Pharmacy Discount Programs Can Lead to a Violation of the False Claims Act

Retail pharmacies that offer a discount drug pricing program to consumers must charge Medicare the same prices for drugs that they charge consumers who participate in those programs. To do otherwise violates the False Claims Act (“FCA”).

The specific question is whether a pharmacy that offers a discount drug pricing program for customers paying for drugs in cash can exclude the discounted prices that those customers pay when computing the “usual and customary” price that the federal Centers for Medicare and Medicaid Services (“CMS”) requires retail pharmacies to charge Medicare Part D beneficiaries for drugs.

“Usual and Customary” Drug Prices and Medicare

The answer is no, according to a Seventh Circuit ruling last year in United States ex rel. Garbe v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016), cert. denied sub nom. Kmart Corp. v. U.S. ex rel. Garbe, 137 S. Ct. 627, 196 L. Ed. 2d 517 (2017).  Federal regulations provide that for most drugs, Medicare Part D will only pay the “usual and customary charges to the general public” and defines “usual and customary” as “the price that an out-of-network pharmacy or a physician’s office charges a customer who does not have any form of prescription drug coverage for a covered Part D drug.” 42 C.F.R. §§ 423, 100, 447.512.

The Seventh Circuit found that participants in such discount programs are considered the “general public,” and the discounted prices charged to those participants are considered the pharmacy’s “usual and customary” charges, which the pharmacy must also charge Medicare.  The pharmacy cannot exclude such discounted pricing when calculating its “usual and customary” charges so as to increase the amount it charges to and is paid by Medicare.

United States ex rel. Garbe v. Kmart Corp.

Pharmacist James Garbe began working at a Kmart pharmacy in Ohio in 2007. One day, Garbe picked up a personal prescription at a competitor pharmacy and received a surprise: the competitor pharmacy charged his Medicare Part D third-party private insurer much less than Kmart ordinarily charged for the same prescription. When Garbe began inspecting Kmart’s pharmacy reimbursement claim, he discovered that Kmart routinely charges customers with insurance – whether private or public – higher prices than customers who paid out of pocket.

Not all cash customers were charged the same price; people in Kmart’s “discount programs” paid much less. Kmart recognized that it was “financially beneficial to maintain the Usual and Customary price higher than reimbursement rates.” Kmart set out to accomplish this goal by instituting a policy of setting low “discount” prices for cash customers who signed up for one of its discount programs, while charging higher “usual and customary” prices to non-program cash customers, “to drive as much profit as possible out of [third-party] programs.”

Garbe’s investigation also revealed that nearly all cash customers received the lower discount program prices. Significantly, those discount program sales were ignored when Kmart calculated its “usual and customary” prices for its generic drugs for purposes of Medicare reimbursement. This omission was significant. For example, Kmart allegedly sold a 30-day supply of a generic version of Zocor for $5 but told the CMS that the usual and customary price was $152.97.

The Seventh Circuit rejected Kmart’s contention that the term “general public,” as found in the definition of CMS’s “usual and customary pricing,” excludes customers who join a discount program. The Seventh Circuit held that the usual and customary price is defined as the “cash price offered to the general public” unless state regulations provide otherwise. Furthermore,, the Seventh Circuit stated that the “CMS Manual has long noted that ‘where a pharmacy offers a lower price to its customers throughout a benefit year’ the lower price is considered the ‘usual and customary price’ rather than a ‘one time lower cash price,’” including when the cash purchaser uses a discount card.