Roche Suit Seeks to Recover $87M From Fraudulent Sale of Diabetes Test Strips

Roche Holding AG headquarters. Photographer: Stefan Wermuth/Bloomberg

Roche Holding AG headquarters. Photographer: Stefan Wermuth/Bloomberg

Roche Diagnostics claims in a new lawsuit that its glucose test strips for diabetes patients were at the center of an $87 million insurance fraud scheme carried out by a Utah company.

The suit filed in Newark federal court Tuesday names six former officers and directors of Alliance Medical Holdings as defendants, as well as a series of affiliate companies that allegedly financed Alliance's fraudulent activities—Hughes & Company Investment Partners and the Pritzker Group, both of Chicago, and Mercato Partners of Cottonwood Heights, Utah. Also named as a defendant is Zions Bancorporation of Salt Lake City. Those companies allegedly knew of and approved the fraudulent scheme, the suit claims.

The suit says Alliance ran an elaborate scheme to obtain blood glucose test strips that were manufactured and packaged by Roche for sale by mail-order insurance plans, but sold those strips to beneficiaries of insurance plans that cover test strips under a pharmacy benefit.

Alliance then submitted claims to pharmacy benefit plans, allowing it to illegally exploit the substantial difference in wholesale list price and insurance reimbursement rates between the two products, the suit claims. Roche said in the suit that it seeks "to obtain compensation for the damages caused by defendants' fraud and other wrongful acts."

Alliance, based in South Jordan, Utah, is not a party in Roche's suit. It filed a Chapter 11 petition in U.S. Bankruptcy Court for the Southern District of Texas in 2017.

The suit said Alliance's fraudulent enterprise had a New Jersey arm at Peterson's Pharmacy in South Amboy, which the company purchased in 2016. Peterson's Pharmacy submitted false insurance claims for over 10 million Roche test strips between 2014 and 2017, and several of the individual defendants were personally involved in establishing, operating or managing Alliance's fraudulent activities in New Jersey through Peterson's Pharmacy, the suit said.

Alliance built a base of diabetes patients through websites that obtained valuable information about consumers by having them sign up for various services and discounts, Roche claims. Alliance employees in call centers phoned these people to convince them to buy test strips from Alliance.

Alliance acquired its low-cost Roche test strips from "diverters" or third parties, who obtain them from distributors willing to breach their contract with manufacturers and sell their strips on the secondary market, the suit claims.

Roche strips labeled for retail sale were sold to wholesalers at prices ranging from $51 to $78 for a vial containing 50 strips, the suit said. The wholesalers sell the strips to retailers at a markup from the wholesale price. A patient's insurance plan reimburses the pharmacy at an additional markup. Roche then pays a rebate to the insurance company, for an amount that was redacted from the public version of the complaint.

In comparison, Roche sells strips labeled "not for retail sale" to mail-order distributors for under $20 for a 50-strip vial, and insurance plans reimburse the mail-order distributor at a small markup on this price. Roche does not pay rebates to insurance plans for strips sold through mail order, the company says.

Roche brings claims under the federal and New Jersey versions of the Racketeer Influenced and Corrupt Organizations Act against all defendants other than Zions Bancorporation. Against all defendants, it brings claims for conspiracy to violate federal and New Jersey RICO laws; fraud; unjust enrichment; negligent misrepresentation; and tortious interference with prospective business relations.

Roche is represented by Geoffrey Potter, chairman of the anti-counterfeiting practice at Patterson Belknap Webb & Tyler in New York, who declined to comment.

Representatives of Hughes & Co., Pritzker Group, Mercato Partners and Zions Bancorporation did not respond to requests for comment.