

specific pharmacy contracts, including the particular pharmacies involved, the specific prices for

specific drugs negotiated, and the specific Caremark employees involved in negotiating these

prices. Defendants explain that, while the Complaint does allege that the inflated MAC prices

charged to Aetna were reported to CMS and not the prices actually negotiated with pharmacies,

Relator never identifies a “negotiated price” paid to the pharmacy for a drug that was different

from what was reported to CMS.

In order to meet the pleading requirements of Rule 9(b) in the FCA context, the United

States Court of Appeals for the Third Circuit requires plaintiffs to provide “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, 157–58 (3d Cir.

2014) (citing U.S. ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009)). An FCA

claimant is not required to show “the exact content of the false claims in question” to survive a

motion to dismiss, as “requiring this sort of detail at the pleading stage would be ‘one small step

shy of requiring production of actual documentation with the complaint, a level of proof not

demanded to win at trial and significantly more than any federal pleading rule contemplates.’”

Foglia, 754 F.3d at 156 (quoting Grubbs, 565 F.3d at 190).

For instance, in Foglia v. Renal Ventures Mgmt., LLC, the plaintiff alleged that a dialysis

center was not actually using all of the medicine for which it was getting reimbursed by Medicare.

754 F.3d 153, 158 (3d Cir. 2014). The Third Circuit held that the following theory of fraud,

although it could be challenged, was sufficient to meet Rule 9(b)’s heightened pleading standard:

Accepting the factual assertions made by Foglia as true, we have patient logs that

show that less Zemplar was used than would be required if it were used in the single

use fashion. We know that Medicare will reimburse for the full vial of Zemplar,

regardless of whether all of the Zemplar is used, and that this provides an

opportunity for the sort of fraud alleged by Foglia. At this point we must assume

that Foglia is correct in alleging that Renal did not follow the procedures that it

should have followed if it was to harvest the ‘extra’ Zemplar from the used vials.

Although we recognize that this hypothesis could be challenged, it certainly

suffices to give Renal notice of the charges against it, as is required by Rule 9(b).

This conclusion is further supported by the fact that Renal, and only Renal, has

access to the documents that could easily prove the claim one way or another—the

full billing records from the time under consideration.

Id.

In U.S. ex rel. Customs Fraud Investigations, LLC v. Vitaulic Co., the relator, a customs

fraud investigator, brought a reverse FCA claim against a manufacturer and distributor of pipe

fittings, stemming from its failure to pay a “marking duty” on imported products, pursuant to the

Tariff Act. 839 F.3d 242, 246–47 (3d Cir. 2016). The relator had not alleged “which shipments,

during which time periods, at which ports, were supposedly unlawful” in the complaint. Id. at 258

(internal quotation marks omitted). But, as the Third Circuit recognized, the relator’s allegations

did explain that “far more Vitaulic pipe fittings on the secondary market should have country-of-

origin markings, that the way marking duties are assessed provides an opportunity for fraud, and

that only Vitaulic has access to the documents that could prove or disprove the CFI’s well-pled

allegations.” Id. Relying on Foglia, the Third Circuit concluded that these allegations were

sufficient to satisfy Rule 9(b). Id.

Here, like the plaintiffs in Foglia and Vitaulic, Relator has pled the alleged theory of fraud

with sufficient particularity. Relator claims that MAC prices set by Caremark, charged to Aetna

and reported to CMS, were higher than the prices actually paid to pharmacies by Caremark. (See

Compl. ¶¶ 101–116.) As the Complaint alleges, the lower prices that Caremark negotiated with

pharmacies were not disclosed to CMS as required, which then resulted in the submission of false

claims to CMS and overpayment to Aetna. (See id. ¶¶ 88–128.) For example, Relator specifically

alleges that Caremark admitted to negotiating lower prices with pharmacies on Aetna’s behalf that

were, in turn, not “passed through” to Aetna. (Id. ¶ 106.) Relator also asserts that Caremark knew

that Aetna was reporting to CMS the MAC prices charged to Aetna by Caremark, and not the

prices Caremark had agreed to with pharmacies. (See id.) According to the Complaint, Caremark

stated that it was not required to provide these “pass through” discounts to Aetna and that to do so

would adversely impact Caremark’s earnings. (Id. ¶ 107.)

Relator also alleges that, in Aetna’s negotiations for a new contract, Caremark offered the

addition of a “risk share provision” in which Caremark would “reset” the Medicare Part D discount

guarantees in the agreement, so that “Aetna would receive 75% of the improvement.” (Id. ¶ 117.)

When Relator allegedly advised Caremark that the 25% that it would retain under this provision

“would create an administrative cost that would have to be reported to CMS,” Caremark withdrew

the offer. (Id. ¶ 118.)

Relator has pled enough particular details describing the allegedly fraudulent scheme to

provide Caremark with adequate notice of the claims against it. See Foglia, 754 F.3d at 158;

Vitaulic, 839 F.3d at 258. Relator is not required, at this stage, to plead facts regarding the specific

pharmacies that negotiated lower prices with Caremark, the actual negotiated prices, or the specific

drugs, especially considering that the pharmacy contracts are exclusively in Caremark’s

possession. See Vitaulic, 839 F.3d at 258 (not required to plead which shipments, during which

time periods, at which ports, were unlawful).

2. Fed. R. Civ. 12(b)(6)

Defendants next argue that, even if the alleged scheme is pled with enough particularity,

Relator fails to state a claim for relief under Fed. R. Civ. P. 12(b)(6) on two grounds: (1) Relator’s

allegations do not support a plausible inference of falsity and (2) Relator’s allegations do not

support a plausible inference of knowing falsity. I address each in turn below.

i. Plausible Inference of Falsity

Defendants contend that Caremark could not have submitted a false claim because

Defendants’ interpretation of 42 C.F.R. § 423.100 and 42 C.F.R. § 423.308 is correct. (Defs.’

Mem., ECF No. 50-1, at 10.) Defendants explain that the “actual cost” required to be reported to

CMS by regulation is the “negotiated price,” which is the price a pharmacy agrees to receive “for

a particular drug.” (Id.) Defendants assert that the “mechanism for reporting the ‘negotiated price’

to CMS is the PDE . . . and CMS guidance expressly states ‘the PDE should reflect actual point-

of-sale incurred costs.’” (Id. at 10–11.)

Accordingly, Defendants argue that “[a]n aggregate guarantee is simply not the same thing

as the actual point-of-sale incurred costs for an individual prescription of a particular drug . . . .

Thus, even taking as true [Relator’s] non-particularized allegation that Caremark made aggregate

guarantees to pharmacies that differed from its aggregate guarantee to Aetna, one cannot

reasonably infer that Caremark’s PDEs were inaccurate.” (Id. at 11.)

I first note that, pursuant to CMS’s guidance to Plan D sponsors, “covered drug costs must

be incurred and actually paid by the Part D sponsor, net of any direct or indirect remuneration that

decreases the costs incurred by the Part D sponsor for the drug.” Instructions: Requirements for

Submitting Prescription Drug Event Data, CMS, 7 (June 24, 2005).5 These covered drug costs are

5 https://www.cms.gov/Medicare/Prescription-Drug-Coverage/DrugCoverageClaimsData/downloads/

PDEInstruction_062305.pdf

referred to in the regulations as “gross covered prescription drug cost.” 42 C.F.R. § 423.308.

“‘Gross covered prescription drug costs’ mean those actually paid costs incurred under a Part D

plan, excluding administrative costs, but including dispensing fees, during the coverage year.” Id.

These costs are comprised of, in relevant part, “[t]he share of actual costs (as defined by §

423.100).” Id.

The regulations define “actual costs” as the “negotiated price for a covered Part D drug.”

42 C.F.R. § 423.100. “Negotiated prices” are prices that meet certain criteria, including prices that

“[t]he Part D sponsor (or other intermediary contracting organization) and the network dispensing

pharmacy or other network dispensing provider have negotiated as the amount such network entity

will receive, in total, for a particular drug” and “[a]re inclusive of all price concessions from

network pharmacies except those contingent price concessions that cannot reasonably be

determined at the point-of-sale.” Id.

I also note that “gross covered prescription drug costs” mean those costs that are “actually

paid.” “Actually paid” is defined as follows:

Actually paid means that the costs must be actually incurred by the Part D sponsor

and must be net of any direct or indirect remuneration (including discounts, charge

backs or rebates, cash discounts, . . . or other price concessions or similar benefits

offered to some or all purchasers) from any source . . . that would serve to decrease

the costs incurred under the Part D plan. Direct and indirect remuneration includes

[these discounts and other price concessions] obtained by an intermediary

contracting organization with which the Part D plan sponsor has contracted,

regardless of whether the intermediary contracting organization retains all or a

portion of the direct and indirect remuneration or passes the entire direct and

indirect remuneration to the Part D plan sponsor and regardless of the terms of the

contract between the plan sponsor and the intermediary contracting organization.

42 C.F.R. § 308.

CMS has commented on the requirement to report certain price concessions excluded from

costs “actually paid.” In a letter regarding the imposition of per-claim administrative fees, levied

by Part D sponsors (or their intermediaries) on pharmacies, CMS explained that “post-point-of-

sale claim adjustments violate our current guidance on negotiated prices.” Announcement of CY

2014 Medicare Advantage Capitation Rates and Medicare Advantage and Part D Payment Policies

and Final Call Letter, CMS, 164 (Apr. 1, 2013).6 “We have clearly stated that negotiated prices .

. . must be the amounts ultimately paid to the pharmacy. . . . We believe that the practical effect, if

not the intention, of per-claim fees deducted post point-of-sale is overstatement of negotiated

prices at point-of-sale. . . . Therefore, we do not believe that per-claim administrative fees that alter

the price ultimately paid to the pharmacy are consistent with Part D rules.” Id.

In summarizing the comments on this conclusion, CMS notes that Part D sponsors and

several PBMs offered “various arguments and regulatory interpretations permitting the reporting

of these price concessions as DIR.” Id. at 165. CMS acknowledges, based on these arguments,

that the “definition of negotiated prices . . . could be interpreted as permitting these kind of

arrangements [with pharmacies], despite our intent that negotiated prices transparently reflect all

price concessions that a pharmacy has agreed to up-front on a per-drug-claim basis.” Id. CMS

points out that notice and comment rulemaking would be necessary to require sponsors to consider

these fees as part of the negotiated price. Id. However, CMS provides that, in the meantime, while

it considers the comments received on this issue and weighs the policy basis for revising the

definition of negotiated price, “[CMS] will not consider sponsors non-compliant with our

negotiated prices rules as long as all such fees are fully reported as price concessions through DIR

reporting . . . .” Id.

6 https://www.cms.gov/medicare/health-plans/medicareadvtgspecratestats/downloads/announcement

2014.pdf

Setting aside these observations about the regulatory scheme, even if I were to assume that

Defendants’ regulatory interpretation is correct, dismissal of Relator’s claims at this stage of the

case is not appropriate. I make no final determination here as to whether Caremark was required

to disclose the prices obtained from pharmacies that were allegedly lower than the MAC prices

charged to Aetna. Further factual development is necessary to conclude whether the type of price

concessions at issue must be reported to CMS.

What is clear at this stage is that Relator has alleged that Caremark failed to report the

lower prices it received from pharmacies on a transactional basis, through PDEs, and also in the

aggregate, through DIR. (See Compl. ¶¶ 65–66, 71–78, 122, 125–128.) For example, Relator

claims that, as a result of Caremark’s alleged scheme, “price concessions or network management

fees were not factored into the DIR reconciliation reports” used by CMS to reconcile payments

made or due to Aetna. (Id. ¶¶ 125–127.) Relator further alleges “[h]ad [Caremark] provided

accurate, non-fraudulent negotiated prices to be reported to CMS, the amount of these payments

from CMS would have been lower by an amount estimated to be $25 million in 2012 and $50

million in 2013.” (Id. ¶ 128.)

Therefore, for the same reasons discussed above regarding Rule 9(b)’s particularity

requirement, I conclude that Relator’s allegation of Caremark’s failure to report alleged price

concessions received from pharmacies in PDE or DIR reports creates a plausible inference of

falsity enough to survive dismissal.

ii. Plausible Inference of Knowing Falsity

Defendants argue, in the alternative, that, even if their interpretation of the regulations are

wrong, the price reporting rules are unclear, and their meaning is fairly debatable. Accordingly,

Defendants contend that Caremark lacks the scienter to knowingly submit a false claim.

I disagree with Defendants and find that Relator has sufficiently alleged scienter. The FCA

defines “knowing” or “knowingly” as “actual knowledge of the information,” “acts in deliberate

ignorance of the truth or falsity of the information,” or “acts in reckless disregard of the truth or

falsity of the information.” 31 U.S.C. § 3729(b)(1)(A). “Knowing” action under the FCA does

not require “proof of specific intent to defraud.” 31 U.S.C. § 3729(b)(1)(B). “Knowledge” may

also be pled generally under Fed. R. Civ. P. 9(b). However, allegations of knowledge are still

subject to the plausibility standard set forth in Twombly and Iqbal. See U.S. ex rel. Pilecki-Simko

v. Chubb Instit., 443 F. App’x 754, 760 n.17 (3d Cir. 2011). The Third Circuit requires “plaintiffs

to allege facts that show the court their basis for inferring that the defendants acted with scienter.”

U.S. ex rel. Pilecki-Simko v. Chubb Instit., No. 06-3562, 2010 WL 1076228, at *7 (D.N.J. Mar.

22, 2010) (internal quotation marks omitted) (citing Burlington, 114 F.3d at 1418).

Here, Relator has pled sufficient facts to demonstrate her basis for inferring that Caremark

acted with actual knowledge or reckless disregard for the truth or falsity of its reporting to CMS.

(See, e.g., Compl. ¶¶ 112, 117–118.) As discussed above, Caremark allegedly admitted in

meetings with Aetna that it had obtained prices from pharmacies lower than the MAC prices

charged to Aetna and subsequently reported to CMS. (Id. at ¶¶ 106–107.) Relator also claims

that, in response to Aetna’s intended “market check” for PBMs offering lower drug prices,

Caremark offered to lower Aetna’s drug prices by 100 basis points, starting in 2013. (Id. at ¶ 112.)

And, after Aetna initiated the market check anyway, Caremark offered to lower prices again by

150 basis points for 2014. (Id.) When the market check was complete, Relator alleges that Aetna

and Caremark began negotiating a new contract. (Id. at ¶ 117.) During those negotiations,

Caremark allegedly agreed to “reset the guarantee so that Aetna would receive 75% of the

improvement.” (Id.) Relator claims that, when she advised Caremark that the “25% Caremark

retained in this type of split would create an administrative cost that would have to be reported to

CMS,” Caremark withdrew its offer. (Id. at ¶ 118.)

Viewing these allegations together in the light most favorable to Relator, I conclude that

Relator has sufficiently pled scienter.7

B. Counts I and II Against SilverScript Insurance Company

Defendants also seek dismissal of Counts I and II against SilverScript for failure to plead

with particularity. SilverScript, a subsidiary of CVS Caremark Corporation, is a Medicare Part D

Plan Sponsor. Relator alleges that “[a] Caremark subsidiary” serves as the PBM for SilverScript

and that “[t]his PBM or the Caremark defendants” negotiated drug prices with pharmacies on

behalf of SilverScript. (Id. ¶ 129.) Relator claims that the negotiated prices with pharmacies on

behalf of SilverScript were “essentially the same or slightly higher” than the prices reported for

Aetna. (Id.) Relator also asserts that the discounts negotiated with pharmacy chains for

7 Defendants also argue that Counts I and II should be dismissed as to Defendant parent corporations,

CVS Caremark Corporation (“CVS”) and CVS Caremark Rx, LLC (“Caremark Rx”), for Relator’s failure

to plead with particularity their direct involvement in violating the FCA or to plead facts sufficient to pierce

the corporate veil.

Relator alleges that Aetna entered into a PBM contract “whereby [Caremark], [Caremark Rx], and

[CVS], agreed to perform certain services to Aetna in connection with Aetna’s Part D plan offerings . . . .”

(Compl. ¶ 89.) Among the services alleged by Relator are the negotiation of prices with pharmacies and

the “accurate[] adjudicate[ion] and process[ing] for payment claims received on behalf of Aetna Part D plan

beneficiaries.” (Id.) Relator also alleges that Caremark and Caremark Rx created, contracted with,

maintained, and administered “a network of pharmacies who agree[d] to dispense prescriptions to Aetna

Part D beneficiaries, and the negotiation, on behalf of Aetna, of the prices to be paid to the pharmacies for

each drug dispensed to an Aetna beneficiary.” (Id.) Relator further claims that CVS, Caremark, and

Caremark Rx agreed “to provide drug cost data, including the price paid to the pharmacy for each claim of

Aetna Part D beneficiaries (the negotiated price), as required to be submitted to CMS in accordance with

[the regulations]” and oversaw “the creation of PDE files and review[ed] and approve[d] the submission of

the PDE files to CMS.” (Id. ¶¶ 90, 92.) Finally, Relator alleges that the Caremark Defendants, which she

identifies in the Complaint as including CVS and Caremark Rx (Id. ¶ 1), knew of the fraud and participated

in the meetings with Aetna to discuss it as well as the negotiation of a new PBM contract with Aetna. (See

id. ¶¶ 102, 104–107, 112, 117–118.)

Based on these allegations and for the same reasons discussed above as to Counts I and II against

Caremark, I conclude that Relator has plausibly pled, with sufficient particularity, CVS and Caremark Rx’s

involvement in the submission of false claims.

SilverScript Part D beneficiaries “do not vary at all by geographic region or pharmacy chain,

suggesting that those prices are not the actual prices that Caremark defendants have negotiated

with the pharmacies.” (Id.)

Unlike Relator’s allegations of the Caremark Defendants’ fraudulent reporting as to Aetna,

Relator pleads no facts in support of SilverScript’s actual knowledge, deliberate ignorance, or

reckless disregard for the truth or falsity of its price reporting. Instead, I am asked to assume that,

because SilverScript is part of the CVS “conglomerate,” it “would have had at least the same

visibility into the competitively unreasonable (and thus suspicious) level of its prices as Aetna

discovered.” (Pl.’s Opp., ECF No. 54, at 25.) Rule 9(b) does not permit this assumption. As such,

Counts I and II are dismissed without prejudice against SilverScript. Relator will have an

opportunity to amend the Complaint as to these claims, but only if a plausible, good faith

amendment is possible.

C. Count III Against All Defendants

Defendants also argue that I should dismiss Count III against all Defendants because

Relator has failed to allege any obligation to pay or transmit money to the Government.

On this point, I agree with Defendants. A violation of 31 U.S.C. § 3729(a)(1)(G) makes

liable any person who “knowingly makes, uses or causes to be made or used, a false record or

statement material to an obligation to pay or transmit money or property to the Government, or

knowingly concealing or knowingly and improperly avoiding or decreasing an obligation to pay

or transmit money or property to the Government.” A claim brought under this provision is often

referred to as a “reverse false claim.” “Claims raised under the FCA’s reverse false claims

provision ‘may not be redundant of FCA claims asserted under other provisions of [the FCA].’”

U.S. ex rel. Petratos v. Genentech, Inc., 141 F. Supp. 3d 311, 322 (D.N.J. 2015) (quoting U.S. ex

rel. Sobek v. Educ. Mgmt., LLC, No. 10-131, 2013 WL 2404082, at *29 (W.D. Pa. May 31, 2013)).

In other words, in order to plausibly allege a violation of § 3729(a)(1)(G), a plaintiff cannot merely

recast “his false statement claim” by “essentially alleging that [the defendant] failed to refund the

false claims that the government paid.” U.S. ex rel. Thomas v. Siemens AG, 708 F. Supp. 2d 505,

514 (E.D. Pa. Apr. 23, 2010). “[T]here must be a clear obligation or liability to the government.”

Id.

Here, Relator asserts that CMS used data submitted by Caremark on behalf of Aetna to

reconcile payments made or due to Aetna for drugs dispensed to Medicare Part D beneficiaries

that did not include, as required, the price concessions that Caremark received from pharmacies.

(See Compl. ¶¶ 37–39, 57, 64, 69, 126.) Like the plaintiff in U.S. ex rel. Thomas v. Siemens AG,8

Relator is alleging that Caremark failed to refund the false claims that the government paid, but a

failure to refund is not the same as an affirmative obligation to pay the Government.9 Moreover,

the regulation that Relator relies on in the Complaint states only that CMS “may” recover payments

made to Plan D sponsors for failure to provide the required drug cost data. (See Compl. ¶ 69

8 See 708 F. Supp. 2d at 514 (“Thomas appears to be making two arguments in support of liability under

the reverse false claim provision. First, he argues that SMS demanded payment based on a fraudulently

induced contract each time it requested payment. Consequently, each invoice was inflated, imposing an

affirmative obligation on SMS to refund payments it improperly received from the government. Because

SMS did not refund the payments, it avoided or decreased its obligation to the government. Second,

Thomas maintains that SMS failed to comply with its affirmative obligation under 48 C.F.R. § 552.238–

70 to disclose to the government subsequent price reductions it offered to other customers after the

government had awarded it contracts and to offer the government a price adjustment.”).

9 Relator cites to my opinion in U.S. ex rel. Class v. Bayada Home Health Care, Inc. to support the

sufficiency of her pleading as to Count III. However, in Bayada, unlike here, the relator specifically alleged

that the defendant had an obligation to repay or refund the United States and failed to satisfy that obligation.

No. 16-680, 2018 WL 4566157, at *16 n.7 (E.D. Pa. Sept. 24, 2018) (“Relators submit that ‘[Bayada] knew

that it had received much needed Medicare dollars in home health PPS payments for patients who did not

qualify for the Medicare home health benefit, yet . . . took no action to satisfy its obligations to the United

States to repay or refund those payments and instead retained the funds and continued to bill the United

States.’”)

(citing 42 C.F.R. § 423.343).) Relator has failed to plausibly plead a clear obligation to pay the

Government. As such, Count III against all Defendants is dismissed without prejudice. Relator

will have an opportunity to amend the Complaint as to this Count, but only if a plausible, good

faith amendment is possible.10

IV. CONCLUSION

For the foregoing reasons, Defendants’ Motion to Dismiss is denied as to Counts I and II

against the Caremark Defendants. Defendants’ motion is granted as to Counts I and II against

SilverScript and as to Count III against all Defendants. Relator may amend the Complaint to

address the deficiencies identified in this Opinion.

An appropriate Order follows.

10 Defendants seek dismissal of all claims prior to, at least, 2010. Defendants argue that the alleged

obligation to report “pass through” prices did not become effective until January 1, 2010 and Caremark’s

agreement with Aetna to provide PBM services did not become effective until January 1, 2011. Relator

does not oppose the dismissal of all allegations prior to 2010 and concedes that all allegations relating to

reimbursement claims submitted through Aetna do not pre-date 2011. (Pl.’s Opp., ECF No. 54, at 30 n.11;

Pl.’s Sur-Reply, ECF No. 60, 10.) However, Relator points out that reimbursement claims submitted

through other Part D plans, such as SilverScript, date back to 2010. Based on Relator’s concessions, I

dismiss all claims prior to January 1, 2011 as to the Caremark Defendants and dismiss all claims prior to

January 1, 2010 as to SilverScript.