Case 2:14-cv-00824-MSG Document 499 Filed 06/25/25 Page 1 of 105

IN THE UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF PENNSYLVANIA

UNITED STATES OF AMERICA ex rel.

SARAH BEHNKE,
Civil Action
Plaintiff,
No. 14-cv-824
v.

CVS CAREMARK CORPORATION et

al.,

Defendants.

Goldberg, J. June 25, 2025

MEMORANDUM OPINION

CONTENTS
I. INTRODUCTION........................................................................................................................................ 3
II. FACTUAL BACKGROUND ...................................................................................................................... 3
A. General Background and Medicare Part D.............................................................................................. 4
B. Overview of Caremark’s Contracts During the Relevant Time Period ................................................... 7
C. Caremark’s Relationship with the Part D Sponsors ................................................................................ 8
D. Caremark’s Pharmacy Contracts with Walgreens and Rite Aid.............................................................. 8
E. Caremark’s Budgeted GER with CVS Pharmacy ................................................................................... 9
F. Caremark’s Reporting ............................................................................................................................. 9
G. Relator’s Role........................................................................................................................................ 10
III. PROCEDURAL HISTORY ....................................................................................................................... 11
A. Summary Judgment Ruling on Falsity .................................................................................................. 12
B. Summary Judgment Ruling on Causation ............................................................................................. 13
C. The Bench Trial..................................................................................................................................... 14
IV. LEGAL STANDARDS .............................................................................................................................. 14
V. FINDINGS OF FACT ................................................................................................................................ 16
A. Falsity as to CVS Pharmacy .................................................................................................................. 16
i. Similarities Between Budgeted GERs and GER Guarantees ............................................................ 18
ii. Differences Between Budgeted GERs and GER Guarantees ............................................................ 18
B. Materiality and Scienter ........................................................................................................................ 21

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i. DIR Reporting Requirements ............................................................................................................ 22

ii. What was Reportable under DIR Guidance # 9................................................................................ 23
iii. Caremark’s Contracts with Walgreens and Rite Aid........................................................................ 23
iv. Caremark’s Discussions with Others in the Industry ....................................................................... 28
C. Causation as to Aetna ............................................................................................................................ 34
i. PDE Records .................................................................................................................................... 34
ii. DIR Reports ...................................................................................................................................... 35
iii. Aetna’s Reliance on Caremark’s PDE and DIR Data ...................................................................... 35
D. CVS Health Corporation’s Liability ..................................................................................................... 37
E. Damages ................................................................................................................................................ 39
i. Dr. Loren Smith ................................................................................................................................ 39
ii. Mr. Brett Barlag ............................................................................................................................... 44
VI. CONCLUSIONS OF LAW ........................................................................................................................ 46
A. Falsity as to CVS Pharmacy .................................................................................................................. 46
i. Actually Paid .................................................................................................................................... 47
ii. Identifying the Budgeted GERs ......................................................................................................... 52
B. Materiality ............................................................................................................................................. 53
i. Condition of Payment ....................................................................................................................... 54
ii. Whether the Representation was “Minor” or “Insubstantial” or Goes to the “Essence of the
Bargain” ..................................................................................................................................................... 55
iii. The Government’s Reaction to the Representation if Discovered .................................................... 57
C. Causation ............................................................................................................................................... 61
i. Normal Consequence ........................................................................................................................ 63
ii. Superseding Cause ........................................................................................................................... 65
D. Scienter.................................................................................................................................................. 66
i. Caremark’s Knowledge of CMS’s Regulations and Guidance ......................................................... 68
ii. Concealment ..................................................................................................................................... 76
iii. Turning a Blind Eye .......................................................................................................................... 79
iv. Employee Belief and Caremark’s Motive ......................................................................................... 82
v. Others in the Industry ....................................................................................................................... 91
vi. Government Knowledge.................................................................................................................... 95
E. CVS Health Corporation’s Liability ..................................................................................................... 96
F. FCA CLAIMS PROVEN ...................................................................................................................... 99
G. DAMAGES ......................................................................................................................................... 102
VII. CONCLUSION ........................................................................................................................................ 105

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I. INTRODUCTION

Relator Sarah Behnke (“Relator”) brings this qui tam action under the False Claims Act,

31 U.S.C. § 3729, asserting the interests of the United States of America, against Defendants CVS

Caremark Corporation and related entities (collectively “Caremark”). Relator alleges that

Caremark caused certain health insurers to misrepresent to the government the amount they paid

for prescription drugs on behalf of Medicare beneficiaries. The gravamen of Relator’s claims is

that Caremark, a pharmacy benefits manager (“PBM”) contracted with pharmacies to pay a fixed

average price for prescription drugs but caused higher prices to be reported.

On March 25, 2024, I granted in part and denied in part the Parties’ Cross-Motions for

Summary Judgment (ECF No. 339.) Thereafter, on March 10, 2025, I presided over an eight-day

bench trial to adjudicate the remaining issues. Having considered the trial record and the Parties’

proposed findings of fact and conclusions of law, I will enter partial judgment in favor of the

United States in the amount of $95 million. 1 I set out below my findings of fact and conclusions

of law.

II. FACTUAL BACKGROUND

To put what follows in perspective, I first provide an overview of the facts and procedural

history.

This case concerns the complex interplay between the Centers for Medicare and Medicaid

Services (“CMS”), health insurers, pharmacy benefits managers (“PBMs”), and pharmacies from

2010 through 2016 (“the relevant time period”). This case involves health insurers Aetna and

SilverScript, PBM Caremark, and pharmacies Walgreens, Rite Aid, and CVS Pharmacy. These

1
The Parties have not yet briefed the issue of trebling or statutory penalties. As a result, I make no findings as to
those issues.

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entities each played a role in the process whereby Medicare beneficiaries obtained prescription

drugs under Medicare Part D.

A. General Background and Medicare Part D

Medicare Part D is a CMS-administered program designed to “partially cover the cost of

providing prescription drug coverage to the public.” (ECF No. 452 (Joint Stipulations) ¶ 32.)

CMS does not purchase or negotiate prescription drug prices for beneficiaries. (Id. ¶ 31.) Instead,

it contracts health insurers—referred to as “Part D sponsors”—to sell insurance plans which

partially cover the cost of prescription drugs for beneficiaries. (Id.) Part D sponsors can then

delegate to PBMs the responsibility to negotiate drug costs with retail pharmacies. (Id. ¶ 34.)

Under that scenario, PBMs are responsible for negotiating the prices that a Part D sponsor’s

customers will pay the pharmacy for their prescription drugs.

This process involved two types of contracts: (1) those between the PBM and the

pharmacies; and (2) those between the PBM and the Part D sponsors. In the first contract, the

PBM promises to reimburse pharmacies for drugs purchased by the Part D sponsor’s customers

(“members”). (Id. ¶ 35.) In the second, the Part D sponsor reimburses the PBM for the drug costs

and the PBM’s services. (Id.)

During the relevant time period, CMS subsidized a portion of the prescription drug cost

paid by a Part D sponsor for Part D prescriptions. (Id. ¶ 36.) To calculate these subsidies, CMS

needed to know how much the Part D sponsor spent on drugs. (S.J. Op. at 4.) To ensure accurate

reporting, CMS promulgated regulations which required Part D sponsors to file certain reports.

(Id.) First, Part D sponsors were required to complete prescription drug event (“PDE”) records,

“which gave the prices for individual purchases (i.e., one filled prescription for one plan member).”

(Id. at 13.) Second, Part D sponsors submitted year-end direct and indirect remuneration (“DIR”)

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reports, “which included all other discounts and rebates that affected what it cost the Part D sponsor

(or its PBM) to purchase those drugs.” (Id.)

This case primarily involves what Caremark caused Part D sponsors to report to CMS.

Prior to 2010, Part D sponsors were permitted to report to CMS the price that they paid to the

PBM, even if that price was different from the amount the PBM paid to the pharmacy. This

scenario—whereby the amount the Part D sponsor paid to the PBM differed from that the PBM

paid to the pharmacy—was known as “lock-in” pricing. The difference between the amounts the

PBM paid to the pharmacy and received from the Part D sponsor was known as “spread” or margin.

Where, however, the price negotiated by a PBM and paid to a pharmacy equaled the price paid by

the Part D sponsor back to the PBM, the contracts between the PBM and the Part D sponsor were

called “pass-through” agreements. A simple example of lock-in pricing is helpful to understand

how these entities interacted:

Caremark negotiates with Walgreens to reimburse a certain prescription for $8. Separately,

Aetna agrees to reimburse Caremark for that same prescription at $10. Prior to 2010, Aetna could

report to CMS a claim for $10, even though the price paid at the point of sale (the pharmacy) was

$8. In this scenario, Caremark would generate a “spread” of $2.

In 2010, CMS decided that lock-in contracts could result in “undesirable results,” including

“higher beneficiary out-of-pocket costs” and “Government risk sharing on amounts that reflect

administrative costs, contrary to Congressional intent to exclude risk-sharing on administrative

expenses.” 74 Fed. Reg. 1494, 1505 (Jan. 12, 2009). As a result, CMS promulgated new rules for

the drug costs that could be reported for reimbursement. Specifically, the 2010 rule change altered

the definitions of several key reporting terms, including “gross covered prescription drug costs,”

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“actually paid,” and “negotiated prices,” and added a definition for “administrative costs.” (Joint

Stips. ¶ 141.)

The Parties agree that consistent with those definitions, Part D sponsors were thereafter

required to report to CMS the “price ultimately received by the pharmacy or other dispensing

provider.” (Id. ¶ 143.) The Parties also agree that under the 2010 rule change, any difference

between the price the PBM paid to the pharmacy, and the price the Part D sponsor paid to the PBM

(the spread), “would have to be reported as an ‘administrative cost’ paid to the PBM.” (Id. ¶ 142

(citing 74 Fed. Reg. at 1506).)

It is undisputed that “[o]nce the 2010 rule change took effect, the majority of Part D

sponsors and PBMs adopted pass-through pricing arrangements.” (Id. ¶ 146.) This makes sense

because, after the rule change, if the PBM earned “margin or ‘spread’ by charging its Part D

sponsor client more than what it paid the pharmacy, the government would only subsidize what

the PBM paid the pharmacy and would not subsidize the ‘spread.’” (S.J. Op. at 9.)

Relevant to this case, and more thoroughly discussed in my Summary Judgment Opinion,

CMS explained that only those costs which were “actually paid” would be used to calculate

reimbursements to the Part D sponsors. (S.J. Op. at 10.) This term is crucial because the “purpose

of price reporting was to inform CMS how much each Part D plan paid for drugs so that CMS

could calculate the appropriate subsidy, which depended only on amounts ‘actually paid.’” (Id. at

58 (internal citations omitted).) As I found at summary judgment, “[a]ctually paid” costs are those

that were: “(1) ‘actually incurred,’ (2) adjusted for price concessions and other ‘direct and indirect

remuneration’ (DIR), and (3) the ‘negotiated prices’ between the PBM and the pharmacy.” (Id.)

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B. Overview of Caremark’s Contracts During the Relevant Time Period

Two contractual provisions contained in both Caremark’s contracts with the pharmacies

and the Part D sponsors are relevant to this case. First, Caremark negotiated Generic Effective

Rate guarantees (“GERs”), which were essentially promises to pay or receive an “agreed upon

average price for drugs over the course of a year.” (Id. at 22.) The GERs operated as a “price

floor but not a price ceiling: Caremark promised to pay at least the agreed-upon average, but could

pay more.” (Id.) The Parties stipulated to the following explanation of a GER:

A “generic effective rate” is a metric that captures the average price of an

aggregate group of drugs. A GER is usually expressed as a set percentage
off the “average wholesale price,” such as “AWP-78%.” So if there were
three drugs that each had an AWP of $100, and the first was priced at $20
(i.e., AWP-80%), the second was priced at $30 (i.e., AWP-70%), and the
third was priced at $40 (i.e., AWP-60%), then the average price would be
$30, and the GER would be AWP-70%.

(Joint Stips. ¶ 93.) 2

Second, the contracts contained provisions regarding the price of individual drug

purchases. A more detailed description of how those rates were chosen is set out in my Summary

Judgment Opinion. (S.J. Op. at 20-22.) Importantly, the individual drug price was often set

according to the “maximum allowable cost” or “MAC” price. (Id.) Caremark controlled the MAC

price and could set different MAC rates for “Medicare beneficiaries [and] non-Medicare

beneficiaries.” (Id. at 22.)

Caremark maintained MAC lists and negotiated GERs for both the Part D sponsors and for

the pharmacies.

2
The “-“ referred to in these figures denotes subtraction. “AWP” stands for “average wholesale price.”

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C. Caremark’s Relationship with the Part D Sponsors

During the relevant time period, Caremark provided PBM services to Part D sponsors such

as Aetna and SilverScript. (Joint Stips. ¶ 56.) Under those contracts, Caremark would negotiate

and pay for “drugs purchased at pharmacies by members of Aetna’s and SilverScript’s health

plans, and Aetna and SilverScript would pay Caremark for those services.” (Id.)

Caremark’s contract with Aetna, signed in 2010, covered both Part D and commercial drug

plans. (Id. ¶ 58.) Caremark’s contract with SilverScript covered only Part D plans. (Id. ¶ 61.)

Both contracts contained a GER provision, or a promise to pay at least an agreed upon average

price for certain drugs over the course of the year. (Id. ¶¶ 60, 62.)

These contracts also contained “pass-through” pricing provisions for Part D purchases,

meaning “Aetna would pay Caremark the same price Caremark paid the pharmacy, plus an

administrative fee.” (S.J. Op. at 42; Joint Stips. ¶ 108 (“The amount billed to SilverScript will be

equal to the amount paid to the Participating Pharmacies.”).) Caremark could, however, earn

“spread” on commercial drugs under its Aetna contracts. For example, if Caremark paid $8 to the

pharmacy for a commercial drug, it could charge $10 to Aetna and retain the $2 difference. (See

S.J. Op. at 43.)

D. Caremark’s Pharmacy Contracts with Walgreens and Rite Aid

During the relevant time period, Caremark also had GER guarantees with Walgreens and

Rite Aid. Unlike the Plan GERs, the Pharmacy GERs were “overall” guarantees, meaning that the

GER covered both Part D and commercial drug purchases. (Joint Stips. ¶¶ 114, 121; S.J. Op. at

23.) Under these contracts, and as explained in my Summary Judgment Opinion:

[I]f the promised average was $10 and Caremark paid $12, Walgreens
would have no obligation to return the extra $2. But, if Caremark paid less
than the agreed-upon average, Caremark would have to make an end-of-
year payment (called a “reconciliation” payment) to make up the difference.

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(Id. at 22-23.) Relator’s claims “pertain to pharmacies and years in which Caremark ended up

having to make a reconciliation payment because its individual sale payments fell short of the

promised average.” (Id. at 23.)

One of Caremark’s goals was to hit, or get as close as possible, to the Pharmacy GER

guarantee. (Id. at 29.) It did so by “managing” the MAC prices to meet the guarantee. The

following illustration explains how this worked:

Suppose Caremark and the pharmacy agreed that Caremark would pay an
average of $10 across all purchases. If Caremark made individual payments
of $6 and $10, this would be an average of $8, and Caremark would have to
make up the $4 shortfall (i.e., $2 × 2) in an end-of-year payment. On the
other hand, if Caremark made individual payments of $6 and $12, Caremark
would be closer to the promised average and only a $2 end-of-year payment
(i.e., $1 × 2) would be required.

(Id. at 29-30.)

E. Caremark’s Budgeted GER with CVS Pharmacy

Unlike Walgreens and Rite Aid, Caremark’s contracts with CVS pharmacy did not set an

average price that Caremark was “required to pay,” but instead set a “target” for the average price

from 2013 to 2016. (Id. at 68; Joint Stips. ¶ 124.) If Caremark missed the “target,” it was not

required to make reconciliation payments to CVS pharmacy at the end of the year. (S.J. Op. at

70.) However, like its contracts with Walgreens and Rite Aid, Caremark “managed” the “target”

by adjusting individual MAC prices as discussed above. (Id. at 27.)

F. Caremark’s Reporting

For the relevant time period, Caremark “provided information to Aetna and SilverScript

that those entities then used to submit drug price reports.” (Id. at 81.) It is undisputed that the

information provided to the Part D sponsors included the individual sale prices Caremark paid to

the pharmacies, not the guaranteed average prices that Caremark needed to hit at the end of the

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year. Accordingly, the Part D sponsors “reported Caremark’s individual sale prices and not

Caremark’s guaranteed average prices.” (Id. at 33.) “Similarly, Aetna’s and SilverScript’s DIR

reports did not account for Caremark’s guaranteed average prices with pharmacies.” (Id.) For

example, if the Pharmacy GER was set at $10, but Caremark paid Walgreens $12 for a specific

Part D medication, Caremark reported to the Part D sponsor—and the Part D sponsor to CMS—a

PDE record indicating a $12 purchase.

G. Relator’s Role

Relator Sarah Behnke was an actuary in Aetna’s Medicare department during the relevant

time period. Sometime in late 2012 or early 2013, Relator used publicly available drug pricing

information to analyze how Aetna’s Part D drug prices compared to the prices available through

other Part D sponsors. (Joint Stips. ¶ 152.) As a result, Relator realized that “Aetna did not pay

the same prices for Medicare Part D drugs as Caremark’s other clients.” (Id. ¶ 153.) At that time,

Relator viewed Caremark’s actions as a financial problem and told “Caremark that its MAC prices

for Part D drugs were too high and that, as a result, Aetna’s Part D plans would not be competitive

in the marketplace.” (Id. ¶ 154.)

Caremark initially informed Aetna that its higher Part D prices were caused by

“marketplace conditions,” but by early 2013, Caremark acknowledged that “Aetna’s competitors

paid less, and Aetna’s higher rates were set to maximize what Caremark was allowed to charge

under their contract.” (S.J. Op. at 42.) When Aetna requested better Part D rates, Caremark’s

Senior Vice President of Underwriting and Actuarial, Allison Brown, responded that Caremark

“already ha[d] better deals at the pharmacies” that were not being “pass[ed] . . . along to” Aetna.

(Id. at 42-43.) Brown elaborated that the situation was “like a see-saw where . . . if [Aetna] pa[id]

less, then [Caremark] [would] have to pay more somewhere else.” (Id. at 43 (internal quotations

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and citations omitted); see also ECF No. 480 (Rel. Proposed Findings of Fact) Scienter Fact ¶ 11.)

Brown’s “see-saw” comment shifted Relator’s focus from a financial concern to a compliance

concern. In her view, the “see-saw” comment referred to Caremark’s GERs with the pharmacies

and meant that “if Part D prices were pushed down, commercial prices would have to go up,” and

if commercial prices went up, Caremark would earn less spread on commercial drugs. (S.J. Op.

at 43.) According to Relator, Caremark was thus “admitting that it was, in effect, profiting on Part

D purchases because inflated Part D prices increased Caremark’s spread on commercial

purchases.” (Id.)

Relator raised her concerns internally, prompting Aetna to conduct a “market check” and

hire outside counsel to conduct an internal investigation. (Joint Stips. ¶ 157; S.J. Op. at 48.) The

internal investigation—which was conducted by Crowell & Moring LLP—resulted in two memos

in 2013 and 2015, respectively. Therein, the Crowell firm essentially opined that Caremark’s

conduct was accepted practice. Caremark relies heavily on these memos to negate the scienter

element of Relator’s case. The memos, however, were filled with qualifiers.

In 2014, while the Aetna investigation was ongoing, Relator filed the instant False Claims

Act case. (ECF No. 1.)

III. PROCEDURAL HISTORY

This case remained sealed until 2018, at which time the Government filed a Notice titled

“The United States . . . is Not Intervening at This Time.” (ECF Nos. 24, 25.) Relator originally

brought suit against CVS Caremark Corporation, CVS Caremark Rx, LLC, CaremarkPCS Health

LLC, and SilverScript Insurance Company. (ECF No. 1.) After I granted in part and denied in

part Defendants’ first Motion to Dismiss, Relator amended her Complaint. (ECF Nos. 78, 79, 86.)

On September 8, 2020, the Parties agreed to dismiss all claims against SilverScript. (ECF Nos.

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98, 109.) On November 16, 2020, Relator filed her Second Amended Complaint. (ECF No. 114.)

There, Relator alleged three separate provisions of the False Claims Act, 31 U.S.C. § 3729,

asserting the interests of the United States of America against Defendants CVS Health Corp.,

Caremark Rx, LLC, CaremarkPCS Health LLC, and CVS Caremark Part D Services, LLC.

After extensive discovery, the Parties filed cross-motions for summary judgment. Below,

and to place the remainder of this Opinion in context, I provide some background on my rulings

at the summary judgment stage.

A. Summary Judgment Ruling on Falsity

In analyzing falsity under the False Claims Act, I interpreted several key terms from the

2010 rule change discussed above. (See S.J. Op. at 58-62.) Most important to my falsity ruling, I

determined what the regulations meant in requiring Part D sponsors to report to CMS the costs

“actually paid” for Part D drugs. I found, as a “matter of law, that when Caremark had a guaranteed

average price with a pharmacy, and Caremark’s individual sale prices in the aggregate fell below

that guaranteed average, the amount Caremark ‘actually paid’ was the guaranteed average price

and not the individual sale prices.” (Id. at 62.) Thus, the amount of subsidies that Aetna and

SilverScript were entitled to depended on “Caremark’s negotiated average prices, not individual

sale prices.” (Id. (citing 42 C.F.R. § 423.308 (effective June 7, 2010)).)

Because CMS relied on the PDE or DIR reports submitted by Part D sponsors, I found that:

as a matter of law, Aetna and SilverScript’s price reports were required to

reflect the prices Caremark “actually paid” for Part D drugs, which was
Caremark’s negotiated average price with the pharmacy. To the extent
Aetna and SilverScript’s PDE records reflected only individual sale prices,
Aetna and SilverScript were required to account for the difference in their
DIR reports.

(Id. at 68.)

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I concluded that because it was undisputed that “price reports for Caremark’s Part D

sponsor clients did not reflect Caremark’s negotiated average prices with Walgreens and Rite Aid

. . . [a]s a matter of law, those reports were therefore false.” (Id.) Accordingly, I granted partial

summary judgment on the issue of falsity for the relevant time period as to Caremark’s dealings

with Walgreens and Rite Aid.

I reached a different result as it relates to Caremark’s relationship with CVS Pharmacy, a

materially different arrangement that that between Caremark, Walgreens, and Rite Aid.

Specifically, Caremark and CVS Pharmacy (both subsidiaries of CVS Health Corp.) maintained a

Budgeted GER, which unlike Caremark’s contracts with Walgreens and Rite Aid, was not

contractual in nature. Because the summary judgment record was not “conclusive on the question

of whether the [Budgeted GER’s] ‘targeted’ average price between Caremark and CVS was what

Caremark ‘actually paid,’” I denied the Parties’ cross-motions on this issue for 2013-2016 time

period when Caremark had a “targeted” average price with CVS Pharmacy. (Id. at 70-71.) 3

I thus left for trial the issue of whether the Budgeted GER target set between Caremark and

CVS Pharmacy was the price that Caremark “actually paid.” I concluded that Relator must show

that this target was “negotiated” and that “the outcome of the[] negotiation [w]as obligatory.” (Id.

at 70.)

B. Summary Judgment Ruling on Causation

I found that although there was a genuine dispute as to whether Caremark caused Aetna to

submit false reports, the same was not true for Caremark’s interactions with SilverScript. For

SilverScript, I concluded that it was undisputed that Caremark: “(1) submitted PDE records on

3
I did, however, grant Caremark’s Motion for Summary Judgment relating to similar agreements between Caremark
and CVS Pharmacy for 2011-2012. (S.J. Op. at 72.)

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SilverScript’s behalf, (2) provided SilverScript draft DIR reports in a ‘CMS-ready format,’ and (3)

certified to SilverScript that these reports included all reportable price concessions.” (Id. at 83.)

Accordingly, I found there was no genuine dispute that the normal consequence, “or at least a

normal consequence [of Caremark’s actions], was that SilverScript would allow Caremark to

submit the reports that Caremark had certified were accurate.” (Id. (emphasis in original).)

Accordingly, at trial, Relator did not need to prove Caremark caused SilverScript to submit false

reports, but was required to prove causation as to Aetna.

After denying the Parties’ other various grounds for summary judgment, the following

elements were left to be determined by a fact finder: (1) falsity specific to Caremark’s relationship

with CVS Pharmacy; (2) materiality; (3) causation specific to Aetna’s submissions to CMS; (4)

scienter; and (5) damages.

C. The Bench Trial

I presided over a two-week bench trial from March 10, 2025 to March 20, 2025. At the

close of Relator’s case in chief, Defendants moved for judgment under Federal Rule of Civil

Procedure 52(c). (ECF No. 459.) I deferred ruling on the Motion and declined rendering any

judgment until the close of evidence. See Fed. R. Civ. P. 52(c); (N.T. Mar. 19, 2025 at 5:5-10.)

Following the close of trial, each party submitted proposed findings of fact and conclusions of law.

(See ECF Nos. 479, 480, 482, 483, 487, 488, 489, 490.) On June 11, 2025, the Parties presented

closing argument. (See ECF No. 492.)

IV. LEGAL STANDARDS

“In an action tried on the facts without a jury or with an advisory jury, the court must find

the facts specially and state its conclusions of law separately.” Fed. R. Civ. P. 52(a)(1). My

findings must be “‘sufficient to indicate the factual basis for the ultimate conclusion.’” United

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States ex rel. Morsell v. NortonLifeLock, Inc., 651 F. Supp. 3d 95, 113 (D.D.C. 2023) (quoting

Kelley v. Everglades Drainage Dist., 319 U.S. 415, 422 (1943)). I need not, however, address

“every factual contention and argumentative detail raised by the parties, or discuss all evidence

presented at trial.” Id. (internal quotations and citations omitted). Accordingly, while I have cited

trial testimony, exhibits, and designated deposition testimony to support my findings of fact, I do

not identify every portion of the record upon which I have relied to make such findings. I note

that the “omission of a citation to a particular portion of the record does not necessarily mean that

[I] did not rely on that portion to make [my] findings of fact.” Id.

The false claims act imposes liability for anyone who, inter alia: (1) “knowingly presents,

or causes to be presented, a false or fraudulent claim for payment or approval” (“presentment”);

(2) “knowingly makes, uses, or causes to be made or used, a false record or statement material to

a false or fraudulent claim” (“false statement”); and (3) “knowingly makes, uses, or causes to be

made or used, a false record or statement material to an obligation to pay or transmit money or

property to the Government, or knowingly conceals or knowingly and improperly avoids or

decreases an obligation to pay or transmit money or property to the Government” (“reverse false

claim”). 31 U.S.C. § 3729(a)(1)(A),(B),(G). Relator has alleged causes of actions under each of

these sections.

Relator’s presentment and false statement causes of action are “complementary” and are

“designed to prevent those who make false records or statements to get claims paid or approved

from escaping liability solely on the ground that they did not themselves present a claim for

payment or approval.” United States ex rel. Int’l Brotherhood of Electrical Workers Local Union

No. 98 v. The Farfield Co., 438 F. Supp. 3d 348, 388 (E.D. Pa. 2020) (emphasis in original)

(internal quotations and citations omitted).

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To make out each of her claims, Relator must prove four elements: (1) falsity; (2)

materiality; (3) causation; and (4) scienter. If liability attaches, Relator must then prove damages.

Relator bears the burden of proof and is required to “prove all essential elements of the cause of

action, including damages, by a preponderance of the evidence.” 31 U.S.C. § 3731(d).

V. FINDINGS OF FACT 4

A. Falsity as to CVS Pharmacy

As previously noted, Part D sponsors were required to report to CMS the prices “actually

paid” at the point of sale to the pharmacies. As it relates to Walgreens and Rite Aid, “when

Caremark had a contractual obligation to Walgreens and Rite Aid to pay at least a certain average

price for drugs, and in fact paid no more than that average price, the negotiated average was what

Caremark ‘actually paid.’” (S.J. Op. at 69.) That is so, because “Caremark’s overall indebtedness

to the pharmacy would increase by the negotiated average price for each purchase, regardless of

what price Caremark put down at the time of sale.” (Id.)

The question, as it pertains to CVS Pharmacy—which did not maintain a formal contract

with Caremark—was whether similar reasoning applies. Specifically, whether Caremark’s

“Budgeted GER” with CVS Pharmacy could be considered “negotiated” and “obligatory” in a

manner consistent with my finding as to Walgreens and Rite Aid. If answered affirmatively,

Caremark’s Budgeted GER with CVS Pharmacy would be considered the price “actually paid”

under CMS regulations. If not, Relator has not carried her burden on this issue.

4
These facts are taken from the Parties’ Proposed Findings of Fact, their respective Responses thereto, the trial
transcripts, trial exhibits, and the Joint Stipulations. (ECF Nos. 452, 466-73, 475, 479, 480, 482, 483.) I also
incorporate the background section of this Opinion as well any rulings made in my Summary Judgment Opinion.

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Caremark and CVS Pharmacy were both subsidiaries of CVS Health Corp. during the

relevant period. (Joint Stips. ¶¶ 2-4, 86.) During that time, a provider agreement covered various

pricing arrangements between CVS Pharmacy and Caremark. (Id. ¶¶ 87-89; see also ECF No. 479

(Caremark Proposed Findings of Fact) Falsity Fact ¶ 1.) Unlike its contracts with Walgreens and

Rite Aid, Caremark’s contracts with CVS Pharmacy did not contain any GER guarantee.

(Caremark Falsity Fact ¶ 3.) Instead, from 2013 to 2016, Caremark and CVS Pharmacy maintained

a Budgeted GER. (Relator Falsity Fact ¶ 1; Joint Stips. ¶ 124.)

The Budgeted GERs were created by “senior executives from Caremark and CVS

Pharmacy.” (Caremark Falsity Fact ¶ 5.) The question of how these GERs were formed was a

key issue at trial. The only witness with insight into how both Caremark and CVS Pharmacy

generated the Budgeted GER was Eva Boratto. From 2013 to 2016, Ms. Boratto was the Controller

and Chief Accounting Officer for CVS Health Corp.—the parent company which owned both

Caremark and CVS Pharmacy. (ECF No. 484 at 4-5.) In that role, she endeavored to learn what

Caremark’s “desires” and “needs were” relating to the Budgeted GER and would “also do the same

separately” for CVS Pharmacy. (N.T. Mar. 14, 2025 at 136:20-137:1.) Boratto would then “bring

that data” to Dave Denton—then Chief Financial Officer of CVS Health Corp., who would discuss

the Budgeted GER with other “senior executives . . . and ultimately decide” the rate at which the

Budgeted GER would be set. ((N.T. Mar. 14, 2025 at 137:2-6; PTX-0319 at 28 of 252 (listing

Denton as “Chief Financial Officer of CVS Health Corporation since January 2010”).) Both

Parties agree that the purpose of this process—and the resulting Budgeted GER—was “in part to

ensure that the planning assumptions for both businesses would align.” (ECF No. 482 (Rel.’s

Resp. to Caremark Proposed Facts) Falsity Fact ¶ 5).)

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i. Similarities Between Budgeted GERs and GER Guarantees

Once the Budgeted GERs were decided, Caremark tracked performance, relative to the

Budgeted GER, in a similar manner as it tracked performance relative to the Walgreens and Rite

Aid GER guarantees. (See ECF No. 483 (Caremark Resp. to Rel.’s Proposed Facts) Falsity Fact

¶ 5; Rel.’s Resp. to Caremark Falsity Fact ¶ 9.) Similarly, as it did with Walgreens and Rite Aid,

Caremark managed MAC prices to achieve or come close to achieving the Budgeted GER. (N.T.

Mar. 13, 2025 at 230:2-13 (Domenico Gugliuzza agreeing that with respect to MAC price

management, what Caremark did “for CVS Pharmacy was the same as what [Caremark did] for

Rite Aid and Walgreens.”).) Perhaps the best example of this was Caremark’s actions in December

of 2016. Then, Caremark changed MAC prices for commercial drugs by a factor of 1.6674 to

ensure that Caremark achieved the Budgeted GER for 2016. (Rel. Falsity Fact ¶ 7 (citing PTX-

0099).) Caremark acknowledged this resulted in increased payments to CVS Pharmacy totaling

$13 million. (PTX-0099; N.T. Mar. 17, 2025 at 27:22-28:9 (Caremark Corporate Witness Elena

Kinney testifying about the 2016 end-of-year MAC price adjustment).) Caremark was “very

effective” at managing individual drug prices to achieve, in the aggregate, the Budgeted GER.

(Rel. Falsity Fact ¶ 8; id. ¶ 6 (“Caremark changed the MAC prices (individual drug prices) for

commercial lock-in clients (also known as spread clients) to ensure that the budgeted CVS

Pharmacy overall GER was hit.”).)

ii. Differences Between Budgeted GERs and GER Guarantees

Unlike the contractual GER guarantees, the Budgeted GERs with CVS Pharmacy could

and did change throughout the year. (Caremark Falsity Fact ¶ 7.) Although Relator disputes this,

I credit the testimony of three separate Caremark employees who explained that the Budgeted GER

was a “forecast” or “budget assumption” which was subject to change. (See N.T. Mar. 14, 2025

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at 73:4-16 (Domenico Gugliuzza examining the CVS Pharmacy budget file for 2015); id. at 140:2-

5 (Eva Boratto explaining that the Budgeted GER “can change . . . [j]ust like any other budget

assumption”); N.T. Mar. 10, 2025 at 120:8-12 (John Lavin explaining that the Budgeted GER was

conveyed to him more than once per year).)

The key difference between the Budgeted GERs and the GER guarantees concerns what

happened if Caremark missed the Budgeted GER target. Unlike the contractual GER guarantees,

the Budgeted GERs between Caremark and CVS Pharmacy did not provide for a reconciliation or

“claw back” if Caremark underpaid relative to the Budgeted GER. (Caremark Falsity Fact ¶ 6;

N.T. Mar. 10, 2025 at 196:6-16 (former Caremark employee John Lavin explaining that the

Budgeted GER did not impose any financial obligation on Caremark and that, to his knowledge,

Caremark never made a reconciliation payment to CVS Pharmacy); N.T. Mar. 14, 2025 at 150:6-

151:24 (Eva Boratto explaining that Caremark did not make end-of-year reconciliation payments

to CVS Pharmacy); id. at 72:13-17 (Domenico Gugliuzza explaining that the “biggest difference

[between the contractual GERs and the Budgeted GER] is at the end of the year there’s no payment

that was made between [Caremark and CVS Pharmacy].”). Indeed, in 2015, where Caremark did

not meet the Budgeted GER, it was not required to make any true-up payment to CVS Pharmacy.

(See N.T. Mar. 14, 2025 at 73:4-75:2; PTX-0116A.)

Another difference between the Budgeted GERs and the GER guarantees was the form or

dissemination of the GERs. Whereas the GER guarantees were set at the beginning of each year,

and the percentage off AWP was included in Caremark’s contracts with Walgreens and Rite Aid,

the same cannot be said for the Budgeted GERs.

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In an effort to establish what the Budgeted GERs were and that they were both obligatory

and negotiated, Relator presented evidence from various documents and spreadsheets. 5 For 2013,

Relator pointed to an internal slideshow from August 20, 2013, stating that “CVS [Pharmacy] was

set to committed rate of 79.8%” and that the “Current Cap” for CVS Pharmacy was set at 79.8%.

(Relator Falsity Fact ¶ 12 (citing PTX-0190, PTX-0639).) That slideshow, however, also explains

that Caremark “ha[s] an agreement with CVS [Pharmacy] to reimburse [the pharmacy] at 79 for

2013.” (PTX-0190 at 1 (emphasis added).) She also cites a 2013 CVS pharmacy reconciliation

look-a-like document showing that at the end of 2013, Caremark had managed the MAC prices of

both commercial and Part D drugs to achieve a realized Budgeted GER of 79.82%. (See Rel.

Falsity Fact ¶ 12 (citing PTX-0106A).)

For 2014, Relator offered into evidence a 2014 pharmacy reconciliation look-a-like

document showing that at the end of 2014, Caremark had managed the MAC prices of both

commercial and Part D drugs to achieve a realized Budgeted GER of 81.16%. (See id. (citing

PTX-0115A).)

For 2015, Relator provided a pharmacy reconciliation look-a-like document which

contains a cell titled “2015 Target All Other” with a value of 83.81%. (See id. (citing PTX-0116A

at 10).) Underneath that cell, a cell titled “Actual to date” has a value of 83.08%. (PTX-0116A.)

Finally, for 2016, Relator cites a 2016 pharmacy reconciliation look-a-like document

which shows an “Overall” “Generic” “Discount” rate of 84.30%. (See Rel. Falsity Fact ¶ 12 (citing

PTX-0117A at 36.).) For all years at issue, and as it relates to CVS Pharmacy, Caremark paid less

5
I discuss the Budgeted GER only to illustrate the Budgeted GER amounts Relator attempted to prove at trial. As
explained later, I do not find that Relator proved by a preponderance of the evidence that the amounts discussed in
this section represent a “negotiated” and “obligatory” GER.

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(deeper discount) for commercial drugs and more (shallower discount) for Part D drugs relative to

the Budgeted GER.

Relator describes the 2013, 2015, and 2016 numbers as “explicit targets.” (See PD-016

(citing PTX-190, PTX-115A, PTX-116A, PTX-117A).) However, Relator’s proposed Budgeted

GER numbers are taken from different cells located in different tabs of different reconciliation

look-a-like excel spreadsheets. 6 Moreover, the 2013 internal slideshow listed two different target

numbers and no witness at trial confirmed which number was the target for 2013.

B. Materiality and Scienter 7

The 2010 rule change and the impact thereof was well known throughout the industry.

(Rel. Materiality Fact ¶ 1.) Under the rule change, Part D sponsors were required to “report to

CMS the price actually paid to the pharmacy.” (PTX-0192 (June 6, 2009 CMS Press Release) at

1.) Moreover, any “difference between the price paid by the plan to the PBM and the price paid

by the PBM to the pharmacy [was required to] be reported as administrative cost.” (Id. at 1-2.)

The purpose of the rule change was to “ensure that sponsors’ administrative costs [were] not

included in the drug costs used to determine how much the beneficiary [paid]” and that the amounts

subsidized by CMS did not include such costs. (Id.) In making this change, CMS sought to “bring

greater transparency to drug price reporting,” and explained that “[m]aking prices more transparent

will help plans negotiate lower prices and administrative fees.” (Id.) Caremark was aware of the

2010 rule change’s requirements and purpose. (See N.T. Mar. 13, 2025 at 173:22-174:13

(Caremark Corporate Witness Rebecca Justice).)

6
Caremark informed Relator that “[t]he budgeted generic effective rate for CVS Pharmacy can be identified in
documents such as CVS-Behnke-1813534,” which is a reconciliation look-a-like document in evidence as PTX-0106.
(PTX-125 at 19 of 36.) This fact, without more, does not establish that the various numbers Relator located in these
documents actually were the Budgeted GERs for the years in question.
7
Many of the facts relevant to materiality are also relevant to scienter.

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Caremark also understood that “CMS required and relied on accurate and complete

Medicare Part D drug price reporting” and that such reports were an “express condition of payment

by CMS.” (Caremark Resp. to Rel. Materiality Fact ¶ 4.) In addition, CMS required Part D

sponsors and their PBMs to attest to the truthfulness of the pricing data submitted. (See Joint Stips.

¶ 49 (quoting 42 C.F.R. § 423.505(k)(3)).) Caremark submitted pricing data to Part D sponsors,

who in turn, incorporated such data into PDE and DIR reports which were sent to CMS. CMS

relied on truthful and accurate price reporting, including “post point-of-sale adjustments” to

accurately calculate subsidies and reimbursements. (See N.T. Mar. 13, 2025 at 173:11-18

(Caremark corporate witness Rebecca Justice).) As a result, CMS’s payments were conditioned

on accurate PDE and DIR reports.

i. DIR Reporting Requirements

Each year, CMS issued guidance which laid out different categories of reportable DIR. In

2011, CMS made clear that “PBM penalty payments and repayments that impact Part D drug costs”

were “[c]onsidered [reportable] DIR.” (DX220.0008; see also DX 219.0026 (Final Medicare Part

D DIR Reporting Requirements for 2010 stating the same).) Indeed, Part D sponsors were required

to report, in DIR Column # 9, “[a]pplicable pharmacy adjustments that reduce the total payments

made to the pharmacy . . . as a positive adjustment that will serve to reduce the sponsor’s drug

costs.” (DX220.0016.) Both Caremark and Aetna employees were aware of this guidance. (N.T.

Mar. 10, 2025 at 84:6-10 (Caremark employee John Lavin); (N.T. Mar. 19, 2025 at 67:1-6 (Aetna

in-house counsel Charles Klippel testifying about DIR guidance # 9).) This requirement was

understood to include, as reportable, “monies that were taken back from the pharmacies or

withheld from the pharmacies that were not covered under other parts of DIR.” (N.T. Mar. 19,

2025 at 66:5-25 (Aetna Deputy General Counsel Charles Klippel discussing DIR # 9).)

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ii. What was Reportable under DIR Guidance # 9

At trial, a key issue was whether Caremark’s contracts with the pharmacies, which were

one-way guarantees, functioned as two-way guarantees. In a one-way guarantee, a PBM was

required to make a year-end reconciliation payment to a pharmacy if it underpaid relative to the

GER, but the pharmacy was not required to do the same if the PBM overpaid relative to the GER.

(N.T. Mar. 18, 2025 at 156:7-158:17 (Former Acting Director of CMS Leslie Norwalk explaining

the difference between one-way and two-way guarantees).) In a two-way guarantee, the pharmacy

was required to pay back the PBM if the PBM overpaid relative to the GER, and, the PBM was

required to pay the pharmacy if the PBM underpaid relative to the GER.

Industry participants agreed that a two-way GER guarantee created reportable DIR. (See

N.T. Mar. 12, 2025 at 112:14-16 (Aetna actuary Jean Walker testifying that “in [a] two-way

guarantee, if we overpaid the pharmacies, they would pay us money back. So that would appear

as a positive DIR.”); N.T. Mar. 18, 2025 at 155:10-13, 156:7-23 (Leslie Norwalk agreeing that a

“two-way guarantee . . . must be reported on DIR but [a] one-way guarantee does not need to be

reported on DIR” and that “industry participants” would have understood this difference).) Indeed,

in 2015 while Aetna’s investigation into Caremark’s pricing scheme was wrapping up, Aetna “took

pharmacy contracting in-house [and] utilized two-way pharmacy guarantees that could result in

money paid from pharmacies to Aetna, [and] reported the money pharmacies paid Aetna back as

DIR, and continued to report point-of-sale prices on PDEs.” (Caremark Scienter Fact ¶ 25.)

iii. Caremark’s Contracts with Walgreens and Rite Aid

In 2010, Caremark entered into its first overall GER with Walgreens which covered both

Medicare Part D and commercial claims. (Rel. Scienter Fact ¶ 2.) Although pharmacies like

Walgreens had been requesting GER guarantees for years, there is no evidence that before 2010,

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any industry participant had entered into an overall GER agreement. (See N.T. Mar. 10, 2025 at

97:23-98:17 (Caremark employee John Lavin explaining that the 2010 Walgreens contract, which

he negotiated, was “one of the first [overall Pharmacy GERs] for any pharmacy anywhere that”

Caremark entered into and that he could not recall an example of any overall GER predating the

2010 agreement).)

In form, Caremark’s contracts with Walgreens and Rite Aid were one-way GER

guarantees. (N.T. Mar. 10, 2025 at 166:13-169:22 (John Lavin explaining Caremark’s GER

guarantees).) In function, however, these contracts acted as a two-way guarantee. This is because

Caremark’s contracts contained an “offsetting” provision. Under this provision, Caremark could

subtract from any monies owed due to underpayments on commercial drug purchases relative to

the overall GER, the amount it overpaid on Part D purchases relative to the overall GER. (See

DX046.001, 004 (Caremark’s 2013 and 2014 contracts with Rite Aid) (“[A]ny amounts owing

pursuant to this subsection [] may be offset against any amounts received by [Rite Aid] that

exceeded the Contractual Reimbursement.”).)

The economic effect of Caremark’s one-way guarantee was the same as if it had a two-way

guarantee with the pharmacies. (N.T. Mar. 14, 2025 at 125:6-128:11 (Rite Aid 30(b)(6) witness

Richard Stoneking agreeing that the net effect of a two-way guarantee and a one-way guarantee

with an offsetting provision would be the same).) This impact is most readily apparent when

looking at end-of-year reconciliation spreadsheets kept by Caremark for both Walgreens and Rite

Aid. A series of demonstratives filed by Relator illustrate the economic impact of Caremark’s

one-way guarantees and offsetting provisions. (See PD-001, PD-002, PD-003, PD-004.) The

demonstratives, which take data from Caremark’s reconciliation spreadsheets, demonstrate two

key facts: (1) from 2013-2014, Caremark underpaid on commercial drugs and overpaid on Part D

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drugs relative to the overall GER guarantees; and (2) the offsetting provisions in the Walgreens

and Rite Aid contracts allowed Caremark to pay less in end-of-year reconciliation payments to the

pharmacies. For example:

(PD-001 (citing PTX-0068; PTX-0096).) 8

As shown in PD-001, for Rite Aid in 2013, the overall GER guarantee was 78.60%. (See

PTX-0096 at 1.) At the end of the year, however, Caremark had managed MAC prices so that

commercial drug purchasers received a deeper discount (AWP-80.44%) and Part D purchasers

received a shallower discount (AWP-76.05% and 75.98%). (See PTX-0068.) Relative to the

overall GER, this meant that Caremark underpaid on commercial drugs by over $51 million

dollars. Because, however, Caremark overpaid, relative to the GER, on Part D purchases to the

8
All data except for the yellow cells are taken directly from end-of-year reconciliation documents that Caremark kept
in the course of its business with Rite Aid. Gen Eff Rate is the end-of-year realized GER. “Gen AWP – Performance”
is the difference between the amount paid to the pharmacy for individual drug sales in the aggregate and what was
contractually owed for those same drugs under the overall pharmacy GERs. (Rel. Scienter Fact ¶ 4 n.5.) Put simply,
the yellow cells are calculated using the following formula: (Gen AWP * overall Pharmacy GER guarantee) – (Gen
AWP * Gen Eff Rate).

Caremark does not dispute that the calculation used to achieve the yellow cells is correct.

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tune of some $44 million, Caremark only owed Rite Aid approximately $7.5 million in end-of-

year reconciliation payments.

The same process—including overpayments on Part D and underpayments on commercial

relative to the overall GER—repeated for 2013 and 2014 at both Walgreens and Rite Aid. (See

PD-002 (citing PTX-0069; PTX-0096); PD-003 (citing PTX-0073; PTX-0062); PD-004 (citing

PTX-0074; PTX-0061); PD-004 (citing PTX-0074; PTX-0061).) An illustration is helpful in

understanding this phenomenon:

(See PD-009 (citing PTX-0068, PTX-0069, PTX-0073, PTX-0074, PTX-0096, PTX-0455, PTX-

0456).) 9 As made clear by this table, from 2013 to 2014 at Rite Aid and Walgreens, the average

discount Caremark paid for Part D drugs at the pharmacies and reported to Aetna and SilverScript

was consistently shallower than the overall GER it maintained with the pharmacy. Put another

9
Average discount refers to the average discount off AWP calculated from PDE and DIR reports submitted by
Caremark to CMS. (See N.T. Mar. 17, 2025 at 139:20-140:2.)

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way, during this time period, Caremark consistently paid more for Part D drugs and less for

commercial drugs relative to the overall GER it maintained with the pharmacies.

Although nearly every Caremark-affiliated witness testified that there was no strategy to

increase prices on Part D so that it could decrease prices on commercial drugs, internal Caremark

documents belie that position. Indeed, one slideshow—which incorporated input from Jon

Roberts, Executive Vice President of CVS Health Corp.—showed that to hit the 2013 and 2014

Rite Aid GER, Caremark planned to manage the GER by paying shallower discounts for Part D

drugs and deeper discounts for commercial drugs. (See PTX-0312A at 8; N.T. Mar. 10, 2025 at

139:22-141:5 (Discussing PTX-0312A, John Lavin agreeing that the document showed “an intent

to manage on Medicare Part D . . . paying more than the overall GER and managing the commercial

line to pay less than the overall GER”).)

(PTX-0312A at 8 of 9.)

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Moreover, of the five fact witnesses who previously worked for Caremark and testified that

they did not believe Caremark’s one-way Pharmacy GER guarantees triggered PDE or DIR

reporting requirements, four of them testified that their knowledge respecting Caremark’s

pharmacy contracts was incredibly limited. (See N.T. Mar. 13, 2025 at 199:18-200:18 (Caremark

30(b)(6) witness Rebeca Justice explaining that she has never seen a Caremark/pharmacy

reconciliation report and that she was unfamiliar with the pharmacy reconciliation process); N.T.

Mar. 13, 2025 at 105:15-19 (Caremark employee James Margiotta explaining that during the

relevant time period, he did not “have access to detailed network pharmacy contracts”); N.T. Mar.

17, 2025 at 73:2-74:14 (Caremark employee David Azzolina explaining that during the relevant

period, he: (1) had not reviewed Caremark’s pharmacy contracts; (2) did not remember what

Caremark’s subject matter experts reviewed before instructing him to sign certain attestations; (3)

was not even aware that Caremark’s contracts contained an “overall GER inclusive of both

commercial and Medicare D lines of business”; and (4) had no understanding of how these overall

GER guarantees were reconciled post-point-of-sale); N.T. Mar. 17, 2025 at 56:16-22 (Caremark

employee Elena Kinney explaining that she never saw Caremark’s end-of-year reconciliation

documents).) Accordingly, because these witnesses either had not seen the pertinent documents,

or were otherwise unaware of how Caremark’s pharmacy contracts worked, I assign little weight

to their testimony.

iv. Caremark’s Discussions with Others in the Industry

At trial, it was hotly contested whether Caremark sufficiently informed both CMS and

Aetna about its overall GER guarantees with Rite Aid and Walgreens. This point is important

because, if faced with full disclosure, Aetna and CMS’s actions—or lack thereof—could rebut

both scienter and materiality.

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1. The Aetna Investigation 10

Three individuals intimately involved in Aetna’s internal investigation of Caremark’s

pricing scheme testified at trial: Jean Walker, Sarah Behnke, and Charles Klippel. Aetna’s

investigation yielded two conclusions: (1) Caremark provided pass-through pricing and did not

retain spread; and (2) Caremark’s overall GER guarantees with the pharmacies did not create

reportable DIR not already provided to Aetna. (See Caremark Scienter Fact ¶¶ 23, 24.)

The first conclusion was based on an investigation and report conducted by a third-party

auditing company, the Burchfield Group. (See PTX-0670A.) The Burchfield Audit focused in

pertinent part on whether the pass-through pricing reported by Caremark to Aetna was accurate.

(Id. at 5 of 65.) Although Burchfield had access to Caremark’s contracts with the pharmacies, the

scope of the audit “did not encompass Direct and Indirect Remuneration (“DIR”) reporting

provided by Caremark to Aetna.” (Id.; see also id. at 14 of 65 (“While Burchfield cannot relay

details found in the pharmacy contracts due to their proprietary nature, Burchfield can confirm that

the prices charged to Aetna for Medicare enrollees were the rates paid by Caremark for the point

of sale prescriptions.”).) Moreover, “Burchfield did not address whether Caremark’s arrangements

with pharmacies . . . could involve amounts reportable as DIR or price concessions to be reported

and passed back to Aetna” because DIR reporting “was outside the scope of the audit.” (Id. at 14

of 65.) Accordingly, and despite its access to Caremark’s contracts with the pharmacies, the

Burchfield audit is not relevant to the question of whether Caremark’s overall GER guarantees and

the offsetting provisions therein created reportable DIR.

10
For the sake of brevity, and because the facts and circumstances surrounding the Aetna investigation are not truly
disputed, I incorporate the Background Section of my February 3, 2025 Memorandum Opinion and reference only
findings of fact which the Parties disputed at trial. (ECF No. 412 at 2-7.)

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The second conclusion—that Caremark’s pricing practices did not trigger additional DIR

reporting obligations—was based on analysis provided by attorney Art Lerner from the Crowell

& Moring law firm. (See N.T. Mar. 19, 2025 at 78:14-79:1.) Lerner relied on representations

made by Caremark and Caremark’s outside counsel, Epstein Becker and Green, and thereafter

submitted two memos to Charles Klippel and Aetna. (Id.; see also N.T. Mar. 19, 2025 at 60:8-17

(Klippel explaining that, other than Caremark’s representations, there was no other source for

Lerner’s investigation); id. at 128:4-17 (Klippel explaining he was privy to neither Caremark’s

pharmacy contracts nor its post-point-of-sale reconciliation spreadsheets) Lerner did not

independently corroborate Caremark’s representations. (See DX003.0005 (“We have not made

any independent confirmation of [Caremark’s] representations and attestations.”); see also id.

(Lerner explaining that he did not have “visibility into all the facts [Caremark] considered or into

how [Caremark] reached its judgment or the legal analysis it performed in doing so”).)

This investigation lasted years and by March of 2013, the scope of the investigation was

focused on how Caremark “reconciled post point-of-sale, [its] pass-through contract with Aetna

and their pharmacy contracts.” (N.T. Mar. 19, 2025 at 120:10-14 (Charles Klippel discussing

DX156).)

Caremark understood Aetna’s concern to be “whether ‘true-up’ payments from or to a

pharmacy to [Caremark] under a pharmacy guarantee [counts as] DIR.” (DX005.0004.) Caremark

explained that pharmacies “have not, and do not, make true up payments to [Caremark] under a

guarantee.” (DX005.0005 (emphasis in original).) What Caremark failed to explain, however,

was that its contracts with the pharmacies contained offsetting provisions that were economically

identical to two-way GER guarantees, which both Parties agree would create reportable DIR. (See

DX162; DX005; DX006.) Indeed, at trial, Charles Klippel testified that he was never informed of

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any offsetting provision or the effect thereof. (N.T. Mar. 19, 2025 at 137:17-22; id. at 140:17-22

(Klippel responding to a question about Caremark’s offsetting provisions and explaining that the

offsetting provisions were “not something [he] knew about at the time” and that he was “not even

aware of what [counsel was] talking about here”).)

To summarize, Caremark did not inform Lerner or Aetna about the offsetting provisions,

did not share its contracts or reconciliation spreadsheets with Lerner or Aetna, and Lerner and

Aetna did not independently verify the representations made by Caremark. Consequently, I place

little weight on Aetna’s investigation and absolution of Caremark’s conduct. Aetna simply did not

know enough to make an adequate determination as to whether Caremark’s pricing practices with

the pharmacies created reportable DIR.

2. Caremark’s Interactions with CMS

“CMS frequently interacts with industry participants in a wide range of formal and informal

settings, ranging from formal comments on proposed regulations and guidance to informal

telephone and email conversations.” (Caremark Materiality Fact ¶ 2.) Indeed, when CMS “has

questions or concerns about a price-reporting practice, CMS does not hesitate to express them.”

(Id. ¶ 10.)

Caremark’s Vice President of Finance for Medicare Part D, David Azzolina, was the

“individual at Caremark that had responsibility for CMS reporting on behalf of Medicare clients

related to DIR” during the relevant time period. (N.T. Mar. 17, 2025 at 74:20-24.) In 2015,

Azzolina provided attestations on behalf of Caremark to Aetna regarding pricing data for contract

year 2014. (See PTX-0094A.) At that time, Azzolina had not reviewed Caremark’s pharmacy

reconciliation spreadsheets or its contracts with the pharmacies. (See N.T. Mar. 17, 2025 at 73:2-

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6.) Indeed, he did not even know that Caremark’s contracts with the pharmacies contained “an

overall GER inclusive of both commercial and Medicare D lines of business.” (Id. at 73:25-74:8.)

In addition to overseeing CMS reporting compliance, Azzolina was also Caremark’s point

person for CMS communications. In March of 2016, CMS contacted Azzolina to learn more about

Caremark’s GER guarantees with the pharmacies. (Joint Stips. ¶ 184.) On a March 8, 2016 phone

call, the CMS official responsible for guidance on DIR reporting requirements explained that CMS

was concerned with whether Pharmacy GER guarantees allowed PBMs to “claw back” money

from pharmacies. (Caremark Materiality Fact ¶ 4; N.T. Mar. 17, 2025 at 79:5-8 (Azzolina agreeing

that “CMS’s main focus on the March 8[] call was on GERs and how they were reconciled if

Caremark paid more to a pharmacy than the GER”).)

On May 26, 2016, Azzolina sent a follow up email to CMS. (See PTX-0026.) Azzolina

acknowledged that, before sending that email, he had not “personally” reviewed any of Caremark’s

pharmacy contracts or reconciliation spreadsheets. (See N.T. Mar. 17, 2025 at 85:8-14.) Instead,

he relied on “subject matter experts,” the names of whom he could not recall. 11 (Id. at 85:14-24.)

Azzolina acknowledged that he was answering questions from CMS which “fell outside [his] area

of responsibility.” (Id. at 86:14-15.) Still, without understanding the nature of these contracts,

11
James Margiotta—who interfaced with Aetna on behalf of Caremark during the relevant time period—testified that
the subject matter experts he relied on in signing similar attestations were “primarily [Caremark’s] legal counsel.”
(N.T. Mar. 13, 2025 at 156:1-17.) Caremark has repeatedly explained that it is not furthering an “advice of counsel
defense.” (See ECF No. 412 (Opinion denying Relator’s Motion to Preclude testimony and evidence relating to the
Aetna investigation based on the “sword and shield doctrine” in part because Caremark asserted that it was not relying
on advice of counsel.).) Margiotta’s testimony was stricken because his reliance on Caremark’s counsel in signing
these attestations could be construed as an attempt to back-door an “advice of counsel” defense.

Because Azzolina himself was unqualified and unprepared to answer CMS’s questions or sign attestations, I need not
concern myself with whether Azzolina’s subject matter experts were also Caremark’s counsel. To the extent that these
subject matter experts were Caremark’s counsel, I would have similarly stricken such testimony. Moreover, because
these subject matter experts were unnamed and the materials they relied on unknown, I do not place any weight on
these so-called experts.

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Azzolina informed CMS that “the example discussed where the pharmacy is required to pay back

to the plan a portion of the point of sale price as an adjustment is not applicable to our GER

arrangements with network pharmacies.” (PTX-0026.) This email did not disclose the existence

of any offsetting provision, and in fact, at that time, Azzolina was “not familiar with” Caremark’s

offsetting provisions. (N.T. Mar. 17, 2025 at 96:15-22.)

Despite knowing that CMS was “very concerned . . . [that] PBMs [were] over performing

on [Pharmacy GER] contracts [and] clawing back those dollars,” Caremark did not provide to

CMS its pharmacy contracts, reconciliation spreadsheets, or any other documents which would

have informed CMS about the offsetting provisions. (Id. at 114:5-9; Rel. Scienter Fact ¶ 21.)

Despite knowing that it could ask CMS for clarification, Caremark never asked CMS whether its

one-way GER pharmacy guarantees and the offsetting provisions contained therein triggered DIR

reporting obligations. (Rel. Scienter Fact ¶ 22.)

CMS also discussed Caremark’s reporting practices with Aetna in February 2015.

(Caremark Materiality Fact ¶ 12.) CMS auditors issued a final report which “did not note any

issue concerning Caremark’s Pharmacy GER guarantees” and stated that Aetna’s PDE and DIR

reports were “fairly stated, in all material respects.” (Id. ¶ 14 (citing DX210).) Again, however, I

place very little weight on these facts because as discussed supra, Aetna did not have enough

information about the form and function of Caremark’s pharmacy contracts to adequately explain

Caremark’s pricing scheme to CMS.

In sum, I find that Caremark’s argument—that it fully disclosed to CMS and Aetna its

pricing arrangements with the pharmacies—deserves little consideration.

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C. Causation as to Aetna

Part D sponsors such as Aetna were required to submit both PDE records and DIR reports

to CMS. (Joint Stips. ¶¶ 126-129.) PDE records were submitted each time a covered Part D drug

was dispensed to a Part D beneficiary. (Id. ¶ 127.) DIR reports, which covered direct and indirect

remuneration after a prescription is adjudicated at the point of sale, were submitted by the Part D

sponsor at the end of each year. (Id. ¶ 130.) DIR reports captured “11 different categories” of

DIR and CMS issued detailed guidance each year instructing Part D sponsors and PBMs on what

was reportable DIR. (Id. ¶¶ 131, 135-36.)

Aetna maintained its own claims adjudication system which it called the “Aetna Pharmacy

Management Claim Adjudication System.” (Caremark Causation Fact ¶ 5.) Claims adjudication

is “the process that determines what a pharmacy will be reimbursed for a prescription drug at the

point of sale.” (Joint Stips. ¶ 20.) Nevertheless, Part D sponsors like Aetna “often rely on PBMs

to perform claims adjudication services.” (Id. ¶ 21.) Aetna relied on Caremark to submit certain

information with respect to both its PDE records and DIR reports.

i. PDE Records

Caremark had the ability to set MAC prices—or price of an individual drug at the point of

sale—for multi-source generic drugs. (Id. ¶¶ 27, 29, 74, 85, 90, 150.) Once a drug was purchased

by an Aetna Part D beneficiary, Aetna received two pieces of information which it would input

into its claims adjudication system. First, Aetna would learn from the pharmacy that a prescription

was filled and second, Caremark would provide “pricing assumptions to determine the point of

sale paid amount.” (N.T. Mar. 18, 2025 at 39:4-8; id. at 42:4-13 (Aetna 30(b)(6) witness Clifford

Passuello explaining Aetna’s claims adjudication system).) Once those pricing “assumptions” or

“instructions” were provided by Caremark, the Aetna system implemented the instructions “in an

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automated fashion.” (Id. at 57:4-7.) In turn, Aetna’s system used those instructions “to calculate

the exact dollar amount that [was] reported to CMS in the PDE data.” (Id. at 57:8-12.) In short,

the PDE data Aetna supplied CMS was generated from information Caremark provided.

ii. DIR Reports

Both Aetna and Caremark contributed to the DIR reports submitted to CMS. Caremark

provided Aetna “draft reports with all the information [it] had in [its] systems.” (N.T. Mar. 13,

2025 at 186:14-17 (Caremark employee Rebecca Justice explaining Caremark’s involvement in

client DIR reporting).) From 2011 to 2014, Caremark provided “DIR amounts to Aetna in the

form of . . . an Excel spreadsheet based on the CMS template for DIR reports in which . . . Caremark

added DIR amounts to [] categories” 5, 9, 10, and 11. (N.T. Mar. 18, 2025 at 55:14-20.) “Aetna

did not change any of the values Caremark provided in the prepopulated DIR template.” (Joint

Stips. ¶ 163.) Caremark knew that the DIR templates it provided to Aetna did not report “any

amounts derived from Caremark’s overall Pharmacy GER calculations.” (Rel. Causation Fact ¶

5.)

iii. Aetna’s Reliance on Caremark’s PDE and DIR Data

From 2012 through 2014, Caremark provided Aetna with attestations which certified, in

pertinent part, that Caremark knew the pricing information it provided affected the calculation of

CMS payments and that the data would be used to obtain Federal reimbursement. (PTX-0078

(2012 Caremark attestation to Aetna); PTX-0079 (2013 Caremark attestation to Aetna); PTX-0094

(2014 Caremark attestation to Aetna).) Aetna “required that Caremark provide attestations that

the prices reported to CMS were true, accurate and complete, and Caremark did so.” (Rel.

Causation Fact ¶ 7.) These attestations were meant to “verify that [Caremark was] reporting to

Aetna in accordance with the identified rules and regulations . . . regarding negotiated prices and

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direct and indirect remuneration.” (N.T. Mar. 13, 2025 at 148:3-9 (Caremark employee James

Margiotta, who signed some of the attestations, explaining their purpose).) Aetna relied on the

accuracy of Caremark’s submissions because “the attestations [Caremark provided] were [meant]

to tell [Aetna] things that [Caremark] would know [and] that [Aetna] wouldn’t.” (N.T. Mar. 19,

2025 at 42:15-21 (Aetna Deputy General Counsel Charles Klippel explaining why Caremark’s

attestations were necessary); N.T. Mar. 18, 2025 at 38:19-23 (Passuello testifying that Aetna relied

on Caremark’s attestations that “the assumptions [Caremark] gave [Aetna] is what [Aetna] should

be paying and what’s paid to the pharmacy”); Id. at 59:10-23 (Passuello agreeing that “Aetna

required these attestations because Aetna relied on Caremark to provide the PDE and DIR amounts

that were then, in fact, reported to CMS”).)

As discussed previously, after Relator raised her concerns about Caremark’s pricing

practices, Aetna hired Art Lerner to “investigate whether Caremark’s overall Pharmacy GER

guarantees . . . triggered any price-reporting obligations under CMS regulations.” (Caremark

Causation Fact ¶ 10.) Throughout Aetna’s investigation, Aetna did not reopen any of its previous

PDE or DIR reports submitted to CMS, relied on “all the information” Caremark provided, and

made an “independent decision to continue reporting in the same manner.” (N.T. Mar. 19, 2025

at 106:19-23.)

It is worth repeating that the “information available to” Aetna, however, was provided

entirely by Caremark. And, as discussed supra, Caremark failed to inform Aetna or its outside

counsel of the offsetting provisions contained in its pharmacy contracts and the reportable DIR

created as a result.

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The Aetna investigation described above was the only action Aetna took to verify the

pricing instructions, DIR templates, and Caremark attestations. As a result, Aetna did not know

the true nature of Caremark’s pricing arrangements with the pharmacies.

D. CVS Health Corporation’s Liability

Relator proceeds against Defendants CVS Health Corp., Caremark Rx, L.L.C.,

CaremarkPCS Health, L.L.C., and Caremark Part D Services, L.L.C. (Joint Stips. ¶¶ 1-4.)

Defendants provided an organizational chart setting out the relationship between these

organizations:

(Caremark Trial Demonstratives (ECF No. 463) at 123 of 123.) Defendants dispute liability as to

CVS Health Corp., the parent company.

CVS Health Corp. was not a party to Caremark’s PBM agreement with Aetna. (See

DX011.0010 (this contract, which covered the years in question, was between Aetna and

CaremarkPCS Health, L.L.C. (on behalf of Caremark RX, L.L.C.)).) Similarly, CVS Health Corp.

was not a party to Caremark’s PBM contracts with SilverScript. (See DX026.0001.) In addition,

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CVS Health Corp. was not a party to Caremark’s contracts with either Rite Aid or Walgreens.

(See DX042.0001 (Addendum to Network Reimbursement Agreement as between PCS Health

Systems, Inc. and Rite Aid Corp.); DX033.0001 (Addendum to Walgreens Provider Agreement

showing contract between PCS Health Systems, Inc. and Walgreen Co.).) Nonetheless, at trial, it

became clear that current and former Caremark or CVS Health Corp. employees referred to their

employer—whether the parent company or Caremark—as “CVS Health.” (Caremark CVS Health

Corp. Liability Fact ¶ 9.) This confusion is best resolved by examining the documentary evidence.

During the relevant time period, CMS “required Part D plan sponsors and PBMs they

retained to generate claims data to execute attestations certifying, based on ‘best knowledge,

information and belief,’ the ‘accuracy, completeness, and truthfulness of the data’ and

acknowledging that it would be used ‘for the purpose of obtaining Federal reimbursement.’” (Joint

Stips. ¶ 49 (quoting 42 C.F.R. § 423.505(k)(3)).) SilverScript, which was a Part D sponsor and

subsidiary of CVS Health Corp., submitted such attestations. From 2013 to 2016, those

attestations were signed by individuals whose listed organization was “CVS Health Corp.” (See

PTX-0210 (2013 SilverScript attestation signed by CVS Health Corp. CFO & Treasurer); PTX-

0211 (2014 SilverScript attestation signed by CVS Health Corp. CFO for SilverScript); PTX-0212

(2015 SilverScript attestation signed by CVS Health Corp. VP and CFO for Medicare); PTX-0213

(2016 SilverScript attestation signed by CVS Health Corp. representative Todd Meek).)

CVS Health Corp.’s Executive Vice President, Jon Roberts, assisted Caremark (the PBM)

in determining how the overall GER guarantee should be managed for Rite Aid in 2013 and 2014.

(See N.T. Mar. 10, 2025 at 141:18-21.) An internal Caremark slideshow shows that Roberts

suggested GER “[r]ates . . . needed with Rite Aid” for those years. (PTX-0312A at 8 of 9.) That

same document shows that while the 2013 and 2014 overall Rite Aid GER guarantee would be set

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at 80.50%, Part D would be set at a lower discount (higher price) of 76.50% and commercial would

be set at a higher discount (lower price) of 83.70%. (Id.; see also N.T. Mar. 10, 2025 at 142:2-4

(Caremark employee John Lavin explaining that the targets were “83.7 for 2013 [commercial]

versus overall and Med D was 76.5”); see also id. at 143:16-24 (Lavin agreeing that “Mr. Roberts’

targets, all had Medicare D -- having the pharmacy be paid more on Med D than the overall GER

and less on commercial”).)

David Azzolina, who was responsible for providing verbal and written responses to CMS

during the relevant time period, was the Vice President for finance at CVS Health Corp. (See N.T.

Mar. 17, 2025 at 62:3-10.) He worked in the “Caremark business unit” from 2010 to 2018. (See

id. at 105:12-24.) In February of 2017, Azzolina emailed a “Recap of [his] Meetings with CMS”

to CVS Health Corp. President and CEO Larry Merlo, CVS Health Corp. Executive Vice President

Jon Roberts, and CVS Health Corp. Chief Financial Officer David Denton. (PTX-0286.) Still, a

number of former or current employees explained that CVS Health Corp. operated separately from

Caremark when it came to PBM and Part D services. Allison Brown, who signed a declaration

stating she was an employee of CVS Health Corp. and whose comments to Aetna in 2013 led to

Aetna’s internal investigation, testified that CVS Health Corp. was not involved in any of

Caremark’s PBM activities. (N.T. Mar. 19, 2025 at 186:14-16.)

E. Damages 12

i. Dr. Loren Smith

Relator’s damages expert Dr. Loren Smith is an economic consultant who, from 2005 to

2013, served as a staff economist at the United States Federal Trade Commission. He has a Ph.D

12
Because, as will be explained later, Relator has not met her burden regarding Falsity as to CVS Pharmacy, I include
only those facts relevant to the damages calculation for Walgreens and Rite Aid.

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in economics and while at the FTC, he led investigations into high-profile competition and

consumer protection matters, including matters involving allegations of anticompetitive and other

consumer-harming conduct by pharmacy benefit managers. At trial, his qualifications went

unchallenged. (See N.T. Mar. 17, 2025 at 128:9-18.)

Dr. Smith calculated damages as the difference between what CMS actually paid in

subsidies versus what CMS would have paid had Caremark submitted PDE or DIR reports which

accurately reflected the aggregate average price point negotiated and paid to the pharmacies.

Smith’s methodology thus required two steps: (1) calculate the pricing discrepancy; and (2)

determine the difference in subsidies.

1. Pricing Discrepancy

Dr. Smith first calculated the “discrepanc[y] between what was actually reported to CMS

and what would have been reported had [Caremark] instead priced [] drugs in the aggregate at a

price equal to the Pharmacy GER.” (N.T. Mar. 17, 2025 at 158:11-15.) Smith used PDEs, DIR

Reports, Payment Reconciliation System (PRS) data, and documents showing Pharmacy GERs to

calculate the discrepancies. (See N.T. Mar. 17, 2025 at 159:20-160:16 (Smith explaining that PRS

reports: (1) are created by CMS; (2) show “the reconciliations for the subsidies that the government

pays”; and (3) include “the total amount of drug costs . . . reported in PDE and DIR reports.”); see

also PTX-0562 (a 1006 summary of data files produced by Defendants inclusive of PRS reports

used by Smith to calculate damages).)

Smith determined pricing discrepancies in two ways. First, he calculated the difference

between the overall Pharmacy GER and the realized, or average discount, reported by Aetna or

SilverScript to CMS. (See Rel. Damages Fact ¶ 10.) To calculate the average discount, Smith

relied on PDE and DIR data taken from payment reconciliation system reports produced by CMS.

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(N.T. Mar. 17, 2025 at 159:20-160:16; see also id. at 163:3-7.) Second, Dr. Smith calculated the

difference between the overall Pharmacy GER and the amount reported to CMS when set to equal

the Part D sponsor’s GER. (See Rel. Damages Fact ¶¶ 10-11.) Caremark does not dispute that

Smith calculated—from a computational perspective—the pricing discrepancies correctly. (N.T.

Mar. 20, 2025 at 20:6-11 (Caremark expert Brett Barlag).)

I find Relator’s first method (average discount) reliable because Relator used actual PDE

and DIR data taken from PRS reports provided by CMS. This data thus represented the actual

prices and price concessions reported to CMS. Relator’s second method (price reported as plan

GER), however, is not compelling. Although it is true that Caremark got “as close as [it] could”

to hitting the Plan GERs, the testimony was clear that Caremark “never hit a [Plan GER] exactly,”

and that Caremark was “always off.” (N.T. Mar. 13, 2025 at 222:17-19.) Caremark expert Brett

Barlag explained this concept succinctly: “The comparison of the plan GER guarantee with the

pharmacy GER guarantee [in this context] also holds Caremark responsible for theoretical

reimbursement amounts, rather than the prices actually reported to CMS.” (Barlag Written

Testimony ¶ 42.) I agree and find the average discount price discrepancy method to be a more

reliable calculation of damages.

Once the pricing discrepancies were calculated for Aetna and SilverScript generally, Dr.

Smith then allocated those amounts among the individual Aetna and SilverScript Part D plans “by

year based on ingredient cost.” (Rel. Damages Fact ¶ 13; see also Caremark Damages Fact ¶ 11;

N.T. Mar. 17, 2025 at 169:15-22.) For example, for SilverScript in 2013, the total pricing

discrepancy based on the average discount calculation was $43 million. (See PTX-0564

(demonstrative citing Smith Suppl. Rpt. Table 1).) Dr. Smith then divided that amount amongst

the individual SilverScript plans for that year based on the percentage of ingredient cost each plan

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was responsible for. (N.T. Mar. 17, 2025 at 171:4-13.) Such an allocation was consistent with

CMS guidance. (See id.) 13 Although Caremark expert Brett Barlag disagreed with Smith’s

allocation, he did not offer any alternative method to allocate DIR across Aetna or SilverScript

plans. (Rel. Damages Fact ¶ 14.) Instead, Mr. Barlag opined that allocation was unnecessary and

that, instead, Dr. Smith should have performed his calculations “at the individual plan level.” (See

N.T. Mar. 20, 2025 at 29:24-30:14.)

Smith calculated a total pricing discrepancy for 2013 and 2014 at Walgreens and Rite Aid

of $123 million when using the average discount method:

13
Caremark contends that “Dr. Smith . . . did not identify the CMS Guidance he relies on.” (ECF No. 483 at 138.) In
his written rebuttal testimony, however, Smith cites to his reply report, which in turn cites to CMS guidance from
2016, which is in evidence as PTX-0166. That Guidance explains:

We are aware, however, that some sponsors may receive and/or record DIR at the sponsor or contract
level, instead. To satisfy the reporting requirements, such Part D sponsors must allocate DIR to the
PBP and 11-digit NDC level by applying reasonable allocation methodologies. A description of all
allocation methodologies used to report DIR at the PBP and/or 11-digit NDC level must be
submitted by the sponsor in HPMS as part of the 2016 DIR Submission Information Report.

(PTX-0166 at 12.) One such methodology includes “Allocation to the PBP level based on Plan’s Total Drug Spend.”
(Id. at 13.)

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(PTX-0564); see also N.T. Mar. 17, 2025 at 163 (discussing Plaintiff’s demonstrative PTX-0564).)

The analysis does not stop there, however. Instead, because CMS subsidizes only part of

the reported drug prices, Smith calculated damages to be “[a]pproximately 60 to 70 percent of this

number.” (N.T. Mar. 17, 2025 at 164:1-5; see also id. at 164:6-9 (Smith explaining that the non-

subsidized 30 to 40 percent is “paid by the plan sponsors and their members”).)

2. Subsidy Allocation

During the relevant period, CMS “subsidized a portion of the cost of providing prescription

drugs to Medicare beneficiaries insured under Medicare Part D plans. Generally, a subsidy can be

understood as a reimbursement from CMS to cover a portion of the Part D sponsor’s spending on

prescription drugs.” (Joint Stips. ¶ 36.) Relevant to this case, CMS paid Part D sponsors three

different types of subsidies: (1) Low-Income Cost Subsidy (LICS); (2) Federal Reinsurance; and

(3) Risk-Sharing. (Rel. Damages Fact ¶ 2.) To calculate the subsidy discrepancy, and thus

damages, Smith used two methods: (1) the DIR method and (2) the PDE method. Both Parties

agree that subsidies are impacted differently depending on which method is used. (Rel. Damages

Fact ¶¶ 4, 5.) 14 Smith explained that only two of those subsidy types are relevant to the DIR

method but all three are applicable where the PDE method is used.

Dr. Smith used “CMS subsidy formulas and calculations to calculate the subsidies that

CMS would have paid had the Pharmacy GERs been reported in either PDEs or DIR Reports.”

(Rel. Damages Fact ¶ 15.)

I explained Dr. Smith’s DIR-based method in my Summary Judgment Opinion:

14
I more thoroughly explained each subsidy type in my Summary Judgment Opinion. (See S.J. Op. at 15-18.) The
Parties have also stipulated to how each subsidy worked. (See Joint Stips. ¶¶ 36-49.)

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In that method, Dr. Smith assumed that Caremark’s clients would have
continued to include individual sale prices in PDE records but would have
reported Caremark’s negotiated average prices as price concessions. For
example, if an Aetna Part D plan paid $12 on an individual sale for drug X,
but the cost of drug X would have been $10 if measured using the negotiated
average, Caremark would have reported $2 as a price concession,
effectively telling CMS that the $12 payment should be reduced to $10.

(S.J. Op. at 36.) Dr. Smith took the amount CMS actually paid Aetna and SilverScript in subsidies

and subtracted therefrom the amount it would have paid had the appropriate price concession been

reported as DIR. Smith allocated DIR adjustments across individual Aetna and SilverScript plans,

meaning that even if an individual Aetna or SilverScript plan “achieved larger discounts than the

Pharmacy GER,” thus decreasing the price discrepancy, that amount would be “equally offset by

an increase in pricing discrepancy at other Aetna (or SilverScript) Part D Plans.” (Smith Written

Rebuttal Testimony ¶ 2.) As a result, and by using the average discount pricing discrepancy model,

Dr. Smith calculated damages at $95 million under the DIR-Based methodology. (See N.T. Mar.

17, 2025 at 174:8-15; PD-012 (citing Smith Suppl. Rpt. Table 2).)

For his PDE damages calculation, Dr. Smith used “an aggregate methodology that

calculated the lower subsidies CMS would have paid had prices in the aggregate equal to the

overall Pharmacy GERs been reported in PDEs.” (Rel. Damages Fact ¶ 16 (emphasis in original).)

To be clear, Dr. Smith did not individually recalculate millions of PDE records to match the overall

Pharmacy GER. (Id.) For reasons explained later, and because I do not rely on Dr. Smith’s PDE-

based damages calculation, I decline to describe the method further.

ii. Mr. Brett Barlag

Mr. Barlag holds a bachelor’s degree from Notre Dame and a master’s degree in business

administration from Columbia Business School. (Barlag Written Testimony ¶ 2.) He is a Senior

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Managing Director of the Health Risk Management and Advisory Practice at FTI Consulting, Inc.

(Id. ¶ 3.) Before that, he served as the Chief Financial Officer and Chief Strategy Officer at Maxim

Healthcare. (Id.) His qualifications went unchallenged at trial. (N.T. Mar. 20, 2025 at 10:3.)

Mr. Barlag challenged Dr. Smith’s damages analysis both generally and specifically. 15

1. Years Not Considered

First, Mr. Barlag opined that Dr. Smith’s entire damages calculation should be disregarded

because it is “inherently unreliable.” (Barlag Written Testimony at 6.) Barlag explained that Smith

only calculated damages for 13 of 30 possible pharmacy, sponsor, and year combinations. (Barlag

Written Testimony ¶¶ 22-37.) While it is true that Smith did not provide calculations for some 17

pharmacy, sponsor, and year combinations, he had good reason not to do so.

First, Smith did not calculate damages for 2011-2012 at Rite Aid and 2015-2016 at

Walgreens because Caremark maintained separate Part D and commercial GERs with Rite Aid

and Walgreens, respectively. (N.T. Mar. 20, 2025 at 35:11-25 (Barlag agreeing those years were

excluded because “they[ were] not part of [Relator’s] case”).) As explained at summary judgment,

“Relator’s claims only relate to pharmacies and years for which the average pricing guarantees

encompassed both commercial and Part D purchases.” (S.J. Op. at 23.) It is thus unsurprising that

years where the Pharmacy GERs were not “overall” are excluded from Dr. Smith’s calculations.

Second, Dr. Smith excluded from his calculations Aetna claims at Walgreens in 2014 and

SilverScript claims at Rite Aid in 2015 and 2016 because the pharmacy GERs in those years did

15
Because I find that Relator has not made out her claims relating to the CVS Pharmacy Budgeted GERs, I will not
address Mr. Barlag’s first opinion. I also will not address Mr. Barlag’s third opinion because I do not rely on the Plan
GER method for calculating pricing discrepancy. Finally, I do not address Mr. Barlag’s fourth opinion concerning
the number of allegedly false claims. The issue of how many false claims were submitted to CMS is best decided
after this opinion is issued and during briefing regarding treble damages and statutory penalties.

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not cover claims from those Part D sponsors’ members. (Barlag Written Testimony ¶ 29.) The

exclusion of those combinations is not surprising for the same reasons stated above.

Finally, Dr. Smith excluded from his calculations combinations where there was either

“no” or “little” evidence of fraud.” (Id. ¶¶ 30-35.) Barlag explained that when analyzing damages,

his view “is that an expert should analyze all relevant years.” (Id. ¶ 34.) Dr. Smith’s work papers

showed “that Caremark paid Walgreens over $12.2 million less than the overall discount rate in

the overall pharmacy GER guarantee for Aetna and SilverScript’s Part D claims in 2011 and 2012.”

(Id. ¶ 32 (emphasis in original).)

VI. CONCLUSIONS OF LAW

A. Falsity as to CVS Pharmacy

To recap, at summary judgment, I found that:

when Caremark had a contractual obligation to Walgreens and Rite Aid to
pay at least a certain average price for drugs, and in fact paid no more than
that average price, the negotiated average was what Caremark “actually
paid.” The reason is that Caremark’s overall indebtedness to the pharmacy
would increase by the negotiated average price for each purchase, regardless
of what price Caremark put down at the time of sale.

(S.J. Op. at 69.) I left open for trial the question of “whether similar reasoning could apply to CVS

[Pharmacy], where there was not a formal written contract but rather some other type of

arrangement on what the average price would be.” (Id.) At trial, Relator was required to prove,

by a preponderance of the evidence, that: (1) the Budgeted GER’s between Caremark and CVS

Pharmacy represented what Caremark “actually paid”; and (2) what those average price targets

were. (Id. at 70.) For the following reasons, I conclude that Relator has not met that burden.

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i. Actually Paid

The applicable regulations define “actually paid” as “costs that were: (1) ‘actually

incurred,’ (2) adjusted for price concessions and other ‘direct and indirect remuneration’ (DIR),

and (3) the ‘negotiated prices’ between the PBM and the pharmacy.” (Id. at 58.) The question left

for trial was whether Caremark’s Budgeted GERs with CVS Pharmacy were “negotiated” and

whether “both sides viewed the outcome of their negotiation as obligatory.” (Id. at 70.)

The regulation defining “negotiated price” does not itself define the term “negotiated.” See

42 C.F.R. § 423.100 (effective June 7, 2010) (defining “negotiated prices” as “prices … that[] …

[t]he [PBM] and the network dispensing pharmacy . . . have negotiated as the amount [the

pharmacy] will receive, in total, for a particular drug.”). In addition, and as explained in my

Summary Judgment Opinion, neither party offered “authority on the meaning of these terms

beyond their regulatory definitions.” (S.J. Op. at 70.) “When words are not defined within the

statute, we construe them ‘in accordance with [their] ordinary or natural meaning.’” Bonkowski

v. Oberg Indus., Inc., No. 14-1239, 2015 WL 2444503, at *8 (3d Cir. May 22, 2015) (quoting

FDIC v. Meyer, 510 U.S. 471, 476 (1994)). “In such cases, resorting to dictionary definitions may

be helpful.” Id. (citing MCI Telecomm. Corp. v. Am. Tel. & Tel. Co., 512 U.S. 218, 225 (1994)).

“Negotiate” is defined as:

1. To communicate with another party for the purpose of reaching an

understanding <they negotiated with their counterparts for weeks on end>;
2. To bring about by discussion or bargaining <she negotiated a software
license agreement>
....
Negotiate, BLACK’S LAW DICTIONARY (12th ed. 2024).

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The Walgreens and Rite Aid contracts were negotiated instruments resulting from the

bargaining of sophisticated parties. The contractual GERs contained therein were obligatory

because “Caremark’s overall indebtedness to the pharmacy would only increase by the guaranteed

average price, and any amount by which the individual sale price exceeded the guaranteed average

would be recouped by year’s end.” (S.J. Op. at 61.) An illustration from my Summary Judgment

Opinion warrants review:

To better understand this term as used in the CMS regulations, suppose an

Aetna Part D member purchased drug X from Walgreens, and that
Caremark’s negotiated average price [for] that drug was $10 but Caremark
paid $15 to Walgreens for that individual sale. Even though Caremark
initially put down $15, the total amount of money that would actually leave
Caremark’s pocket by the end of the year would be $10, not $15. This result
was driven by Caremark’s obligation to reimburse based on end-of-year
averages. Every extra dollar above $10 that Caremark gave Walgreens for
this purchase would be one dollar less that Caremark would have to pay
Walgreens by the end of the year to make the average $10. Conceptually,
Caremark would get $5 back. Various additions and subtractions might
occur over the course of the year before Caremark ultimately paid $10, but
moving these sums back and forth would not change the fact that Caremark
was ultimately obligated to pay $10 for every purchase of drug X.

(Id. at 58-59.)

But, as explained below, the Budgeted GERs with CVS Pharmacy did not create the same

result.

1. Negotiated

I start with what agreements, if any, existed between Caremark and CVS Pharmacy.

Caremark and CVS Pharmacy entered into “Provider Agreements,” which established each

entity’s legal obligations to one another. (See DX058, DX059.) Although these agreements

contained provisions on how to determine the point-of-sale price, they did not contain GER

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guarantees. (See id.; N.T. Mar. 10, 2025 at 195:3-9 (John Lavin explaining that from 2011 to 2016

Caremark’s contracts with CVS pharmacy did not include a pharmacy GER guarantee).)

It is true that some Caremark employees considered the Budgeted GER as a “negotiation.”

(See N.T. Mar. 10, 2025 at 195:17-25 (John Lavin explained that “senior leadership” from CVS

Pharmacy and Caremark would ultimately decide what the budgeted GER would be); (N.T. Mar.

18, 2025 at 15:4-8 (CVS Pharmacy 30(b)(6) witness Stacey Bernstein testified that she recalled

“negotiations between CVS Pharmacy and Caremark,” but explained there was not “necessarily

any alignment on what the targeted budget numbers would be.”).) But, the subjective view of

Caremark’s employees does not prove Relator’s claim. Instead, it is important to look at the form

of the “negotiations.”

Eva Boratto, the Controller and Chief Accounting Officer for CVS Health Corporation

from 2013 to 2016, explained the nature of the negotiations:

I would understand and learn from CVS Caremark what their desires were
as it pertained to winning in the market place, growth goals, new clients up
for bid, mix of business, et cetera, what their desires were. Separately and
distinct, I would meet with the CVS retail pharmacy organization to have
the same conversion [sic] through their lens. And I would share that, again,
with my boss, Dave Denton, around the desires of both sides. And, you
know, share that with him for ultimate decision.

(N.T. Mar. 14, 2025 at 148:18-149:5.) From there, Dave Denton—Chief Financial Officer for

CVS Health Corp.—met “with other senior leaders [and they would] ultimately [] decide what was

the budgeting or planning assumption.” (Id. at 149:8-10.) The purpose of these discussions was

to align the interests of CVS Pharmacy and Caremark, which were both under the umbrella of CVS

Health Corp. (See id. at 149:14-21 (Eva Boratto explaining that the Budgeted GERs were a

“critical assumption for the company” and that the decision was made “with the full company’s

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best interest in mind”).) The Budgeted GER was “set during the CVS Health . . . annual budget

process.” (Id. at 135:23-136:3.) Moreover, the Budgeted GERs changed throughout the year

based on internal forecasts.

The evidence does not show that CVS Pharmacy and Caremark engaged in some arms-

length negotiation or bargaining. Rather, it is more consistent with a parent company—CVS

Health—listening to each subsidiary’s position and then implementing a Budgeted GER aimed at

benefiting the company as a whole. Accordingly, I find that the Budgeted GERs were not

“negotiated.”

2. Obligatory

Even if the Budgeted GERs were “negotiated,” they did not place some “obligation” upon

Caremark and CVS Pharmacy. The most compelling evidence to support this conclusion is that,

unlike the contractual GER guarantees, the Budgeted GERs did not provide for a reconciliation or

“true-up” payment if Caremark underpaid relative to the Budgeted GER. (Caremark Falsity Fact

¶ 6; N.T. Mar. 10, 2025 at 196:6-16 (former Caremark employee John Lavin explaining that the

Budgeted GER did not impose any financial obligation on Caremark and that, to his knowledge,

Caremark never made a reconciliation payment to CVS Pharmacy); N.T. Mar. 14, 2025 at 150:6-

151:24 (Eva Boratto explaining that Caremark did not make end-of-year reconciliation payments

to CVS Pharmacy); id. at 72:13-17 (Domenico Gugliuzza explaining that the “biggest difference

[between the contractual GERs and the Budgeted GER] is at the end of the year there’s no payment

that was made between [Caremark and CVS Pharmacy]”).

Relator contends that the absence of a contractual offsetting provision is not dispositive

and urges me to look to the manner in which Caremark managed MAC prices to hit the Budgeted

GER. The best and only example of Caremark making a payment that could theoretically resemble

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an end-of-year reconciliation payment came in 2016. Then, Caremark increased commercial MAC

prices by $13 million to make up for a shortfall as it relates to the Budgeted GER. (See PTX-

0099.) This change in MAC pricing was made “to meet the target,” or the Budgeted GER for that

year. (N.T. Mar. 17, 2025 at 58:3-6 (emphasis added).) There is no evidence that Caremark made

any other such changes to account for shortfalls relative to the Budgeted GER in other years.

The record indicates that Caremark was incredibly effective at managing MAC prices to

hit the Budgeted GER. (See N.T. Mar. 10, 2025 at 126:15-18 (John Lavin agreeing that

Caremark’s MAC management team “had the ability to manage MAC very closely to the . . .

budgeted [] GERs”); N.T. Mar. 14, 2025 at 31:20-23 (Domenico Gugliuzza explaining that his

team was “good” at hitting the Budgeted GER); N.T. Mar. 17, 2025 at 28:20-23 (Ms. Kinney was

impeached with her deposition testimony in which she explained she could not remember any year

where Caremark missed the Budgeted GER target). Still, in the absence of a true-up or

reconciliation payment requirement, Caremark’s ability to manage to a budget does not sufficiently

prove that the Budgeted GER was obligatory. Rather, I conclude that the arrangement between

Caremark and CVS Pharmacy existed because that was what CVS Health Corp. determined was

best for the health of the company.

In these circumstances, I cannot find that the Budgeted GERs created a binding agreement.

Although Caremark tried to hit the target, they were not obligated to do so. If Caremark missed

the target, they were not required to send monies to CVS Pharmacy to make up for the shortfall.

Thus, unlike the contractual GERs with Rite Aid and Walgreens, where Caremark’s “overall

indebtedness” was increased only by the negotiated average price, the same cannot be said of the

Budgeted GERs.

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ii. Identifying the Budgeted GERs

Finally, even if the Budgeted GERs were negotiated and obligatory, I am not convinced

that Relator has presented competent evidence showing what those Budgeted GERs actually were.

Relator relies on documents that Caremark produced in determining the Budgeted GERs for the

years in question. Nevertheless, questions remain regarding the precise nature of the Budgeted

GERs.

To establish the Budgeted GER for 2013-2016, Relator relies on different cells, in different

tabs, with different names, in various Caremark reconciliation look-a-like spreadsheets to show

the existence of a Budgeted GER. (Compare PTX-0115 (Relator relies on a cell showing the

realized overall GER) with PTX-0116 (Relator relies on a cell titled “2015 Target”) with PTX-

0117 (Relator relies on a cell titled “Discount” for “All Other”).) For 2013, Relator points to an

internal slideshow which contains two separate Budgeted GER amounts. (See PTX-0190 (on one

page the Budgeted GER appears to be “79,” but on the next, it appears to be “79.8”).) No witness

could confirm which amount was correct for 2013. (See N.T. Mar. 14, 2025 at 25:10-15

(Domenico Gugliuzza explaining that he could not recall whether the 2013 Budgeted GER was

79.8 percent); id. at 28:13-20 (same); id. at 145:13-147:15 (Eva Boratto explaining that she could

not remember which rate was the Budgeted GER but “looking at [PTX-0190], the CVS rate . . .

was [] 79 percent.”).) Although in a vacuum, the difference between “79” and “79.8%” may seem

de minimis, the difference could equate to millions of dollars.

In 2014, Relator’s own expert explained that he “wasn’t comfortable” with Caremark

documents and thus used “the realized value in the last document that [he] could find for that year

as an approximation of the . . . target.” (N.T. Mar. 17, 2025 at 182:10-18.) Moreover, witnesses

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made clear that the Budgeted GERs—unlike the contractual GER guarantees—changed

throughout the year. (Caremark Falsity Fact ¶ 7.)

In sum, Relator has not made out falsity as to CVS Pharmacy. Relator has failed to show

the Budgeted GERs were “negotiated,” rather than decided unilaterally by the parent company for

budgeting purposes. Relator has also failed to show that the Budgeted GERs were obligatory

because there was no consequence if Caremark missed the mark and the budget assumptions could

be changed throughout the year. And finally, Relator has not sufficiently proven what the

Budgeted GERs actually were.

B. Materiality 16

Relator was required to prove that the “violation be, among other things, ‘material’ to the

government’s decision to pay.” United States ex rel. Druding v. Care Alternatives, 81 F. 4th 361,

365 (3d Cir. 2023) (quoting Universal Health Servs., Inc. v. United States ex rel. Escobar, 579

U.S. 176, 192-93 (2016)). A violation is “material” to that decision if it has a “natural tendency

to influence, or be capable of influencing, the payment or receipt of money or property.” 31 U.S.C.

§ 3729(b)(4).

At summary judgment, “I accept[ed] Caremark’s standard for materiality, and conclude[d]

that Relator must establish that had CMS known of Caremark’s guaranteed average pricing terms

and the corresponding mismatch with reported prices, such knowledge would have had a ‘likely’

‘effect’ on CMS’s payment decisions.” (S.J. Op. at 78 (citing Escobar, 579 U.S. at 193).)

My inquiry is a “holistic” one and I consider the following non-exhaustive factors:

16
After closing arguments, the Parties submitted supplemental briefing on the question of Materiality. (ECF Nos.
495, 497.) In addition, the Government filed a Statement of Interest, urging that its non-intervention decision should
“not be used as a basis to defeat materiality.” (ECF No. 498 at 3.) Many of the arguments presented by Relator,
Caremark, and the Government are already addressed in this Opinion.

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(1) whether the representation went to a condition of payment (i.e., an

express condition or an implied condition for which the Government would
have the option to decline payment, though neither is dispositive); (2)
whether the representation was “minor or insubstantial”; and (3) if the
Government knew the facts surrounding the representation, the
Government's reaction to it (i.e., whether it continued to pay the claim in
full).

United States ex rel. Krahling v. Merck & Co., Inc., No. 23-2553, 2024 WL 3664648, at *6 (3d

Cir. Aug. 6, 2024) (citing Escobar, 579 U.S. at 194-95.).

i. Condition of Payment

“[T]he Government’s designation of compliance with a particular regulatory requirement

as a condition of payment is relevant to, but not dispositive of, materiality.” United States ex rel.

Int’l Brotherhood of Electrical Workers Local Union No. 98 v. The Farfield Co., 5 F.4th 315, 343

(3d Cir. 2021) (internal citations omitted).

It is undisputed that CMS payments were “conditioned upon” price reports made by Part

D sponsors in the manner specified by the Secretary of Health and Human Services and CMS.

(Joint Stips. ¶ 48.); see also (Caremark Resp. to Rel. Materiality Fact ¶ 4); 42 U.S.C. § 1395w-

115(d)(2)(A). CMS required Part D sponsors and their PBMs to “execute attestations certifying,

based on ‘best knowledge, information and belief,’ the ‘accuracy, completeness, and truthfulness

of the data’ and acknowledging that it would be used ‘for the purpose of obtaining Federal

reimbursement.’” (Joint Stips. ¶ 49 (quoting 42 C.F.R. § 423.505(k)(3)).) In turn, those

attestations focused on specific price reports, including DIR, and certified that such reports

affected the way CMS calculated payments to Aetna or SilverScript. 17 (See N.T. Mar. 13, 2025 at

17
See PTX-0104 (2011 Attestation from Caremark to Aetna acknowledging that the information provided “directly
affects the calculation of CMS payments to Aetna . . . under the Medicare Part D program and that the DIR data will
be used for the purpose of obtaining Federal reimbursement”); PTX-0078 (2012 Attestation from Caremark to Aetna
acknowledging the same); PTX-0079 (2013 Attestation from Caremark to Aetna acknowledging the same); PTX-0094
(2014 Attestation from Caremark to Aetna acknowledging the same); PTX-0210 (2013 Attestation from Caremark to

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173:11-18 (Caremark corporate witness Rebecca Justice agreeing that “Medicare relies on truthful

and accurate price reporting” including “any post point-of-sale adjustments”).)

Taken together, this evidence establishes that CMS’s payment decisions were conditioned

on accurate reporting—through either PDE or DIR reports—as to what Caremark actually paid to

the pharmacies. It follows that, if CMS knew that Caremark had not provided accurate reports to

the Part D sponsors, and the sponsors in turn submitted inaccurate reports—thus violating a

condition of payment—CMS would not have paid the subsidies based on such faulty reporting.

ii. Whether the Representation was “Minor” or “Insubstantial” or Goes to

the “Essence of the Bargain”

“The next non-exclusive factor identified by the Supreme Court in Escobar is whether the

‘non-compliance is minor or insubstantial’ or ‘the extent to which the requirement that was

violated is central to, or goes to the very essence of, the bargain.’” United States ex rel. Krahling

v. Merck & Co., Inc., No. 10-4374, 2023 WL 8367939, at *12 (E.D. Pa. July 27, 2023) (quoting

Escobar, 579 U.S. at 194)).

The purpose of the 2010 rule change was to ensure that the Part D “sponsors’ administrative

costs [were] not included in the drug costs used to determine how much the beneficiary [would]

pay, as well as [the subsidy] payments made by CMS.” (PTX-0192 at 2 of 3.) Moreover, the

change was designed to ensure “transparency[, providing] Part D sponsors with the information

needed to more effectively negotiate with PBMs to reduce their risk premiums as well as other

administrative fees.” 74 Fed. Reg. at 1508. The Government’s Statement of Interest at summary

judgment further explained that the rule change was designed to “discourage mark-ups associated

SilverScript acknowledging the same); PTX-0211 (2014 Attestation from Caremark to SilverScript acknowledging
the same); PTX-0212 (2015 Attestation from Caremark to SilverScript acknowledging the same); PTX-0213 (2016
Attestation from Caremark to SilverScript acknowledging the same).

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with ‘lock-in’ pricing, and to increase Part D drug price reporting accuracy.” (ECF No. 312 at 3

(citing 74 Fed. Reg. at 1505).)

The essence of the bargain here was simple: Part D sponsors and PBMs would follow CMS

guidance and report accurate prices to CMS, and in return, CMS would subsidize those costs

accordingly. One particular CMS price reporting requirement deserves significant consideration.

As discussed infra, CMS required Part D sponsors to report as DIR:

Applicable pharmacy adjustments that reduce the total payments made to

the pharmacy . . . as a positive adjustment that will serve to reduce the [Part
D sponsor’s] drug costs.

(DX219.0026.) This Guidance, “DIR #9,” was well known in the industry. It was this Guidance

that concerned CMS when it reached out to Caremark in 2016. Specifically, CMS asked Caremark

whether its GER guarantees with the pharmacies called for “claw back” or “true-up” payments

that flowed from the pharmacy to the PBM, thus reducing the post-point-of-sale price of Part D

drugs. (See Caremark Materiality Fact ¶ 4; PTX-0026; PTX-0286 (Azzolina explaining that

CMS’s main focus on the March 8, 2016 call was “whether pharmacies were required to make true

up payments to [] Caremark under a GER should their reimbursement be more than the minimum

guaranteed amount”).)

Because I have found that Caremark’s GER guarantees with the pharmacies and the

offsetting provisions contained therein were economically identical to two-way GER guarantees,

and because Caremark failed to report to Aetna or SilverScript (and thus CMS) DIR generated as

a result thereof, the prices of Part D drugs reported to CMS were grossly inflated.

The relevant question, however, is whether Caremark’s reporting failures were minor or

insubstantial. For the following reasons, I find they were neither. The regulations and guidance

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demanded, and CMS relied on, accurate price reporting. Caremark’s failure to comply resulted in

the overpayment of tens of millions of dollars. See United States. v. Supervalu, Inc., No. 11-3290,

2024 WL 4351951, at *9 (C.D. Ill. Sept. 30, 2024) (finding Relator was entitled to summary

judgment as to materiality and explaining that “a misstatement regarding the collection of more

money than actually owed was sufficient to establish materiality”). This amount is neither minor

nor insubstantial and it is “highly implausible” that CMS would “willingly [subsidize] inflated”

Part D prescription prices had it known about Caremark’s offsetting provisions. United States ex

rel. Grubea v. Rosicki, Rosicki & Assocs., P.C., 318 F. Supp. 3d 680, 702 (S.D.N.Y. 2018).

Indeed, although the Government did not intervene in this action, it filed a Statement of Interest at

summary judgment, explaining in part that “the United States has a strong interest in ensuring that

the Part D program does not pay inflated drug prices and that the information that Plan Sponsors

and their PBMs report to CMS reflects the true costs of the program.” (ECF No. 312 at 2.)

This factor weighs in Relator’s favor on the issue of materiality.

iii. The Government’s Reaction to the Representation if Discovered

Caremark’s entire argument against materiality focuses on what CMS knew and how it

reacted. Specifically, Caremark urges that Relator has not made out materiality because: (1) CMS

was informed of Caremark’s pricing scheme; (2) CMS continued to reimburse Aetna and

SilverScript; and (3) CMS never sanctioned or otherwise brought an enforcement action against

Caremark.

CMS’s understanding of Caremark’s pricing scheme may be evidence against materiality

if: (1) “the Government pays a particular claim in full despite its actual knowledge that certain

requirements were violated”; and (2) “the Government regularly pays a particular type of claim in

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full despite actual knowledge that certain requirements were violated, and has signaled no change

in position.” Escobar, 579 U.S. at 195 (emphasis added).

Caremark argues that “[t]ime and again, [CMS] . . . was told the facts the Court later found

made the price-reporting false. And time and again, CMS declined to take action in response.”

(Caremark Conclusions of Law (ECF No. 488 at 4).) In support, Caremark cites three instances

where CMS was purportedly made aware of Caremark’s pricing scheme and refused to change its

subsidization practices: (1) the 2016 conversations between Azzolina and CMS; (2) CMS’s 2015

audit of Aetna; and (3) the filing of Relator’s lawsuit. (Id. at 4-6.) I address each in turn.

First, Caremark Vice President of Finance for Medicare Part D David Azzolina testified

about his 2016 conversations with CMS. At that time, and as discussed above, CMS made clear

that its main concern was whether PBMs such as Caremark were “clawing back” money from

pharmacies as part of their GER guarantees. (N.T. Mar. 17, 2025 at 114:5-9.) Although Azzolina

explained that Caremark did not receive any payments back from the pharmacies, he failed to

inform CMS about Caremark’s offsetting practices. When Azzolina emailed CMS on May 26,

2016, he once again failed to include any mention of the offsetting provisions. Caremark urges

that the following portions from that email—the only written correspondence between Caremark

and CMS—put CMS on notice of exactly what Caremark’s contracts with the pharmacies allowed:

Caremark has agreed to a Generic Effective Rate (GER) with a few

pharmacies.
...
The commitment is to pay at least the guaranteed amount in order to provide
certainty to the pharmacy for their financial and other considerations.
...
[Caremark’s] GER’s [sic] establish a pricing commitment to pay a
minimum guaranteed amount, generally across the pharmacy book of
business with the PBM.
...

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The GER is also not associated with additional arrangements that reduce the
price, such as DIR arrangements with the pharmacies . . . . Thus, the
example discussed where the pharmacy is required to pay back to the plan
a portion of the point of sale price as an adjustment is not applicable to our
GER arrangements with network pharmacies.
...
Pharmacies do not make true up payments to CVS Caremark under a GER
should their reimbursement be more than the minimum guaranteed amount
. . . . In the event the pharmacy receives less than the minimum guaranteed
amount, the cost of any true up payment to the pharmacy (typically
following the end of the year) are completely the responsibility of
Caremark.

(PTX-0026.)

Caremark argues that this was enough to put CMS on notice of its pricing scheme. (See

N.T. June 12, 2025 at 83:23-84:20.) I disagree.

While it is true that some details from Caremark’s contracts were disclosed, others were

not. Importantly, Caremark did not explain its offsetting provision and the impact it had on the

price Caremark actually paid for Part D prescriptions. Moreover, Relator has established that what

Caremark did explain misled CMS as to the actual nature of the contracts. For example, in stating

that pharmacies were not “required to pay back to the plan a portion of the point of sale price as

an adjustment,” Caremark failed to explain that any overpayment on Part D purchases could be

used as a credit to offset amounts owed from underpayments on commercial purchases.

It is entirely unclear how Azzolina’s interactions with CMS could have provided the

government with actual knowledge of the offsetting provisions and the effect thereof. This is

especially so in light of the dearth of evidence that any other PBM or Part D sponsor maintained

an overall GER guarantee, much less one with an accompanying offsetting provision. (See N.T.

Mar. 18, 2025 at 202:6-11 (Leslie Norwalk agreeing that as of her deposition, she could not

identify “a single example, outside this case, of a pharmacy GER that covered both Med D and

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commercial”); N.T. Mar. 20, 2025 at 73:2-17 (Joseph Zavalishin testifying that although such

contracts exist, he could not identify “any other contract between a PBM and a pharmacy . . . that

contained an overall GER encompassing both Medicare Part D and commercial lines of

business”).) Under these circumstances, I cannot find that—based on the Azzolina emails—CMS

had actual knowledge of the guaranteed average pricing terms or the corresponding mismatch in

reported prices.

For essentially the same reasons, Caremark’s reliance on CMS’s audit of Aetna does not

provide a basis for CMS’s actual knowledge. As will be explained in the Scienter Section of this

Opinion, Aetna did not know—and thus could not have told CMS—about the specific contractual

provisions which underlie Caremark’s fraudulent representations.

Lastly, I do not find that CMS gained actual knowledge from the filing of Relator’s

Complaint. It is well settled that I may not “equate the government’s awareness of allegations of

fraud with ‘actual knowledge’ that fraud occurred.” Druding, 81 F. 4th at 375; see also id. (quoting

United States ex rel. USN4U, LLC v. Wolf Creek Fed. Servs., Inc., 34 F.4th 507, 517 (6th Cir.

2022) (“And we recognize that ‘the Government may not want to prematurely end a relationship

with a contractor over unproven allegations.’”)); United States ex rel. Brown v. Pfizer, Inc., No.

05-6795, 2017 WL 1344365, at *11 (E.D. Pa. Apr. 12, 2017) (holding, albeit at the motion to

dismiss stage, that “[t]he mere fact that the government has continued to pay and approve claims .

. . after Relators’ allegations [were filed] is insufficient to establish that Relators’ claims lack

materiality”).

Because CMS did not have actual knowledge that Caremark’s pricing terms and

subsequent reporting violated the relevant requirements, CMS’s subsequent inaction has little

probative value. See United States ex rel. Prather v. Brookdale Senior Living Communities, Inc.,

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892 F.3d 822, 834 (6th Cir. 2018) (“Without actual knowledge of the alleged non-compliance, the

government’s response to the claims submitted by the defendants . . . has no bearing on the

materiality analysis.”); see also Supervalu, Inc., 2024 WL 4351951, at *9 (“Although some payors

may have known about the Defendants pri[cing practice], there is no evidence they knew claims

submitted were false.”).

Based on the foregoing, I find that Relator has proven materiality by a preponderance of

the evidence.

C. Causation

As set out in my Summary Judgment Opinion, “[d]uring the time period relevant to this

case, the federal government subsidized a portion of the cost of providing prescription drugs to

Medicare beneficiaries insured under Medicare Part D plans.” (S.J. Op. at 9.) These subsidies can

“be understood as a reimbursement from CMS to cover a portion of the Part D sponsor’s spending

on prescription drugs.” (Id.) CMS thus had to “determine how much Part D sponsors were

spending on prescription drugs in order to calculate an appropriate subsidy for the sponsor’s

spending.” (Id.)

In turn, Part D sponsors like Aetna were obligated to submit pricing information as a

condition of receiving subsidy payments. 42 U.S.C. § 1395w-115(d)(2)(A) (effective March 23,

2010). CMS regulations required contracts between Part D sponsors and their PBMs to “comply

with all applicable Federal laws, regulations, and CMS instructions.” 42 C.F.R. § 423.505(i)(3)(v),

(i)(4)(iv) (effective June 1, 2012). Thus, a Part D sponsor who submitted “claims data” to CMS

that was “generated by” a PBM was “required to [ensure] the PBM [also] certif[ied] the accuracy

of the data and to acknowledge that the data would be used for federal reimbursement.” (S.J. Op.

at 38-39 (citing 423.505(k)(3)).)

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Relator’s theory of causation thus focuses on whether Caremark caused Aetna and

SilverScript to submit for payment false PDE and DIR reports. See United States v. Lagerbusch,

361 F.2d 449, 449-50 (3d Cir. 1966) (internal citations omitted) (discussing the situation whereby

one party causes another to submit the false or fraudulent claim to the Government and holding,

“[w]e have no doubt that the False Claims Act covers such an indirect mulcting of the

government.”); see also United States ex rel. Schmidt v. Zimmer, Inc., 386 F.3d 235, 244 (3d Cir.

2004) (holding that if a defendant’s actions resulted in the submission by a third party

“certifications required by Medicare that [the defendant] knew would be false . . . this conduct and

this knowledge [if] proven at trial, [could allow] a jury [to] conclude that [the defendant]

knowingly caused . . . false claims to be filed.”).

At summary judgment, I explained the causation standard as follows:

The False Claims Act reaches any person who “causes to be presented[] a
false or fraudulent claim for payment.” 31 U.S.C. § 3729(a)(1)(A). The
causation element entails “ordinary [proximate] causation principles from
negligence law,” which, in turn, ask whether the defendant’s conduct was a
“substantial factor” in causing the submission of a false claim. United States
ex rel. Schmidt v. Zimmer, Inc., 386 F.3d 235, 244 (3d Cir. 2004). “[T]o
say that one event was a proximate cause of another means that it was not
just any cause, but one with a sufficient connection to the result.” Paroline
v. United States, 572 U.S. 434, 444 (2014). This is a “flexible concept” that
“defies easy summary,” but generally requires a “direct relation between the
injury asserted and the injurious conduct alleged.” Id. (quotation marks
omitted).

(S.J. Op. at 81.)

With respect to SilverScript, I found that because Caremark itself “(1) submitted PDE

records on SilverScript’s behalf, (2) provided SilverScript draft DIR reports in a ‘CMS-ready

format,’ and (3) certified to SilverScript that these reports included all reportable price

concessions,” there was no genuine dispute that the “normal consequence” of Caremark’s actions

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“was that SilverScript would submit price reports listing individual sale prices rather than

guaranteed average prices, which were false.” (S.J. Op. at 83.)

i. Normal Consequence

At that time, I could not find the same as it relates to Aetna. Instead, and “[b]ecause it

[was] not clear from Relator’s statement of facts that Caremark provided price reports to Aetna

with the intention that they be forwarded to CMS unmodified,” there remained a genuine dispute

as to whether the “‘normal consequence’ of Caremark’s conduct was the submission of false

claims.” (Id.) Specifically, I did not determine what it meant for Aetna to “implement Caremark’s

instructions on its system.” (Id. (internal quotations omitted).)

At trial, Relator presented the testimony of Aetna 30(b)(6) witness Clifford Passuello.18

Passuello testified that Aetna had its own “automated” system for producing both PDE and DIR

reports. (N.T. Mar. 18, 2025 at 56:14-57:7 (discussing Aetna’s APMCAS system).) Aetna relied

on Caremark to provide pricing instructions which informed Aetna “exactly how [to] calculate the

dollar amount to be paid to the pharmacy, and . . . reported in the PDE data to CMS.” (Id. at 56:24-

57:3; id. at 59:15-23 (Passuello explaining that Aetna relied on Caremark to submit “PDE . . .

amounts that [Aetna] then . . . reported to CMS”).)

A similar process took place as it relates to DIR reporting. Caremark was responsible for

reporting to Aetna certain categories of DIR. Specifically, Aetna relied on Caremark to report

certain DIR—such as DIR #9—the existence of which was understood only by Caremark and thus

18
Passuello’s testimony was presented via deposition designation. At trial, while the video designations played,
Caremark’s counsel objected that certain questions and answers went outside the scope of Passuello’s 30(b)(6)
capacity. (N.T. Mar. 18, 2025 at 35-37.) Caremark “wanted it to be clear that for [] particular questions and answers
[Passuello was] speaking on behalf of himself rather than [Aetna].” (Id. at 37:1-8.) I neither sustained nor overruled
the objection but “preserved” Caremark’s “observation” for the record. (Id. at 38:2-4.) Caremark agreed with this
preservation and did not reraise its objection later, even though I offered the opportunity. (Id. at 38:1-6; 123:3-10.)
Regardless, Mr. Passuello was familiar with the facts and I find his testimony relevant.

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entirely under Caremark’s control. Caremark recorded its DIR in an excel “template” provided by

CMS. (Id. at 51:3-5.) Caremark then produced these templates to Aetna, which would “copy and

paste” the data into its “master template [which was then sent] to [CMS].” (Id. at 51:4-7.) Aetna

relied on the DIR data provided by Caremark. (Id. at 52:1-5.)

Caremark knew that Aetna would rely on that data, a fact made clear by Caremark’s

attestations to Aetna. (Id. at 45:15-46:23, 59:10-23; N.T. Mar. 12, 2025 at 32:15-18 (Aetna

employee Jean Walker confirming that during the relevant time period, Aetna relied on Caremark’s

attestations regarding the accuracy of its pricing information); see also PTX-0104 (2011 Caremark

attestation to Aetna certifying that the data provided to Aetna was complete and accurate); PTX-

0078 (same for 2012); PTX-0079 (same for 2013); PTX-0094 (same for 2014).) Because Aetna

did not have access to Caremark’s pricing contracts with the pharmacies or its reconciliation

spreadsheets, Aetna did not know that the attestations and data were false. (See N.T. Mar. 18,

2025 at 52:11-16; see also N.T. Mar. 13, 2025 at 101:17-20 (Caremark Corporate witness James

Margiotta explaining that from 2010 to 2016 Aetna did not have access to Caremark’s contracts

with the pharmacies).)

Caremark urges that, despite these facts, a finding of causation would be improper because

“under Medicare regulations, a ‘Part D sponsor’ like Aetna ‘maintains ultimate responsibility’ for

compliance, ‘[n]otwithstanding any relationship(s) that [it] may have’ with a PBM like Caremark.”

(Caremark COL at 9 (quoting 42 C.F.R. § 423.505(i)(1)).) Even if this is true, Caremark knew

that Aetna relied on Caremark-provided data to adjudicate claims. Furthermore, it is clear—based

on Caremark’s attestations—that Caremark expected Aetna to use Caremark’s pricing instructions

and DIR data in an unmodified fashion to generate PDE and DIR reports. Aetna’s later submission

of such false reports was thus a normal consequence of Caremark’s conduct.

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ii. Superseding Cause

Caremark also argues that Aetna’s independent judgment, preparation of DIR reports, and

government inaction represents a superseding cause that breaks the causal chain. I disagree.

Under the ordinary principles of negligence law, an intervening act, “‘which is a normal

consequence of a situation created by the actor’s . . . conduct is not a superseding cause of harm

which such conduct has been a substantial factor in bringing about.’” Schmidt, 386 F.3d at 244

(quoting Restatement (Second) of Torts § 443). The burden rests on Caremark to show an

intervening or superseding cause. See Hill v. Reederei F. Laeisz G.M.B.H., Rostock, 435 F.3d

404, 421 (3d Cir. 2006) (explaining that the district court properly instructed on superseding cause

in negligence action where the instruction read, “in terms of this superseding cause, the defendant

has the burden of proof by a preponderance of the evidence”). Although “intervening cause” is

not an affirmative defense, Caremark must still prove by a preponderance of the evidence that

Aetna’s actions broke the causal chain.

Although it is true that Aetna had the ultimate responsibility to submit the claims, I disagree

that this responsibility absolves Caremark of culpability. In an indirect presentment case, such as

this, the “paradigmatic” example of liability “occurs when the non-submitting party takes

advantage of an unwitting intermediary, thereby causing that party to submit a false claim.” United

States ex rel. Tran v. Computer Sciences Corp., 53 F. Supp. 3d 104, 126 (D.D.C. 2014). I thus

consider the knowledge and independent agency with which Aetna acted in submitting claims to

CMS.

Again, Caremark points to Aetna’s internal investigation as evidence that Aetna was aware

of Caremark’s pricing practices yet continually reported Caremark-provided data. But again,

because Caremark omitted material information from Aetna during the investigation, Aetna did

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not have actual knowledge of Caremark’s pricing scheme and Caremark’s reliance is thus

misplaced.

In these circumstances, I find that Relator has proven causation as to Aetna by a

preponderance of the evidence.

D. Scienter

To prove scienter, Relator must show that Caremark “knowingly” presented a false claim

to the government. 31 U.S.C. § 3729(a)(1)(A). Knowingly is defined as “actual knowledge,”

“deliberate ignorance,” or “reckless disregard.” § 3729(b)(1)(A). Relator need not prove a

“specific intent to defraud.” § 3729(b)(1)(B). “Actual knowledge refers to whether a person is

aware of information.” Supervalu, Inc., 2024 WL 4351951, at *6 (internal quotations and citations

omitted). “Deliberate ignorance encompasses defendants who are aware of a substantial risk that

their statements are false, but intentionally avoid taking steps to confirm the statements’ truth or

falsity.” Id. (internal quotations and citations omitted). Finally, “reckless disregard relates to

defendants who are conscious of a substantial and unjustifiable risk that their claims are false, but

submit the claims anyway.” Id. (internal quotations and citations omitted).

Here, my inquiry focuses on “whether Caremark subjectively understood what CMS’s

regulations required—namely, that they mandated reporting guaranteed average prices under the

circumstances,” inclusive of accurate DIR calculations. (S.J. Op. at 85.) My prior finding of

falsity does not factor into the scienter inquiry, but rather, I look to “what the defendant knew

when presenting the claim.” United States ex rel. Schutte v. SuperValu Inc., 598 U.S. 739, 752

(2023); see also Halo Electronics, Inc. v. Pulse Electronics, Inc., 579 U.S. 93, 105 (2016)

(“[C]ulpability is generally measured against the knowledge of the actor at the time of the

challenged conduct.”).

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At summary judgment, and as it relates to falsity, I concluded that “as a matter of law,

Aetna and SilverScript’s price reports were required to reflect the prices Caremark ‘actually paid’

for Part D drugs, which was Caremark’s negotiated average price with the pharmacy.” (S.J. Op.

at 68.) Because the “price reports for Caremark’s Part D sponsor clients did not reflect Caremark’s

negotiated average prices with Walgreens and Rite Aid . . . those reports were therefore false.”

(Id.) I analyzed how the guaranteed average price could have been reported, addressing the

question through the lens of DIR reports, and explained that because “the purpose of reporting

price concessions was to arrive at the prices Caremark had ‘actually incurred,’ it was essential that

price concessions related to Caremark’s guaranteed average pricing contracts be included in end-

of-year DIR reports so that CMS could calculate a correct subsidy.” (Id. at 66-67.)

The question is thus whether Caremark: (1) actually knew that its reported prices for Part

D drugs were not the prices it “actually paid”; (2) was aware of a substantial risk that their higher

retail pharmacy prices were not the price they “actually paid” the pharmacies and “avoided

learning whether their reports were accurate,” or (3) was aware of such a substantial and

unjustifiable risk but reported that pricing anyway. See Schutte, 598 U.S. at 757 (citing §

3729(b)(1)(A)).

Before proceeding, I note that Caremark urges that Relator attempts improperly to prove

scienter by pointing to the company’s “collective knowledge.” Although the Third Circuit has not

explicitly decided whether scienter in the false claims setting can be decided on “collective”

corporate knowledge, other courts examining the issue have found such knowledge insufficient.

See Int’l Brotherhood, 438 F. Supp. 3d at 380 (quoting United States v. Fadul, No. 11-385, 2013

WL 781614, at *9 (D. Md. Feb. 28, 2013)) (“‘When the Government seeks to hold an entity liable

under the False Claims Act, it cannot rely on the collective knowledge of the entity’s agent to

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establish scienter’ and instead ‘must prove an entity’s scienter by demonstrating that a particular

employee or officer acted knowingly.’”); United States v. Sci. Applications Int’l Corp., 626 F.3d

1257, 1275 (D.C. Cir. 2010) (“We know of no circuit that has applied the ‘collective knowledge’

theory to the FCA.”); United States v. Life Care Ctrs. Of Am., Inc., 114 F. Supp. 3d 549, 567 (E.D.

Tenn. 2014) (“As a general matter, federal courts have not permitted a ‘collective knowledge’

theory to be applied in an FCA case.”).

Still, in determining whether Caremark acted recklessly or with deliberate ignorance, I

must consider the corporation’s systems and processes, the information that individuals had access

to as a result, what the corporate interests were, and the impact such interests had on individual

action. See United States v. Educ. Mgmt. Corp., 871 F. Supp. 2d 433, 452 (W.D. Pa. 2012); Int’l

Brotherhood, 438 F. Supp. 3d at 380 (explaining that although collective knowledge theory of

liability is inappropriate, Relator can still make out liability through reckless disregard).

As explained below, the “actions of [Caremark] employees or [Caremark’s] systems and

structure” establishes that Caremark acted “recklessly or with deliberate ignorance of the truth.”

Sci. Applications Int’l Corp., 626 F.3d at 1276.

i. Caremark’s Knowledge of CMS’s Regulations and Guidance

In this section, I discuss what Caremark, by its own employees’ admissions or through the

knowledge of others in the industry, knew and understood CMS regulations and guidance to

require. I then discuss how Caremark’s GER guarantees with Walgreens and Rite Aid implicated

such requirements.

I note that what others in the industry knew CMS’s regulations and guidance to require is

relevant to the question of what Caremark employees knew. See United States ex rel. Patzer v.

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Sikorsky Aircraft Corp., 722 F. Supp. 3d 839, 854 (E.D. Wisc. 2024) (“[E]vidence that industry

participants would not regard [an] arrangement [as violative of a federal contracting rule] is

relevant to whether defendants acted with deliberate ignorance or reckless disregard.”). This

reasoning is why I allowed Caremark to introduce a variety of evidence which would otherwise be

inadmissible hearsay. Indeed, and as discussed later, Caremark’s main argument against scienter

focuses on what others in the industry—including Aetna—knew or believed during the relevant

time period. (See Caremark COL at 14-15 (citing Patzer, 722 F. Supp. 3d at 854).)

1. DIR Reporting Requirements

Part D “drug costs that counted for purposes of Medicare Part D subsidies were those that:

(1) were the ‘negotiated prices’ between the sponsor (or PBM) and the pharmacy; (2) were

‘actually incurred’; and (3) were net of DIR.” (S.J. Op. at 13 (emphasis added).) The amount a

Part D sponsor “actually paid” “had to be adjusted to account for transactions such as rebates—

called ‘direct and indirect remuneration’ or DIR—that tended to reduce the cost of purchasing

drugs.” (S.J. Op. at 14.) Although certain price adjustments were reported in PDE records, CMS

did not require such reports to be adjusted for all price concessions. (Id.) Instead, price

concessions “not reflected in the cost of the drug on the PDE record” were to be included in a

“DIR report.” (See DX218.0033-34; DX220.) CMS required Part D sponsors to submit DIR

reports “[w]ithin six months of year-end.” (DX218.0034.)

During the relevant time period, CMS—through guidance published annually—required

Part D sponsors to report eleven different categories of DIR. (Joint Stips. ¶¶ 135-36.) A key

question at trial was whether Caremark knew—but failed to report as such—that its pricing

contracts with Walgreens and Rite Aid resulted in reportable DIR in one of those categories.

One type of DIR guidance applicable after the 2010 rule change is of particular importance:

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With the exception of adjustments to generic dispensing incentive payments

and adjustments, which are reported in column DIR #8, applicable
adjustments to pharmacy payments are reported in this column. These
include penalties or pharmacy repayments stipulated in the Part D sponsor’s
contract with its network pharmacies that represent incorrect drug costs that
were paid or reported by the Part D sponsor due to an error made by the
pharmacy. For these types of pharmacy penalties, the portion of the penalty
that is equivalent to the amount by which the drug costs paid by the Part D
sponsor or reported to CMS on the PDE exceeds the correct drug
costs must be reported as DIR in this column.

Applicable pharmacy adjustments that reduce the total payments made to

the pharmacy should be reported as a positive adjustment that will serve to
reduce the plan’s drug costs. Applicable pharmacy adjustments that
increase the total payments made to the pharmacy should be reported as a
negative adjustment that increases the plan’s drug costs.

(DX219.0026 (CMS Guidance for 2010 Payment Reconciliation) (emphasis added); see also

DX220.0016 (final CMS Guidance regarding DIR Reporting Requirements for 2011);

DX173.0004 (email from Jean Walker to Charles Klippel asking about impact of this guidance on

Caremark’s contracts with the pharmacies).) Caremark was certainly aware of this guidance. (See

N.T. Mar. 10, 2025 at 84:6-10 (Caremark employee John Lavin—who was charged with

negotiating GER guarantees with the pharmacies testified that he would have been made aware of

“a final rule or regulation that affected . . . network or related activities for Medicare Part D”).)

Aetna Deputy General Counsel Charles Klippel, a sophisticated industry participant,

believed that the guidance here was “clear enough on its face” and was meant to “capture money

flowing back from the pharmacy to the PBM on the basis of some aggregate performance metric

that is not directly attributable on a claim-by-claim basis.” (DX173.0003.) He testified that this

guidance covered “money coming back from the pharmacies, taken back from . . . or flowing back

from the pharmacies after the fact of the claim payments.” (N.T. Mar. 19, 2025 at 67:1-6.)

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Both Parties agree that this guidance applied to situations where a Part D sponsor or PBM

had a two-way GER guarantee with a pharmacy. Aetna’s Head of Governmental Actuarial

Underwriting Jean Walker explained the concept of a two-way GER guarantee succinctly: “in [a]

two-way guarantee, if we overpaid the pharmacies, they would pay us money back. So that would

appear as a positive DIR.” (N.T. Mar. 12, 2025 at 112:13-16.).

Under a two-way GER guarantee, any payments sent back from the pharmacy to the PBM

or Part D sponsor for overpayments on Part D purchases served to reduce the amount actually paid

on Part D drugs and thus represented reportable DIR. 19 Indeed, when Aetna took pharmacy

contracting in-house in 2015 and instituted a two-way guarantee with pharmacies, it reported as

DIR any monies paid back from the pharmacies as a result of such guarantees.

A true one-way GER guarantee, which did not allow a PBM or Part D sponsor to offset

underpayments on commercial drugs with overpayments on Part D drugs relative to the overall

GER, did not create reportable DIR. (N.T. Mar. 19, 2025 at 68:18-20 (Klippel explaining the

difference between a two and one-way GER guarantee).) Caremark expert and former Acting

Director of CMS Leslie Norwalk agreed with both Klippel and Walker. (See N.T. Mar. 18, 2025

at 155:10-13 (Norwalk agreeing that a “two-way guarantee . . . must be reported on DIR but [a]

one-way guarantee does not need to be reported on DIR”).) Norwalk also explained that “industry

participants” would have understood the difference between a one-way and two-way guarantee.

(Id. at 156:7-23.)

19
Caremark’s counsel acknowledged this at various times during trial. (See N.T. Mar. 10, 2025 at 56:20-22 (“And
no one disputes that if the pharmacy is paying money to the PBM, that [] is reportable as DIR.”); N.T. Mar. 14, 2025
at 114:20-24 (“What’s key here is the fact that no one disputes that a two-way guarantee would need to be reported
on DIR. That’s what Aetna had with Rite Aid. Because there were times when Rite Aid would be sending a check
back to Aetna.”)

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Accordingly, I conclude that it was understood in the industry—and thus by Caremark—

that any monies flowing back to Caremark for overpayments on Part D drugs was reportable DIR.

2. Caremark’s GER Guarantees

The next question is whether Caremark knew its overall GER guarantees with the

pharmacies were, for all intents-and-purposes, akin to a two-way GER guarantee for DIR reporting

purposes. In Caremark’s view, its contracts with the pharmacies were one-way guarantees which

did not generate reportable DIR because the pharmacy never sent Caremark a payment. That is,

the pharmacy never mailed, wired, or otherwise sent money to Caremark for an overpayment.

Although true, there is no evidence that the pharmacies “sent” a payment back to Caremark,

that fact is not dispositive. Instead, I look to the form and function of Caremark’s contracts with

the pharmacies. These contracts contained an “offsetting” provision which is best understood

through a careful examination of the contracts themselves. For example, Caremark’s 2013 and

2014 agreements with Rite Aid called for a 78.6% and 80.4% overall GER, respectively, and

included the following provision:

If [Rite Aid’s] reimbursement is less than the Contractual Reimbursement,

Caremark will pay [Rite Aid] additional reimbursement to achieve the
Contractual Reimbursement for the affected claims. Notwithstanding the
foregoing, any amounts owing pursuant to this subsection [] may be offset
against any amounts received by [Rite Aid] that exceeded the Contractual
Reimbursement. If [Rite Aid’s] reimbursement is greater than the contra
ctual reimbursement, [Rite Aid] will not be obligated to pay Caremark the
difference.

(DX046.0001, 0004 (emphasis added).) Caremark’s contracts with Walgreens included the same

or similar language. (See PTX-0061 at ¶ 4; PTX-0062 at ¶ 4.)

Richard Stoneking, the 30(b)(6) witness for non-party Rite Aid explained that this

provision meant, “in essence, if [Rite Aid] owed [Caremark] money . . . [the amount owed] would

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be offset against other groupings.” (N.T. Mar. 14, 2025 at 99:11-13.) In short, any amount owed

by Caremark to the pharmacy for an underpayment on commercial drugs, could be lessened by the

amount that Caremark overpaid on Part D drugs. Stoneking explained how this worked:

Counsel: So what would have Rite Aid’s understanding been if Caremark

had overpaid, paid more than the pharmacy GER by 5 million on Med D,
and underpaid on the commercial relative to the pharmacy GER by 10
million.
Mr. Stoneking: So we would -- they [sic] would be new deal of 5 million
on the commercial side, reducing it by the amount that we were overpaid on
the Part D side.
Counsel: Okay. So Rite Aid would have been owed 10 million on
commercial, but by virtue of the offset provision that we just saw in the
contract, the 5 million that was overpaid on the pharmacy GER would have
served to lessen the amount that Caremark had to pay Rite Aid, correct?
Mr. Stoneking: Yes, that’s correct.

(Id. at 99:24-100:13.)

As explained by Stoneking, a neutral third-party witness, the net effect of the offsetting

provision was the same as if Caremark had negotiated a two-way guarantee with the pharmacies.

(Id. at 126:8-128:11.) Indeed, the math is quite simple:

Type Overpayment on Underpayment on Net Owed to

Part D Commercial Pharmacy
One-way guarantee $2 $5 $3
with offsetting
provision
Two-way guarantee $2 $5 $3

The effect on Part D drug prices was the same as well. Under either guarantee, Caremark’s

overall indebtedness to the pharmacy for Part D drugs would only increase by the negotiated

average price, not by what Caremark paid at the point of sale.

Based on a careful review of the entire record, I disagree with Caremark’s theory that its

pharmacy contracts did not create the same reportable DIR as a two-way guarantee. Whether

Caremark received a credit in the form of a check or an end-of-year reconciliation deduction,

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Caremark’s Part D drug payments were reduced by the overpayment relative to the overall GER.

Put another way, the offset reduced what Caremark paid on Part D drugs from the point-of-sale

price to the overall GER.

I have neither seen nor heard evidence rebutting this concept and in fact, Caremark’s own

expert confirmed the similarity:

Counsel: I owe you [] $100. You owe me [$]50 . . . . We meet. I give you
a $100. You hand me a $50. That’s situation 1.
Counsel: Now suppose, situation 2, I just subtract the $50 you owe me and
I just hand you $50 . . . . [W]ould you agree that those two situations are
economically the same?
...
Ms. Norwalk: I ended up with $50 either way. Is that your point? Yes. I
ended up with $50 either way. Economically equivalent? I ended up with
$50.

(N.T. Mar. 18, 2025 at 221:7-25.)

The belief of Klippel, Norwalk, and other sophisticated industry participants that a one-

way guarantee with an offsetting provision was akin to a two-way guarantee is powerful evidence

that Caremark understood such guarantees created reportable DIR. See Patzer, 722 F. Supp. 3d at

854 (explaining that evidence regarding how industry participants would have regarded certain

arrangements is “relevant to whether defendants acted with deliberate ignorance or reckless

disregard”). This evidence is bolstered by Caremark’s clear understanding of the impact of its

offsetting provisions. Indeed, one need only look at Caremark’s contracts with Rite Aid and the

relevant reconciliation spreadsheets for 2011 and 2014.

In 2011, Caremark had a one-way guarantee with Rite Aid that was not overall. That is,

Caremark negotiated one GER for commercial drugs and another for Part D. (See DX042.0001.)

In addition, unlike the 2013 and 2014 contracts, the 2011 agreement did not allow Caremark to

offset underpayments on commercial drugs with overpayments on Part D drugs. (See DX042.0004

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(“[E]xcept that no offsetting shall occur for the Medicare Part D Retail Network.”).) At trial,

Stoneking explained the financial impact on Caremark in 2011. (See N.T. Mar. 14, 2025 at 94:4-

95:17 (discussing PTX-0560 at 1 of 10).) Reviewing a Caremark/Rite Aid reconciliation

spreadsheet, Stoneking explained that the spreadsheet showed an overpayment on Part D drugs

relative to the Part D GER of $2,658,384 and an underpayment on commercial drugs relative to

the commercial GER of $22,322,637. (Id. at 93:18-94:12; PTX-0560 at 1 of 10.) Because,

however, the 2011 contract did not include an offsetting provision, the overpayment did not serve

to reduce the amount owed by Caremark in reconciling the underpayment. As a result, Caremark

could not offset and owed Rite Aid some $22 million dollars.

The results in 2014, after Caremark negotiated and included an offsetting provision in its

overall GER guarantee with Rite Aid, are illuminating. Then, Caremark underpaid on commercial

drugs by some $53,526,184. (PD-002 (citing PTX-0069 at tab “2014 Proj” at cells A3:R26; PTX-

0096).) Because, however, Caremark overpaid on Part D drugs relative to the overall GER by

$46,110,996, it only owed $7,415,188 in reconciliation payments.

In total, from 2013 to 2014 at Rite Aid and Walgreens, Caremark underpaid on commercial

drugs relative to the overall GER by some $235,000,000. (See PTX-0068; PTX-0069; PTX-0073;

PTX-0074; see also PD-001; PD-002; PD-003; PD-004; PD-009.) During that same time,

Caremark overpaid on Part D drugs relative to the GER by close to $159,000,000. (See generally

id.) If Caremark’s contracts were true one-way guarantees, Caremark would have owed some

$235,000,000 in reconciliation payments and would not have been paid back for its significant

overpayment on Part D drugs. Because, however, Caremark negotiated overall GER guarantees

with an offsetting provision, Caremark only owed some $76,000,000 in end-of-year reconciliation

payments during this time. This sequence warrants reemphasis.

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In 2011, Caremark’s contracts with Rite Aid specifically disallowed offsetting with Part D

overpayments relative to the Part D GER. In 2013, Caremark’s contracts with Rite Aid specifically

allowed offsetting with Part D overpayments relative to the overall GER. The difference meant

Caremark saved millions of dollars when it came time to reconcile with Rite Aid at the end of each

year.

Individuals from Caremark tracked all of this information and clearly appreciated how the

offsetting provision impacted its bottom line. John Lavin negotiated the contracts, Jon Roberts

had some hand in setting the overall GERs and determining how Part D and commercial drug

purchases would be managed to hit that number, and Domenico Gugliuzza managed MAC prices

throughout the year to make sure Caremark met those goals. Other employees, discussed below,

played a role in carrying out Caremark’s scheme.

ii. Concealment

Caremark argues that it “did not conceal from Aetna and CMS how its overall pharmacy

GER guarantees operated [and] instead . . . disclosed the facts necessary for those sophisticated

industry participants to understand its practices.” (Caremark Resp. to Rel. COL (ECF No. 489) at

11 (emphasis added).) I disagree.

If Caremark had fully informed CMS and Aetna of its pricing contracts with the

pharmacies, such evidence would weigh heavily against a finding of scienter. See United States

ex rel. Patzer v. Sikorsky Aircraft Corp., 730 F. Supp. 3d 856, 873 (E.D. Wisc. 2024) (“[A]

defendant who intends to defraud the government is unlikely to disclose the illegal aspect of its

contract to anyone in the government.” (emphasis in original)). The inverse is also true: if

Caremark omitted or withheld a material and fraudulent aspect of its pharmacy contracts in

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discussions with CMS (or Aetna), such omissions or half-truths could weigh in favor of a scienter

finding.

1. Aetna

As discussed below, Caremark informed Aetna about its overall guarantees with the

pharmacies, that Medicare MAC rates might be higher than commercial MAC prices, and that

Caremark’s pharmacy GER guarantees could reflect deeper aggregate discounts off AWP than

Aetna’s Part D plans. What Caremark failed to explain, however, was that “pursuant to the offset

provision in Caremark’s contracts with Rite Aid and Walgreens, money was, in fact, flowing back”

to Caremark on the “Part D side.” (N.T. Mar. 19, 2025 at 137:17-22 (Charles Klippel testifying

that he did not know, “at the time,” about the offsetting provisions or the consequences thereof);

N.T. Mar. 10, 2025 at 106:11-16 (John Lavin explaining that the Part D sponsors would not have

known about the end-of-year reconciliation payment Caremark made to the pharmacies).) When

asked whether Caremark provided any “description of the offset language in the Rite Aid or

Walgreens contract,” Charles Klippel testified that he was “not even aware of what [counsel] was

talking about.” (N.T. Mar. 19, 2025 at 140:17-22.)

Caremark’s responses to the Crowell & Moring led Aetna investigation confirms that

Caremark did not disclose its offsetting provisions with the pharmacies. (See DX0005; DX0006;

DX166.) Instead, Caremark misled Aetna about the nature of its contracts, telling Aetna that

“Pharmacies have not, and do not, make true up payments to [Caremark] under a guarantee” and

that Caremark’s “payment is always to the pharmacy, not from the pharmacy.” (DX005.0005-

0006 (emphasis in original).) Caremark’s willingness to share certain information about its

contracts with the pharmacies, while withholding from Aetna the one contractual provision which

would have revealed its fraudulent behavior, is evidence of scienter.

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2. CMS

A similar process played out during Caremark’s conversations with CMS. During the

relevant time period, Caremark Vice President of Finance for Medicare Part D David Azzolina

was responsible for “reporting on behalf of Medicare clients related to DIR year-end

reconciliations and PDE reporting.” (N.T. Mar. 17, 2025 at 62:11-14.) After the Aetna

investigation began, Caremark tapped Azzolina to respond to inquiries from CMS regarding

Caremark’s contracts with the pharmacies.

The first interaction between CMS and Azzolina took place some time in late January 2016.

Azzolina learned that CMS wanted to learn more about Caremark’s GER contracts with the

pharmacies and the impact thereof on DIR. (See PTX-0711; N.T. Mar. 17, 2025 at 76:4-77:23.)

On March 8, 2016, Azzolina spoke with CMS representatives on an unrecorded phone call. (See

N.T. Mar. 17, 2025 at 78:20-23.) The main focus of the call was “on GERs and how they were

reconciled if Caremark paid more to a pharmacy than the GER.” (Id. at 79:5-8.) On May 26,

2016, Azzolina sent a follow up email to CMS answering several questions raised on the call.

(PTX-0026.) Importantly, Azzolina did not—in either the phone call or the May 26, 2016 email—

explain that Caremark’s pharmacy contracts contained an offsetting provision. (See N.T. Mar. 17,

2025 at 96:15-97:9; PTX-0026.) Instead, as it did with Aetna, Caremark stated that the situation

“where the pharmacy is required to pay back to the plan a portion of the point of sale price as an

adjustment is not applicable to [Caremark’s] GER arrangements with network pharmacies.”

(PTX-0026 (emphasis added).)

Once again, Caremark’s decision to proclaim it was not receiving any reconciliation

payments from the pharmacies while omitting any details about the offsetting provisions is

misleading and speaks to the scienter question. Cf. United States ex rel. Williams v. Renal Care

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Grp., Inc., 696 F.3d 518, 531 (6th Cir. 2012) (explaining that a defendant has not acted in reckless

disregard where they have “consistently sought clarification on the issue, followed industry

practice in trying to sort through ambiguous regulations, and were forthright with government

officials”).

iii. Turning a Blind Eye

Congress added the “deliberate ignorance and reckless disregard criteria for the meaning

of ‘knowingly’ within the meaning of the FCA in 1986 . . . to address ostrich-like behavior, or the

refusal to learn of information which an individual, in the exercise of prudent judgment, had reason

to know.” United States v. LabQ Clinical Diagnostics, LLC, No. 22-10313, 2025 WL 893722, at

*35 (S.D.N.Y. Mar. 24, 2025) (internal quotations and citations omitted); see also Urquilla-Diaz

v. Kaplan Univ., 780 F.3d 1039, 1058 (11th Cir. 2015) (explaining the same). “What typically

matters at common law is whether the defendant made the false statement ‘without belief in its

truth or recklessly, careless of whether it is true or false.’” Schutte, 598 U.S. at 752 (citing

Restatement (Second) of Torts § 526, Comment e.) “If a defendant knows that he lack[s an] honest

belief in the statement’s truth, that is often enough to establish scienter for fraud.” Id. (internal

quotations and citations omitted) (alteration in original).

Azzolina testified that Caremark was aware that “it could ask CMS for guidance regarding

the propriety of a particular business practice.” (N.T. Mar. 17, 2025 at 66:17-20.) Leslie Norwalk

testified that there was commonly a “back-and-forth” relationship between CMS and industry

participants. (N.T. Mar. 18, 2025 at 159:3-4.) She explained that if there was “a question as to

how something should be interpreted, [it] was very common for someone to pick up the phone and

call . . . any number of [] people at CMS who could help them understand what CMS was requiring

on both the PDE side as well as the direct and indirect” remuneration side. (Id. at 159:3-10.)

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Caremark certainly knew it could ask questions or submit concerns, as shown by its letter to CMS

in April of 2015 regarding a separate DIR issue. (See PTX-0726.)

Nevertheless, there is no evidence that Caremark sought clarification, submitted

commentary, or in any other way reached out to CMS to inquire whether its offsetting provisions

created reportable DIR. Even if I were to accept Caremark’s argument, that it did not view its one-

way GER guarantees the same as a two-way GER guarantee, this does not absolve Caremark from

asking CMS for guidance. This is especially so when the economic similarities and impact on Part

D drug prices were so clearly apparent to Caremark. Under these circumstances, Caremark’s

failure to seek clarification or guidance from CMS is further evidence of scienter. See Int’l

Brotherhood, 438 F. Supp. 3d at 363 (alterations in original) (internal quotations and citations

omitted) (“The standard of reckless disregard represents an intent to hold liable [o]nly those who

act in gross negligence, that is, those who failed to make such inquiry as would be reasonable and

prudent to conduct under the circumstances.”).

Next, I consider the knowledge and actions of David Azzolina—the Caremark employee

charged with signing attestations for Aetna and responding to CMS inquiries. In 2015, Azzolina

signed an attestation to Aetna, certifying inter alia, that:

2. [Caremark] has reported to [Aetna] for DIR reporting all price

concessions it obtained from pharmacies, including reporting post point of
sale per claim administrative fees that network pharmacies have agreed to
with PBM, directly or indirectly.
3. In connection with Part D covered drugs dispensed to [Aetna’s] members,
[Caremark] does not receive or retain any other remuneration from any
source (excluding administrative fees paid by Aetna) that constitutes DIR
that is not reported to Aetna pursuant to number 2 above.

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(PTX-0094A at 5 of 5.) But, in signing this attestation, Azzolina did not review the pharmacy

contracts or the pharmacy reconciliation spreadsheets. (N.T. Mar. 17, 2025 at 73:2-9.) Although

Azzolina said that Caremark’s “subject matter experts . . . provid[ed] an understanding” such that

he was “aware of what [he] needed to be aware of . . . to be comfortable to sign the attestation,”

he did not know or explain what the subject matter experts reviewed in advising him. (Id. at 72:22-

73:24.) In addition, Azzolina had “no understanding” of the fact that Caremark’s contracts with

the pharmacies “contained an overall GER inclusive of both commercial and Medicare D lines of

business” or “how those [contracts] were reconciled.” (Id. at 73:25-74:12.) There is also no

evidence that Azzolina knew about the offsetting provisions in the Walgreens and Rite Aid

contracts. It is worth emphasizing that Azzolina was the person that Caremark put in charge of

“CMS reporting on behalf of Medicare clients related to DIR.” (Id. at 74:20-24.)

Azzolina was similarly ill-equipped to respond to CMS when it reached out directly in

2016. Before sending the May 26, 2016 email to CMS, Azzolina did not review the reconciliation

spreadsheets or the pharmacy contracts. (Id. at 85:8-14.) Again, Azzolina testified that he felt

comfortable submitting responses to CMS because the “subject matter experts” provided the

appropriate responses to him. (Id. at 85:14-19.) But again, Azzolina could not explain what these

“experts” reviewed before providing him with draft responses and testified that he did not know

who those “experts” even were. (Id. at 85:20-24; 86:16-20.)

Azzolina’s actions, or lack thereof, when certifying that Caremark was compliant with

CMS requirements constitute evidence of Caremark’s scienter. See Laymon, Jr. v. Bombardier

Transp. (Holdings) USA, Inc., No. 05-169, 2009 WL 793627, at *13 (W.D. Pa. Mar. 23, 2009)

(“An individual responsible for certifying the truth of a claim made to the government cannot turn

a blind eye, rather, they must make the reasonable inquiries regarding claims that are being

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submitted.”). Azzolina’s attestations and responses to CMS, without having reviewed any of the

contracts or reconciliation spreadsheets at issue was, at a minimum, reckless. See Morsell, 651 F.

Supp. 3d 95, at 182 (finding an employee’s “failure to so much as send an email” or “seek[] an

explanation . . . before making [the] representation” was evidence of reckless disregard and

deliberate ignorance). That Azzolina relied on unknown subject matter experts who relied upon

unknown documents does not cure this deficiency, it only exacerbates it. Especially so when, in

signing attestations and communicating with CMS, Azzolina did not even know that Caremark’s

contracts with Rite Aid and Walgreens contained an “overall GER . . . that encompassed both the

Medicare Part D and commercial lines of business” as well as an offsetting provision. (N.T. Mar.

17, 2025 at 74:1-12; 124:7-12.) Put simply, Mr. Azzolina did not know enough to answer the

questions being posed and did not follow up to understand any better.

iv. Employee Belief and Caremark’s Motive

1. Employee Belief

A majority of Relator’s witnesses were under Caremark’s control during the relevant time

period. Former Caremark employees John Lavin, Rebecca Justice, Domenico Gugliuzza, James

Margiotta, Elenna Kinney, and David Azzolina each testified, in some form or another, that they

did not believe Caremark was earning improper spread or failing to report DIR. (See N.T. Mar.

10, 2025 at 175:20-77:15; N.T. Mar. 13, 2025 at 192:7-25; N.T. Mar. 14, 2025 at 75:17-25; N.T.

Mar. 13, 2025 at 148:13-50:4; id. at 53:13-54:12; N.T. Mar. 17, 2025 at 121:15-21.) But, as I have

detailed, this testimony is belied by evidence which shows just the opposite.

Internal guidance, distributed by Caremark during the Aetna investigation in 2014, reflects

that Caremark knew it was earning improper spread or failing to account for reportable DIR. (See

PTX-0270.) There, Caremark’s Senior Legal Counsel explicitly told employees: “Do not create

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documents that link how increased payments to pharmacies for Medicare Part D drugs may relate

to reduced payments to pharmacies for commercial drugs.” (Id. at 2.) That guidance applied to

“any [] employee[] that may be involved in negotiating pricing with Part D plan sponsors and/or

network pharmacies.” (Id. at 1.)

Caremark explains that this policy pertained to Caremark’s compliance with the federal

Anti-Kickback statute, not the False Claims Act. (Caremark Resp. to Rel. Materiality Fact ¶ 10.)

But, regardless of why the guidance was created, the unmistakable message was that: Caremark

employees should stop creating internal documents which show that Caremark is giving deeper

discounts on commercial drugs, shallower discounts for Part D drugs, and using the subsequent

overpayments on Part D drugs to offset the amount underpaid on commercial drugs.

Caremark employees appear to have heeded this message. Whereas in 2012, Caremark

and CVS Health Corp. employees internally discussed offsetting in corporate slideshows, no such

evidence exists after the 2014 internal guidance. (See PTX-0312A at 7 (Slide titled “Rates that

are needed” “In Order to Hit Budget” and showing that in 2013 and 2014, Caremark planned to

pay deeper discounts on commercial drugs and shallower discounts for Part D drugs relative to the

overall GER with Rite Aid); see also PTX0095A at 8 of 14 (discussing profitability of offsetting

practices).) Caremark’s instruction to cease discussions about this practice is thus evidence of its

knowledge. See United States ex rel. Strunck v. Mallinckrodt Ard LLC, No. 12-175, 2020 WL

362717, at *4 (E.D. Pa. Jan. 22, 2020) (citing as evidence of scienter internal emails showing an

awareness that certain activities were illegal).

2. Motive

Relator need not prove motive to make out scienter. See Int’l Brotherhood, 5 F.4th at 350

(citing United States ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908, 921 (4th

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Cir. 2003) (“To ‘establish[ ] liability under the FCA, a plaintiff need not prove the defendant had

a financial motive to make a false statement relating to a claim seeking government funds.’”).

Still, a motive to gain financially from its overall GER could be relevant to the question of whether

Caremark “knew, deliberately ignored, or recklessly disregarded that average price reporting was

required.” (S.J. Op. at 85.)

Caremark understood that under the 2010 rule change, it could not earn spread or profit on

Part D drugs which was not reported to CMS. (See N.T. Mar. 13, 2025 at 223:22-224:2 (Domenico

Gugliuzza agreeing that “Caremark could not earn any spread or locked margin from [Part D]

plans that was not reported to CMS”).) Indeed, in the 2010 press release regarding the rule change,

CMS made clear that although plans could continue to use the “lock-in model with their PBMs, .

. . they must report to CMS the price actually paid to the pharmacy as the negotiated price. Any

difference between the price paid by the plan to the PBM and the price paid by the PBM to the

pharmacy must be reported as an administrative cost.” (PTX-0192 at 1-2 of 3.) In a 2009 annual

report, Caremark described the impact of this change to its shareholders:

These changes impact our ability to offer Medicare Part D plan sponsors
pricing for 2010 that includes the use of retail network “differential” or
“spread,” and we expect these changes to reduce profitability of our
Medicare Part D business beginning in 2010.
(PTX-0174 at 34 of 80 (emphasis added).)

Perhaps this prediction would have come true had Caremark maintained separate GERs for

commercial and Part D drugs. But instead, Caremark negotiated overall GER guarantees with

Walgreens and Rite Aid. The natural result of doing so was that Caremark continued to profit—

albeit in an indirect way—from Part D drug purchases.

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This “indirect profit” or “hidden spread” concept warrants careful review. Under

Caremark’s overall GER guarantees with the pharmacies, the more Caremark paid pharmacies on

Part D drugs, the less it had to pay on commercial drugs relative to the overall GER. (N.T. Mar.

14, 2025 at 82:13-25 (Caremark employee Domenico Gugliuzza agreeing that the “more

[Caremark paid] on a Med D pass-through plan the less [Caremark had] to pay the pharmacy on

commercial spread plans”).) That is so because every dollar spent on Part D drugs in excess of

the overall GER guarantee was a dollar less Caremark had to pay for commercial drugs.

Importantly, the less Caremark paid on commercial drugs relative to the overall GER, the greater

the spread it could earn on such purchases. Caremark witness John Lavin explained that “[s]pread

is just markup,” like when a customer goes to “Costco [and] pay[s] a thousand dollars for a

television, [Costco] didn’t . . . pay a thousand dollars. [Costco] paid somewhere less than a

thousand dollars.” (N.T. Mar. 10, 2025 at 179:5-16.)

Caremark clearly understood this. Indeed, Caremark internally forecasted the “value” of

offsetting, or managing MAC prices so that Caremark paid more on Part D drugs and less on

commercial, and how this would impact its bottom line. (See PTX-0095A at 8 of 14.) Caremark

discussed the impact of offsetting on EBIT—a measure of profit—and predicted profits at Rite

Aid of $79.5 million in 2013 and $159 million in 2014. (See id.; see also id. at 6 of 14 (showing

CVS Health Corp. executive Jon Roberts’s target GER guarantee with offsetting of Part D and

commercial drugs).) Caremark employee John Lavin agreed that “Caremark understood that if the

overall GER was achieved, while overpaying on the [Part D] line and underpaying on the

commercial line, . . . Caremark would profit $159 million.” (N.T. Mar. 10, 2025 at 146:16-21.)

He also agreed that “a portion of the $159 million [profit] included the spread.” (Id. at 146:22-

24.)

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John Lavin was not the only Caremark employee to understand this concept. Albeit in the

context of the CVS Pharmacy Budgeted GER, Caremark employee Elena Kinney agreed that if

Caremark increased commercial drug prices, Caremark would make less spread. (See N.T. Mar.

17, 2025 at 27:1-4.) In addition, in 2013, when Caremark negotiated with Aetna to provide more

competitive Part D prices, Caremark employees discussed the impact of doing so internally. (See

PTX-0249.) Indeed, James Margiotta agreed that if Caremark acceded to an Aetna request for

better Part D prices, doing so would “cost” Caremark some $24 million dollars. (See N.T. Mar.

13, 2025 at 109:4-10; see also PTX-0249; N.T. Mar. 13, 2025 at 101:5-8 (Margiotta explaining

that by decreasing Part D prices, there would be a “financial cost to Caremark”).)

Caremark’s 2013 price negotiations with Aetna are also evidence of scienter. In emails

sent during Aetna’s 2013 discussions with Caremark, Aetna employee Jean Walker explained that

Caremark “told [Aetna] that if [Caremark] modif[ies] Generic MACs to improve [Aetna’s]

competitive position it will come out of [Caremark’s] pocket.” (PTX-0237.) This made no sense

to Aetna because, in a pass-through environment, changes in what Caremark paid for Part D drugs

should not have impacted Caremark’s bottom line. (See N.T. Mar. 12, 2025 at 144:5-19 (Sarah

Behnke explaining Allison Brown’s see-saw comments).) Moreover, in July of 2013, Caremark

offered to “magically improve the pharmacy rates” on Part D drugs without renegotiating rates

with the pharmacies. (See id. at 160:16-162:21 (Sarah Behnke discussing an excel document from

Caremark showing that Caremark could, without renegotiating with the pharmacies, provide a “.15

percent improvement in [Aetna’s] GER”).) The only reason Caremark could have done so was

because it understood that its overall GER guarantee was the price it was actually paying and, as

long as it continued to price Part D drugs above that guarantee, it could continue to hit or get close

to its negotiated average with the pharmacies, and thus continue to profit on the increased spread.

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Taken together, the above facts demonstrate two key concepts: (1) Caremark knew its overall GER

guarantees represented the price it actually paid; and (2) it had a financial motive to recklessly

disregard the risk that its scheme created reportable DIR.

In an effort to minimize evidence of motive, Caremark disputes the very notion that the

GER guarantees were its idea. In support, John Lavin—a former Caremark employee responsible

for pharmacy contracting—testified that the pharmacies were the ones pushing for GER provisions

in their contracts with Caremark. (N.T. Mar. 10, 2025 at 96:17-18.) He testified that Walgreens

requested a GER in 2010 so that it could “get some certainty around [its] reimbursement,” adding

that Walgreens was “aggressive” about renegotiating. (Id. at 99:2-5.) Lavin explained that if

Caremark did not renegotiate, Walgreens would “take [itself] out of [Caremark’s] future networks

and clients.” (Id. at 99:12-14.) Still, at least as it relates to Rite Aid, Lavin testified that it was

Caremark’s idea and “proposal to Rite Aid that Med D be included in an overall GER.” (Id. at

113:1-5.) He explained that if he was forced to have a GER guarantee, it was more beneficial to

Caremark that the guarantee be overall because “fewer GERs” were “easier to manage.” (Id. at

184:2-3.) Lavin further explained that there was no overall strategy in negotiating with the

pharmacies. Instead, whether the pharmacy had separate GERs or an overall GER “just depended

on the negotiations with the pharmacy.” (Id. at 189:11-13.) Caremark witness Domenico

Gugliuzza shared this sentiment, explaining that the pharmacy GERs did not create any “upside

for Caremark” because such contracts place all the “risk” on Caremark. (N.T. Mar. 14, 2025 at

63:24-64:18.)

Both statements deserve little weight in the absence of any supporting evidence. Although

the pharmacies may have asked Caremark to institute GERs, it was Caremark who masterminded

the concept of an overall GER guarantee. (N.T. Mar. 10, 2025 at 97:16-98:17 (John Lavin agreeing

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that he was “one of the architects” of the overall pharmacy GER and that Caremark’s 2010 overall

GER guarantee with Walgreens was “one of the first [of its kind] . . . for any pharmacy anywhere

that [Caremark did].”).) I again note that the only evidence of overall GER guarantees comes from

Caremark’s contracts with Rite Aid and Walgreens.

To recap, I conclude that Relator has proven that: (1) Caremark knew it was managing

MAC prices to pay more for Part D drugs and less for commercial drugs; (2) Caremark knew that

the more it paid for Part D drugs, the less it had to pay for commercial drugs; (3) Caremark knew

that if it paid less on commercial drugs, it could earn more spread; (4) Caremark knew that if it

earned more spread, it earned more profit; and (5) Caremark knew that any profit earned on the

commercial side was thus enabled by inflating the price of Part D drugs.

Caremark attempts to dispute this evidence by pointing to witnesses who testified, in

substantially the same manner, that Caremark did not intentionally set MAC prices higher for Part

D drugs and lower for commercial drugs. (N.T. Mar. 19 at 181:25-182:7 (Allison Brown had no

reason to “believe that [Caremark] was increasing prices for Medicare Part D in order to decrease

prices on commercial.”); N.T. Mar. 10, 2025 at 188:14-189:16 (John Lavin explaining the same);

N.T. Mar. 13, 2025 at 198:8-13 (Rebecca Justice saying the same); N.T. Mar. 14, 2025 at 64:19-

65:3 (Domenico Gugliuzza explaining the same); N.T. Mar. 13, 2025 at 125:10-126:14, 138:11-

20 (James Margiotta explaining that he was unaware of anyone violating Caremark’s internal

policy which prohibited Caremark employees from seeking to increase the plan’s pass-through

drug price for the purpose of decreasing the price for commercial drugs). In support of this

testimony, Caremark introduced what it considered to be other, non-spread or profit related

considerations, which it urges explain its pricing practices for the years in question. As set forth

below, I have carefully considered Caremark’s “market factor” contentions.

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First, Caremark presented testimony which provided a different explanation for why Part

D drugs were priced higher than commercial drugs during the years in question. As an initial

matter, several witnesses explained that Part D drugs involve a different “utilization mix” than

commercial lines. (N.T. Mar. 14, 2025 at 60:2-61:2 (Domenico Gugliuzza explaining that Part D

beneficiaries are typically older and require more prescriptions which can change the drug

“utilization mix”).) Caremark employees explained that some drugs, depending on this “utilization

mix,” are “deeply discounted.” (Id. at 60:2-9.) Moreover, whether the drug had one manufacturer,

or multiple, impacted Caremark’s ability to offer deeper discounts. (Id. at 61:14-62:2.)

Caremark’s Director of Retail Network Strategies during the relevant time period, Elena Kinney,

agreed that “limited competition” among manufacturers could impact the MAC prices as well.

(N.T. Mar. 17, 2025 at 37:3-15.)

Finally, Caremark’s expert Leslie Norwalk provided another competition-based theory on

why Part D prices were higher than commercial: because the Part D regulations required Part D

sponsors or PBMs to offer their pharmacy networks to all pharmacies wishing to participate, and

because no such requirement existed for the commercial line of business, Caremark could not

negotiate better prices on Part D drugs. (N.T. Mar. 18, 2025 at 132:17-133:5.) In essence,

Caremark was able to be more selective for commercial lines of business, which in turn, provided

Caremark the opportunity to offer pharmacies a larger volume of commercial drugs (at the

exclusion of other pharmacies) in exchange for a deeper discount. (Id. at 133:1-5.)

Ms. Norwalk provided a series of other explanations which were unconvincing. First, she

pointed to a Part D benefit design called “the doughnut hole.” (Id. at 125:17-24.) She explained

that the design included four phases: (1) the beneficiary pays in full to meet a certain deductible;

(2) the Part D benefit kicks in and the drugs are covered; (3) the beneficiary enters a second

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deductible period, also known as the doughnut hole; and (4) the beneficiary reaches catastrophic

coverage and pays nothing. (See id. at 126:25-28:3.) She opined that because this process was so

confusing, pharmacists had to spend more time explaining which benefit phase the Part D recipient

was in. (Id. at 128:1-17.) This could mean that the “same drug cost[s] a different amount at the

pharmacy counter for a beneficiary of Medicare Part D and a commercial recipient.” (Id. at 128:9-

17.) For her second explanation, Ms. Norwalk testified that Medicare beneficiaries are “far more

likely to have a very long list of drugs” which would result in “a lot more time and effort” from

the pharmacist and thus, it would “not surprise [her] for the pharmacist to want more money.” (Id.

at 131:5-21.)

In a nutshell, Ms. Norwalk opined that because it takes more time for a pharmacist to deal

with a Medicare beneficiary, it is reasonable that Part D drug prices are higher. Ms. Norwalk’s

explanations are refuted by one of Caremark’s other experts, Joseph Zavalishin, who testified that

Caremark sets the MAC price and “[i]t was irrelevant to the pharmacy whether a patient was a

commercial or Medicare beneficiary.” (Zavalishin Written Direct Exam. ¶¶ 34, 40.) I also note

that Ms. Norwalk has never “worked for a retail pharmacy as an employee” and could provide no

basis for her theory that pharmacists are essentially billing by the minute for Part D drugs. (N.T.

Mar. 18, 2025 at 206:12-15.) I thus assign little weight to these two opinions.

Relator presented convincing evidence to rebut Caremark’s market factor contentions.

Caremark witnesses explained that despite the above “market factors,” Caremark consistently

managed MAC prices to hit the overall GER. (See N.T. Mar. 17, 2025 at 58:20-25 (Elena Kinney

explaining that “market factors” did not play a role in end-of-year contractual adjustments to hit

the CVS pharmacy “commitment.”); N.T. Mar. 14, 2025 at 79:7-10 (Domenico Gugliuzza

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explaining that “despite [] market factors, [he] and [his] team were able to manage the MAC . . .

prices to get very close to the overall pharmacy GERs”).)

Moreover, Caremark’s internal documents did not evince any consideration of market

factors when setting the MAC prices for each line of business. Instead, certain documents showed

a premeditated plan—without mention of market factors—to pay more for Part D drugs and less

for commercial drugs. An internal slideshow shows that Caremark’s “strategy . . . in connection

with Rite Aid [for its] 2013, ’14, ’15 contracts . . . reflects the need to have Caremark pay more to

Rite Aid for Medicare Part D than the [overall] GER . . . and less on the commercial side than the

pharmacy [overall] GER.” (N.T. Mar. 10, 2025 at 114:14-21; PTX-0313A at 12 of 23; see also

N.T. Mar. 10, 2025 at 113:19-114:21 (Caremark employee John Lavin explaining that in 2013,

Caremark internally discussed setting an “overall GER of 77.6 percent” with Rite Aid, which

necessitated a “Part D . . . GER of [AWP-]74.8 percent” and a “commercial [GER] of [AWP-

]80.6” percent).) John Lavin put it succinctly, agreeing that it “was Caremark’s intention to

overpay Rite Aid on the Med D line and underpay on the commercial line in terms of achieving

the overall GER.” (Id. at 117:7-14.)

In these circumstances, and because Caremark set MAC prices without regard to so-called

“market factors,” Caremark’s market factor defense fails to move the needle.

v. Others in the Industry

Caremark’s main argument against scienter concerns Aetna’s investigation into

Caremark’s pricing terms with the pharmacies. Caremark presses that Aetna’s investigation into,

and absolution of, Caremark’s pricing scheme is strong evidence that Caremark did not know it

was doing anything wrong. Caremark relies on a sophisticated industry participant theory. That

is, if Aetna—a sophisticated player in this field—reviewed Caremark’s pricing scheme and

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decided there was nothing wrong, than Caremark in turn could not have had the requisite scienter.

See Patzer, 722 F. Supp. 3d at 854.

Although I have previously discussed the Aetna investigation, I do so now in a separate

context. That is, whether Caremark can rely, in good faith, on Aetna’s investigation. For the

reasons that follow, I place little weight on this evidence.

There are two possible reasons Aetna’s investigation of Caremark’s pricing practices could

be relevant to scienter. First, the investigation and resultant memos could stand for the proposition

that the regulations were not clear. Second, that Aetna investigated and cleared Caremark of

wrongdoing could indicate that Aetna, like Caremark, did not believe Caremark’s pricing practices

were fraudulent. Caremark appears only to focus on the second proposition. (See Caremark COL

at 14 (internal citations omitted) (“Instead, industry-practice evidence at trial corroborated

Caremark employees’ sincere belief that they were doing nothing wrong.”).)

Most of the Aetna investigation was introduced through the testimony of Charles Klippel—

Aetna’s former Deputy General Counsel. Klippel took Ms. Behnke’s concerns seriously and relied

on a well-regarded lawyer in Art Lerner to investigate Caremark’s pricing scheme. (See N.T. Mar.

19, 2025 at 23:1-4.) That investigation, however, relied entirely upon half-truths and misleading

representations from Caremark.

The compliance portion of Aetna’s investigation was split into two parts: (1) did

Caremark’s contracts with the pharmacies create reportable DIR; and (2) was Aetna receiving

pass-through pricing. The first part was assigned to Art Lerner and his team at Crowell and

Moring. The second was handled by the Burchfield Group, a third-party auditor. (See DX191.)

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Art Lerner handled the DIR prong of the investigation because it was an “interpretive

issue” aimed at determining whether “the regulations or the instructions require certain things to

be reported or not.” (N.T. Mar. 19, 2025 at 78:18-23.) Because Caremark and Aetna had been

and could have become competitors, Caremark did not share its pharmacy contracts or

reconciliation spreadsheets with Aetna. (Id. at 77:18-21.) As a result, Aetna relied entirely upon

representations made to it by Caremark and Caremark’s counsel. Those representations were not

corroborated by Aetna or Mr. Lerner. (See DX003.0005 (“We have not made any independent

confirmation of the foregoing representations and attestations by [Caremark].”).)

From 2013 to 2015, Caremark and its outside counsel provided three responses to questions

posed by Relator, Klippel, and Lerner. The first response—from sometime in April of 2013—did

not disclose Caremark’s offsetting provisions nor did it explain that it had overall GER guarantees

with the pharmacies. (See DX162. 20)

On February 9, 2015, Caremark submitted its second written response, which explained

that the pharmacies did not make “true up payments” back to Caremark. (DX005.) This response

did not satisfy Aetna’s DIR concerns and Aetna requested additional clarification. (DX004.)

On March 13, 2015, Caremark—through counsel—submitted its third response. (DX006.)

Caremark explained that the “extent to which CMS has issued annual guidance and the sheer

number of enumerated examples of DIR and price concessions strongly suggests that CMS would

have explicitly included a PBM pharmacy guarantee covering both commercial and Medicare Part

D rates as an example of DIR.” (DX0006.0007.) I understand this to mean that, if CMS wanted

20
This exhibit, and most of the documents associated with Aetna’s internal investigation, were admitted for a limited
non-truth purpose, that is, Aetna’s state of mind and thus Caremark’s state of mind. See Patzer, 722 F. Supp. 3d at
854 (explaining that evidence a sophisticated industry participant investigated the conduct and found no wrongdoing
is relevant to scienter); (See N.T. Mar. 12, 2025 at 23:24-24:5.)

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Part D sponsors to report as DIR the impact on Part D drugs from an overall GER guarantee, they

would have said so. This response and Caremark’s reliance thereon carries little weight because

there is no evidence that any other industry participant maintained an overall GER guarantee at the

relevant time. (See N.T. Mar. 18, 2025 at 202:6-14 (Leslie Norwalk agreeing that as of her

deposition, she could not identify “a single example, outside this case, of a pharmacy GER that

covered both Med D and commercial”); N.T. Mar. 20, 2025 at 73:2-15, 80:10-18 (Joseph

Zavalishin testifying that although he is “extremely certain” that such contracts existed, he could

not identify “any other contract between a PBM and a pharmacy . . . that contained an overall GER

encompassing both Medicare Part D and commercial lines of business”).)

Klippel testified that he was “satisfied” with these responses because, in his mind, they

were “complete and well-reasoned.” (N.T. Mar. 19, 2025 at 95:5-8.) As Klippel acknowledged,

however, these responses contained no mention of Caremark’s offsetting provisions.

Regarding the Burchfield Group audit, that analysis focused on whether Aetna was

receiving pass-through pricing on its members’ Part D purchases. Although the Burchfield group

had access to Caremark’s contracts with the pharmacies—and thus theoretically could have

reviewed the offsetting provisions—that audit was never “meant to address DIR reporting.” (N.T.

Mar. 19, 2025 at 78:10-12; see also DX191.0005 (“[T]he scope of the audit did not encompass

Direct and Indirect Remuneration . . . reporting provided by Caremark to Aetna.”).) The audit

concluded that the price Caremark paid the pharmacies on Part D drugs at the point of sale matched

what Caremark charged Aetna. But again, this audit did not apprise Aetna of Caremark’s offsetting

practices.

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As already explained, the omission of the offsetting provision, in the face of questions

about DIR, is evidence of concealment and thus scienter. The omission also serves to undercut

Caremark’s reliance on the Aetna investigation and its results.

vi. Government Knowledge

Caremark’s final argument against scienter relates to its interactions with CMS. If CMS

actually knew of Caremark’s pricing scheme and approved subsequent claims despite this

knowledge, CMS’s inaction could bolster Caremark’s purported belief that it was complying with

CMS regulations and guidance.

The extent of what Caremark informed CMS is encapsulated in an un-recorded March 8,

2016 phone call and a May 26, 2016 email. (See PTX-0026.) In that email, Azzolina informed

CMS that Caremark:

has agreed to a Generic Effective Rate (GER) with a few pharmacies . . . .

[Caremark’s] GER’s establish a pricing commitment to pay a minimum
guaranteed amount, generally across the pharmacy book of business . . . .
Pharmacies do not make true up payments to CVS Caremark under a GER
should their reimbursement be more than the minimum guaranteed amount.
The GER is also not associated with additional arrangements that reduce the
price, such as DIR arrangements with pharmacies where there may be an
agreed upon incentive payment and/or discount based on pharmacy
performance. Thus, the example discussed where the pharmacy is required
to pay back to the plan a portion of the point of sale price as an adjustment
is not applicable to our GER arrangements with network pharmacies.

(Id.)

Although the email does not state that the GERs covered both commercial and Part D lines

of business, Caremark urges that CMS would have understood Azzolina as saying as much. He

testified that the term “book of business . . . is understood within the industry” to mean “everything

that the PBM transacts with the pharmacy.” (N.T. Mar. 17, 2025 at 82:6-8; 91:19-23.)

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To be clear, the issue here is not whether Caremark disclosed its overall GER guarantees

with the pharmacies, but rather, whether Caremark disclosed how those guarantees worked. That

was the focus of CMS’s call with Azzolina. As previously noted, the evidence simply does not

support the position that Azzolina’s responses sufficiently explained the impact of Caremark’s

overall GER guarantees.

I conclude that Azzolina never explained the offsetting provisions to CMS and thus, CMS

was left with an incomplete picture. On the one hand, CMS was told that the pharmacies did not

make true up payments to Caremark. But on the other, Caremark did not explain that the offsetting

provisions had the same economic effect as a true-up payment. In these circumstances, it is of no

moment that CMS did not ask follow up questions, impose fines, or otherwise find Caremark at

fault. CMS thought its questions were answered, when in reality, it was misled.

E. CVS Health Corporation’s Liability 21

“It is a general principle of corporate law deeply ingrained in our economic and legal

systems that a parent corporation . . . is not liable for the acts of its subsidiaries.” United States v.

Bestfoods, 524 U.S. 51, 61 (1998) (internal quotations and citations omitted). This general rule

applies in False Claims Act cases. See United States v. Tenet Healthcare Corp., No. 22-11590,

2024 WL 3926474, at *6 (E.D. Mich. Aug. 23, 2024) (internal citations omitted). A parent

company may, however, “be held liable for acts of subsidiaries when an ‘alleged wrong can

seemingly be traced to the parent through the conduit of its own personnel and management,’ and

when the parent has interfered with the subsidiaries’ operations in a way that surpasses control

Throughout this Opinion, I have referred to Defendants collectively as Caremark. For this Section only, I refer to
21

Defendants CVS Health Corp. and its Caremark subsidiaries as “Defendants.”

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intrinsic to ownership.” United States v. Planned Parenthood Fed’n of Am. Inc., 601 F. Supp. 3d

97, 116 (N.D. Tex. 2022) (quoting Bestfoods, 524 U.S. at 64-65).

Relator’s theory of liability against CVS Health Corp.—the parent company—relies on the

organization’s alleged direct involvement with Defendants’ alleged pricing scheme. (See ECF No.

490 at 14-15.) Defendants counter that CVS Health Corp. cannot be held liable because it was not

directly involved in causing the submission of false claims. (Caremark COL at 19 (citing United

States v. Exec. Health Res., Inc., 196 F. Supp. 3d 477, 513 (E.D. Pa. 2016)).) Rather, Defendants

assert that Relator has proven only that certain individuals with roles at both CVS Health Corp.

and its subsidiaries had some hand in the submission of these false claims.

Relator must rebut the presumption that “directors are wearing their subsidiary hats and

not their parent hats when acting for the subsidiary.” United States ex rel. Baker v. Cmty. Health

Sys., Inc., No. 05-279, 2014 WL 10212574, at *26 (D.N.M. May 16, 2014) (internal quotations

and citations omitted). In an attempt to do so, Relator points to the following evidence: (1) CVS

Health Corp. was the signatory on each attestation submitted by subsidiary SilverScript to CMS.

(PTX-0210; PTX-0211; PTX-0212; PTX-0213); (2) CVS Health Corp.’s Executive Vice President

assisted Caremark in setting the overall GER guarantees at Rite Aid in 2013 and 2015 (See PTX-

0312A at 8 of 9; N.T. Mar. 10, 2025 at 141:18-21); (3) David Azzolina, who was Vice President

for finance at CVS Health but worked in the “Caremark business unit” from 2010 to 2018 was

responsible for “CMS reporting on behalf of Medicare clients related to DIR”; (4) Azzolina signed

an attestation to Aetna reporting that prices were accurate; and (5) Azzolina made misleading

representations to CMS and then updated CVS Health executives on those conversations. (ECF

No. 490 at 14-15.)

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Caremark urges this evidence is not enough to prove CVS Health Corp.’s direct

involvement. I agree. I start by noting that the best evidence for finding CVS Health Corp. liable

comes from an internal slideshow where CVS Health Corp. executive Jon Roberts assisted in

setting the Rite Aid overall GER guarantees for 2013 and 2014. (See PTX-0312A at 8 of 9.) That

evidence, however, is undercut by another internal slide show, where Jon Roberts is listed as a

“Caremark” key decision-maker. (See PTX-0095A at 10 of 14.) I also note that SilverScript

attestations were signed by representatives of CVS Health Corp. This fact is not determinative,

however, because Todd Meek—one of the signatories during the years in question—explained that

he signed those documents in his role as a SilverScript employee.

Finally, Relator argues that David Azzolina’s actions were made on behalf of CVS Health

Corp. This contention is not persuasive. Although Azzolina was a CVS Health Corp. executive,

Relator concedes that he signed the 2014 attestation to Aetna and communicated to CMS on behalf

of Caremark, not the parent company. (See Rel. Scienter Fact ¶ 25.)

This evidence is simply not enough to find that Relator has rebutted the presumption that

Roberts, Azzolina, Meek, and other employees were acting on behalf of Caremark as opposed to

CVS Health Corp. Accordingly, I conclude that Relator has not made out liability against CVS

Health Corp.

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F. FCA CLAIMS PROVEN

The final liability question concerns whether Relator has proven each of her FCA claims

under 31 U.S.C. § 3729.

Caremark urges Relator has failed to prove her presentment and false statement claims

(Counts I and II) under 31 U.S.C. § 3729(a)(1)(A) and (a)(1)(B) because Relator did not show that

individual PDE and DIR reports were themselves false. I disagree.

At summary judgment, I “conclude[d] that Aetna and SilverScript were required to submit

PDE records and DIR reports that, collectively, reflected the prices Caremark ‘actually paid’—

i.e., Caremark’s guaranteed average prices.” (S.J. Op. at 63.) I explained that “[t]o the extent

Aetna and SilverScript’s PDE records reflected only individual sale prices, Aetna and SilverScript

were required to account for the difference in their DIR reports.” (S.J. Op. at 68.) Because

Caremark’s Part D sponsor clients’ PDE and DIR reports “did not reflect Caremark’s negotiated

average prices with Walgreens and Rite Aid . . . those reports were therefore false.” (Id.)

To be clear, I will not speculate as to which report—PDE or DIR—Aetna and SilverScript

would have used to disclose the average negotiated price had it known about Caremark’s offsetting

provisions and the effect thereof. I will, however, credit the undisputed testimony that Aetna

continued to, and accurately reported, point-of-sale prices in PDE reports but reported the monies

paid back from the pharmacies as DIR when it took over pharmacy contracting in 2015. (Caremark

Scienter Fact ¶ 25.) Both Parties appear to agree that when the price concession was accurately

reported in an end-of-year DIR report, the PDEs—which reported point-of-sale prices—were

accurate. As Caremark explains, “[t]here was no failure to report pharmacy GER guarantees unless

and until the DIR reports did not reflect those guarantees.” (Caremark COL at 17.)

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Because this is how sophisticated industry participants accurately reported two-way GER

guarantees, I find that the DIR reports submitted by Caremark’s Part D sponsors’ were thus false.

Accordingly, Relator has met her burden of proof on both her § 3729(a)(1)(A) and (a)(1)(B)

claims.

As to Relator’s reverse FCA claim (Count III), Relator was required to show that Caremark

knowingly made or caused to be made a “false record or statement material to an obligation to pay

or transmit money or property to the Government,” knowingly concealed, or knowingly and

improperly avoided or “decrease[d] an obligation to pay or transmit money or property to the

Government.” 31 U.S.C. § 3729(a)(1)(G). Relator’s reverse false claim theory rests on an

understanding of the effect Caremark’s conduct had on “risk-corridor” payments Aetna and

SilverScript were obligated to make at the end of each year. I explained the concept of risk-

corridor payments in my Summary Judgment Opinion:

CMS used risk corridor payments to limit the aggregate amount of gain or
loss a Part D plan could incur throughout the year. (See Norwalk Opening
Report ¶ 67; Craft Second Amended Opening Report ¶ 73.) At the end of
the year, CMS would calculate the gain or loss by comparing the total
amount the plan spent on prescription drugs (adjusted for any reinsurance
or LICS subsidies received) to its predicted expenditure. 42 C.F.R.
§§ 423.336(a) (effective March 22, 2005); 423.308 (effective June 7, 2010).
Spending in excess of the prediction was a loss; spending below the
prediction was a gain. If the magnitude of the gain or loss was less than a
certain amount (called the “first threshold”), the plan would bear the entire
risk and no adjustments would be made. 42 C.F.R. § 423.336(b)(1). If, on
the other hand, the magnitude of the gain or loss exceeded the threshold, the
government would share a portion of it.

(S.J. Op. at 17-18.) The key, for purposes of Relator’s reverse FCA claim is that, “if the plan made

a gain over the threshold, the plan would be obligated to return some of that gain to the government,

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and if the plan suffered a loss above the threshold, the government would repay the plan for a

portion of that loss.” (Id. at 18 (internal citation omitted).)

At trial, Dr. Smith explained that if a Part D sponsor’s initial bid to CMS “for the cost of

their plan . . . is higher than what actually happens at the end of the year, [the plan has] to pay back

some of the subsidy they . . . received through the year to the Government.” (N.T. Mar. 17, 2025

at 172:12-16.) Smith showed, that by failing to report accurate prices to Part D sponsors (who

then reported that amount to CMS), Caremark caused the Part D sponsors to pay less to the

government in risk corridor payments at the end of each year. (See id. at 172:17-25.)

Relator relies on the same evidence, regulations, and guidance to make out all three

theories. Moreover, her damages calculation—which relies on the impact on risk-corridor

payments had Caremark accurately reported price concessions—would be the same regardless of

her theory on liability. I thus find the reverse FCA claim a “redundant ‘flip-side’ of the claims

made in the preceding counts.” United States ex rel. Sobek v. Educ. Mgmt, LLC, No. 10-131,

2013 WL 2404082, at *29 (W.D. Pa. May 31, 2013); see also Hawaii ex rel. Torricer v. Liberty

Dialysis-Hawaii LLC, 512 F. Supp. 3d 1096, 1119 (D. Haw. 2021) (“[T]he court agrees with the

substantial authority holding that an actionable reverse false claim cannot be based on a

defendant’s failure to refund the same payment that was obtained by an actionable false claim.

Such a claim under § 3729(a)(1)(G) would be redundant of the original claim.”).

Accordingly, I find liability only as two Counts I and II.

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G. DAMAGES

For the reasons discussed above, I find damages exist only as to the plan-year combinations

Relator presented regarding Rite Aid and Walgreens. I make the following findings and

conclusions regarding Dr. Smith’s damages calculations.

“In calculating FCA damages, the fact-finder seeks to set an award that puts the

government in the same position as it would have been if the defendant’s claims had not been

false.” Sci. Applications Int’l Corp., 626 F.3d at 1278 (internal citations omitted). Although

damages must be proven “with reasonable certainty, proof of the amount of damages may be based

on a reasonable estimate.” United States ex rel. Landis v. Tailwind Sports Corp., No. 10-976,

2017 WL 5905509, at *5 (D.D.C. Nov. 28, 2017) (emphasis added) (internal quotations and

citations omitted).

Relator has proven damages with reasonable certainty. As outlined above, Caremark’s

conduct inflated the prices of Part D drugs and thus caused CMS to over-subsidize drug costs. The

question here is whether Relator has provided a reasonable estimate for damages. Relator’s expert,

Dr. Loren Smith calculated damages as the difference between: (1) the subsidies CMS actually

paid, in the aggregate, for Part D drug claims; less (2) the subsidies CMS would have paid for Part

D drug claims had prices equal in the aggregate to Caremark’s overall GERs with the pharmacies

been reported.

I find that Dr. Smith’s DIR-based damages calculation, using the “average discount price

discrepancy” model, represents a reasonable estimate of damages in this case. I do so for two

reasons. First, had Caremark accurately reported DIR, its PDE records would have been

compliant. (See S.J. Op. at 63 (concluding that “Aetna and SilverScript were required to submit

PDE records and DIR reports that, collectively, reflected the prices Caremark ‘actually paid’—

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i.e., Caremark’s guaranteed average prices”).) Again, I cannot predict what Caremark would have

done—that is reporting through PDE records or DIR reports. But I can point to the only other

evidence in the record showing how industry participants reported DIR generated in substantially

the same manner. When Aetna maintained a two-way GER with the pharmacies and money flowed

back to Aetna, it reported such payments in end-of-year DIR reports and continued to report the

point-of-sale price in PDE records. Both Parties agree that this practice was appropriate and

Aetna’s PDE records were compliant with CMS regulations. Accordingly, I find that the DIR

reports are a better indicator of Caremark’s false claims in this case. It appears that Caremark

agrees. (See Caremark COL at 17 (“There was no failure to report pharmacy GER guarantees

unless and until the DIR reports did not reflect those guarantees.”).)

Second, I only rely on Smith’s “average discount price discrepancy method,” and not his

“Plan GER price discrepancy method,” in determining damages. As explained supra, the average

discount method—which is based on actual PRS data provided by CMS—is a more accurate

measure of the pricing discrepancy.

Caremark’s main argument against Dr. Smith’s DIR based damages calculation is that

Smith “relie[d] on aggregate calculations at the plan-sponsor level when plan sponsors actually

report DIR separately for each Part D plan.” (Caremark COL at 18.) This, Caremark urges, results

in excess damages for plan-year combinations where the plan reported “better” pricing than the

applicable pharmacy GER guarantee. (Id. (emphasis in original).) By doing so, Caremark

contends, Dr. Smith “over-allocated the pricing discrepancy essential to his damages calculations.”

(Id.) This argument holds no water.

As explained above, Smith allocated DIR amongst individual Aetna and SilverScript plans

consistent with CMS guidance, and, CMS subsidized Aetna and SilverScript in the aggregate, not

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on a plan-by-plan basis. (See PTX-0166 at 12; Joint Stips. ¶ 47.) That Smith allocated some DIR

to plans which outperformed the pharmacy GER guarantee is of no moment. Indeed, if the GER

was AWP-80%, it would make sense that some individual plans would be above, and others below,

that mark. (See Smith Written Rebuttal Testimony ¶ 2 (“Mr. Barlag ignores that any decrease in

pricing discrepancy for a given group of Aetna (or SilverScript) Part D Plans must be equally offset

by an increase in pricing discrepancy at other Aetna (or SilverScript) Part D Plans.”).) 22

Next, Caremark argues that Relator’s damages calculation for Rite Aid and Walgreens

“does not reflect that Caremark paid Walgreens over $12.2 million less for Aetna and

SilverScript’s Part D claims in 2011 and 2012,” and accordingly, “$12.2 million should be

deducted from any damages award.” (Caremark Resp. to Rel. COL at 14 (emphasis in original).)

The gist of this argument is that Dr. Smith should have reduced his damages calculation by any

“negative pricing discrepancy.” Caremark points to portions of Dr. Smith’s workpapers which

originally calculated damages at Walgreens for 2011 and 2012. (See Caremark Damages Fact ¶

19.) Relator contends that the discrepancy should not be deducted from overall damages because:

(1) that data was outside the scope of Smith’s damages calculation and (2) that amount does not

reflect that CMS would only subsidize about 60%-70% of reported drug costs.

I will not reduce damages by $12.2 million or the proposed subsidized amount. Those

plan, year, pharmacy combinations are not at issue in this case. Moreover, and noting that the

22
Caremark furthered—and I rejected—a similar argument at summary judgment. (See S.J. Op. at 76 (“Caremark
has not identified a requirement, either under the False Claims Act or Medicare Part D, to allocate damages to
individual PDE records or DIR reports, particularly given the evidence that CMS made subsidy payments on an
aggregate basis.”); see also id. (“In addition, while Caremark’s expert faults Relator’s expert for allocating price
concessions to Part D plans whose individual sale prices were lower than Caremark’s guaranteed average prices,
Caremark has not cited authority that such an allocation would have been inconsistent with CMS’s reporting rules,
which permitted some kinds of allocation.”).) Caremark has not changed my mind.

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burden remains on Relator, Caremark has not explained how a negative pricing discrepancy would

reduce damages.

Accordingly, and based on Dr. Smith’s expertise and testimony, I find pre-trebling and pre-

penalty damages of $95 million.

VII. CONCLUSION

For the foregoing reasons, I find in favor of Relator. I make no ruling at this time regarding

the number of false claims, trebling, or civil penalties. A briefing schedule will follow as will an

Order consistent with this Opinion.

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