Kmart to Pay $32.3M to Settle False Claims Act Allegations

John Commins, December 27, 2017

Federal prosecutors say the retailer offered discounted generic drug prices to cash-paying customers but knowingly failed to disclose those prices when reporting to federal health programs.

Kmart Corp. will pay the federal government $32.3 million to settle allegations that its pharmacies failed to report discounted prescription drug prices to Medicare Part D, Medicaid, and TRICARE, the Justice Department announced.

The settlement ends a nearly 10-year legal battle and stems from a 2008 lawsuit, filed by whistleblower James Garbe, which alleged that Kmart pharmacies offered discounted generic drug prices to cash-paying customers but knowingly failed to disclose those prices when reporting to federal health programs its usual prices, which are used to establish reimbursement rates.

"Pharmacies that are not fully transparent about drug pricing can cause federal health programs to overpay for prescription drugs." said Acting Assistant Attorney General Chad A. Readler for the Department’s Civil Division.

"This settlement should put pharmacies on notice that there will be consequences if they attempt to improperly increase payments from taxpayer-funded health programs by masking the true prices that they charge the general public for the same drugs," Readler said.

The settlement is a part of a $59 million settlement that includes a resolution of state Medicaid and insurance claims against Kmart. Garbe, who litigated the case after the government declined to intervene in the action, will receive $9.3 million.

“The settlement shows we were right to continue to pursue the case on behalf of taxpayers, despite the government’s decision not to join the qui tam lawsuit,” said Erika A. Kelton, a whistleblower attorney and partner at Phillips & Cohen. “Not only did we recover funds for taxpayers, we also stopped a practice that would have been an improper drain on government healthcare funds.”  

Kmart tried to get the case dismissed after it was unsealed seven years ago, taking it all the way to the US Supreme Court. However, the US Supreme Court declined in January to hear Kmart’s appeal of a lower court decision in 2015 that ruled against Kmart and denied the company’s request to dismiss the case.

According to the whistleblower’s complaint, Kmart sold a 30-day supply of a generic version of a popular prescription drug for $5 to customers who registered for a discount program but Kmart sought reimbursement from the government for $152 for the same drug for Medicare customers, which Kmart claimed was the “usual and customary” price.

Garbe worked for a Kmart pharmacy in Ohio when he discovered that Kmart was charging Medicare customers significantly more for generics than it was charging customers enrolled in its cash discount program. He had filled a personal prescription at the pharmacy and saw that Kmart claimed to his Medicare Part D insurer that the prescription cost $60 rather than the much lower price of $15 that it charged cash-paying customers in its discount program, the complaint alleged.

Kmart argued in court that it could exclude the lower prices that it charged members of its discount program when determining the proper price – known as the “usual and customary price” – to charge government healthcare programs. But the 7th US Circuit Court of Appeals disagreed.

“The 'usual and customary' price requirement should not be frustrated by so flimsy a device as Kmart's 'discount programs,'" the court wrote in its opinion.

In a statement emailed to HealthLeaders Media, Kmart said: "We're pleased to put this case behind us so that we can focus on the needs of our members and customers, and our company's transformation."

John Commins

John Commins is a senior editor at HealthLeaders Media.

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