A Texas federal court recently denied a pharmaceutical supplier’s motion to dismiss claims brought by a whistleblower under the federal False Claims Act (FCA) alleging violations of the Anti-Kickback Statute (AKS) and manipulation of Average Wholesale Pricing (AWP) rules. The complaint was filed by a pharmacist (the Relator) who previously worked for the defendant, Professional Compounding Centers of America Inc. (PCCA), a pharmaceutical supplier which sells active ingredients to compounding pharmacies. The Relator alleged that PCCA reported inflated AWPs for the ingredients it sold to its compounding pharmacy customers as part of a scheme that violated the FCA and AKS. The Government filed its complaint in partial intervention in November 2021, asserting FCA claims against PCCA for causing the submission of false claims to TRICARE and for reporting false AWPs to the pricing compendia upon which TRICARE reimbursement is based.

1. Government’s Allegations.

The government alleged that PCCA (1) knew that the AWPs it submitted to the third-party pricing compendia were false; (2) that its customers submitted claims for compounds to TRICARE seeking reimbursement based on fraudulent AWPs; (3) that the inflated AWPs would drive customers to purchase and submit claims for ingredients solely because of their reimbursement potential; and (4) that the AWPs were material to payment decisions made by insurers like TRICARE. The government alleged specific examples of PCCA’s conduct that were prohibited including: (i) selling prescription drug ingredients to pharmacies at unreported discounts; (ii) teaching clients how to bill compound claims to get the “widest spread possible”; (iii) offering certain customers access to specialized billing software and a database of over 8,000 suggested formulas for compound drugs; (iv) rewarding top customers with all-expenses paid trips; (v) assisting customers in manipulating their usual and customary (U&C) prices through its billing software to ensure that pharmacies would be reimbursed according to AWPs rather than an alternative, lower price; (vi) maintaining billing software that enabled pharmacies to automatically report their U&C price for a compound as equal to the AWP-based price and have this submitted to third-party payors including TRICARE; and (vii) promoting “particularly lucrative compound formulas… to further induce sales of its ingredients —especially those used in pain, wound, and scar creams—even when the formulations were potentially harmful.”  The Court’s ruling referenced 2003 guidance from the HHS OIG which stated, “the conjunction of manipulation of the [AWP] to induce customers to purchase a product with active marketing of the spread is strong evidence of the unlawful intent necessary to trigger the anti-kickback statute.”

2. Court’s Rejection of PCCA’s Motion to Dismiss.

In its motion to dismiss, PCCA argued that because it had not submitted claims to TRICARE itself, it could not be liable under the FCA. PCCA also argued that the government failed to tie that remuneration to specific claims for payment and therefore had not plead facts sufficient to bring an FCA claim. The Court explained that a party does not need to submit false claims to be liable under the FCA, it must only “cause” false claims to be submitted. Therefore, the fact that PCCA’s inflated AWPs caused its customers to submit false claims was sufficient to bring an FCA claim. The Court explained that to plead sufficient facts under the FCA, the government does not need to tie specific claims to renumeration. The government’s complaint must only allege “particular details of a scheme to submit false claims paired with reliable indicia that lead to a strong interference that claims were actually submitted.”[1]

PCCA also argued that its AWPs could not be “objectively false” because there is no statutory or regulatory definition of AWP. The Court relied on a Fifth Circuit criminal health care fraud case in which the court found that there is no “objective falsity” standard for pleading fraud, and that imposing “categorical evidentiary” requirements are antithetical to the jury’s duty to consider an array of evidence, ranging from circumstantial to direct. Citing Third and Ninth Circuit cases, the Court emphasized that an objective falsity requirement would conflict with the spirit of the FCA, underscoring that the FCA does not require the government to prove specific intent to defraud. The government must meet the Federal Rules of Civil Procedure Rule 8 and Rule 9(b) standards. This means the government must, plead (1) “enough facts [taken as true] to state a claim to relief that is plausible on its face;” and (2) plead “with particularity the circumstances constituting fraud or mistake,” with intent and knowledge only needing to be alleged generally.[2]

3Key Takeaways:

Compounding pharmacies provide highly specialized and complex services which are often eligible for higher reimbursement rates. Enforcement efforts have historically focused on compounding pharmacies due in part to these factors.The government has begun to display a willingness to take action against wholesalers of compounding ingredients (rather than the pharmacies that actually billed the claims).This enforcement effort may signal the beginning of a new enforcement trend. Compounding pharmacies and wholesalers should review their current practices and work with experienced counsel to identify pricing methodologies and advertising practices that could result in exposure under the AKS and FCA. Should you have any questions regarding the subject matter of this this article, please contact one of the authors listed below.


[1] United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir. 2009); FED.R.CIV.P. 9(b).

[2] United States v. Bollinger Shipyards, Inc., 775 F.3d 255, 260 (5th Cir. 2014) citing FED.R.CIV.P. 8 and 9(b).