Seventh Circuit Gives Green Light to Claims that Pharmacies Bilk Medicare Part D and Medicaid When They Fail to Offer Discount Program Prices

In United States ex rel. Garbe v. Kmart Corp., 2016 U.S. App. LEXIS 9743 (7th Cir. May 27, 2016) the U.S. Court of Appeals for the Seventh Circuit upheld the district court’s summary judgment ruling that a pharmacy chain that fails to offer its prescription savings club prices to Medicaid and Medicare Part D violates the “usual and customary charge” billing requirement. The Court found that where discount program prices were “widely and consistently available,” a pharmacy chain should not be able to frustrate the “usual and customary charge” requirement by claiming that its discount savings club constitute a distinct “subset” of the population, rather than the “general public,” because participants were required to pay a fee, enroll in a program administered by a third party, and turn over private information for the administration of the program.

The ruling is particularly significant because it was issued by several particularly respected jurists: J. Wood, the Chief Judge of the 7th Circuit, J. Easterbrook and J. Hamilton.

A. Kmart’s Discount Program – Enrollment Fees and Third Party Administrator

Kmart’s discount program offered enrollees highly discounted prices on numerous prescription medications. Kmart offered its discount prices to non-insured or “cash” paying customers, but not to government health programs. Op. at 5. Kmart’s discount program referenced a nominal fee; a $10 fee at times was actually imposed. Op. at 20. Enrollees in Kmart’s program had to provide private demographic information on enrolling in the program. Id. Kmart’s program also required participants to enroll in a program administered by a third party administrator who necessarily would have access to their private demographic and prescription data. Op. at 5. As stated by the Court, “[t]o strengthen Kmart’s ‘firewall’ between [its discount price program] and its ‘usual and customary’ prices, Kmart hired Agelity, a third-party processor, to administer [the program].” Id.

B. Kmart’s Defenses

Kmart claimed that the enrollees in its prescription discount program were not members of the general public, but rather a “subset” of the general population that was distinguishable from the general public because of obligations and costs imposed on the enrollees, including, for example, the $10 fee and obligation to turn over personal information. Op. at 19. Kmart further argued that even if these enrollees were deemed the “general public,” it was not obliged to offer the discount prices to Medicare Part D because Medicare Part D was structured in such a way that the government did not pay more than it otherwise would have because of the inflated usual and customary price.

C.  The Seventh Circuit’s Holding

The Seventh Circuit rejected both of these arguments.

1.  Enrollees in Discount Program are not “Subset” of General Public

The Court held that, as a matter of law, Kmart’s “usual and customary price” is the price that it charges customers who take advantage of its prescription discount program because those customers are the “general public,” and not a distinguishable “subset” as K-Mart argued. The Court explained:

“We are given no reason to think that there was any meaningful selectivity for the people who joined Kmart’s programs, and thus that they could be distinguished in any way from the ‘general public.’

Few of Kmart’s customers would consider themselves as ‘belonging to a particular group’ or ‘members of a particular organization’ just because they accepted Kmart’s offer of a discount.

. . .

“Our reading of ‘general public’ is consistent with the regulatory structure that gave rise to the ‘usual and customary’ price term. . . . Taken together, ‘[t]he purpose of these regulations is clear: state agencies are not to pay more for prescribed drugs than the prevailing market price.’ [citations omitted].

. . .

“The ‘usual and customary’ price requirement should not be frustrated by so flimsy a device as Kmart’s ‘discount programs.’ Because Kmart offered the terms of its ‘ discount programs’ to the general public and made them the lowest prices for which its drugs were widely and consistently available, the Kmart ‘discount’ prices at issue represented the ‘usual and customary’ charges for the drugs.”

Op. at 19-22.

2.  FERA Amendments Clear Way for Medicare Part D U&C Cases

With regard to the applicability of the Relator’s allegations to Medicare Part D, the Court analyzed the retroactivity of the provision in the Fraud Enforcement and Recovery Act of 2009 (“FERA”) that did away with the requirement that, to give rise to liability under the FCA, false claims must have been “presented” to a U.S. government official or employee. The Court reiterated its earlier holdings in other cases that this amendment applies to all FCA cases—as opposed to all claims for payment—that were pending on or after the amendments’ effective date in June 2008, a condition met by the Garbe case. The Court held that under the FERA amendments, a pharmacy’s false statement made to obtain Medicare Part D funds is “material” within the meaning of the FCA so long as it influences the payment decision of the Part D sponsor or PBM disbursing the funds- there is no need for plaintiffs to prove that the sponsor’s or PBM’s condition of payment was “material” to the government itself.

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The 7th Circuit’s ruling is likely to discourage pharmacies in the future from bilking Medicare and Medicaid by discounting prices to cash pay customers and then charging the full “sticker price” to government health care programs. It is also likely to encourage the federal Medicare Part D program and state Medicaid programs to aggressively enforce their “usual and customary charge” billing regulations in the context of retail chain prescription savings programs.