James Garbe is a pharmacist who began working for Kmart in 2007. While working at Kmart, Garbe went to another retailer, one of Kmart’s competitors, to fill one of his personal prescriptions. In reviewing his receipt, Garbe noticed that the competitor pharmacy billed his Medicare Part D insurer less than Kmart billed Medicare for the same prescription. Garbe conducted further investigation and found that it was Kmart’s practice to charge customers with insurance higher prices for prescriptions when compared to customers who paid cash for their prescriptions. See U.S. ex rel., Garbe v. Kmart Corp., 824 F.3d 632 (7th Cir. 2016).

Kmart also had a “discount program” where customers who enrolled in the program paid substantially less cash prices then customers not enrolled in the program. When Kmart billed Medicare, it calculated the “usual and customary” price for prescriptions without taking into consideration the cheaper prescription prices charged to customers under its discount program. By doing so, Garbe alleged that Kmart created an inflated price for billing Medicare Part D insurers for prescriptions. Id. at 634-35.

In July of 2008, Garbe shared his information regarding Kmart’s billing practices with the federal government. After the government chose not to intervene, Garbe proceeded individually with a qui tam action under the False Claims Act, pursuing his claims on the government’s behalf. Id. at 635. Through his whistleblower action, Garbe alleged that Kmart’s “usual and customary” pricing should be based on prices Kmart charged the majority of its cash customers, including prices charged to its customers participating in its discount prescription program. Id. According to Garbe, Kmart was liable under the False Claims Act by billing at “usual and customary” rates that were based on higher prices which Kmart only charged customers whose prescriptions were paid by insurance or were not participating in the discount program.

During the course of the litigation, Kmart filed a motion for summary judgment, arguing that Garbe offered no evidence that the purported overcharges were capable of affecting the government’s decision to pay the claims. Kmart also argued that Garbe must establish a “causal chain” between the government’s payment for Medicaid prescription benefits and Kmart’s false claims.

The Seventh Circuit in Garbe rejected both of Kmart’s arguments. Under the False Claim Act, a whistleblower or the government is only required to show that a defendant’s false record or statement “influence the ‘payment or receipt of money or property,’ – no government decision is required.” Id. at 639, quoting 31 U.S.C. 3729(b)(4). The court noted that Garbe is required only to show that Kmart’’s allegedly false claims had to be “capable of influencing [] the decisionmaking body to which [they were] addressed.” Id. (further citations omitted). Garbe satisfied this materiality requirement, the court found, through the testimony of his pharmaceutical economist who concluded that Kmart’s claims were the basis for Kmart being paid through Medicaid. On this point, the court was clear: “[t]here is little doubt that much of the money paid to Kmart under Medicare Part D came from government coffers.” Id. at 639.

In reaching its decision, the Seventh Circuit in Garbe pointed out that the purpose of regulations governing Medicaid payments is to ensure that state agencies do not pay more for prescribed drugs than the prevailing market price. Regulations are in place to guarantee Medicare Part D plans receive the benefit of pricing through discount plans. The court found that allowing Kmart to inflate its “usual and customary” pricing by excluding the discount pricing from its calculations would undermine the “statutory and regulatory structure” underlying the Medicaid program. Id. at 645.

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Jason Cornell is an attorney who represents whistleblowers with the law firm Clark Fountain LaVista Prather Keen & Littky-Rubin. Clark Fountain represents plaintiffs in various matters throughout the United States. If you have questions regarding the issues addressed in this or other posts, you can reach Jason at jcornell@clarkfountain.com.