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United States et al. ex rel. Marc Silver v. Omnicare, Inc. et al.

COURT: District of New Jersey

The complaint alleges as follows: Nursing homes provide nursing care and prescription drugs to residents. Nursing home residents receive prescription drug benefits from Medicare Part A, Medicaid, private insurance, or Medicare Part D (as of January 1, 2006). In order to provide prescription drugs to residents, nursing homes need reliable on-site, in-house pharmacy services. The Pharmacy Defendants provide such on-site, in-house “institutional pharmacy” services pursuant to written contracts.

The nursing home pharmacy model is a sole provider approach. That is, nursing homes typically select a single institutional pharmacy – for example, Defendant Omnicare – to provide prescription drugs to all of that nursing home’s residents, regardless of each patient’s type of insurance (e.g., Medicare Part A, Medicaid, private insurance, etc.).

For nursing home patients covered by Medicaid, institutional pharmacies generally submit claims to the government on a per-prescription basis.

About the case

With respect to Medicare Part A, prior to July 1, 1998, Medicare Part A reimbursed nursing homes for prescription drugs on an “actual cost” basis, i.e., the institutional pharmacy billed the nursing home for each prescription provided to each patient, and the nursing home later recouped those costs from Medicare through a cost-reporting process that permitted the nursing homes to “true up” to their actual costs. In other words, nursing homes “passed through” all prescription drug costs for Part A patients to Medicare. Consequently, when making a choice regarding which institutional pharmacy to use, nursing homes did not focus on cost. Instead, they chose the pharmacy based on the needs of their patients, and the quality of services provided by the pharmacy. Relevant factors included, inter alia, the breadth of the pharmacy’s drug formulary (vis-Ă -vis the prescription drug needs of the residents), whether the pharmacy offered patient-centric services (e.g., maintaining individual patient drug profiles, maintaining a battery of emergency prescriptions, providing daily delivery services, providing consultant services to assist doctors and nurses, attending the nursing home’s quality assurance and infectious disease committee meetings, and providing in-service training to nursing home employees) and certain logistical issues, e.g., how far away was the pharmacy in the event that additional emergency prescriptions were needed.

This payment system dramatically changed after July 1, 1998. After that date, Medicare Part A began paying nursing homes a “flat” or “bundled” rate to provide medical care and prescription drugs to residents. Under this system, which remains in effect today, nursing homes no longer are reimbursed on an actual cost basis, and thus they can no longer pass-through prescription drug costs to Medicare. Instead, the nursing homes paid the institutional pharmacies directly for the cost of the drugs – dollar-for-dollar – but were reimbursed a flat rate by Medicare Part A regardless of the amount they actually spent on the drugs. Accordingly, the nursing homes were incentivized to bargain for the lowest available prescription drug prices.

Because the payment system changed, so did the factors which influenced the nursing homes’ choice regarding which institutional pharmacy to select. Specifically, the nursing homes were now primarily motivated to reduce the costs of prescription drugs, not by the needs of their patients.

In response to this change in the incentive structure, the Pharmacy Defendants created a kickback scheme which involved a practice known as “swapping.” Specifically, the Pharmacy Defendants underpriced Medicare Part A drugs to nursing homes in exchange for the opportunity to provide the same drugs, at a higher cost, to the nursing home’s Medicaid, Medicare Part D, and privately insured patients. The Pharmacy Defendants knew it was practically impossible for a nursing home to have more than one institutional pharmacy because of the complex administrative burden . From a business viewpoint, to compensate for the profit they were losing when they charged nursing homes low prices for drugs to the Medicare Part A patients, the Pharmacy Defendants relied on the higher paying business generated from Medicaid and Medicare Part D patients in order to operate at a profit.

This kickback scheme was successful due to the payer demographics in nursing homes. In the average nursing home, the prescription drug costs of approximately 10-15% of the patients are covered under Medicare Part A. The other 85-90% of the prescription drug costs are paid for by Medicaid, private insurers, and, as of January 1, 2006, Medicare Part D (Medicaid represents the great majority – more than 60% – of the remaining 85-90% patients). Consequently, the Pharmacy Defendants could afford to lose profit when the nursing home was the customer, because they would recover that lost profit through Medicaid, Medicare Part D, and private insurers where they were charging higher prices to more patients for the same drugs. Essentially, the Pharmacy Defendants used the taxpayer-funded Medicaid and Medicare Part D programs to subsidize private discounts to nursing home owners.

This kickback arrangement implicates the Anti-Kickback Statute (“AKS”), and is not protected by the “discount safe harbor.” In addition to violating the AKS, the kickback arrangement violate the drug pricing rules of the California State Medicaid Program, known as Medi-Cal, by charging Medi-Cal higher prices for prescription drugs than other comparable payers.

The case settled for $124 million in October 2013.

Lead Attorneys

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Sherrie R. Savett

Chair Emeritus & Executive Shareholder

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