The Department of Justice (DOJ) recently announced a False Claims Act (FCA) settlement with Kmart Corporation for $32.3 million.  The settlement is part of a global $59 million settlement; the relator will receive $9.3 million.

Former Kmart Employee Filed the Qui Tam

James Garbe, the relator, was employed by Kmart as a pharmacist from 2007 until 2010. The complaint originally filed in California was transferred to the Southern District of Illinois upon Kmart’s motion.  In his third amended complaint, the relator alleged that Kmart, which operates pharmacies in many of its stores, was “maintaining a dual and opportunistic pricing scheme for generic drugs, which allowed Kmart to claim and receive reimbursement from governmental prescription drug programs in excess of its ‘usual and customary’ prices.”

 Kmart Allegedly Overbilled Generic Prescription Drugs

Kmart allegedly allowed its cash-paying (or “self-paying”) customers to purchase certain generic drugs at pricing that was a “boon” for consumers.  He further alleged that Kmart knowingly failed to report the pricing on claims for reimbursement submitted to certain government programs. The alleged “scheme” impacted Medicare Part D, which requires that with respect to medical services and supplies for which the federal government pays. All providers must provide those items “economically.”  According to the relator, “[e]very time Kmart submits a claim to a Plan in which it seeks reimbursement for a prescription at a price that is substantially inflated over the price it charges self-paying customers for the exact same drug, it violates its duty to provide the prescription economically.”  The relator contended that another federal regulation prohibited Kmart from charging the federal government for drugs provided to Medicare beneficiaries at prices higher than the prices it charges cash-paying customers.  The relator alleged that “[e]very fraudulently inflated pharmacy bill or claim for payment knowingly submitted to a charge-based, government prescription drug program” violated the FCA and state false claim statutes.

DOJ Did Not Intervene but Sought Role as the Real Party in Interest

The DOJ declined to intervene.  It did, however, move to file a statement of interest in the matter in 2013, in response to Kmart’s motion to dismiss the second amended complaint.  The DOJ acknowledged that it had declined to intervene, but stated that it had a “vital interest in ensuring that case law interpreting and applying the FCA develop in a manner that is consistent with the language and purposes of the FCA,” and that the “FCA is the government’s principal tool for fighting fraud in government programs.”  The court denied the DOJ’s motion for leave to file, noting that while it fully appreciated that the US Government was the real party in interest, “the Government elected not to intervene and it is not now seeking to do so.”  Therefore, the relator had the responsibility of prosecuting the case.

DOJ Emphases Preventing Healthcare Fraud

Per the FCA, even though the DOJ did not intervene, it was still entitled to receive a minimum of 70% of any recovery.  The department’s press release on the settlement concluded that the “resolution of this matter illustrates the government’s emphasis on combating health care fraud.” DOJ emphasized “[o]ne of the most powerful tools in this effort is the False Claims Act.”