On January 31, 2019, the Department of Health and Human Services (HHS) released a notice of proposed rulemaking (the Proposed Rule) as part of ongoing administration drug pricing reform efforts. The Proposed Rule would modify a regulatory provision that had previously protected certain pharmaceutical manufacturer rebates from criminal prosecution and financial penalties under the federal Anti-Kickback Statute.

Specifically, the Proposed Rule would exclude from “safe harbor” protection rebates and other discounts on prescription pharmaceutical products offered by pharmaceutical manufacturers to Medicare Part D plan sponsors or Medicaid Managed Care Organizations (MCOs), unless the price reduction is required by law (such as rebates required under the Medicaid Drug Rebate Program). The proposed exclusion would apply to rebates offered directly to Part D plan sponsors and Medicaid MCOs, as well as those negotiated by or paid through a pharmacy benefit manager (PBM). HHS stated that it does not intend for the revisions in this Proposed Rule to negatively impact protection of prescription pharmaceutical product discounts offered to other entities such as wholesalers, hospitals, physicians, pharmacies and third party payors in other federal health care programs. The proposed effective date of this regulatory modification is January 1, 2020, although HHS has sought comments regarding whether this allows sufficient time for parties to restructure existing arrangements.

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Overruling its 23-year precedent, the Ninth Circuit, sitting en banc, held that to avoid dismissal under the False Claims Act’s (FCA) public disclosure bar, relators need not have participated in the public disclosure of alleged fraud to qualify as an “original source.” Although the court’s decision concerned the pre-2010 version of that bar, it is likely that its reasoning will also apply to the post-2010 version, given that the issue before the Ninth Circuit did not turn on the 2010 amendments.

U.S. ex rel. Hartpence v. Kinetic Concepts, Inc. consolidated two FCA complaints brought by former employees against Kinetic Concepts.  The complaints alleged that the company improperly submitted reimbursement claims using an automatic payment modifier code for medical devices that improve wound healing, even though the claims required individual review.  The alleged fraud was already publicly disclosed.  Thus, the FCA’s public disclosure bar precluded the suits unless the relators qualified as original sources of the information.

The pre-2010 FCA statutory language included two requirements for a relator to qualify as an original source: (1) that the relator have direct and independent knowledge of the publicly-disclosed information, and (2) that the relator provide that information to the government before filing suit.  Yet, Ninth Circuit precedent in Wang ex rel. United States v. FMC Corp., 975 F.2d 1412, added a third requirement not apparent on the face of the statute: the relator had to have had a hand in the public disclosure of the alleged fraud.  Based on Wang, the lower court dismissed the complaints against Kinetic Concepts, finding that the relators had not had a hand in the public disclosure.

In overturning Wang, the Ninth Circuit noted that a number of other circuits had declined to adopt Wang’s third prong, including the Fourth and Eighth Circuits.  The Ninth Circuit re-construed the statutory text and found that facially, the original source provision only had two requirements: (1) direct and independent knowledge of the information on which the allegations are based and (2) voluntary provision of the information to the government before filing an action based on the information.  The appellate court remanded the case to determine if the relators were original sources based on the other two prongs found in the FCA text.