RICO: Offering Co-Pay Coupons Does Not Constitute A Racketeering “Enterprise,” Rules Federal Court

Pharmaceutical manufacturer co-payment coupons have come under a lot of scrutiny recently. HHS-OIG recently warned these coupons may violate the anti-kickback statute if they encourage the purchase of Medicare Part D drugs. Manufacturers seem to be safe, however, from co-pay challenges under RICO—the federal Racketeer Influenced and Corrupt Organizations Act which was originally enacted to combat organized crime. Last week, a Federal Court judge dismissed an insurance company’s claim that they overpaid for drugs in which Abbott Laboratories and Abbvie allegedly committed mail and wire fraud by offering co-pay coupons for their brand name drugs. The Court did not find that a racketeering “enterprise” existed between the companies and the pharmacies distributing the drugs.

Manufacturers routinely offer copayment coupons to reduce or eliminate the cost of patients’ out-of-pocket payment for specific brand name drugs. Abbot and Abbvie manufacture and market two brand names, Humira and AndroGel. Humira treats rheumatoid arthritis and plaque psoriasis; AndroGel is a replacement therapy for men with low testosterone. In 2008, the companies began offering coupons that discount patients’ co-pays for these drugs to, among other things, increase the sales of Humira and AndroGel by encouraging patients to choose brand names over less costly generics.

Insurance companies are not as big of fans of this process as patients and companies. In New England Carpenters Health and Welfare Fund v. Abbot and Abbvie, New England—a Massachusetts-based employee welfare benefit plan—contends that co-pay coupons improperly take away patients’ price consciousness. “Requiring health plan members to pay a portion of the high cost of a branded prescription drug—either a co-pay or co-insurance—provides a reasonable, personal incentive for privately-insured individuals to choose less-costly, usually generic, medications, and drives down the cost of the much larger residual portion paid by the [payor],” New England notes in their amended complaint. “Absent such incentives, patients have no financial motivation to select lower-cost drugs.”

View the amended complaint here

To ensure cost-sharing is effective, insurance companies’ pharmacy benefit managers enter into contracts with network pharmacies and require them to collect co-pays directly from patients. Drugs are often placed in tiers based how expensive they are—lower tiers are less expensive, usually generic drugs. Users would have to pay higher percentage co-pays for more expensive brand-name tier drugs. Drug companies who subsidize the co-pay eliminate plan members’ incentives to use less-expensive drugs.

Through co-pay subsidy programs, Abbot and Abbvie “knowingly cause Plaintiff and thousands of other third party payors (“TPPs”) to pay for Defendants’ branded drugs, AndroGel and Humira, when those TPPs could and would have paid for less-expensive therapeutic alternatives,” New England argues. “Defendants accomplish this by intentionally and wrongfully interfering with contracts designed to ensure that TPPs pay for cost.”

According to the complaint, health care plans like New England have no way of knowing whether a manufacturer’s coupon has been used to cover the co-pay for a drug. Therefore, they pay the same reimbursement even though part of the cost of the drug has been subsidized by the manufacturer. 

“Presenting a co-pay subsidy card to a pharmacist reduces the price of the drug to the patient,” notes the complaint. “However, the use of that coupon is not disclosed – and is in fact hidden from – the TPP. Defendants, through their co-pay subsidy program administrators, instruct the pharmacist to code the coupon as secondary insurance and not as a coupon, concealing the payment of the co-pay subsidy from the TPP. Thus, the TPP assumes the pharmacy collected the personal cost-share obligation from the member.”

The complaint alleges that Abbott, TrialCard, which administers a co-pay subsidy program for Abbot’s drug AndroGel, and Pharmacy Data Management, Inc., which processes claims submitted to it by Trial Card, “commandeered the pharmacy adjudication system to fraudulently cause what are essentially drug discounts to be processed as secondary insurance coverage. In doing so, Abbott assumed the role of a pseudo-insurer and PDMI assumed the role of a pseudo-PBM, paying pharmacies administration fees, not for processing insurance coverage, but for processing co-pay subsidies disguised as insurance.”

Federal Court Opinion

Judge Robert M. Dow of the U.S. District Court of the N.D. of Illinois  noted: “Plaintiff contends that the fraudulent processing of Defendants’ savings cards—as secondary insurance as opposed to coupon discounts—constitutes a scheme todefraud that includes predicate acts of mail and wire fraud.” Specifically, pharmacies interacting with the insured customers commit fraud by by either (1) misrepresenting to New England that a customer had secondary insurance, when actually, the customer does not and has merely presented Defendants’ coupon or savings card, or (2) failing to disclose to New England that a co-pay subsidy was used.

According to the New England, they were harmed each time they would have paid less for each perscription in which one of the co-pay cards was used. 

The Court believed that the plaintiff provided a sufficient theory of fraud:

According to Plaintiff, pharmacies also, at the direction of Defendants and their co pay subsidy administrators, misrepresent to TPPs that the insured has secondary insurance, when actually, a coupon is being fraudulently processed as secondary insurance. These misrepresentations and omissions about Defendants’ savings cards are directly communicated to Plaintiff when the pharmacist transmits the insured’s primary insurance information to Plaintiff when prescriptions are filled. In addition, the omissions and misrepresentations are alleged to be part of a larger scheme to systematically conceal the use of savings cards to thwart Plaintiff’s efforts to implement cost-sharing provisions through pharmacy network agreements.  

“While the amended complaint includes some allegations of cooperation between pharmacies and the co-pay subsidy administrators, it falls short of indicating that pharmacies processed savings cards in a fraudulent manner in order to further the distinct goals of an enterprise, separate and apart from the pharmacies’ business,” Dow wrote.

However, the judge dismissed the RICO claim because the plaintiff failed to allege a viable RICO “enterprise,” which is “separate and distinct from Defendants,” as required by statute. “Although the enterprise requirement is interpreted broadly, an association-in-fact enterprise nonetheless must have certain structural features, including a purpose, relationships among those associated with it, adequate longevity, and an ascertainable structure, Judge Dow stated. It is not enough for the defendants to have a commercial relationship; the fraudulent conduct must be “undertaken on behalf of the enterprise,” not simply on behalf of each of the Defendant’s individual interests. 

Judge Dow stated that “hub-and-spoke” enterprises do not violate RICO. “Defendants’ co-pay subsidy administrators are at the middle (as the hub), and they instruct pharmacies (the spokes) to process Defendants’ savings cards as secondary insurance (and they also pay pharmacies a fee to do so),” he notes. “But there are no indicia of any association among the pharmacies beyond the fact that they all allegedly process Defendants’ co-pay subsidies as secondary insurance.”

“For example, there are no allegations that pharmacies that comprise the RICO enterprise are in communication with one another or are even aware that other pharmacies are part of the enterprise,” states Jude Dow. “Nor are there allegations that pharmacies share among one another the common goal of increasing the sales of Humira and AndroGel by processing Defendants’ co-pay subsidies as secondary insurance.”

“This structure is insufficient to allege a viable association-in fact RICO enterprise,” he concludes.

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Courts have now overruled a number of federal RICO claims by health benefit providers claiming that co-pay subsidy programs are fraudulent enterprises. 

On June 3, 2013, for example, the District Court for the S.D. of New York dismissed allegations that a Bristol-Myers Squibb’s co-pay subsidy program was unlawful under federal racketeering and antitrust laws. See American Fed’n of State, County and Mun. Employees Dist. Council 37 Health & Sec. Plan v. Bristol-Myers Squibb Co., 12 Civ. 2238 (S.D.N.Y. June 3, 2013). In that case, the judge noted that the allegations “show only that Plaintiffs believe that the co-pay subsidy program is counter to their business objectives.”

While drug companies appear safe from RICO cases involving co-pay coupons, insurance companies piggy-backng on off-label settlements are a different story. We wrote earlier about Kaiser’s successful RICO case against Pfizer here. 

Earlier this summer, Humana alleged that Medtronic violated the RICO Act by conspiring with physicians to promote unapproved uses of its Infuse Bone Graft. “Defendants paid at least $210 million” to key-opinion leaders, states the complaint, who in turn improperly influenced and promoted the sale of device. View the complaint here. We will be following cases brought under RICO because this looks like an active area.