Created in 2006, Medicare Part D is a government program that subsidizes the cost of prescription drugs to Medicare beneficiaries. The program is run through “Plan Sponsors” – private entities that receive a fixed monthly payment from the Center for Medicare and Medicaid Services (“CMS”) and subcontract with Pharmacy Benefit Managers to provide prescription drug benefits to eligible Part D members.  While CMS does not directly pay or reimburse prescriptions, it does require participating pharmacies to charge Part D members no more than the provider’s “usual and customary charges to the general public.”  42 C.F.R. § 447.512(b)(2).  The “usual and customary” price is “the price 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.”  24 C.F.R. § 423.100.

In United States ex rel. Garbe v. Kmart Corporation, No. 15-1502, 2016 WL 3031099 (May 27, 2016), the Seventh Circuit evaluated Kmart’s alleged practice of charging its cash customers (i.e. customers with no insurance) significantly reduced prices as compared to its customers who have insurance.  James Garbe, a pharmacist who began working at a Kmart pharmacy in 2007, was the whistleblower who commenced the qui tam lawsuit on July 12, 2008.

Mr. Garbe contended that Kmart had a policy of setting “discount” prices for cash customers who enrolled in one of Kmart’s discount programs, while charging higher rates to insured customers.  The purported purpose of this practice was “to drive as much profit as possible out of [third-party payor] programs.”  This allegedly created a substantial pricing discrepancy in which insured individuals, including Part D participants, were charged significantly more for prescription drugs than the prices charged to Kmart’s cash customers.  Mr. Garbe allegedly discovered the issue when he was picking up personal prescriptions at a competing pharmacy and noticed that the competitor was charging his Part D insurer far less than Kmart charged for the same prescription.

The Seventh Circuit evaluated whether Kmart’s discount program for cash customers represented its usual and customary charges to the general public.  Kmart argued that its discount members “belong to a particular group” or “organization” and are, therefore, not members of the general public.  Kmart argued that the prices charged to such customers for prescription drugs could not constitute Kmart’s usual and customary charges to the general public.  The Seventh Circuit disagreed:

Saying that someone is a member of a “particular” organization, however, does not make it so. 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 from the “general public.” . . . Even if the prices were offered only to members of its “discount programs” – and it is disputed whether this was the case – the programs themselves were offered to the general public.

The Seventh Circuit’s ruling is instructive for retail pharmacies who must consider that their discount programs will be considered in determining their “usual and customary” pricing, rather than being an exception to such pricing.