Pharmacies Face Looming Penalties in Supreme Court Case

Defendant chains are accused of fudging their “usual and customary” rates for some drugs.

Back in mid-January, the U.S. Supreme Court granted certiorari in two consolidated cases from the 7th U.S. Circuit Court of Appeals – U.S. ex rel. Schutte v. SuperValu Inc., No. 21-1326, and U.S. ex rel. Proctor v. Safeway, Inc., No. 22-111 – which has teed up a case that could undermine one of the government’s most powerful tools for fighting fraud in government contracts and programs (and, dare I say, an overreaching tool). This would be the False Claims Act (FCA): a jackhammer where a scalpel would suffice.

At issue is whether hundreds of major retail pharmacies across the country knowingly overcharged Medicaid and Medicare by overstating what their usual and customary prices were. In other words, the question presented is whether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it “knowingly” violated the FCA. Unlike most civil fraud actions, the FCA allows treble damages, which in “non-lawyer-ese” equals triple damages.

To calculate base damages, you look at the injury and determine what damages to the government resulted “because of” the defendant’s acts. The burden is on the government or the relator to prove that the damages sought were caused by fraud. The defendant will want to be able to distance the alleged damages from the fraudulent acts to the extent possible (such that the damages cannot be said to have been caused by the defendant’s acts) in order to minimize its potential financial liability.

This case essentially began in 2006, when Walmart upended the retail pharmacy world by offering large numbers of frequently used drugs at very cheap prices – $4 for a 30-day supply, for example – with automatic refills. That left the rest of the retail pharmacy industry desperately trying to figure out how to compete.

The pharmacies came up with various offers that matched Walmart’s prices for cash customers, but they billed Medicaid and Medicare using far higher prices, not what are alleged to be their usual and customary prices.

Walmart did report its discounted cash prices as usual and customary, but other chains, like Safeway and SuperValu, did not. Even as the discounted prices became the majority of their cash sales, other retail pharmacies continued to bill the government at the previous (and far higher) prices.

For example, between 2008 and 2012, Safeway charged just $10 for almost all of its cash sales for a 90-day supply of a top-selling drug to reduce cholesterol. But it did not report $10 as its usual and customary price. Instead, Safeway told Medicare and Medicaid that its usual and customary price ranged from $81 to $109. In the petition, the petitioner’s “expert estimated that Safeway received $127 million more in reimbursements from government health programs than it would have if it reported its price-match and discount club prices as its usual and customary prices.”

A decision is expected this summer. Here’s a quote from the petitioner about Safeway trying to hide their price matching policy from media or investigators:

“With respect to price-matching, Safeway adopted an ‘official company policy’ of denying that it would match Walmart prices ‘if an unidentified customer calls in. This is to avoid trouble with the media or competitors.’ But ‘[i]f a regular customer known to you asks if we will match . . . the answer is YES.’”

I foresee the pharmacies facing a looming overpayment. The petition explains that, for example, after a pharmacy manager informed executives that Nebraska’s Medicaid program was requiring price-matched discount prices to be reported as usual and customary prices, an executive asked: “does anyone think we have an issue here? My question is how the state of Nebraska will know that we offered to match any price out there.” In a follow-up communication, other executives pointed out that advertising their price-matching program would “alert the Medicaid programs to start looking” into what Safeway was doing, and therefore stressed the “need to keep a low profile.”