United States ex rel. Proctor v. Safeway, Inc.

30 F.4th 649

UNITED STATES of America EX REL. Thomas PROCTOR, Plaintiff-Appellant,

v.SAFEWAY, INC., Defendant-Appellee.

No. 20-3425

United States Court of Appeals, Seventh Circuit.

Argued September 9, 2021

Decided April 5, 2022

John Timothy Keller, Dale J. Aschemann, Attorneys, Aschemann Keller LLC, Marion, IL, Gary M. Grossenbacher, Attorney, Law Office of Gary Grossenbacher, Rollingwood, TX, Glenn Grossenbacher, Attorney, Law Office of Glenn Grossenbacher, San Antonio, TX, Jason M. Idell, Attorney, Idell PLLC, Austin, TX, Paul B. Martins, Julie W. Popham, James A. Tate, Attorneys, Helmer, Martins, Tate & Garrett Co., LPA, Cincinnati, OH, Rand J. Riklin, Attorney, Goode, Casseb, Jones, Riklin, Choate & Watson, San Antonio, TX, for Plaintiff-Appellant.

James F. Hurst, Andrew A. Kassof, Brenton A. Rogers, Attorneys, Kirkland & Ellis LLP, Chicago, IL, John C. O'Quinn, Attorney, Kirkland & Ellis LLP, Washington, DC, for Defendant-Appellee.

Daniel R. Hergott, Attorney, Behn & Wyetzner, Chartered, Chicago, IL, for Amicus Curiae Taxpayers Against Fraud Education Fund.

John Patrick Elwood, Attorney, Arnold & Porter Kaye Scholer LLP, Washington, DC, for Amicus Curiae Chamber of Commerce of the United States of America.

Craig Young Lee, Attorney, Hunton Andrews Kurth LLP, Washington, DC, for Amicus Curiae National Association of Chain Drug Stores, Incorporated.

John Mercer Masslon, II, Attorney, Washington Legal Foundation, Washington, DC, for Amicus Curiae Washington Legal Foundation.

Before Kanne, Hamilton, and St. Eve, Circuit Judges.

St. Eve, Circuit Judge.

Relator Thomas Proctor alleges that Safeway, Inc. knowingly submitted false claims to government health programs when it reported its "retail" price for certain drugs as its "usual and customary" price, even though many customers paid much less than the retail price. As a result, the government effectively subsidized Safeway's low prices for cash customers by reimbursing Safeway based on the higher retail price. The district court granted Safeway's motion for summary judgment, concluding that Safeway's pricing practices were "objectively reasonable" and no "authoritative guidance" cautioned against its interpretation of the relevant Medicare and Medicaid regulations.

While this case was pending before the district court, it was an open question in this circuit whether the Supreme Court's decision in Safeco Ins. Co. of America v. Burr , 551 U.S. 47, 127 S.Ct. 2201, 167 L.Ed.2d 1045 (2007) applied to the False Claims Act ("FCA"). In United States ex. rel. Schutte v. SuperValu Inc. , 9 F.4th 455 (7th Cir. 2021), however, we answered that question and held that Safeco does apply to the FCA's scienter requirement. In other words, a defendant does not act with reckless disregard as long as its interpretation of the relevant statute or regulation was objectively reasonable and no authoritative guidance warned the defendant away from that interpretation. We also clarified that a failure to satisfy the Safeco standard for reckless disregard precludes liability under the FCA's actual knowledge and deliberate indifference provisions, which concern higher degrees of culpability.

The central remaining question in this appeal is whether a footnote in a Centers for Medicare and Medicaid ("CMS") manual constitutes "authoritative guidance" under Safeco. We hold that it does not. CMS can (and did) revise the manual at any time, and a single footnote in a lengthy manual does not support treble damages liability in this case. The other sources of guidance Relator has identified are unpersuasive because they do not come from the agency. Accordingly, we affirm the district court's grant of summary judgment in favor of Safeway.

I. Background

This case requires us to consider yet again whether a defendant properly reported its usual and customary ("U&C") prices for prescription drugs when seeking reimbursement from government programs, including Medicare Part D and Medicaid. Before setting out the facts of this case, we briefly survey the regulatory landscape.

Medicare Part D is a federal prescription-drug benefit administered by the Department of Health and Human Services through the CMS. CMS awards contracts to plan "sponsors," or private insurance companies. 42 C.F.R. § 423.505. Sponsors contract with middlemen known as Pharmacy Benefit Managers ("PBMs") to administer an insurance plan's prescription-drug benefits. 42 U.S.C. § 1395w-112(b)(1) ; 42 C.F.R. § 423.505(i). In turn, PBMs negotiate and contract with pharmacies to set prescription drug prices, process claims, and reimburse pharmacies. PBM contracts specify how pharmacies are reimbursed for prescription drugs. See 42 U.S.C. § 1395w-111(i). Notably, the government makes direct payments only to plan sponsors, not PBMs or pharmacies.

Medicaid is a partnership between the federal government and the states that provides healthcare coverage to economically disadvantaged individuals. State Medicaid programs set their own reimbursement criteria for prescription-drug claims, but CMS partially funds and oversees the programs.

The parties agree that the U&C price of a prescription drug generally refers to "the cash price charged to the general public." They disagree as to what "the general public" means and whether Safeway correctly reported its U&C prices when seeking reimbursement under Medicare Part D and Medicaid. We held in United States ex rel. Garbe v. Kmart Corp. , 824 F.3d 632 (7th Cir. 2016) that discount-program prices for prescription drugs were offered to "the general public," so it is now settled in this circuit that pharmacies should report those prices as U&C. Id. at 645. Crucially, however, the relevant conduct in this case preceded our decision in Garbe.

Prior to Garbe , federal regulations did not make clear whether the U&C price for a particular drug includes lower prices offered through pharmacy discount programs. The relevant Medicaid regulation provides that agency payments for prescription drugs "must not exceed, in the aggregate," pharmacies' "usual and customary charges to the general public." 42 C.F.R. § 447.512(b). The regulation does not define "to the general public." Id. § 447.512(b)(2). Medicare regulations, by comparison, define U&C as the price "a customer who does not have any form of prescription drug coverage for a covered Part D drug" pays. 42 C.F.R. § 423.100.

But PBMs are free to adopt alternative definitions of U&C with pharmacies by contract. See 42 U.S.C. § 1395w-111(i). Another Medicare regulation requires plan sponsors to include terms in their contracts with PBMs and other downstream entities stipulating that those entities "must comply with all applicable Federal laws, regulations, and CMS instructions." 42 C.F.R. § 423.505(i)(4)(iv). We need not decide whether the Medicaid definition of U&C applies to Safeway's contracts with PBMs—for purposes of reimbursement under Medicare Part D—because the parties have stipulated that U&C means "the cash price charged to the general public."

A. Factual Background

The following facts are undisputed unless otherwise noted. Safeway is a nationwide grocery chain that operates pharmacies in many of its stores. Safeway pharmacies serve customers with commercial insurance plans and government health programs, including Medicare Part D, TRICARE, the Federal Employee Health Benefits Program, and state Medicaid programs. In 2006, the year Medicare Part D went into effect, Wal-Mart introduced a low-priced generics program in which all pharmacy customers could receive a 30-day supply of popular generic drugs for just $4. Wal-Mart reported these prices as its U&C prices, meaning that it received a lower reimbursement rate from PBMs.

Pharmacies like Safeway developed a variety of strategies to compete with Wal-Mart. Between 2006 and 2015, Safeway offered three discount programs for prescription drugs at various times and in various locations around the country. The differences among the three programs affect our analysis of their legality under the FCA, so we discuss them in some detail below.

1. Individual Price Matching

Between 2006 and 2015, Safeway pharmacists had discretion to match competitors' lower prices after verifying the published or advertised prices of certain drugs. To receive a discount, Safeway customers needed to request a price match, and the lower price applied only to the transaction on the date requested. After verifying a competitor's price, the pharmacist would manually override the original price at the point of sale. Safeway did not report price matches as the U&C price for a given drug. There is no evidence that participating pharmacies advertised or otherwise publicized the existence of price matching. On July 15, 2015, Safeway discontinued price matching in all of its stores.

2. The $4 Generics Program

Beginning in March 2008, Safeway offered certain generic prescription drugs for $4. The "$4 Generics Program" was limited to four of Safeway's geographic divisions, as well as five pharmacies in its Denver division. The specific drugs available at this rate changed over time, but when Safeway listed a generic drug on its "formulary," customers could receive a 30-day supply of that drug for $4, a 60-day supply for $8, and a 90-day supply for $12. All customers were eligible for these prices, including cash customers, participants in government health programs, and customers with private insurance. The parties agree that Safeway reported $4 as the U&C price for drugs on its formulary at locations participating in the $4 Generics Program. Safeway advertised the availability of its $4 generics formulary until July 2010, when it discontinued the program.

3. Discount Club Programs

Beginning in March 2008, Safeway introduced its Matching Competitor Generic Program ("MCGP") in five other geographic divisions. The MCGP offered certain generic drugs for the same price as the $4 Generics Program: $4 for a 30-day supply, $8 for a 60-day supply, and $12 for a 90-day...