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United States ex rel. Garbe v. Kmart Corporation

United States Court of Appeals, Seventh Circuit

May 27, 2016

United States of America ex rel. James Garbe, Relator-Appellee,
Kmart Corporation, Defendant-Appellant.

          Argued October 28, 2015

         Appeal from the United States District Court for the Southern District of Illinois. No. 3:12-cv-00881-NJR-PMF - Nancy J. Rosenstengel, Judge.

          Before Wood, Chief Judge, and Easterbrook and Hamilton, Circuit Judges.

          WOOD, CHIEF JUDGE.

         James Garbe, an experienced pharmacist, began working at Kmart pharmacy in Ohio in 2007. One day, Garbe picked up a personal prescription at a competitor pharmacy. When he reviewed his receipt, Garbe got a surprise: the competitor pharmacy had charged his Medicare Part D insurer far less than Kmart ordinarily charged it for the same prescription. Curious to see whether his discovery was a one-off, he started inspecting Kmart's pharmacy reimbursement claims. His amateur detective work revealed that Kmart routinely charged customers with insurance-whether public or private-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. But the ensuing investigation revealed that nearly all cash customers received the lower "discount program" prices. Meanwhile, those "discount program" sales were ignored when Kmart calculated its "usual and customary" prices for its generic drugs for purposes of Medicare reimbursement. Garbe shared his discovery with the government and filed a qui tam suit on July 12, 2008. The government has not intervened.

         According to the accepted definition of "usual and customary, " Garbe says, Kmart's "usual and customary" prices should be based on the prices Kmart charged the majority of its cash customers, meaning those participating in its generic drug "discount programs"-not the higher prices it imposed on a small fraction of those buyers or those with third-party insurance. After a flurry of motions, the district court granted partial summary judgment in Garbe's favor on some issues and denied it to Kmart on others.

         We accepted an interlocutory appeal from these rulings under 28 U.S.C. § 1292(b). Before us are several questions: (1) whether the amendments to 31 U.S.C. § 3729(a)(2) (now 31 U.S.C. § 3729(a)(1)(B)) in the Fraud Enforcement and Recovery Act (FERA) apply to all cases "pending on or after June 7, 2008, " or just all claims as of that date; (2) whether Medicare Part D Pharmacy Benefit Managers and Plan Sponsors are "officers or employees of the United States" for purposes of the FCA; (3) whether Garbe has satisfied the materiality requirement under the FCA for his Medicare Part D claims; and (4) whether Kmart's "discount" prices were offered to the "general public." We conclude that the district court erred when it found that the Pharmacy Benefit Managers and Plan Sponsors are "officers or employees of the United States, " but we otherwise affirm the district court's rulings.



         Garbe's allegations cover Kmart programs that stretch back 12 years. In 2004, Kmart introduced a program meant to compete with online, mail-order pharmacies: the "Kmart Maintenance Program" (KMP). The KMP offered specified generic drugs to customers with 90-day prescriptions at a discount price of $15 per prescription.

         Congress added the Part D prescription benefit to Medicare, a federally funded health insurance program, in 2006. Part D allows beneficiaries to opt in to prescription drug benefits by enrolling in a private insurance plan. The program provides insurance coverage, up to a certain amount, for beneficiaries' prescription drug costs. Above that amount, beneficiaries are responsible for additional costs up to another set dollar value, where Part D's "catastrophic coverage" kicks in. (This coverage gap is known as the "donut hole.")

         The Part D program is overseen by the federal Centers for Medicare and Medicaid Services (CMS). CMS does not ad­minister the program; instead, it uses Plan Sponsors, which are private entities that compete for the opportunity to man­age Part D beneficiaries' claim submissions and payment processes. Most Plan Sponsors subcontract with Pharmacy Benefit Managers, which are other private entities that work directly with retail pharmacies to provide prescriptions to Part D beneficiaries. CMS pays Plan Sponsors fixed monthly payments according to certain benchmarks. At the end of each year, it conducts "reconciliation" with the sponsors. The reconciliation process determines, based on Plan Sponsor records and a complex subsidy system, whether individual Plan Sponsors should receive additional funds.

         CMS thus does not directly pay or reimburse any individual prescriptions through the program. It does control prices, however, insofar as it requires retail pharmacies to charge Medicare Part D beneficiaries the "usual and customary" price, an administratively defined term, for each prescription. See 42 C.F.R. §§ 423.100, 447.512(b). The district court found that the "usual and customary" price is generally understood to mean the "cash price offered to the general public."


         Kmart saw the Part D program as an attractive potential source for new revenue. But Kmart had a problem: the program was leading to increased competition among retail pharmacies, which were developing their own discount generic-drug programs. This competition, Kmart feared, would drive down the prices for prescriptions reimbursed by third-party payers, and therefore revenue.

         In late 2005, as the Part D program was rolling out, Kmart revamped the KMP. The key reform was a new pricing system. According to Kmart internal documents (from which we take all of the following quotes), 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 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." Kmart's second step was simple: it changed the program's name. In order to put it at as "long a[s] possible arms length from [Kmart's] U&C pricing, " the KMP was relabeled as the "Retail Maintenance Program, " or "RMP."

         To strengthen Kmart's "firewall" between RMP and its "usual and customary" prices, Kmart hired Agelity, a third-party processor, to administer RMP. According to Garbe's evidence, however, Agelity's participation was a sham. In reality, Kmart decided which drugs were in the RMP formulary, the prices for those drugs, and which customers were eligible for those prices. In 2008, Kmart expanded RMP to include additional drugs and expanded its discount programs to many 30- and 60-day prescriptions. Ye t Kmart pharmacists routinely overrode official program pricing to match competitor prices. In 2009 Kmart retooled RMP by introducing the "Prescription Savings Club, " under which Kmart officially offered its low cash prices on 30-, 60-, and 90-day prescriptions. The programs underwent other modifications along the way. But according to Garbe, each version of Kmart's "discount programs" was the same old wine, in new bottles: Kmart offered low prices to discount-program cash customers, while submitting higher "usual and customary" prices for prescriptions reimbursed by third-party insurers and some non-program cash customers.


         As Garbe sees it, Kmart's real "usual and customary" prices were not the high ones paid by non-program cash customers or those submitted to third parties for reimbursement, but the low ones it offered to the cash customers participating in one of its "discount programs." These programs, he charges, were nothing but a sham allowing it to manipulate its "usual and customary" cash price.

         Garbe retained a pharmaceutical economist, Dr. Joel Hay, to analyze mountains of reimbursement data. Dr. Hay's work revealed that Kmart charged nearly all its cash customers "discount program" prices. Garbe also hired an auditor, who testified that, under industry practice and the terms of over 1, 000 contracts between Kmart and Medicare Part D Benefit Managers and Plan Sponsors, Kmart should have based its reimbursement requests to the insurance companies handling Medicare Part D on its "discount program" prices. Dr. Hay's examination revealed that Kmart instead used significantly higher prices when submitting those requests, and was thus reimbursed at a much higher level.

         At the close of discovery, Kmart filed four motions for partial summary judgment. Relevant to this appeal, it challenged Garbe's assertion that Kmart's "discount programs" were its actual "usual and customary" prices, and therefore that it made a false statement in requesting reimbursement based on allegedly inflated "usual and customary" prices. It also argued that Garbe's claims failed for lack of presentment and materiality on the theory that the government never actually received or paid any of its reimbursement requests. Related to its second challenge, it argued that FERA, which amended the FCA, applied retroactively only to claims pending on or after June 7, 2008. (Garbe filed ...

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