In a complaint filed September 2003 against Merck-Medco Managed Care, L.L.C., (Medco), the United States alleged that Medco submitted false claims in connection with its contract to provide mail order prescription services to federal employees. The government filed an amended complaint against Medco in December 2003, in which it alleged, among other things, that Medco encouraged health care providers to switch patients to different prescription drugs that would result in larger rebate payments from drug manufacturers to Medco. According to the complaint, Medco did not inform prescribers or patients of the increased rebates and did not pass along resulting savings to patients or their health care plans. Count VI of the amended complaint also sought injunctive relief under the fraud injunction statute, 18 U.S.C. § 1345, which permits the Attorney General to sue whenever someone is "committing or [is] about to commit a Federal health care offense." The complaint would be unremarkable except for the fact that it alleged that Medco's lack of an "effective" corporate compliance program demonstrated the requisite knowledge under the FCA. United States v. Merck-Medco Managed Care, L.L.C., No. 00-CV-737 (E.D. Pa. filed Sept. 29, 2003).

In April 2004, Medco and the United States settled the government's claim for injunctive relief and entered into a consent order. Twenty states, including Arizona, California, Connecticut, Delaware, Florida, Illinois, Louisiana, Maine, Maryland, Massachusetts, Nevada, New York, North Carolina, Oregon, Pennsylvania, Texas, Vermont, Virginia, and Washington joined in the settlement and each will file a separate consent order covering both the states' injunctive and monetary claims. Under the state settlements, Medco will pay $20 million to the states in damages, $6.6 million to the states in fees and costs, and about $2.5 million in restitution to patients who incurred expenses related to switching between drugs. The federal government is proceeding with the remaining portions of its amended complaint, including its allegation that Medco's lack of an effective compliance program satisfies the knowledge requirement under the FCA.

Specific intent to defraud is not required under the FCA. Rather, the Act imposes liability for knowingly submitting a false claim. Knowingly is defined as actual knowledge, deliberate ignorance, or reckless disregard of the truth or falsity of the claim. According to the government, "deliberate ignorance" or "reckless disregard" were demonstrated by Medco's lack of an effective compliance program.

This is the first time the government has alleged that failure to implement an effective compliance program satisfies the knowledge requirement under the FCA. There is no statute or regulation requiring a health care provider to implement a compliance program. The publicity surrounding government enforcement initiatives has driven prudent providers to implement such programs over the course of the last several years, however. In its complaint against Medco, the government did not merely allege that Medco acted recklessly because it did not have a compliance program, the government alleged that Medco acted recklessly because its "compliance program .was not reasonably capable of reducing the prospect of misconduct." In other words, according to the government, a provider will be considered to have acted recklessly unless it has implemented an effective compliance program. This theory, no doubt, will be employed by the government unless, and until, a court rules that failure to implement an effective compliance program does not demonstrate recklessness.

Medco is the nation's largest pharmaceutical benefits management (PBM) company, with over 62 million covered people. PBMs contract with health plans to process prescription drug payments to pharmacies for drugs provided to patients enrolled in the health plan. s

Mr. Shepard thanks Harry R. Silver for his invaluable contributions to the writing of this article.