Seventh Circuit Limits the Use of the Federal Assignment Law under the False Claims Act

It’s common in the healthcare industry for large insurers to negotiate discounts from pharmacies for prescription drugs. The federal government, the granddaddy of all insurers, does this too, when it negotiates discounts on behalf of its Medicaid program. One would think that with all that bargaining power the federal government would get the biggest discounts of them all. But it doesn’t. Medicaid, in fact, is a poor negotiator, often paying more than its private-industry counterparts (a phenomenon that any first-year economics student can rightly explain as caused by the government’s lack of a “residual claimant”).

Carl Thulin, a former Shopko retail pharmacist, knew that Medicaid typically paid more to his employer than private insurers did, and he thought that that was wrong. Or, setting any speculation about his mores to one side (and perhaps more realistically), he at least hoped to get in on part of the action. Thulin filed a qui tam action against Shopko under the False Claims Act, alleging that Shopko committed fraud when it filed for reimbursement of the prescription drug costs for certain “dual eligible” consumers (that is, customers eligible to participate in Medicaid, but who also have private health insurance) and received anything more than it would receive from a private insurer. The Seventh Circuit, in a decision written by Judge Dow (of the N.D. Ill. and sitting by designation), took the opposing view and affirmed Judge Conley of the W.D. Wis., who earlier had dismissed Thulin’s complaint. Thulin v. Shopko Stores Operating Co., No. 13-3638 (7th Cir. Nov. 12, 2014). 

An example will help to illustrate all this. Suppose a “dual eligible” submits to Shopko a prescription for a drug with a list price of $50. Medicaid has contracted to pay Shopko $30 for the drug. The private insurer has contracted to pay only $25 (split between $20 from the insurer and a $5 copay) for the same drug. In the case of a “dual eligible,” Shopko accepts the $25 payment from the private insurer and then bills Medicaid an additional $10, or the difference between the amount paid by the private insurer (exclusive of the copay) and the amount Medicaid agreed to pay.

Thulin believed that Shopko’s practice “failed to report truthfully to Medicaid the nature and extent of [Medicaid’s] obligation” to Shopko. In his view, Shopko should not have billed Medicaid more than the $25 that the private insurer would pay, and Shopko compounded that fraud by omitting the $5 that it received from the insured’s copay. The hook in the False Claims Act, so far as Thulin was concerned, was 42 U.S.C. § 1396k(a)(1)(A), what he called the “Federal Assignment Law,” which, he argued, required Shopko “to assign the State any rights . . . to support . . . and to payment for medical care from any third party.”

The problem for Thulin was that the provision “by its terms applies only to a beneficiary’s right to actually receive payments.” Citing decisions from the Supreme Court of the United States and the federal courts of appeals, the Seventh Circuit explained that the assignment law “ensures that Medicaid is entitled to reimbursement of its medical expenditures if a beneficiary receives a settlement or other recovery from third-party tortfeasors.”

In other words, what Shopko had done was entirely cricket, so far as the False Claims Act was concerned. The court thought that Thulin’s application of the assignment rule to Shopko was “novel” and held that his legal theory was “not viable.” It affirmed the district court’s dismissal.