IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA UNITED STATES OF AMERICA, ex rel. : ANTHONY R. SPAY, : : CIVIL ACTION Plaintiff, : : v. : : NO. 09-4672 : CVS CAREMARK CORPORATION; : CAREMARK Rx, LLC (f/k/a CAREMARK : Rx, Inc.); CAREMARK, LLC (f/k/a : CAREMARK, INC.); SILVERSCRIPT, LLC : (f/k/a SILVERSCRIPT INC.), : : Defendants. : MEMORANDUM BUCKWALTER, S.J. December 20, 2012 Currently pending before the Court is the Motion by Defendants CVS Caremark Corporation, Caremark RX, LLC, Caremark, LLC, and Silverscript, LLC (collectively “Defendants”) to Dismiss Relator’s First Amended Complaint. For the following reasons, the Motion is denied in its entirety. I. FACTUAL AND PROCEDURAL BACKGROUND The present litigation is an action to recover damages and civil penalties on behalf of the United States of America arising from false and/or fraudulent records, statements and claims made, used, and caused to be made, used, or presented by Defendants. (Am. Compl. ¶ 1.) At this stage of the litigation, the Court takes the facts directly from the Amended Complaint.1 1 See Schrob v. Catterson, 948 F.2d 1402, 1405 (3d Cir. 1991) (“On a motion to dismiss for failure to state a claim, all allegations must be accepted as true and the plaintiff . . . must be A. General Background on Medicare and the Medicare Part D Program2 Medicare is a federally funded and administered health insurance program for certain groups, primarily elderly and disabled persons. The Department of Health and Human Services (“HHS”) administers the Medicare program through the Centers for Medicare and Medicaid Services (“CMS”). There are four major components to the Medicare program: (1) Part A, the hospital insurance benefits program, 42 U.S.C. §§ 1395c, 1395d; (2) Part B, the supplemental medical insurance benefits program, which generally pays for a percentage of certain medical and other health services, including physician services, 42 U.S.C. §§1395j, 1395k, 1395l; (3) Part C, the Medicare Advantage program, which allows CMS to contract with public and private entities to provide, at a minimum, Medicare Part A and B benefits to certain Medicare beneficiaries, 42 U.S.C. § 1395w-21–28, et seq.; and (4) Part D, the voluntary prescription drug benefit program. 42 U.S.C. § 1395w-101, et seq. Part D was established in 2003 by the Medicare Prescription Drug, Improvement, and Modernization Act, Pub. L. 108-173, 117 Stat. 2066, which set up a voluntary prescription drug given the benefit of every favorable inference that can be drawn from those allegations.”) The United States Court of Appeals for the Third Circuit has explained that “in deciding motions to dismiss pursuant to Rule 12(b)(6), courts generally may not consider matters extraneous to the pleadings unless it is a matter of public record or is ‘integral to or explicitly relied upon in the complaint.’” In re Burlington Coat Factory Secs. Litig., 114 F.3d 1410, 1426 (3d Cir. 1997) (citation omitted). Notably, however, the factual recitation provided by the Court is merely a summary of Plaintiff’s rather significant 382-count pleading. To the extent facts beyond this summary are relevant to the issues at hand, the Court addresses them within the pertinent section of this Memorandum. 2 In crafting this summary of the Medicare and Medicaid Part D program, the Court relies heavily on the thorough, but concise description provided in the United States’ Statement of Interest in Response to Defendants’ Motion to Dismiss. 2 benefits program for Medicare enrollees. Part D became effective January 1, 2006. 42 U.S.C. § 1395w-101(a)(2). An individual may enroll in Part D if he or she lives in the service area of a Part D plan and is entitled to Medicare benefits under Part A or enrolled under Part B. 42 U.S.C. § 1395w-101(a)(3)(A); 42 C.F.R. § 423.30(a). Unlike Parts A and B, Medicare Part D is based on a private market model, wherein Medicare contracts with private entities, known as Part D “sponsors” to administer prescription drug plans. Part D benefits are provided by a Part D plan sponsor, which is either a prescription drug plan (“PDP”), a Medicare Advantage organization that offers a Medicare Advantage prescription drug plan (“MA-PD plan), a Program of All-Inclusive Care for the Elderly (“PACE”) organization offering a PACE plan including qualified prescription drug coverage, or a cost plan offering qualified prescription drug coverage. 42 C.F.R. § 423.4. The Part D plan sponsor must provide qualified prescription drug coverage which includes “standard prescription drug coverage” or “alternative prescription drug coverage” with at least actuarially equivalent benefits. 42 U.S.C. § 1395w-102; 42 C.F.R. § 423.104(c). The requirements for standard or alternative prescription drug coverage relating to deductibles, benefit structure, initial coverage limits, out-of-pocket expenditures, etc., are set out in the Medicare Statute and its regulations. 42 U.S.C. § 1395w-102(b); 42 C.F.R. § 423.104(d)(3). Plans may also provide supplemental prescription coverage, which can include reductions in cost-sharing (such as deductibles or coinsurance percentages) or covering certain drugs that would qualify as a covered Part D drugs if they were not among the drugs described at 42 U.S.C. § 1396r-8(d)(2), (d)(3) and excluded from the definition of a Part D drug at 42 U.S.C. § 1395w-102(e)(2)(A). A Part D sponsor submits a bid in the year prior to the calendar year in which Part D 3 benefits will actually be delivered. Id. § 423.265. 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. Id. §§ 423.265, 423.272. From the bids, CMS calculates nationwide and regional benchmarks which represent the average PMPM cost. Id. § 423.279. If the Part D plan sponsor’s bid exceeds the benchmark, the enrolled beneficiary must pay the difference as part of a monthly premium. Id. § 423.286. 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. 42 C.F.R. § 423.293 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. (Defs.’ Mot. Dismiss, Ex. B, Instructions: Requirements for Submitting Prescription Drug Event Data (“CMS Instructions”), April 26, 2006, at 9.) 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. Id. 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. Id. at 9–10. 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 4 sponsor will have to pay back some its estimated payments. Id. 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. 42 C.F.R. § 423.505(k)(1). 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. 42 C.F.R. § 452.505(k)(3). 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. 42 C.F.R. § 423.505(h)(1). 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. 42 C.F.R. § 423.505(i)(4)(iv). B. The Parties and Other Relevant Entities 1. The Relator/Plaintiff Relator/Plaintiff Anthony R. Spay is a licensed physician with approximately thirty-seven years of diversified experience within the pharmacy industry. (Am. Compl. ¶¶ 8–21.) He is not only a licensed pharmacist, but has been involved with pharmacy management, benefits management, long-term care, behavioral health, executive management, prescription drug 5 fraud/abuse detection, audition, and recovery for many of the nation’s largest payers and pharmacy claims processors. (Id.) 2. The Defendants Defendant CVS Caremark Corporation (“CVS Caremark”) is the largest provider of prescriptions and related healthcare services in the United States. (Id. ¶ 22.) CVS Caremark participates in the Medicare Part D prescription drug program and has provided Part D Pharmacy Benefits Manager (“PBM”) services to its clients’ Part D Plans through its subsidiaries, Silverscript, Inc., Caremark LLC, CaremarkPCS, CVS Caremark Part D Services, LLC, and RxAmerica, LLC. (Id. ¶ 33.) Since 2006, CVS Caremark has served as a Medicare Prescription Drug Plan (“PDP”) sponsor that contracts with Medicare to provide prescription drug benefits in all fifty states, the District of Columbia, and Puerto Rico through SilverScript Insurance Company (“SSIC”) and Accendo Insurance Company (“Accendo”). (Id. ¶ 34.) In addition, CVS Caremark operates thousands of retail pharmacies, as well as mail order and specialty pharmacies that process Part D prescriptions and dispense Part D drugs to Medicare beneficiaries. (Id. ¶ 36.) Since 2006, CVS Caremark, through its subsidiary SSIC, a Medicare Prescription Drug Plan Sponsor, has provided Medicare Part D drug benefits to eligible beneficiaries. (Id. ¶ 37.) Finally, on April 29, 2011, CVS Caremark acquired the Medicare Part D business of Universal American Corp. (“UAM Medicare Part D business”), through which CVS Caremark now provides Medicare prescription drug benefits to more than three million beneficiaries through the community CCRxSM prescription drug plan. (Id. ¶ 39.) Defendant Caremark Rx, LLC (“Caremark Rx”) is one of the largest pharmaceutical services companies in the United States. (Id. ¶¶ 40–41.) Its services are referred to as pharmacy 6 benefit management (“PBM”) services, which, through its subsidiaries, operates mail order, specialty mail order, and retail specialty pharmacy subsidiaries throughout the United States. (Id. ¶¶ 42–43.) CVS Caremark participates in the administration of Medicare (Part D) Drug Benefit through Caremark Rx. (Id. ¶ 45.) It also “assists employer, union, and other health plan clients that qualify for the Medicare Part D retiree drug subsidy by collecting and submitting eligibility and/or drug cost data to the CMS as required under Part D in order for these employer, union, and other health plan clients to obtain Part D retiree drug subsidies.” (Id. ¶ 46.) Since March 22, 2007, Defendant SilverScript, LLC (“Silverscript”) has been a wholly- owned subsidiary of Caremark Rx and presently is a wholly-owned subsidiary of CVS Caremark. (Id. ¶ 48.) Since 2006, Defendant Caremark Rx, through Silverscript has provided PBM services to Part D Plan Sponsors throughout the United States. (Id. ¶¶ 49, 52.) Defendant Caremark, LLC is also a wholly-owned subsidiary of CVS Caremark. (Id. ¶ 54.) In 2006 and before the March 2007 CVS-Caremark merger, Defendant Caremark Rx conducted its pharmaceutical services operations through its subsidiaries, including but not limited to, Caremark, Inc. (Now Caremark, LLC) and Caremark PCS. (Id. ¶ 55.) CVS Caremark also participates in the Medicare Part D Program through the offering of Medicare Part D benefits by its subsidiary, SilverScript Insurance Company, a subsidiary of Silverscript. (Id. ¶ 56.) SilverScript Insurance Company obtained a license from the State of Tennessee to operate as a health insurance company in 2006. (Id. ¶ 57.) It now offers Part D Plans in all fifty states, Washington D.C. and Puerto Rico. (Id. ¶ 59.) Overall CVS Caremark’s net revenues include both Part D Payments received from CMS, as well as payments received from Part D Sponsors related to CVS Caremark’s subsidiaries’ Part 7 D PBM services. (Id. ¶ 61.) CVS Caremark’s Part D insurance premiums earned by its PDP are set based on the Part D sponsor’s annual bid and related contractual arrangements with CMS. (Id. ¶ 62.) In addition to the Part D insurance premiums, CVS Caremark’s net revenues include co-payments, deductibles, and co-insurance (collectively, the “Member Co-Payments”) related to PDP members’ actual prescription claims. (Id. ¶ 63.) Finally, CVS Caremark’s net revenues include retiree drug subsidies paid by CMS. (Id. ¶ 64.) 3. The “Medical Card System” Entities Medical Card System, Inc. (“MCS”) is the second largest health administration and health insurance company in Puerto Rico where more than 725,000 commercial, Medicare, and Puerto Rico Medicaid (“Reforma”) insureds live. (Id. ¶ 66.) MCS provides health plans to more than 1,000 companies and covers over 150,000 employees and family members. (Id.) Among other health services, MCS provides medical plans in Puerto Rico, and Medicare Part D coverage through both PDPs and Medicare Advantage Part D Plans (“MA-PDs”), which are offered through MCS’s subsidiary, MCS Life Insurance Company. (Id. ¶ 67.) MCS also provides Part D coverage to employers who offer Part D benefits through employer plans to whom Part D retiree drug subsidies would apply. (Id.) In addition, MCS, through its affiliate, MCS Advantage, Inc., provides managed Medicare coverage. (Id. ¶ 68.) Finally, MCS provides pharmacy benefits to dual eligible Medicare Part D and Medicaid beneficiaries, including members impacted by Low Income Subsidy grants available to Medicare Part D beneficiaries living in the United States territories. (Id. ¶ 69.) MCS Life Insurance Company (“MCS Life”) is a subsidiary of MCS and provides Medicare Part D coverage to plans offered by MCS. (Id. ¶¶ 70–71.) In November 2004, CMS 8 approved MCS Life’s request to offer managed care coverage to Medicare beneficiaries in Puerto Rico. (Id. ¶ 72.) Since January 1, 2006, MCS Life has participated with CMS as a Medicare Part D Plan Sponsor, providing Medicare Part D coverage to plans offered by MCS. (Id. ¶ 73.) From January 1, 2006 through at least September 2007, pursuant to the terms of a contract executed between them (“the Part D Contract”), CVS Caremark and SilverScript provided Medicare Part D PBM services to MCS Life for health insurance plans offered by MCS. (Id. ¶ 74.) In early 2006, MCS Life offered Part D benefits through a number of PDPs and MA-PDs. (Id. ¶ 75.) MCS Life also developed formularies for multiple Part D Plans. (Id. ¶ 76.) Finally, MCS Life also offered Part D benefits to employer plans providing prescription coverage to their retirees. (Id. ¶ 77.) C. The Prescription Benefit Management Agreement In June 2003, Defendant Caremark Rx entered into a Prescription Benefit Management (“PBM”) Agreement with MCS, pursuant to which Caremark, Inc. provided PBM services to health insurance plans offered by MCS. (Id. ¶ 235.) The Agreement was amended once in 2004 and again in 2006. (Id.) In early 2006, MCS Life and Defendant SilverScript entered into a Managed Pharmacy Benefit Services Agreement—Medicare Part D, pursuant to which SilverScript provided PBM services to support MCS Life’s participation with CMS as a Part D Plan sponsor (the “MCS-SilverScript PBM Agreement” or the “Agreement”). (Id. ¶ 237.) According to the terms of this Agreement, SilverScript agreed “to participate, as a subcontractor to [MCS], in the management of [MCS’s] Part D Plan, and [SilverScript] understands that its activities must, to the extent these are communicated to SilverScript, be consistent and comply with [MCS’s] contractual obligations to CMS as a Part D Plan Sponsor.” (Id. ¶ 238.) Both 9 parties also agreed to “comply with applicable CMS Laws and Regulations without the need for further notice to and approval from the other party.” (Id. ¶ 239.) With regard to the submission of Part D claims data, SilverScript and MCS expressly agreed that “SilverScript shall perform data edit and quality control procedures designed to ensure accurate and complete prescription drug data.” (Id. ¶ 241.) Pursuant to the MCS-SilverScript PBM Agreement, the Caremark Defendants had significant financial incentives for adjudicating Part D claims and dispensing Part D drugs. (Id. ¶ 242.) First, the Caremark Defendants received administrative fees per paid retail or mail order/on-line claim. (Id. ¶ 242.) Second, they collected a dispensing fee only if the prescription was billed and dispensed to the Part D participant through Caremark’s retail pharmacy network. (Id. ¶ 243.) The Caremark had additional incentives through their Caremark and CVS-owned mail order and retail pharmacies. (Id. ¶ 244.) Under the MCS-SilverScript PBM Agreement, the Medicare Part D PBM services to be provided by Defendant’s subsidiary also included concurrent Drug Utilization Review (“DUR”) services for retail or point of sale (“POS”) claims. (Id. ¶ 245.) According to the contract’s terms, when a claim was rejected by Caremark’s system, but actually represented appropriate therapy in the judgment of the physician or pharmacist, the pharmacist could either dispense the drug at the plan participant’s expense or call MCS Life or SilverScript to override the denial edit. (Id. ¶ 246.) Under Caremark’s system, however, only those claims processing edits provided by the PBM and selected by the Part D Plan as triggering a denial edit would require further action by the pharmacist to either contact MCS or SilverScript to override the denial or to have the plan participant obtain the prescription outside Part D at their own expense. (Id. ¶ 247.) 10