United States v. Omnicare, Inc.

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 16-4418
_____________
UNITED STATES OF AMERICA, THE STATE OF
CALIFORNIA, THE STATE OF COLORADO, THE
STATE OF CONNECTICUT, THE STATE OF
DELAWARE, THE STATE OF FLORIDA, THE STATE OF
GEORGIA, THE STATE OF HAWAII, THE STATE OF
ILLINOIS, THE STATE OF INDIANA, THE STATE OF
LOUISIANA, THE STATE OF MARYLAND, THE
COMMONWEALTH OF MASSACHUSETTS, THE STATE
OF MICHIGAN, THE STATE OF MINNESOTA, THE
STATE OF MONTANA, THE STATE OF NEVADA, THE
STATE OF NEW HAMPSHIRE, THE STATE OF NEW
JERSEY, THE STATE OF NEW MEXICO, THE STATE
OF NEW YORK, THE STATE OF NORTH CAROLINA,
THE STATE OF OKLAHOMA, THE STATE OF RHODE
ISLAND, THE STATE OF TENNESSEE, THE STATE OF
TEXAS, THE COMMONWEALTH OF VIRGINIA, THE
STATE OF WISCONSIN, AND THE DISTRICT OF
COLUMBIA, ex rel. MARC SILVER,
Appellant
v.
OMNICARE, INC.; PHARMERICA CORPORATION;
CHEM RX CORPORATION; NCS HEALTHCARE, INC.;
NEIGHBORCARE, INC.
____________
Appeal from the United States District Court
for the District of New Jersey
(D.N.J. No. 1-11-cv-01326)
District Judge: Hon. Noel L. Hillman
Argued: November 15, 2017
Before: CHAGARES, VANASKIE, and FUENTES, Circuit
Judges.
(Filed: September 4, 2018)
Shauna B. Itri [ARGUED]
Daniel R. Miller
Sherrie R. Savett
Berger & Montague
1818 Market Street, Suite 3600
Philadelphia, PA 19103
Lisa J. Rodriguez
Schnader Harrison Segal & Lewis
220 Lake Drive East
Woodland Falls Corporate Park, Suite 200
Cherry Hill, NJ 08002
Counsel for Appellant
2
Michael R. Manthei [ARGUED]
David M. Glynn
Jeremy M. Sternberg
Robert M. Shaw
Holland & Knight
10 St. James Avenue
Boston, MA 02116
Peter J. Kocoras
Thompson Hine
180 North Stetson Street
Two Prudential Plaza, Suite 3500
Chicago, IL 60601
Judith Germano
Germano Law LLC
460 Bloomfield Avenue, Suite 200
Montclair, NJ 07042
Counsel for Appellee
____________
OPINION
____________
CHAGARES, Circuit Judge.
Plaintiff-relator Marc Silver appeals the District Court’s
grant of PharMerica Corporation’s1 motion for summary
1
PharMerica is the only active appellee in this matter.
Omnicare, Inc., NNS Healthcare, Inc., and Neighborcare, Inc.,
3
judgment and motion to dismiss his qui tam action filed under
the False Claims Act (“FCA”), 31 U.S.C. §§ 3729–33, based
on the FCA’s public disclosure bar. That bar generally
disallows qui tam actions that rely on allegations that are, at
least in substantial form, already known to the public. Silver
alleges that PharMerica — which owns and operates
institutional pharmacies serving nursing homes — unlawfully
discounted prices for nursing homes’ Medicare Part A patients
(reimbursed by the United States (hereinafter, “the
Government”) to the nursing home on a flat per-diem basis) in
order to secure contracts to supply services to patients covered
by Medicare Part D and Medicaid (reimbursed directly to the
pharmacy by the Government on a cost basis) in the same
nursing homes. This practice is known as swapping. Silver
challenges the District Court’s conclusion that the alleged
fraud had already been publicly disclosed. Specifically, Silver
asserts that the District Court erred by (1) treating public
disclosures concerning the general risk of swapping in the
nursing home industry as a bar to his specific allegations,
supported by non-public information, that PharMerica was
actually engaging in swapping, and (2) concluding that the
fraud was publicly disclosed based upon Silver’s deposition
testimony that he depended upon publicly available
documents, without undertaking an independent review to
determine whether those documents sufficiently disclosed the
fraud. As explained below, we agree with Silver and conclude
that his allegations of fraud were not publicly disclosed. We
therefore will reverse and remand.
were previously dismissed from the underlying suit, and Chem
Rx Corporation is wholly owned by PharMerica.
4
I.
The incentive for a nursing home to swap arises because
of the different payment structures noted above.2 The
Government pays the nursing home a fixed per-diem rate for
each Part A patient, and from this fixed amount, the nursing
home must pay for all of the patient’s care, including
prescription drugs. Because the nursing home bears the
financial risk for the amount of drugs dispensed to their Part A
patients (who tend to be the sickest and so consume the most
medication), nursing homes are motivated to negotiate with
pharmacies for the lowest possible drug prices for those
patients. In contrast, nursing homes are less concerned about
the cost of drugs dispensed to Medicaid and Part D patients,
because the pharmacies collect those payments directly from
state Medicaid programs or from Part D prescription drug plan
sponsors; the nursing homes bear no financial risk. This
reimbursement structure may be viewed as incentivizing the
nursing homes to “swap” with the pharmacies for lower drug
prices for Part A patients in return for allowing the pharmacy
2
Our description of how these distinct reimbursement
policies may induce a nursing home to engage in swapping is
derived from the parties’ briefs. Neither party disputes this
underlying incentive structure, which is amply corroborated by
the documents in the record. See, e.g., Appendix (“App.”) 700
(Health and Human Services advisory opinion describing the
“obvious motives for agreeing to trade discounts on [per diem
reimbursement] business for referrals of non-[per diem
reimbursement] business: the [nursing homes] minimize risk
of losses under the [per diem reimbursement] system and [the
service providers] secure business in a highly competitive
market”).
5
to serve the more lucrative Part D patients. From the
perspective of the pharmacies, it could be in their interest to
provide drugs to Part A patients at even below-cost prices,
because there are many fewer Part A patients than Part D
patients, and the profit margins on the services provided to the
Part D patients that the pharmacies would win the right to serve
could compensate for the losses incurred serving the Part A
patients.
Silver alleges that PharMerica did just that: agreed with
various nursing homes to provide drugs to Part A patients at
per-diem rates that were so low (as little as $8 per day) that
they must have been below cost, in exchange for the right to
service the nursing home’s other residents at the market rate.
Because these alleged below-cost payments would thereby
serve as “remuneration . . . to induce” the nursing homes “to
refer an individual” — namely, Part D patients — “for the
furnishing of any item or service for which payment may be
made in whole or in part under a Federal health care program,”
42 U.S.C. § 1320a-7b(b)(2)(A), Silver alleges that the
swapping violated the Anti-Kickback statute. Silver
3
accordingly brought these claims under the FCA and its
3
The FCA imposes civil liability on “any person who .
. . knowingly presents, or causes to be presented [to the federal
government], a false or fraudulent claim for payment or
approval,” 31 U.S.C. § 3729(a)(1)(A), and permits private
persons to “bring a qui tam action on behalf of the government
to recover losses incurred because of fraudulent claims,”
Hutchins v. Wilentz, Goldman & Spitzer, 253 F.3d 176, 181–
82 (3d Cir. 2001) (footnote omitted). “If the qui tam suit is
ultimately successful, the private plaintiff, known as a relator,
is entitled to up to 30% of the funds the government recovers.”
6
various state-law analogs, alleging that PharMerica
fraudulently billed the federal government for services that it
obtained through these alleged kickbacks by, among other
things, falsely certifying in its reimbursement claims that it was
complying with the Anti-Kickback rules.
After the District Court denied PharMerica’s Federal
Rule of Civil Procedure 12(b)(6) motion to dismiss — a ruling
that is not before this Court on appeal — PharMerica filed
dispositive motions relying upon the public disclosure bar in
the FCA. Because the public disclosure bar was jurisdictional
before it was amended on March 23, 2010, PharMerica moved
to dismiss Silver’s pre-March 23, 2010 claims for lack of
jurisdiction and moved for summary judgment on his later
claims. The District Court granted both motions, determining
— based on a number of publicly available documents that
Silver admits he relied upon to deduce his allegation of fraud
— that the transactions of fraud were publicly disclosed. Silver
timely appealed.
II.4
Id. at 182. As noted earlier, Silver is the relator in this FCA
case.
4
The District Court had jurisdiction under 28 U.S.C. §
1331, and we have jurisdiction under 28 U.S.C. § 1291. We
review de novo both a district court’s dismissal of an FCA
claim for lack of subject matter jurisdiction, United States ex
rel. Zizic v. Q2Administrators, LLC, 728 F.3d 228, 234 (3d
Cir. 2013), and its order granting a motion for summary
judgment, United States ex rel. Spay v. CVS Caremark Corp.,
875 F.3d 746, 752 (3d Cir. 2017).
7
The public disclosure bar to the FCA, prior to March
23, 2010, provided that “[n]o court shall have jurisdiction over
an action under this section based upon the public disclosure
of allegations or transactions . . . unless . . . the person bringing
the action is an original source of the information.” 31 U.S.C.
§ 3730(e)(4)(A) (2006). As amended effective March 23,
2010,5 the disclosure bar is no longer jurisdictional and instead
provides that a “court shall dismiss an action or claim under
this section . . . if substantially the same allegations or
transactions as alleged in the action or claim were publicly
disclosed . . . unless . . . the person bringing the action is an
original source of the information.” 31 U.S.C. § 3730(e)(4)(A)
(2010); see also United States ex rel. Moore & Co. v. Majestic
Blue Fisheries, LLC, 812 F.3d 294, 300 (3d Cir. 2016).
Whereas an “allegation” of fraud is a specific allegation of
wrongdoing, a “transaction” that raises an inference of fraud
consists of both the allegedly misrepresented facts and the
allegedly true state of affairs. See United States ex rel.
Dunleavy v. Cty. of Del., 123 F.3d 734, 741 (3d Cir. 1997),
abrogated on other grounds by Graham Cty. Soil & Water
Conservation Dist. v. United States ex rel. Wilson, 559 U.S.
280 (2010); Moore & Co., 812 F.3d at 303. As no one contends
that, prior to Silver’s suit, PharMerica had been publicly and
explicitly accused of engaging in swapping, our task in this
5
Because the amendment, contained in the Patient
Protection and Affordable Care Act of 2010 (“ACA”), Pub. L.
No. 111-148 § 10104(j)(2), 124 Stat. 119, 901, is not
retroactive, see Graham Cty. Soil & Water Conservation Dist.
v. United States ex rel. Wilson, 559 U.S. 280, 283 n.1 (2010),
claims based on conduct occurring before March 23, 2010 are
still governed under the prior jurisdictional version of the
statute.
8
case is to ascertain whether the transactions raising an
inference of that allegation of fraud were already publicly
disclosed.
To determine whether a fraudulent transaction has been
publicly disclosed by information contained in one of the
enumerated public sources,6 this Court employs a formula of
sorts, where:
6
The list of sources through which the disclosure of
information would be deemed a public disclosure under the
FCA was also amended and narrowed by the ACA. See, e.g.,
Moore & Co., 812 F.3d at 299. The parties agree that the
information alleged to have publicly disclosed the alleged
fraudulent transactions in this case occurred through sources
that would qualify as public disclosure sources under either
version of the statute. See App. 12–13. The ACA’s other
relevant change — that the relator’s alleged fraud need only be
“substantially the same” as, rather than “based on,” the
publicly disclosed allegations or transactions in order to trigger
the public disclosure bar — merely codified the law as it
already existed in this Circuit. See United States ex rel.
Atkinson v. Pa. Shipbuilding Co., 473 F.3d 506, 519 (3d Cir.
2007) (“To be ‘based upon’ the publicly revealed allegations
or transactions the complaint need only be ‘supported by’ or
“substantially similar to” the disclosed allegations and
transactions.” (quoting United States ex rel. Mistick PBT v.
Hous. Auth. of City of Pittsburgh, 186 F.3d 376, 385–88 (3d
Cir. 1999))). Accordingly, because the legal framework
applicable to the determination of whether Silver’s allegations
were publicly disclosed is the same under either version of the
statute, we need not consider separately the pre- and post-
March 28, 2010 conduct.
9
“If X + Y = Z, Z represents the allegation of fraud
and X and Y represent its essential elements. In
order to disclose the fraudulent transaction
publicly, the combination of X and Y must be
revealed, from which readers or listeners may
infer Z, i.e., the conclusion that fraud has been
committed.”
United States ex rel. Zizic v. Q2Administrators, LLC, 728 F.3d
228, 236 (3d Cir. 2013) (quoting Dunleavy, 123 F.3d at 741).
For a court to conclude that an inference of fraud [Z] has been
publicly disclosed such that the public disclosure bar is
triggered, then, “both a misrepresented [X] and a true [Y] state
of facts must be publicly disclosed.” United States ex rel.
Atkinson v. PA. Shipbuilding Co., 473 F.3d 506, 519 (3d Cir.
2007). Where the fraud has been publicly disclosed — either
because the public documents set out the allegation of fraud
itself [Z] or its essential elements [X+Y] — a relator’s claim
will be barred so long as it is “‘supported by’ or ‘substantially
similar to’ [the] public disclosures.” Zizic, 728 F.3d at 237
(quoting United States ex rel. Mistick PBT v. Hous. Auth. of
City of Pittsburgh, 186 F.3d 376, 385–88 (3d Cir. 1999)); 31
U.S.C. § 3730(e)(4)(A) (2010).
In this case, the parties agree that the allegedly
“misrepresented” set of facts [X] is that PharMerica was
complying with the Anti-Kickback statute,7 and that the
7
We have recognized that “[f]alsely certifying
compliance with the . . . Anti–Kickback Act[] in connection
with a claim submitted to a federally funded insurance program
is actionable under the FCA.” United States ex rel. Wilkins v.
United Health Grp., Inc., 659 F.3d 295, 312 (3d Cir. 2011)
10
allegedly “true” state of facts [Y] is that PharMerica was in fact
engaging in the fraudulent practice of swapping, which violates
the statute. PharMerica argued — and the District Court found
— that a number of publicly available reports and documents,
upon which Silver testified that he relied to deduce the fraud,
discussed swapping in the nursing home industry and
accordingly that “the information cumulatively disclosed in the
publicly available documents was sufficient to support an
inference that PharMerica allegedly engaged in swapping
transactions with nursing homes, and therefore the true state of
facts (Y) was publicly disclosed.” Appendix (“App.”) 16.
Finding that both X and Y were publicly disclosed, the District
Court concluded that Silver’s claim was barred. In reaching
this conclusion, the District Court rejected Silver’s argument
that the public documents could not, on their own, disclose the
fraud, and that to arrive at his allegations, Silver had relied on
non-public contracts he had seen that indicated that
PharMerica was offering below-price per-diem rates for Part A
patients. Silver contends that the District Court erred in doing
so for two reasons. First, Silver argues that the District Court
improperly determined that documents publicly describing the
generalized risk of swapping in the nursing home industry
(quoting United States ex rel. Kosenske v. Carlisle HMA, Inc.,
554 F.3d 88, 94 (3d Cir. 2009)). Moreover, as we noted in
Wilkins, id. at 311 n.19, Congress in the ACA, § 6402(f), 124
Stat. at 759, amended the Anti-Kickback Statute to state
expressly that “a claim that includes items or services resulting
from a violation of this section constitutes a false or fraudulent
claim for purposes” of the FCA. See also 42 U.S.C. § 1320a–
7b(g). Some of the fraudulent conduct alleged here, however,
predates the ACA’s effective date of March 23, 2010, and the
amendment is not retroactive.
11
served to bar his specific claim, which depended on non-public
information that PharMerica was actually engaging in
swapping in specific contracts. Second, Silver contends that
the District Court ignored this Court’s guidance when it
concluded, on the basis of Silver’s testimony, that he relied
upon certain publicly available information to reach his
conclusion and that the information itself disclosed the fraud,
without independently determining that the relevant public
document did, in fact, effectuate such a disclosure. We agree.
A.
As noted above, the District Court determined that
various reports cumulatively disclosed the alleged fraudulent
transactions. These reports consisted of:
1. A 1999 advisory opinion by the Health and Human
Services – Office of the Inspector General (“HHS-OIG”)
concerning an ambulance company that wanted to provide
steeply discounted services to a nursing home. The
advisory opinion noted that, depending on the intent, such
an offer might violate the Anti-Kickback Act because it
provides a discount for services that the nursing home itself
pays “in exchange for the opportunity to service and bill for
higher paying Federal health care program business
reimbursed directly by the program to the supplier.” App.
700. The advisory opinion also noted that HHS-OIG had
received “a considerable number of informal inquiries and
anecdotal reports regarding discounts to [nursing homes] .
. . since the enactment of the [prospective payment system
establishing per-diem reimbursement for Part A patients]”
and that the inquiries “suggest that suppliers of a wide range
of [nursing home] services” are offering Part A discounts
12
that are “linked, directly or indirectly,” to getting business
that could be billed directly to the federal government via
Medicare Part B. App. 700;
2. A 2000 HHS-OIG “Compliance Program Guidance for
Nursing Facilities” published in the Federal Register that
referenced the 1999 HHS-OIG advisory opinion and
defined swapping as “when a supplier gives a nursing
facility discounts on Medicare Part A items and services in
return for the referrals of Medicare Part B business.” App.
713;
3. A 2008 HHS-OIG “Supplemental Compliance Program
Guidance for Nursing Facilities” reiterating that swapping
violates the Anti-Kickback Act and cautioning that “a
nursing facility should be careful that there is no link or
connection, explicit or implicit, between discounts offered
or solicited for business that the nursing facility pays for
and the nursing facility’s referral of business billable by the
supplier or provider directly to Medicare or another Federal
health care program.” App. 734;
4. A 2004 report by the Lewin Group commissioned by the
Centers for Medicare and Medicaid Services (“CMS”) that
discusses specifically the interactions between institutional
pharmacies and nursing homes and notes that pharmacies
provide many services to nursing homes at little or no cost.8
8
The District Court incorrectly described the Lewin
Report as “indicat[ing] that long-term care pharmacies provide
prescription drugs to nursing homes at little to no charge.”
App. 6 (emphasis added). The report is clear, however, that
the pharmacies “provide many services to nursing facilities at
13
5. 2007 reports by the Harvard Medical School and the
Medicare Payment Advisory Commission asserting that
“[t]he [institutional pharmacy] market is highly
concentrated, with the top three firms accounting for two-
thirds of nursing home beds: Omnicare covers about
850,000 of the nation’s 1.7 million beds (50 percent),
PharMerica covers 220,000 (13 percent), and Kindred
Pharmacy Services (KPS) covers 100,000 (6 percent).”
App. 696; and
6. PharMerica’s Form 10-k financial disclosures which
delineated aggregate information such as PharMerica’s
costs, gross profits, and its bottom line.
little or no charge” and that they are able to do so specifically
because they are reimbursed well for their provision of
prescription drugs under Medicaid. App. 741; see also id. at
761 (“[Pharmacies] are able to offer many medication
administration services at no additional charge because the
Medicaid pharmacy reimbursement rates are high enough to
cover the cost of these services. In essence, states are cross-
subsidizing the cost of medication administration services
through ingredient and dispensing rates rather than paying
them directly through nursing facility rates”). There is no
indication in the report that any prescription drugs were being
provided at low cost. In fact, the Lewin Report indicates
precisely the opposite, namely that pharmacies are hesitant to
offer discounts on prescription drugs (i.e., offer drug prices
lower than the rate set by Medicaid), lest they appear to be
engaging in swapping. App. 759–60.
14
The District Court’s analysis relied most heavily on the Lewin
Report — which the District Court viewed as linking the
general statements about swapping in the nursing home
industry with swapping between nursing homes and
pharmacies in particular — and the 10-k disclosures that Silver
supposedly relied upon as “the last piece of information he
needed to conclude that PharMerica was, indeed, engaging in
swapping.” App. 17.
Neither of the documents, alone or considered together
with the rest of the public documents, disclose the fraudulent
transactions that Silver alleges, not least of which because the
documents do not point to any specific fraudulent transactions
directly attributable to PharMerica. See, e.g., Atkinson, 473
F.3d at 528–29 (considering separately, for disclosure bar
purposes, each specific “transaction” in which defendants were
alleged to have misrepresented the true state of facts); United
States ex rel. Feingold v. AdminaStar Fed., Inc., 324 F.3d 492,
495 (7th Cir. 2003) (explaining that a fraud is publicly
disclosed “when the critical elements exposing the transaction
as fraudulent are placed in the public domain”); see also Zizic,
728 F.3d at 237–38 (concluding that public disclosure bar
applied because defendants were at least “directly identifiable”
from the allegations that had already disclosed the specific
fraudulent transaction). Rather, the documents merely indicate
the possibility that such a fraud could be perpetrated in the
nursing home industry, which is an allegation that would alone
be insufficient to state a claim for fraud under the FCA and
Federal Rule of Civil Procedure 9(b). Silver’s more concrete
claim, which set out specific facts suggesting that PharMerica
in particular was actually engaged in swapping, relied upon
these general disclosures but could not have been derived from
them absent Silver’s addition of the non-public per-diem
15
information. As explained below, we hold that the FCA’s
public disclosure bar is not implicated in such a circumstance,
where a relator’s non-public information permits an inference
of fraud that could not have been supported by the public
disclosures alone.
1.
Both the District Court and PharMerica accord too
much weight to the Lewin Report. The District Court found
that the Lewin Report “indicated that, as to long-term care
pharmacies . . . in particular, conditions were ripe for swapping
transactions.” App. 6. Likewise, PharMerica relies on the
report as proof that the Government was “concern[ed] with
swapping in the long-term care industry applied specifically to
the provision of services by long-term care pharmacies like
PharMerica” and commissioned the Lewin Report “to evaluate
how long-term care pharmacies charge” for their services.
PharMerica Br. 25. The Lewin Report explained that
institutional pharmacies at the time provided many of their
services to nursing homes at little or no cost and still achieved
acceptable profit margins, because Medicaid was then the
largest source of revenue for pharmacies and reimbursed for
prescriptions at a sufficiently high rate so as to allow the
pharmacies to offer these additional low-cost or free services.
However, far from criticizing or noting concern about these
free tie-in services, the reason that the Lewin Report was
commissioned appears to have been to ascertain whether the
pharmacies would be able to continue to provide these
“customary services” that nursing homes had come to rely
upon after Medicare Part D replaced Medicaid as the primary
form of coverage for nursing home residents. See App. 741–
42.
16
Contrary to PharMerica and the District Court’s view,
the Lewin Report appears to indicate that the Government was
aware that pharmacies offered low-cost services bundled with
their provision of drugs and services to Medicaid patients and
that it hoped those low-cost services could continue after the
transition to Part D. Rather than publicly disclosing the
prevalence of or concern about swapping, the Lewin Report
seems to indicate that the Government desired that pharmacies
would continue to engage in conduct that plainly invited
swapping and moreover that the Lewin Group was of the
opinion that swapping was not a pervasive problem. See App.
759–60 (noting that pharmacies do not offer discounted drug
pricing below the cost set by Medicaid because they are
concerned about the risks of appearing to be engaging in
swapping); App. at 763 (explaining that pharmacies “prefer
fee-for-service reimbursement” rather than offering per-diem
pricing and use true-up clauses to limit the risk they bear when
they do provide per-diem pricing, by adjusting the per diem on
a monthly basis to match the Medicaid rate). The Lewin
Report simply gives no indication that, as PharMerica asserts,
“CMS . . . [was] concerned with and actively investigating
swapping many years before [Silver] filed his lawsuit.”9
9
It is not the case, as PharMerica asserts, that “the
government itself reported on widespread ‘swapping’ in the
long-term care pharmacy industry.” PharMerica Br. 33.
Rather, the HHS-OIG documents discussed the risk of
swapping in the nursing home industry, between nursing
homes and their suppliers. Although pharmacies certainly fall
into the category of suppliers of nursing homes, they were not
specifically identified as suspected swappers. PharMerica
itself recognized this distinction, as it initially (and correctly)
17
PharMerica Br. 26. Indeed, the Lewin Report does not appear
at all to discuss discount pricing or swapping regarding
prescription drugs. See supra note 8. The Lewin Report
therefore does not support or even hint at the inference that any
institutional pharmacy — let alone PharMerica in particular —
was swapping or would in the future be likely to swap, or that
the Government was particularly concerned that the free tie-in
services would lead to the scourge of swapping.
2.
The District Court also relied heavily upon
PharMerica’s 10-k disclosure form, which Silver testified that
he consulted before filing his FCA claim. The majority of the
District Court’s analysis of whether the fraudulent transactions
were publicly disclosed was dedicated to its determination that
Silver had conceded that the aggregate financial information
included in the 10-k was sufficient to support a “conclu[sion]
that PharMerica had engaged in illegal swapping.” App. 15.
At no point did the District Court elucidate what information
in the 10-k forms disclosed or suggested that PharMerica was
engaged in swapping or how anyone could use the 10-k data in
conjunction with information from the other public sources to
reach such a conclusion. Rather, the District Court merely
cited Silver’s deposition testimony, in which he purportedly
admitted that he relied on PharMerica’s financial statements
describes the HHS-OIG documents as identifying the
government’s concern with “swapping arrangement in the
long-term care industry” and the “pervasiveness of swapping
transactions in the nursing home industry,” id. at 23–24, and
then attempts in its argument section to recast these disclosures
as concerning the pharmacies themselves.
18
and that the information contained therein permitted him to
make the “pretty easy” deduction that PharMerica was
swapping. App. 639–40. The District Court rejected as
“internally inconsistent” Silver’s argument that this testimony
was taken out of context and that for the disclosures themselves
to support an inference of fraud, they would need to include
more granular information about individual nursing homes,
rather than average or aggregate data. App. 14–15. In reaching
this conclusion, the District Court misapprehended Silver’s
testimony and the central importance of his non-public per-
diem information to the plausibility of his allegation of fraud.
The crux of Silver’s allegation is that the $8–10 per-
diem rates that he discovered must have been below-cost (and
so violate the Anti-Kickback Act) because if PharMerica had
so low a cost to buy prescription drugs such that it was making
money on services for Part A patients even with such a low
reimbursement rate, then it would have been making an
enormous profit on its significantly more numerous services to
Part D patients, which Silver contends are reimbursed at a rate
that is two-to-three times higher. But based on PharMerica’s
publicly stated profits in its 10-k, Silver deduced that
PharMerica could not be making such enormous profits on
their Part D patients because the company was simply not that
profitable. Silver concluded that PharMerica must not in fact
have such a low cost to purchase prescription drugs, meaning
that it must be offering per-diem rates to Part A patients that
are below its costs. Crucially, while this analysis depends on
having a general sense of PharMerica’s gross profitability
(which is public information), the analysis would be
impossible without first knowing what per-diem rate it was
offering to Part A patients (which is not public information).
This is because if the rate it was offering was, for example, $20
19
per day rather than $10 per day, its costs to purchase
prescription drugs could be higher and it could still turn a profit
on its Part A patients, while its profits from Part D patients —
while still better than Part A profits — would not be so
excessive such that it would not align with the reported gross
profits. In order to allege plausibly that PharMerica was
offering below-cost per-diem rates for Part A patients, then,
Silver needed to know what the per-diem rate was. No one
contends that this rate was publicly disclosed.
With this understanding of how Silver deduced the
alleged fraud, it becomes clear that the District Court erred in
determining that the fraud was publicly disclosed via (1)
documents indicating that swapping was a risk inherent in the
nursing home business, (2) documents confirming that
PharMerica was one of the major players servicing nursing
homes, and (3) PharMerica’s financial statements. In his
deposition statements concerning his reliance on the financial
statements, upon which the District Court based its conclusion
that the fraud could be deduced by reliance on the information
contained in those documents alone, Silver makes clear that his
private knowledge of PharMerica’s per-diem rates was the key
to uncovering the fraud. Without this information, the public
information that he consulted, which reported that swapping
was a potential problem in the nursing home industry, would
have been insufficient to disclose the actual fraud that Silver
alleges. As the Court of Appeals for the Ninth Circuit recently
observed, “[a]llowing a public document describing
‘problems’ — or even some generalized fraud . . . across a
swath of an industry — to bar all FCA suits identifying specific
instances of fraud in that . . . industry would deprive the
Government of information that could lead to recovery of
misspent Government funds and prevention of further fraud.”
20
United States ex rel. Mateski v. Raytheon Co., 816 F.3d 565,
577 (9th Cir. 2016). Although we have not explicitly said so,
we clarify now that the FCA’s public disclosure bar is not
triggered when a relator relies upon non-public information to
make sense of publicly available information, where the public
information — standing alone — could not have reasonably or
plausibly supported an inference that the fraud was in fact
occurring. See, e.g., United States ex rel. Shea v. Cellco
P’ship, 863 F.3d 923, 935 (D.C. Cir. 2017) (public disclosure
bar not triggered where the relator “supplied the missing link
between the public information and the alleged fraud” by
“rel[ying] on nonpublic information to interpret each [publicly
disclosed] contract,” and where “[w]ithout [relator’s]
nonpublic sources . . . there was insufficient [public]
information to conclude” that the defendant actually engaged
in the alleged fraud).
*****
Having concluded that the publicly available
information did not disclose the alleged true state of affairs that
PharMerica was violating the Anti-Kickback law by engaging
in swapping — what, in the terminology of our mathematical
representation of the public disclosure analysis, we might title
the “Y-factor” — the public disclosure bar is inapplicable to
Silver’s claims. The District Court erred in concluding
otherwise.
B.
This conclusion is fully in keeping with our precedents
applying the public disclosure bar to parasitic suits in which a
relator uncovers a fraud based only on the application of
21
background knowledge or experience to the publicly available
facts, see United States ex rel. Stinson, Lyons, Gerlin &
Bustamante v. Prudential Ins. Co., 944 F.2d 1149, 1160 (3d
Cir. 1991), or to cases in which the relator relies “even partly”
on publicly disclosed allegations of fraud, Zizic, 728 F.3d at
238. In both such circumstances, a particular concrete
allegation of fraud has already been disclosed in whole or in
part, and the relator is merely extrapolating from or expanding
on the allegation to include allegedly new fraudsters. When a
free-standing allegation of fraud already exists in the public
realm, the mere application of experience or deductive skills to
such information or the addition of another allegation to the
already articulated accusation of fraud does not create a new,
non-barred, claim of fraud. See, e.g., Mateski, 816 F.3d at
579–80; United States ex rel. Winkelman v. CVS Caremark
Corp., 827 F.3d 201, 210 (1st Cir. 2016) (“[A] complaint that
targets a scheme previously revealed through public
disclosures is barred even if it offers greater detail about the
underlying conduct.”). On the other hand, when, as here, the
publicly disclosed information lacks relevant significance to
the claim of fraud absent the addition of relator’s non-public
information, there are simply no publicly disclosed allegations
of fraud upon which the relators claim could be based. Rather,
the allegation exists solely by virtue of the relator’s added
information.
This distinction between concrete allegations of fraud
and disclosures that might support such an allegation if
supplemented by more particular information, likewise
distinguishes this case from cases in which a fraudulent
transaction was deemed disclosed even though the defendant
itself was never mentioned in the public documents.
22
For instance, in United States ex rel. Gear v. Emergency
Medical Associates of Illinois Inc., 436 F.3d 726 (7th Cir.
2006), upon which PharMerica relies, the relator’s claim
regarding fraudulent billing practices at the teaching hospital
that he worked at was barred based on the public disclosure
that such fraudulent practices were taking place at teaching
hospitals nationwide, even though relator’s hospital — 1 of
125 such institutions operating at the time — was never
mentioned in the disclosures. Id. at 728. The Court of Appeals
for the Seventh Circuit rejected the relator’s contention “that
for there to be public disclosure, the specific defendants named
in the lawsuit must have been identified in the public records,”
and held that “[i]ndustry-wide public disclosures bar qui tam
actions against any defendant who is directly identifiable from
the public disclosures.” Id. at 729. PharMerica contends —
and the District Court held — that the HHS-OIG and CMS
documents suggesting that swapping may be occurring in the
nursing home industry and acknowledging PharMerica’s status
as one of the three largest institutional pharmacies serving
nursing homes, means that PharMerica was identified as a
likely swapper, even without being directly named. In Gear,
however, the allegations concerning the fraudulent practice
were concrete and leveled directly at the industry at issue, and
— most importantly — various hospitals had reached
settlements with the Government concerning specific
allegations that they engaged in the practice, and the
Government was in the process of auditing dozens of
additional hospitals. Id. at 728–29. Given the public
disclosures that the fraud was actually being perpetrated across
the industry and the clear indication that the Government was
already uncovering the culpable institutions, the relator’s
addition of information specifically identifying yet another
hospital did not constitute relevantly new or undisclosed
23
information. In the case at bar, however, the public disclosures
lack any concrete indication that pharmacies were actually
swapping, and the most on-point document seems to indicate
that they were not doing so. Silver’s allegation, supported by
non-public contracts plausibly indicating below-cost per-diem
pricing (which the Lewin Report specifically noted pharmacies
would not offer) and clarifying the mechanism of the fraud (the
true-up clauses that imply that the low per-diem rates are
introductory prices subject to increase, but which PharMerica
never “trues-up”), has relevance that was lacking in Gear,
because it implicates participants in an industry that had, as yet,
never been specifically accused of engaging in the fraud. See,
e.g., United States ex rel. Dig. Healthcare, Inc. v. Affiliated
Comput. Servs., Inc., 778 F. Supp. 2d 37, 49–51 (D.D.C. 2011)
(explaining that “while the government may be aware of fraud
and improper payments being made by participants in the
Medicaid program on a general level, it was not ‘squarely on
the trail’ of the defendant,” where the purported public
disclosures “reveal some important background information,”
but do “not rise to the level of ‘allegations or transactions’”
(quoting United States ex rel. Fine v. Sandia Corp., 70 F.3d
568, 571 (10th Cir. 1995))).
Similarly, in Zizic, this Court found that the fraud
engaged in by two companies was publicly disclosed by a prior
lawsuit even though the defendants were not named, because a
prior suit alleged a specific fraud taking place in an industry —
qualified independent contractors (“QICs”) who review certain
Medicare eligibility determinations — over a period of time,
and only one QIC operated in the industry at any given period.
Zizic, 728 F.3d at 238. The fraud in Zizic was specifically
alleged to have occurred in the industry, and the identity of
each company was readily ascertainable because they “were
24
the only QICs during their respective contractual terms” which
took place during the time period alleged in the prior suit and
anyone could look up what company served as a QIC at a given
time. Id. The Court therefore concluded that, although the
defendants “were not actually identified in the [prior]
litigation, they were directly identifiable from that public
disclosure.” Id. Again, the same is not true here, where no
specific allegations of fraud or disclosures of information
which would raise an inference of fraud had been made against
pharmacies servicing nursing homes.
Finally, our refusal to afford preclusive effect to
information that discloses merely a potential or possibility of
fraud, without any indication of who is perpetrating it or how
they are doing so, accords with the heightened showing
required by Federal Rule of Civil Procedure 9(b) when
pleading a claim of fraud in FCA actions. See Foglia v. Renal
Ventures Mgmt., 754 F.3d 153, 155 (3d Cir. 2014) (“[I]n
alleging fraud or mistake, a party must state with particularity
the circumstances constituting fraud or mistake.” (quoting Fed.
R. Civ. P. 9(b)). None of the publicly available documents in
this case indicate that any institutional pharmacy is engaging
in swapping or is likely to do so. The Lewin Report is the only
document discussing pharmacies in particular, and that
document at most explains the various payment structures that
would make swapping possible or attractive. It does not imply
that any pharmacy is suspected of engaging in swapping, and
in fact asserts just the opposite — that pharmacies are wary of
any prescription drug pricing that falls below the price set by
the federal government.
A complaint based only on these publicly available
documents would not be able to “support its allegations” with
25
adequate factual detail needed to plead fraud with particularity.
Moore & Co., 812 F.3d at 307. At a minimum, for an FCA
relator to satisfy Rule 9(b), “he must provide ‘particular details
of a scheme to submit false claims paired with reliable indicia
that lead to a strong inference that claims were actually
submitted’”; “[d]escribing a mere opportunity for fraud will
not suffice.” Foglia, 754 F.3d at 157–58 (quoting United States
ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 190 (5th Cir.
2009)); see also, e.g., United States ex rel. Baltazar v. Warden,
635 F.3d 866, 868 (7th Cir. 2011) (holding that “reports
documenting a significant rate of false claims by an industry as
a whole — without attributing fraud to particular firms — do
not prevent a qui tam suit against any particular member of that
industry . . . because these reports do not so much as hint that
any particular provider has submitted fraudulent bills” and so
“do not disclose the allegations or transactions on which
[Realtor’s] suit . . . is based” (citations omitted)). In Foglia,
this Court noted that an inference of illegality based on facts
that could plausibly have either a legal or illegal explanation
would be insufficient to meet Rule 9(b)’s burden, because a
relator must “establish a ‘strong inference’ that false claims
were submitted” and the possibility of a legitimate explanation
undermines the strength of the inference of illegality. Foglia,
754 F.3d at 158.
As we explained earlier, had Silver not been in
possession of the non-public per-diem information,
PharMerica’s financial statements would not have raised a
sufficiently strong inference of a false claim, because they
would be just as consistent with PharMerica’s use of higher per
diems that were not below cost. Only with the addition of
Silver’s non-public per-diem information is the allegation of
fraud raised with the necessary force. In other words, but for
26
Silver’s knowledge of the non-public contract information, the
financial disclosures could not have provided specific enough
detail to allege a fraud under Rule 9(b)’s pleading standard. No
plaintiff could have come into court with only the publicly
available information and survived a motion to dismiss,
because even if the public documents identify a high likelihood
of swapping in the nursing home industry and even if the
institutional pharmacy sector is highly concentrated such that
PharMerica is an obvious defendant, none of the documents
indicate that PharMerica was actually engaging in swapping,
as opposed simply to operating in an environment that makes
swapping attractive. See, e.g., Foglia, 754 F.3d at 158;
Mateski, 816 F.3d at 577; Baltazar, 635 F.3d at 868. We
conclude that the public disclosures concerning the potential
for swapping in the nursing home industry did not publicly
disclose the actual fraud that Silver alleges, and his claim is
accordingly not foreclosed by the FCA’s eponymous bar.
III.
Silver also finds fault with the manner of the District
Court’s determination that Silver’s admission that he relied
upon certain public documents to deduce PharMerica’s fraud
meant that those documents had publicly disclosed the fraud.
He argues that not only did the District Court err substantively
as discussed above, but also that it erred procedurally by failing
independently to determine whether the public documents at
issue in fact contained sufficient information to disclose the
fraudulent transactions. Instead, Silver contends, the District
Court essentially took him at his word that his analysis of
certain documents alerted him to the fraud, and accordingly
determined that those documents must therefore have already
publicly disclosed the fraud, thereby barring Silver’s claim.
27
Silver cites to our decision in Mistick where — discussing
whether allegations that are “based upon” publicly available
information must be actually derived from that information or
instead just “supported by” or “substantially similar” to that
information — we agreed with the majority of the Courts of
Appeals that “the relator’s independent knowledge of the
information is irrelevant” if his allegations merely mirror
allegations that were already publicly disclosed. 186 F.3d at
386. Silver argues based on this that when determining
whether an allegation or transaction is actually publicly
disclosed, it is improper to rely upon what the relator says he
relied on (because whether or not he relied on the public
information is irrelevant), but instead that the court must
analyze the public documents to ascertain whether they
disclose the fraud in sufficient detail. Again, we agree.
If the information that the relator relied upon is
irrelevant to determining whether his allegations are based
upon publicly available information, it would be anomalous to
rely upon his characterization of the record to determine that
the information was indeed public or that his allegations are in
fact derived from those public documents. Although we have
not specifically addressed the procedure to be followed when
determining whether a given document relied upon by a relator
publicly disclosed the fraud, in Atkinson, we mandated a two-
step process to determine whether the public disclosure bar
applies. “First, [the court must] determine whether the
information was disclosed via one of the sources listed in
§ 3730(a)(4)(A). Second, [the court must] decide whether the
relator’s complaint is based upon those disclosures.”
Atkinson, 473 F.3d at 519. For both steps, the court must reach
its own conclusions based on the content of the record before
it. As was made clear in Mistick, a relator’s subjective belief
28
that he relied upon certain information is immaterial to the
court’s decision, which must be based on an independent
assessment of the scope of the information disclosed the by
public documents. If the public documents disclose
substantially the same fraud that the relator — even through
non-public information — alleges, the allegation is deemed
publicly disclosed, regardless of the relator’s honest, but
mistaken, belief to the contrary.10 The court in such a situation
owes no deference to the relator’s understanding of how he
arrived at his allegations, but instead must review the public
documents and assess what relevant information can be
gleaned from them. It follows that a relator’s honest, but
likewise mistaken, belief that certain public documents
themselves disclose the alleged fraud — where in fact the
documents only effect such a disclosure when read in light of
proprietary or non-public information held by the relator —
cannot be the sole basis for a court’s determination that the
documents disclosed the fraud.11 Rather, as is the case when a
10
Of course, if the relator actually relied on non-public
information to reach his allegation of fraud, he may be eligible
as an original source of the allegation and thereby “clear the
[public disclosure] bar.” Moore & Co., 812 F.3d at 304;
Atkinson, 473 F.3d at 520.
11
Our conclusion does not render such an admission
meaningless. If the district court makes the independent
determination that information in certain documents publicly
disclosed the fraud, then a relator’s concession that he relied
on that information could constitute a waiver of his ability to
argue that he is an original source of the information, because
in that case his information would not be “independent” of the
public disclosure. See, e.g., United States ex rel. Schumann v.
Astrazeneca Pharm. L.P., 769 F.3d 837, 845 (3d Cir. 2014).
29
relator claims not to rely on public disclosures, the court must
first determine whether the publicly available documents in
fact disclosed information sufficient to raise the inference of
fraud, and second whether the relator’s complaint objectively
relied upon that disclosed information. See, e.g., Shea, 863
F.3d at 934–35 (considering the content of public disclosures
that relator suggested in his deposition provided him with the
information needed to deduce the fraud, and independently
determining that despite relator’s apparent testimony, none of
those public documents actually raised inferences of fraud).
Here, the District Court conflated these two steps, by
basing its conclusion that the allegation of fraud was publicly
disclosed (step one) largely on Silver’s apparent contention
that he relied upon certain publicly disclosed documents (step
two), rather than on an independent assessment of the scope of
each disclosure. This is particularly clear in relation to
PharMerica’s form 10-k disclosures. Silver at various points
in his deposition testimony admitted to relying on the
aggregate financial information contained in the 10-k, which
the District Court concluded was the “last piece of
information” that Silver needed to make his allegation. App.
17. But the District Court did not explain how the information
in the 10-k, even when combined with the other publicly
available information, could lead to an inference of fraud.
Neither could PharMerica, when pressed at oral argument, put
forward any chain of reasoning based only on the 10-k and the
publicly available information that would lead to Silver’s
allegation. Instead, in its brief and at oral argument,
PharMerica returned continually to the fact that Silver said that
But such an admission cannot itself establish that the
information was publicly disclosed.
30
he relied on the 10-k, and insisted that our analysis must stop
there. But as we make clear now, in the context of the public
disclosure bar, courts may not rest their conclusions based only
on the relator’s view of the state of the public disclosures. And
as we held in Part II, infra, an independent analysis of the
record leads to the conclusion that PharMerica’s public
financial disclosures could not, alone or in concert with the
other disclosures, have uncovered PharMerica’s alleged
swapping. Such a conclusion instead depends necessarily upon
Silver’s non-public per-diem information. The District Court
should have independently assessed the 10-k disclosures and
explained what conclusions could reasonably be drawn
therefrom — an exercise which likely would have alerted the
District Court to the central flaw in PharMerica’s argument.
That it did not do so is a separate basis for our decision to
reverse and remand.
IV.
Silver also argues that the District Court erred by
refusing to assert supplemental jurisdiction over his state law
claims. We review such a decision for abuse of discretion. See
Elkadrawy v. Vanguard Grp., 584 F.3d 169, 172 (3d Cir.
2009). The District Court declined to exercise supplemental
jurisdiction over Silver’s state law claims based on its
conclusion that it no longer retained any cause of action
establishing federal jurisdiction. See 28 U.S.C. § 1367(c)(3)
(“The district courts may decline to exercise supplemental
jurisdiction over a claim . . . if . . . the district court has
dismissed all claims over which it has original jurisdiction.”).
Because we conclude that Silver’s FCA claim is not foreclosed
by the public disclosure bar and that his federal claim will
remain pending before the District Court, we will also vacate
31
and remand the District Court’s order as to supplemental
jurisdiction, to give the District Court an opportunity to
consider exercising its jurisdiction over the claims brought
under state law.12
V.
For the foregoing reasons, we will reverse the District
Court’s Order and remand for proceedings consistent with this
opinion.
12
Given our determination that Silver’s allegation was
not publicly disclosed, we need not reach his alternative claim
that, even assuming the public disclosure bar applied, the
District Court erred when it determined that Silver failed to
qualify for the FCA’s “original source” exception.
32