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From Health Law Daily, May 31, 2016

Contracted Part D sponsors, managers not considered government employees

By Kayla R. Bryant, J.D.

Pharmacy benefit managers (PBMs) and plan sponsors are not officers or employees of the United States for the purposes of the False Claim Act (FCA) (31 U.S.C. §3729 et seq.), so claims paid by these parties cannot be the basis for a FCA suit. The U.S. Court of Appeals for the Seventh Circuit affirmed most of the lower court’s rulings in a qui tam case against K-Mart, such as the applicability of different two versions of the FCA to the claims and the finding that K-Mart offered discount drug prices to the “general public” through its drug programs. Although the case was remanded for claims relying on the earlier version of the FCA, the court has not yet determined if any such claims actually exist (U.S. ex rel Garbe v. Kmart Corporation, May 27, 2016, Wood, D.).

Discount drug programs. Kmart charged customers different prices for drugs based on insurance coverage or enrollment in discount drug programs. Those with public or private insurance paid more than cash customers, while cash customers enrolled in discount programs paid less. However, when Kmart calculated the customary prices charged to customers for generic programs for the purposes of determining Medicare reimbursement, it excluded the amounts charged to those receiving the discount. The qui tam relator alleged that Kmart should base its “usual and customary” prices on the amount charged to the majority of cash customers.

Plan sponsors. CMS contracts with plan sponsors to administer the Part D program, paying them monthly payments according to benchmarks. Plan sponsors in turn contract PBMs, which work directly with retail pharmacies to provide prescriptions to beneficiaries. CMS requires pharmacies to charge Part D participants the “usual and customary” price, which is the “cash price offered to the general public.” Kmart charged the “usual and customary” prices to non-discount program cash customers in order to ensure that third party pricing remained higher and did so by hiring a third-party processor to administer its discount program.

Original decision. The district court found that, as a matter of law, all of the discount program transactions represented the usual and customary price, and that all of the transactions the relator identified were subject to FCA liability, regardless of when they occurred (see Relator claims Kmart drug programs misrepresented ‘usual and customary’ prices, November 18, 2014). In certifying its summary judgment order, the district court identified three pivotal issues, one of which involved the status of Part D PBMs and plan sponsors as officers of employees of the government under the FCA.

Disagreement. Although the appeals court agreed that the qui tam relator satisfied the materiality requirement under the FCA and that all transactions were subject to FCA liability, it disagreed on the status of PBMs and plan sponsors. Prior to 2009, the FCA provided for liability to anyone who presents a fraudulent claim for payment to an officer or employee of the U.S. government. This wording was struck through an amendment after the U.S. Supreme Court held that that the statute required a claim for payment to be presented directly to the government. The court of appeals found that if any of the claims were not covered by the later version of the FCA, the relator could not rely on the earlier version because none of the claims for payment were submitted directly to the government.

The case is No. 15-1502.

Attorneys: Erika A. Kelton (Phillips & Cohen LLP) for the United States. Catherine Marcene O'Neil (King & Spalding LLP) for Kmart Corp.

Companies: Kmart Corp.

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