The former chief pharmacist for a Fort Worth pharmacy implicated in what federal authorities say was a $55 million healthcare scam testified Wednesday that he formulated so-called “compounded drugs” with the deliberate intention of driving up payments from insurers, including the government’s insurance program for military personnel.
George Lock Paret said much of his job as pharmacist-in-charge for Rxpress Pharmacy consisted of figuring how much insurers would pay out for various prescription compounds, then “tinkering” with the formulas for those compounds to maximize reimbursements from private and government insurers.
His testimony, secured by prosecutors through a plea agreement, came on the second day of the criminal fraud trial of Richard Hall, a co-owner of the now-defunct pharmacy and a related company, Xpress Compounding.
Paret is to continue testifying Thursday morning before a jury in the court of U.S. District Judge Karen Gren Scholer of Dallas.
As an example of how he boosted the price of compounds, Paret said, if one milligram of a certain ingredient would satisfy a patient’s medical needs but five milligrams would do the patient no harm, “then we were going to go with five milligrams.” Faced with a choice between two ingredients that could be used in a compound, he said, he would typically “choose one that makes us the most money.” And if an insurer disallowed a claim for a compound, he said, he might swap out one ingredient for another or modify the proportions of the ingredients in the compound, then resubmit the claim.
Compounded drugs, the specialty of Rxpress and Xpress Compounding, are medications, usually very expensive, that are custom-mixed and individually prescribed for patients who cannot take a mass-produced prescription drug to treat the same condition. For example, a patient might be allergic to a dye or preservative in a conventional prescription drug; the patient’s doctor could then prescribe a compounded version that leaves out the troublesome ingredient.
According to a federal indictment issued in December 2018 and updated in May 2020, Hall and business associates, including Paret, oversaw “a vast network of marketers” who got millions of dollars in kickbacks to recruit doctors to write thousands of prescriptions for the pharmacies’ compounded medications.
The recruiters lured some doctors into the enterprise, prosecution witnesses have said, with financial incentives.
Six of eight original defendants named in the indictment have cut deals with the government. Three of them, including Paret, have testified already against Hall, and three others are listed as potential witnesses.
Judge Scholer told jurors the trial should take about two weeks.
According to the 2020 superseding indictment, from May 2014 to September 2016, the government paid Xpress Compounding $58.9 million on claims submitted to two federal health insurance programs: TRICARE, which insures active and retired members of the armed services, their dependents and their survivors, and a program authorized under the Federal Employees’ Compensation Act (FECA) that pays workers’ compensation benefits for federal employees injured or killed on the job.
“The vast majority” of those claims, the indictment said, “were the product of illegal kickbacks and fraud.”
In the government’s opening statement on Tuesday, Jacqueline Zee DerOvanesian, a Department of Justice prosecutor based in Miramar, Florida, pegged the portion of that $58.9 million that stemmed from fraudulent acts at $55 million.
Generally, the indictment said, Rxpress Pharmacy submitted claims to private insurers, and Xpress Compounding submitted claims to TRICARE and FECA. But in other ways, it said, the two businesses “were separate in name only.” Hall was a co-owner of both, along with his father, longtime Fort Worth pharmacist Lewis Hall, and two business partners, Tarrant County residents Scott Schuster and Dustin Rall. Schuster and Rall are among those who’ve pleaded guilty and are cooperating in the prosecution of Richard Hall.
Paret, the pharmacist, testified that by adjusting the formulation of just one of the companies’ many compounded drugs, he was able to raise its billable cost by $1,500 per prescription, which translated to an additional $24 million in revenues over the course of a year.
He said it was not uncommon for the pharmacies to process 500 prescriptions a day, and that he was paid a bonus of $5,000 for each day when insurance claims hit $1 million.
Testimony from two other government witnesses Wednesday further suggested the magnitude of the enterprise:
– James Gogue, a Defense Department healthcare fraud specialist, said Xpress Compounding billed TRICARE $19,419,06 for a single tube of one compounded cream — a tube about the size of a tube of toothpaste. The government paid $16,569.16 on the claim.
Under cross-examination by John D. Cline of San Francisco, one of Hall’s defense lawyers, Gogue acknowledged that doctors — not pharmacies — prescribe medications and determine which drugs, even very expensive ones, are necessary for their patients.
Gogue said that with thousands of prescription claims flowing in every day in behalf of TRICARE’s 9.6 million military beneficiaries, it’s impossible for the government to check the legitimacy of each claim.
“We have a trust-based system,” he said, which operates on the assumption that providers “are billing in good faith.”
– And Michael Ranelle, formerly one of the top marketers for Rxpress and Xpress Compounding, testified that he had about 100 “sub-marketers” working under him soliciting business from doctors. Ranelle said his “kickback” from the pharmacies was 60 percent of the net proceeds of every prescription he brought in, and that he paid his cadre of “subs” out of that money.
The indictment said Xpress Compounding alone paid Ranelle about $4.1 million in bribes and kickbacks over a 28-month period from 2014 to 2016.
Ranelle, another of the original eight indictees, pleaded guilty in 2019 to one count of conspiracy under an agreement with prosecutors and was sentenced by Judge Scholer to 18 months in prison, a sentence he has completed. Additionally, he was ordered to pay restitution of more than $8.6 million to the government jointly and severally with a fellow confessed conspirator, marketer Luke Zeutzius.
Ranelle is represented by Sarah Q. Wirskye of Dallas.
Paret is represented by Jeffrey J. Ansley, a shareholder in Vedder Price in Dallas.
According to court records, Zeutzius, listed as a potential government witness, is represented by Robert M. Castle III, a partner in the Dallas office of Duane Morris.
Prosecutor Kate Payerle, from the DOJ’s criminal fraud section in Washington, D.C., asked Paret if trials were ever conducted to assess the medical efficacy of his remixed compounds — if his “tinkering,” in other words, made the medicines any more or less helpful as treatments.
“Not to my knowledge, no,” Paret replied. He implied that improving profits, not medicines, was the motivation for his frequent re-working of formulas.
In other testimony Wednesday, a medical specialist retained by the government said many of the compounds produced by the two Fort Worth pharmacies were “of dubious efficacy,” no more helpful to patients than far cheaper mass-produced prescription drugs or, in some cases, “no better than a placebo.”
“These aren’t very effective combinations at all,” said Dr. Xavier Jimenez, who is affiliated with Long Island Jewish Medical Center in New York.
Jimenez is a board-certified practitioner of psychiatry, pain medicine and addiction treatment. He also holds a master’s degree in bioethics.
Many compounded drugs are topical creams prescribed for pain. Part of their allure in medical circles over the past 10 years or so was that they were promoted by and to doctors as a safe alternative to addictive, often lethal, opioids.
But Jimenez said pain creams produced by Hall’s pharmacies were neither effective nor appropriate substitutes for opioid painkillers. “It’s apples and oranges,” he said.
Another of Hall’s defense attorneys, Marlo Cadeddu of Dallas, told jurors in her opening statement Tuesday that her client was the innocent victim of his two business partners, Schuster and Rall, whom she characterized as the real villains in the billing scam. Hall, she said, was an honest entrepreneur who made one “terrible, terrible mistake” by going into business with two crooks.
Both Rall and Schuster were original co-defendants in the case, and both have signed plea agreements. Schuster was the first witness called by the government. Rall may testify later this week.
Schuster scoffed at the notion that Hall didn’t know about the kickback scheme.
“Of course” he knew, Schuster testified, adding, “He was in charge.”
Schuster said Hall approved of a plan to launder payments to marketers by falsely claiming they were employees of Xpress Compounding, when in reality they were independent operators. TRICARE, like other government health insurance programs, generally forbids payments to third parties for referring prescriptions to a particular pharmacy. However, pharmacies can compensate their own employees for legitimate efforts that stir up new business.
He said that Xpress Compounding — led by Hall — sought legal advice from the company’s attorneys at Haynes Boone, K&L Gates and elsewhere on what steps it should take to convert marketers from their positions as independent contractors to “bona fide” employees in order to satisfy Tricare’s requirements. But little of that advice was heeded, he said. Marketers “filled out paperwork,” including federal tax forms, identifying them as Xpress Compounding employees, but continued doing “the exact same thing” they’d done as contractors.
Paret similarly testified that Hall was fully aware of Paret’s efforts to manipulate the prices of compounded drugs and often voiced his approval when Paret hit upon a more lucrative formulation.
Numerous texts and emails presented by the government reflect Hall’s participation in conversations about the companies’ billing and marketing practices.