Life Science Compliance Update

January 05, 2018

Kmart Settles Whistleblower Case About Inflated Prices

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Kmart Corp. has agreed to pay $42 million to the federal government and several states to settle a whistleblower lawsuit jointly litigated by Phillips & Cohen LLP and Korein Tillery that alleged Kmart overcharged government healthcare programs and private insurers for generic prescription drugs.

The “qui tam” (whistleblower) case filed in 2008 by former Kmart pharmacist James Garbe alleged that from 2004 to 2016 Kmart charged Medicare, Medicaid and Tricare as well as private insurers more for generic prescription drugs than it charged customers who paid cash.

According to the whistleblower’s complaint, Kmart sold a 30-day supply of a generic version of a popular prescription drug for $5 to customers who registered for a discount program but Kmart sought reimbursement from the government for $152 for the same drug for Medicare customers, which Kmart claimed was the “usual and customary” price.

Garbe worked for a Kmart pharmacy in Ohio when he discovered that Kmart was charging Medicare customers significantly more for generics than it was charging customers enrolled in its cash discount program. He had filled a personal prescription at the pharmacy and saw that Kmart claimed to his Medicare Part D insurer that the prescription cost $60 rather than the much lower price of $15 that it charged cash-paying customers in its discount program.

Kmart argued in court that it could exclude the lower prices that it charged members of its discount program when determining the proper price – known as the “usual and customary price” – to charge government healthcare programs. But the appeals court shredded that argument.

 “The ‘usual and customary’ price requirement should not be frustrated by so flimsy a device as Kmart’s ‘discount programs,’” the court wrote in its opinion.

The $42 million settlement includes $32.3 million that will go to the federal government as well as additional sums that will be paid to various states to settle Medicaid false claims allegations and allegations that Kmart improperly billed private insurers higher prices for generic prescription drugs  in violation of the California Insurance Fraud Prevention Act and the Illinois Insurance Claims Fraud Prevention Act.

Kmart waged a fierce legal battle to get the qui tam case dismissed after it was unsealed seven years ago, taking the litigation all the way to the US Supreme Court. The Supreme Court declined in January to hear Kmart’s appeal of a US Seventh Circuit Court of Appeals decision in 2015 that ruled against Kmart and denied the company’s request to dismiss the case.

Garbe will receive a whistleblower award of 29 percent of the federal government’s recovery ($9.3 million), which is nearly the maximum percentage whistleblowers can be awarded under the False Claims Act. He also will be awarded shares of the state recoveries as specified under state false claims and insurance fraud laws. The reason behind the larger-than-usual recovery is Garbe and his attorneys continued to litigate the case even after the government declined to intervene.

“The settlement shows we were right to continue to pursue the case on behalf of taxpayers, despite the government’s decision not to join the qui tam lawsuit,” said Erika A. Kelton, a whistleblower attorney and partner at Phillips & Cohen. “Not only did we recover funds for taxpayers, we also stopped a practice that would have been an improper drain on government healthcare funds.”   

November 29, 2017

Hospitals and Health Systems Sue CMS Over 340B Provisions

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Three hospital groups, along with three health systems, have filed suit against the Department of Health and Human Services (HHS) regarding the Centers for Medicare and Medicaid Services’ (CMS) recent regulation that made substantial cuts to hospitals for 340B drugs. The American Hospital Association, Association of American Medical Colleges, America’s Essential Hospitals, Eastern Maine Healthcare Systems, Henry Ford Health System, and Fletcher Hospital Inc. brought the suit, challenging the changes made to the 340B program that were included in the calendar year 2018 hospital outpatient system (OPPS) and ambulatory surgical center payment systems final rule that CMS released earlier this month. The 340B provisions of the final rule, including a 27 percent reduction in the reimbursement rate for hospitals for 340B drugs, are scheduled to take effect on January 1, 2018.

The lawsuit contends that while CMS has the statutory authority to “calculate” and “adjust” drug payment rates, it does not have statutory authority to reduce those rates by nearly 30 percent. The complaint also states that the 340B provisions of the final rule “undermine the 340B Program by depriving eligible hospitals of critical resources Congress intended to provide those hospitals through 340B discounts.” The groups also note that the cuts will undermine critical programs that provide health services to vulnerable and underserved populations.

On July 13, 2017, CMS issued its proposed rule on OPPS and Ambulatory Surgical Center payment systems for the Calendar Year 2018. In addition to updating the OPPS with 2018 rates, CMS proposed to change how Medicare pays certain hospitals for separately payable drugs purchased under the 340B Program. CMS justified this proposed change by stating that the new rate better recognizes “the significantly lower acquisition costs of such drugs incurred by a 340B hospital,” and that it “better represents the average acquisition cost for these drugs and biologicals.” On November 1, 2017, CMS issued the final version of the 340B Provisions of the OPPS rule, adopting the proposed rate of ASP minus 22.5% for drugs purchased under the 340B Program.

The plaintiffs believe that the 340B Provisions of the OPPS Rule also exceed the Secretary’s authority because they thoroughly undermine the 340B Program by depriving eligible hospitals of critical resources Congress intended to provide those hospitals through 340B discounts.

According to the complaint, the Plaintiffs have used the 340B Program to provide critical healthcare services to their communities, including to underserved patient populations in those communities. The Plaintiffs allege that they, and the populations they serve, would suffer significant and immediate harm from the negation of the cost-reimbursement differential through the 340B Provisions of the OPPS Rule.

The harm would come from the 340B provisions of the OPPS rule because it would deprive the hospitals “of millions of dollars of savings currently generated from the differential between Medicare reimbursements and 340B discounts.”

The hospitals have asked the court to either strike the changes in payment methodology for 340B drugs from the final rule and direct CMS to use the methodology used in calendar year 2017 or issue a preliminary injunction suspending the effective date of the changes until the lawsuit is concluded.

June 26, 2017

Genentech & Escobar: Using Materiality to Escape False Claims Liability

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In constructively bringing an end to a False Claims Act (“FCA”) whistleblower suit alleging Genentech, Inc. (“Genentech”) of defrauding Medicare by way of concealing substantive health care analytics data involving purported side effects of the company’s cancer drug Avastin, the Third Circuit of Appeals in a recent decision determined that the Plaintiff in this matter had failed to demonstrate that any noncompliance had an impact on government payments. Specifically, the Court applied the prevailing standard in Escobar that an FCA lawsuit must demonstrate that any misrepresentation is “material” to the government’s payment decision. In dismissing this suit and invoking this heightened standard of materiality, the Third Circuit not only reinforces Escobar but places the now clear burden on FCA Plaintiffs to demonstrate that any noncompliance was material to alleged fraudulent payments.


Back in August 2016, we highlighted the widely watched and reported U.S. Supreme Court decision in Universal Health Services, Inc. v. United States ex rel. Escobar (“Escobar”). The case “reaffirmed that the government and realtors via qui tam suits can pursue False Claim Act liability against life science and healthcare companies” while adding “a requirement that such parties must also demonstrate any misrepresentations were “material” on statutory, regulatory, or contractual requirements that make such representations misleading on those goods and services."

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