Unmasking Health Care Fraud: RICO Is Increasingly Being Used in the Pharmaceutical Industry

Introduction

Health care fraud is a multi-billion-dollar issue that continues to strain both insurers and health care providers, driving up costs for patients. In July 2024, Allstate Insurance filed a lawsuit under the Racketeer Influenced and Corrupt Organizations (RICO) Act against Marc Kassman and SMK Pharmacy in Rockaway Beach, Queens. The lawsuit alleges that Kassman orchestrated a $4 million fraud scheme by exploiting New York’s no-fault insurance system.¹ This case is not an isolated incident; it’s part of a broader trend of health care-related fraud cases prosecuted under RICO, as insurers aim to crack down on fraudulent practices that are undermining the industry.

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RICO and Racketeering: What They Mean

RICO, enacted in 1970, was initially aimed at dismantling organized crime but has evolved to target enterprises engaged in sustained fraudulent activity. Racketeering refers to conducting illegal business operations through fraudulent schemes, bribery, or extortion over a long period. In health care, it includes fraudulent medical billing, kickback schemes, and manipulating insurance claims to boost profits at the expense of patients and insurers. These practices have been heavily prosecuted in cases such as the Insys Therapeutics opioid scandal and the Theranos fraud case, which rocked the pharmaceutical industry.^2-5

The Allegations: A Multi-Million Dollar Fraud Scheme

Under Marc Kassman’s leadership, SMK Pharmacy allegedly collaborated with health care providers to submit fraudulent prescriptions for compounded medications such as pain creams and gels. According to the lawsuit, these prescriptions were not based on legitimate medical need but were instead part of a scheme designed to exploit New York’s no-fault insurance system. Health care providers involved in the scheme allegedly received illegal kickbacks for issuing the prescriptions, while SMK Pharmacy profited by submitting more than $4 million in fraudulent claims to insurers like Allstate and GEICO.¹

Legal Implications: The Power of RICO in Health Care Fraud

The RICO Act has become an essential legal tool in combating health care fraud. Through civil RICO claims, insurers like Allstate can seek treble damages—3 times the actual financial damages—along with the recovery of legal fees. To establish a RICO violation, plaintiffs must demonstrate that a criminal enterprise existed and engaged in a pattern of illegal activities over time.

This case bears similarities to other high-profile RICO cases in the pharmaceutical sector. For instance, Insys Therapeutics executives were convicted for bribing doctors to overprescribe dangerous fentanyl-based drugs. Similarly, Theranos, led by Elizabeth Holmes, misled investors and endangered patients with fraudulent blood-testing technology. These cases, like Kassman’s, illustrate the far-reaching consequences of fraudulent practices within health care and pharmaceuticals.^2-6

Consequences For Kassman, SMK Pharmacy, and the Industry

If found guilty under RICO, Marc Kassman and SMK Pharmacy face serious legal and financial consequences. Defending a RICO case is notoriously expensive, with legal fees easily running into the millions. Kassman could also face treble damages, multiplying the $4 million in fraudulent claims to $12 million, not to mention the possibility of asset forfeiture and even jail time.^1,6

For the broader pharmaceutical industry, the Kassman case sends a strong message: fraudulent practices will not go unpunished. This case highlights vulnerabilities in the insurance and pharmaceutical systems and underscores the need for stricter compliance and regulatory oversight to prevent similar fraud schemes from flourishing. As more civil RICO claims emerge, the industry may be compelled to adopt stronger fraud prevention protocols and more robust internal compliance measures.^6,7

Industry-Wide Impact

The ripple effects of the Kassman case extend far beyond SMK Pharmacy. Fraud schemes like this one inflate health care costs, forcing insurers to pass on the financial burden to consumers in the form of higher premiums. The broader industry impact could result in increased regulatory scrutiny around the use of compounded medications and stricter oversight of the relationships between health care providers and pharmacies. Additionally, legal experts predict that civil RICO claims will become a more common tool in combating health care fraud, pressuring pharmaceutical companies to strengthen their internal compliance programs and mitigate the risk of engaging in fraudulent activity.^6,8

Conclusion

The RICO case against Marc Kassman and SMK Pharmacy represents a critical turning point in how health care fraud is addressed in the pharmaceutical industry. With millions of dollars and patient safety at stake, the outcome of this case will likely set a legal precedent for how aggressively RICO can be used to prosecute fraudulent enterprises within health care. As this case unfolds, it serves as a warning to others in the industry: fraudulent practices will be met with severe consequences, from financial devastation to reputational harm. In the aftermath, the pharmaceutical industry will likely see heightened regulatory measures, tighter compliance standards, and an overall push toward transparency and ethical practice.

REFERENCES
1. GEICO Files Multi-Million Dollar Civil RICO Claims Against Pharmacy. Turnpike Law. Accessed October 2, 2024. https://www.turnpikelaw.com

2. Founder and Four Executives of Insys Therapeutics Convicted of Racketeering Conspiracy. United States Department of Justice. Published May 2, 2019. https://www.justice.gov

3. Civil RICO Actions on the Rise to Combat Healthcare Insurance Fraud. Mondaq. Published February 18, 2015. https://www.mondaq.com

4. DOJ Charges Opioid Maker Insys Therapeutics with Racketeering. NPR. Published May 2, 2019. https://www.npr.org

5. Theranos and Elizabeth Holmes: A Case Study of Fraud. Harvard Business Review. Published January 2021. https://www.hbr.org

6. Consequences of RICO Violations in Healthcare Fraud Cases. Legal Dictionary. Accessed October 2, 2024. https://www.legal-dictionary.com

7. Court Says Bulk of GEICO’s $2.3 Million Fraud Case Belongs in Arbitration. Claims Journal. Published January 5, 2024. https://www.claimsjournal.com

8. How RICO Has Transformed Healthcare Fraud Litigation. American Law Review. Published July 2023. https://www.americanlawreview.com