Pharmaceutical fraud encompasses a variety of illegal schemes utilized by pharmaceutical manufacturers, pharmacies, or other health care providers resulting in the submission of claims for reimbursement from government programs for drugs that are improperly manufactured, marketed, or priced.
On December 8, 2003, Congress enacted the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “MMA”). Title I of the MMA created new outpatient prescription drug coverage under Medicare (“Medicare Part D”). The Medicare Prescription Drug Improvement and Modernization Act of 2003 added prescription drug benefits to the Medicare program. The Medicare Prescription Drug benefit covers all drugs that are considered “covered outpatient drugs” under 42 U.S.C. § 1396r 8(k).
Prior to January 1, 2006, Medicaid was the primary government-funded program responsible for subsidizing prescription drug costs for Medicare and Medicaid beneficiaries. However, starting in January 2006, Part D of the Medicare Program provided subsidized drug coverage for all beneficiaries, with low income individuals receiving the greatest subsidies. This fundamental change in coverage of pharmacy benefits is considered the most significant change in health benefits coverage since Medicare’s inception in 1965.
Structure of Medicare Part D
While coverage of prescription drugs under Medicare Part D is subject to the same regulations as coverage under the Medicaid Program, the benefit is structured much differently. Generally, Medicare Part D offers an optional drug benefit to beneficiaries through a variety of approved private plans, known as pharmacy benefit plans, whose benefits must be equivalent to or greater than the “model” plan; hence, many available plans vary from the model plan.
Although the amounts are modified slightly each year, the model plan calls for several layers of drug coverage. By way of example, in 2016, Medicare Part D beneficiaries were required to pay the first $360 of the prescription drug costs. This amount is the deductible. During the initial coverage phase, Medicare Part D pays 75% of the covered prescription drug costs after the deductible is met, and the beneficiary pays 25% until the total drug costs (including the deductible) reached $2,960.
The “Donut Hole”
Once the beneficiary’s total drug cost reaches the initial coverage limit ($3,310 in 2016), the beneficiary falls into what is called the “donut hole,” requiring the beneficiary to pay the full cost of prescription drugs until his or her total out-of-pocket cost reaches a pre-determined threshold ($4,850 in 2016). This annual out-of-pocket spending amount includes the yearly deductible and copay amounts.
Once the beneficiary spends more than the annual out-of-pocket amount, the donut hole ends and Medicare Part D pays most of the costs of covered drugs for the remainder of the year. However, the beneficiary remains responsible for a small copay ($2.95 in 2016) for each generic drug and slightly higher copay ($7.40 in 2016) for all other drugs (or 5%, whichever is higher). This is known as catastrophic coverage.
The structure of the Medicare Part D prescription benefit is ripe for fraud because it motivates beneficiaries, physicians, and pharmaceutical companies to devise schemes to circumvent the donut hole in order to tap Medicare funding in the catastrophic coverage zone. This type of Medicare/Medicaid fraud can be reported under the False Claims Act for a substantial whistleblower reward.