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                              Kohll's Pharmacy & Homecare, Inc., DAB CR5496 (2019)
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Kohll's Pharmacy & Homecare, Inc., DAB CR5496 (2019)








  
  
    

  
      
Department of Health and Human Services 
    DEPARTMENTAL APPEALS BOARD
          Civil Remedies Division





Kohll's Pharmacy & Homecare, Inc.
	(NPIs: 1275525537, 1740599893, 1871585125, 1366733669),
	Petitioner,
v.
Centers for Medicare & Medicaid Services.
Docket No. C-19-1058Decision No. CR5496December 20, 2019

        
              
    

      DECISION
The National Supplier Clearinghouse (NSC) revoked the Medicare supplier numbers of Petitioner, Kohll's Pharmacy & Homecare, Inc., and likewise, the Wisconsin Physicians Service Insurance Corporation (WPS) revoked the Medicare enrollment and billing privileges of Petitioner. The Centers for Medicare & Medicaid Services (CMS) issued reconsidered determinations upholding these determinations based on Petitioner's February 23, 2018 felony convictions, and these decisions were upheld by an administrative law judge (ALJ). *Kohll's Pharmacy & Homecare, Inc.*, DAB CR5495 (2019).1
The Centers for Medicare & Medicaid Services (CMS) placed Petitioner on its preclusion list, effective August 1, 2019, for the duration of the period that coincided with Petitioner's re-enrollment bar, based on its determination that the underlying felony
**Page 2**
conduct that led to Petitioner's revocation was detrimental to the best interests of the Medicare program. For the reasons stated below, I affirm CMS's placement of Petitioner on the preclusion list.
I. Background and Procedural History
Petitioner is a pharmacy that operates at various locations in Nebraska and Iowa.  *Kohll's Pharmacy*, DAB CR5495 at 2. Petitioner also operated a non-retail compounding pharmacy in Omaha, Nebraska, that conducted business under the trade name Essential Pharmacy Compounding (EPC). P. Br. at 3; *Kohll's Pharmacy*, DAB CR5495 at 2. On February 23, 2018, a federal judge imposed judgment, following a jury verdict that found Petitioner2
 guilty of one count of conspiracy, in violation of 18 U.S.C. § 371, and two counts of introducing adulterated or misbranded3
 drugs in interstate commerce, with intent to defraud or mislead, in violation of 21 U.S.C. §§ 331(a) and 333(a)(2).4
 *Kohll's Pharmacy*, DAB CR5495 at 2; *see* CMS Ex. 3 at 4.
An ALJ decision, issued simultaneously with this decision, upheld the determinations by CMS, NSC, and WPS revoking Petitioner's Medicare enrollment, billing privileges, and supplier numbers. *Kohll's Pharmacy*, DAB CR5495 at 12.
During the pendency of Petitioner's administrative appeal of the revocations, CMS's Center for Program Integrity's Provider Enrollment & Oversight Group informed Petitioner that it was "being added to the CMS preclusion list effective August 1, 2019, because [its] Medicare billing privileges have previously been revoked and [it is] currently under a reenrollment bar." CMS Ex. 1 at 1 (emphasis omitted). CMS explained that it "has determined that the underlying conduct that led to the revocation is
**Page 3**
detrimental to the best interests of the Medicare program," and that the "action is taken pursuant to 42 C.F.R. §§ 422.2, 422.222, 423.100, and 423.120(c)(6)."5
 CMS Ex. 1 at 1.
In a request for reconsideration dated April 29, 2019, Petitioner, through counsel, stated: "The determination that [Petitioner] should be placed on the preclusion list should also be reversed because the underlying conduct that led to the revocations is not detrimental to the best interests of the Medicare program and therefore does not satisfy the third requirement for being placed on the preclusion list."6
 CMS Ex. 2 at 2. Petitioner argued that the felony convictions resulted from the "conduct of a few employees of a single division of [Petitioner] operating as Essential Pharmacy Compounding (EPC)." CMS Ex. 2 at 2. Petitioner also argued that EPC did not participate in Medicare nor "place[] any Medicare-related interests at risk." CMS Ex. 2 at 2. Petitioner also explained that it closed EPC in 2018, and that other governmental agencies had renewed its licenses. CMS Ex. 2 at 2. Petitioner also reported that it had completed its term of probation. CMS Ex. 2 at 2-3.
On June 27, 2019, the Provider Enrollment & Oversight Group issued a reconsidered determination in which it upheld Petitioner's placement on the preclusion list effective August 1, 2019. CMS Ex. 3. CMS determined that Petitioner's Medicare enrollment, billing privileges, and supplier numbers had been revoked pursuant to 42 C.F.R. § 424.535(a)(3), and that it was currently under a re-enrollment bar. CMS Ex. 3 at 6. CMS also explained that the conduct underlying Petitioner's convictions was detrimental to the best interests of the Medicare program, stating:
CMS must make a determination that the underlying conduct that led to the revocation is detrimental to the best interests of the Medicare program by considering: (1) the seriousness of the conduct underlying the entities [sic] revocation; (2) the degree to which the entities [sic] conduct could
**Page 4**
affect the integrity of the Medicare program; and (3) any other evidence that CMS deems relevant to its determination. CMS finds that the conduct underlying the revocation is very serious and could negatively affect the integrity of the Medicare program. Specifically, Kohll's purchased a synthetic version of dermorphin, and falsely labeled the drug with the fictitious name d-peptide, which was given to racehorses to improve their performance .... Kohll's misleadingly labeled the drug and sold it to be administered to horses in violation of state and federal law. Kohll's did this to influence the outcome of horse races. This behavior demonstrates Kohll's dishonesty and shows a total disregard for state and federal laws. Not only did Kohll's engage in conduct that posed a threat to the safety of animals, but according to the Indictment, it created false billing records, invoices, and other documents that might otherwise reveal the acts of distributing an unapproved, adulterated, and misbranded drug for horses .... Consequently, Kohll's offense also calls into question its ability and willingness to provide services and submit claims for payment within the parameters of federal and state laws.
While Kohll's argues that Dermorphin is not a controlled substance, it is not a drug that can be legally administered to animals or humans because it is not approved by the United States Food and Drug Administration. Kohll's behavior of illegally purchasing and selling a drug with the intent to defraud or mislead others is behavior that is serious and extremely dangerous. Furthermore, Kohll's conduct clearly shows a lack of integrity and raises concern because being part of the Medicare program requires the supplier's propensity for good judgment and the ability and desire to follow federal laws, rules, and program instructions. Consequently, CMS deems the seriousness of conduct underlying the revocation as being detrimental to the best interests of the Medicare program. As a result, CMS upholds Kohll's inclusion on the preclusion list as it pertains to the Medicare Advantage program.
CMS Ex. 3 at 5. CMS explained that "the conduct underlying [the] revocations is concerning, serious, and detrimental to the best interest of the [Medicare] program." CMS Ex. 3 at 6.
Petitioner filed a timely request for an ALJ hearing on August 26, 2019. On September 6, 2019, the Civil Remedies Division issued my standing pre-hearing order (Pre-Hearing Order). CMS filed a combined pre-hearing brief and memorandum in support of summary judgment (CMS Br.), along with 17 exhibits (CMS Exs. 1-17). Petitioner submitted a response brief (P. Br.). As neither party has objected to any of the proposed exhibits, I admit all submitted exhibits.
**Page 5**
Neither party has submitted written direct testimony, and it is therefore unnecessary to convene a hearing for the purpose of cross-examination of any witnesses. *See* Pre-HearingOrder, §§ 12-14. The record is closed, and the case is ready for a decision on the merits.7
II. Issue
Whether CMS has a legitimate basis to place Petitioner on the preclusion list. 42 C.F.R. § 422.2.
III. Jurisdiction
I have jurisdiction to decide this case. 42 C.F.R. §§ 498.3(b)(20), 498.5(n)(2); *see also* 42 U.S.C. § 1395cc(j)(8).
IV. Findings of Fact, Conclusions of Law, and Analysis8
Petitioner is a "supplier" for purposes of the Medicare program. *See* 42 U.S.C. § 1395x(d); 42 C.F.R. § 400.202 (definition of supplier). In order to participate in the Medicare program, a supplier such as Petitioner must meet certain criteria to enroll and receive and maintain billing privileges and a supplier number. *See* 42 C.F.R. §§ 424.57(c), 424.505, 424.510. CMS may revoke a supplier's enrollment, billing privileges, and supplier number for any reason stated in 42 C.F.R. § 424.535(a). After a supplier's Medicare enrollment and billing privileges are revoked, the supplier is barred from re-enrolling in the Medicare program for one to three years. 42 C.F.R. § 424.535(c). As previously discussed, Petitioner's Medicare enrollment, billing privileges, and supplier numbers were revoked, effective February 23, 2018, at which time a three-year re-enrollment bar was imposed, effective September 2018. *Kohll's Pharmacy*, DAB CR5495 at 12.
On July 22, 2016, the Comprehensive Addiction and Recovery Act of 2016 (CARA) was enacted, and its stated purpose was to "authorize the Attorney General and Secretary of Health and Human Services to award grants to address the prescription opioid abuse and heroin use crisis, and for other purposes." Pub. L. No. 114-198, 130 Stat. 695 (2016). Section 704 of the CARA called on the Secretary of the Department of Health and Human Services (Secretary) to establish a program to prevent prescription drug abuse under Medicare Parts C and D. 130 Stat. at 742-52. Among other things, Section 704
**Page 6**
amended the Social Security Act (42 U.S.C. § 1395w-10(c)) to require the Secretary to implement a drug management program to limit access to controlled substances for at-risk Medicare beneficiaries. *Id.* at 742-48. Section 704(g) of the CARA directed the Secretary to promulgate regulations implementing the provisions of that section of the act. *Id.* at 751-52. Section 704(g)(1) directed that "amendments made by this section shall apply to prescription drug plans ... for plan years beginning on or after July 1, 2019." *Id.* at 751. Additionally, Section 704(b)(2) of the CARA specifically amended the Social Security Act, at 42 U.S.C. § 1395w-104(c), to add a provision for a "utilization management tool to prevent drug abuse," and required that the Secretary conduct a "[r]etrospective utilization review to identify ... providers of services or suppliers that may facilitate the abuse or diversion of frequently abused drugs by beneficiaries." *Id.* at 748.
CMS proposed rulemaking to implement the CARA on November 28, 2017. 82 Fed. Reg. 56,336. As relevant here, CMS proposed that an MA organization may not make payment for an item or service that is furnished by an individual or entity on a newly established preclusion list, and likewise, that a Part D plan sponsor must reject pharmacy claims for Part D drugs if the prescriber is on the same preclusion list. *Id.* at 56,340. CMS explained that individuals, entities, and prescribers would be placed on the preclusion list if certain requirements were all met, to include having engaged in conduct that is detrimental to the best interests of the Medicare program and its beneficiaries. *Id.* CMS "note[d] also that [its] proposal is of particular importance when considering the current nationwide opioid crisis" and that "the inclusion of problematic prescribers on the preclusion list could reduce the amount of opioids that are improperly or unnecessarily prescribed by persons who pose a heightened risk to the Part D program and Medicare beneficiaries." *Id.* at 56,444. With respect to the Part C program, CMS remarked that "we believe that an appropriate balance can be achieved between this program integrity objective and the desire to reduce the burden on the provider and supplier communities" and "propose[d] to utilize the same ‘preclusion list' concept in MA that we are proposing for Part D ...." *Id.* at 56,448. CMS further remarked that "[w]e believe this approach would allow us to concentrate our efforts on preventing MA payment for items and services furnished by providers and suppliers that could pose an elevated risk to Medicare beneficiaries and the Trust Funds, an approach, as previously mentioned, similar to the risk-based process in § 424.518." *Id.* In its final rule, CMS established a January 1, 2019 effective date for the preclusion list, which is consistent with the CARA's mandate. 83 Fed. Reg. 16,440 (Apr. 16, 2018).
Through its rulemaking, CMS established a single list of individuals and entities for whom MA plans cannot provide reimbursement for items and services they provide, and for prescribers to whom Medicare Part D plans cannot provide reimbursement for any prescriptions the individuals write. 42 C.F.R. §§ 422.222 and 423.120(c)(6). As relevant here, because Petitioner is a pharmacy and is not a prescriber of Part D drugs, CMS's placement of Petitioner on the preclusion list is based on the provisions of 42 C.F.R.
**Page 7**
§ 422.222 pertaining to MA plans. In order for CMS to include a pharmacy such as Petitioner on its preclusion list, all of the following three requirements must be met:
(i) The ... entity is currently revoked from Medicare under [42 C.F.R.] § 424.535.
	(ii) The ... entity is currently under a reenrollment bar under [42 C.F.R] § 424.535(c).
	(iii) CMS determines that the underlying conduct that led to the revocation is detrimental to the best interests of the Medicare program. In making this determination under this paragraph ..., CMS considers the following factors:
(A) The seriousness of the conduct underlying the ... revocation.
	(B) The degree to which the ... conduct could affect the integrity of the Medicare program.
	(C) Any other evidence that CMS deems relevant to its determination ....
42 C.F.R. § 422.2.
***1. A jury found Petitioner guilty of, inter alia, the felony offenses of introducing adulterated or misbranded drugs in interstate commerce, with intent to defraud or mislead, and a federal judge imposed judgment on February 23, 2018.***
***2. Effective February 23, 2018, the date of its felony convictions, CMS revoked Petitioner's Medicare enrollment, billing privileges, and supplier numbers pursuant to 42 C.F.R. § 424.535(a)(3) based on its determination that Petitioner's felony offenses were detrimental to the best interests of the Medicare program and its beneficiaries.***
***3. CMS imposed three-year re-enrollment bars, effective September 2018.***
***4. Petitioner's revocation was upheld in an ALJ decision.***
***5. CMS determined that the conduct underlying Petitioner's felony convictions was detrimental to the Medicare program.***
***6. CMS had a legitimate basis to add Petitioner to its preclusion list, effective August 1, 2019.***
Petitioner "concedes that there is a current revocation and an active reenrollment bar." P.
**Page 8**
Br. at 2;9
 *see Kohll's Pharmacy,* DAB CR5495 at 12. As such, the first two requirements for inclusion on the preclusion list are met. 42 C.F.R. § 422.2.
As for the third requirement listed in 42 C.F.R. § 422.2, CMS determined that Petitioner's conduct underlying his revocation was detrimental to the best interests of the Medicare program. CMS Ex. 3 at 5. Petitioner "disputes ... the third required finding for placement on the preclusion list which requires CMS to determine the underlying conduct that led to the revocation is detrimental to the best interests of the Medicare program on the listed factors." P. Br. at 2.
Petitioner argues that "the analysis conducted by CMS in determining that the underlying conduct leading to revocation is detrimental to the best interests of the Medicare program is erroneous." P. Br. at 2. Although Petitioner contends that the felony convictions "result[ed] from [the] conduct of a few employees of a single division of Kohll's operating as [EPC]," (P. Br. at 3), it has not explained how its criminal culpability is eliminated because the felonious activity was limited to just a few of its employees. *See* 42 C.F.R. § 498.70(a). Nor has Petitioner submitted any evidence in support of this claim. Likewise, although Petitioner argues that its conduct underlying the offense did not place Medicare-related interests at risk, the relevant question is whether the conduct is detrimental to the best interests of the Medicare program. 42 C.F.R. § 422.2. Further, although Petitioner argues that it has closed its EPC division, it does not dispute that Kohll's Pharmacy & Homecare, Inc., itself, was convicted of the felony offenses at issue, and the criminal conviction was not limited to only its EPC compounding pharmacy division. And although Petitioner feels that a lack of prior misconduct and the age of the criminal conviction weigh in its favor, I note that pursuant to 42 C.F.R. § 424.535(a)(3), CMS is authorized to revoke enrollment, billing privileges, and supplier numbers when a supplier has committed a felony offense in the preceding 10 years.
CMS explained that Petitioner "misleadingly labeled the drug," dermorphin, when it dispensed the compounded prescriptions, and the indictment detailed how it "created false billing records, invoices, and other documents that might otherwise reveal the acts of distributing an unapproved, adulterated, and misbranded drug for horses ...." CMS Ex. 3 at 5. CMS determined that Petitioner's conduct "clearly shows a lack of integrity and raises concern because being part of the Medicare program requires the supplier's propensity for good judgment and the ability and desire to follow federal laws, rules, and program instructions." CMS Ex. 3 at 5. CMS also explained that Petitioner's criminal offense "calls into question its ability and willingness to provide services and submit claims for payment within the parameters of federal and state laws." CMS Ex. 3 at 5.
**Page 9**
CMS has put forward a legitimate basis to support its determination that Petitioner's underlying conduct was detrimental to the Medicare program. *See* 42 C.F.R. § 422.2. In applying the factors listed in 42 C.F.R. § 422.2, CMS recognized that Petitioner's conduct was very serious; in fact, Petitioner was convicted of the felony level of the offense, which required that Petitioner had misbranded or adulterated drugs with the "intent to defraud or mislead." CMS Ex. 3 at 5; *see* 42 C.F.R. § 422.2; 21 U.S.C. §§ 331(a), 333(a)(2); *see also* 18 U.S.C. § 3559(a) (classifying as felonies offenses punishable by more than one year of incarceration). Further, CMS determined that Petitioner's conduct was of such a degree to affect the integrity of the Medicare program—CMS explained that Petitioner had compounded a non-FDA approved drug that was illegally used in horseracing and that it had mislabeled the drug, dermorphin, calling into question its integrity and willingness to adhere to applicable laws and Medicare program requirements. CMS Ex. 3 at 5. I agree with CMS that Petitioner's conduct that led to its revocation and felony convictions was detrimental to the best interests of the Medicare program and its beneficiaries. Petitioner's conduct dispensing mislabeled or adulterated drugs, with the intent to defraud or mislead, is precisely the type of conduct that CMS sought to address through its creation of a preclusion list in response to Congress's directive to implement a program to prevent prescription drug abuse under Medicare Parts C and D. *See* 82 Fed. Reg. at 56,444 (noting that the preclusion list "could reduce the amount of opioids that are improperly or unnecessarily prescribed by persons who pose a heightened risk to ... Medicare beneficiaries"). CMS therefore had a legitimate basis to add Petitioner to its preclusion list.
V. Conclusion
For the reasons explained above, I affirm CMS's determination placing Petitioner on the preclusion list.


          /s/
        Leslie C. Rogall

                      Administrative Law Judge
      1. Petitioner filed the instant request for hearing more than five months after it requested a hearing to challenge its revocation. Neither party has requested consolidation of the cases, and Petitioner is represented by different counsel in each case. Therefore, I have simultaneously issued separate decisions in these matters. See Kohll's Pharmacy, DAB CR5495. back to note 1
                      2. The defendant listed on the judgment of the conviction is "KOHLL'S PHARMACY & HOMECARE INC., d/b/a/ ESSENTIAL PHARMACY COMPOUNDING." Kohll's Pharmacy, DAB CR5495 at 2 n.2. Petitioner does not dispute its conviction. P. Br. back to note 2
                      3. A drug is "misbranded" if the "labeling is false or misleading in any particular." 21 U.S.C. § 352(a). A drug is "adulterated" under circumstances such as when it is manufactured under unsanitary conditions or is of an improper strength, quality, or purity. 21 U.S.C. § 351(a)-(d). back to note 3
                      4. Based on 21 U.S.C. § 331(a), "[t]he introduction or delivery for introduction into interstate commerce of any food, drug, device, tobacco product, or cosmetic that is adulterated or misbranded" is prohibited. Petitioner was found guilty of the felony level of that offense, as section 21 U.S.C. § 333(a)(2) provides for a maximum period of incarceration of three years if "such a violation [is] with intent to defraud or mislead." See 18 U.S.C. § 3559(a) (classifying as felonies offenses punishable by more than one year of incarceration). back to note 4
                      5. CMS later clarified that the initial determination "incorrectly lists §§ 423.100 and 423.120(c)(6) as two of the bases for including [Petitioner] on the preclusion list," and explained that "[section] 423 of the 42 C.F.R. does not apply to pharmacies" because pharmacies are not prescribers of Part D drugs." CMS Ex. 3 at 1 n.1. back to note 5
                      6. Petitioner also referenced an argument CMS presented in its pre-hearing brief in the companion revocation case, in which CMS contended that revocation pursuant to 42 C.F.R. § 424.535(a)(3)(ii)(D) was warranted because Petitioner's offense was presumptively detrimental to the Medicare program and its beneficiaries because it warranted exclusion based on section 1128(a)(4) of the Social Security Act. CMS Ex. 2 at 2; see Kohll's Pharmacy, DAB CR5495 at 6 n.10. The ALJ decision upheld revocation based on 42 C.F.R. § 424.535(a)(3), and not based on 42 C.F.R. § 424.535(a)(3)(ii)(D). See Kohll's Pharmacy, DAB CR5495 at 6-11. back to note 6
                      7. Because the parties have not identified any witnesses and a hearing is unnecessary, I need not address whether summary judgment is appropriate. back to note 7
                      8. My numbered findings of fact and conclusions of law are set forth in italics and bold font. back to note 8
                      9. Petitioner's brief is not paginated, and I therefore refer to the page number that displays on the electronic version of the document. back to note 9 Back to top
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