The Supreme Court heard oral arguments this week on whether major pharmacies illegally overbilled Medicare and Medicaid for prescription drugs, a case that could weaken a key law the federal government uses to stamp out fraud.
The case before the high court hinges on two whistleblower cases brought under the False Claims Act, a 19th-century law described by one legal expert as the “weapon of choice” for going after healthcare fraud.
In the two cases against SuperValu and Safeway, whistleblowers accused the pharmacies of offering discounted prices to cash-paying customers while billing Medicare and Medicaid at higher rates, in effect overstating their “usual and customary” prices — the cash price, without insurance, paid by the general public.
The False Claims Act calls for any person who knowingly submits a claim that is fraudulent or false, or knowingly makes a false statement about such a claim, to be liable for triple the damages plus a penalty tied to inflation, according to the Department of Justice (DOJ).
Background
Back in 2006, Walmart shook up the retail pharmacy market by selling a number of commonly used drugs at a significant discount, some as low as $4 for a 30-day supply.
In an attempt to compete, other pharmacies, including SuperValu and Safeway, instituted price-match programs, in which, upon request, they would drop their price for cash-paying customers to meet a competitor’s price, then continue to charge future refills at that lower price.
In 2012, nearly 80% of SuperValu’s cash sales were completed at price-matched prices, according to the whistleblower’s amicus brief. Yet when it billed Medicaid, Medicare, and other third-party payers, they reported much higher prices as their usual price. (Medicaid and Medicare typically calculate reimbursements paid out to pharmacies in relation to these usual prices charged to the public.)
SuperValu was also accused of trying to conceal its price-match program, citing one executive’s emails on the “slippery slope” of a transition to price-matching. The executive noted that once this practice becomes the “rule,” it could impact “the integrity of our [usual and customary] price.” He then described an approach where price matching could be portrayed as “an ‘exception’ for customer service reasons.”
By framing the sale as exceptional, it would no longer match the description of “usual and customary.”
Safeway, also eager to compete with Walmart’s generic discount program, started its own price-matching program, which later evolved into what one circuit court of appeals called a “stealth Membership Program.” Like SuperValu, despite allowing discounts on most of its cash sales, Safeway submitted claims to Medicare based on inflated usual prices.
For example, from 2008 to 2012, Safeway sold a 30-day supply of lovastatin (Altoprev) at a discounted $4 cash price more than 80% of the time, but submitted claims to the government for usual and customary prices of $27 to $66.
Safeway’s discounted cash prices represented 75% to 88% of all sales for the pharmacy’s top 20 drugs, and half to two-thirds of its total cash sales, during the last 5 years of the program, according to the whistleblowers’ brief.
Safeway also took pains to conceal a loyalty program, which was essentially a price-match program. Its “official company stance” was that it would not match Walmart or another pharmacy’s discount if an “unidentified customer” made a request, but if a known customer asked to match Walmart’s discounted price program, they would honor the request.
“We cannot put any of this in writing to stores,” Safeway wrote, according to the circuit court, since its official policy was that the store does not match prices.
The lower court ended up siding with the pharmacies, in separate split decisions. The judges argued that a “single footnote in a lengthy [Centers for Medicare and Medicaid Services] manual does not support treble damages liability in this case.”
While both whistleblower cases looked at whether these pharmacies violated the False Claims Act, the specific legal concern before the Supreme Court centers around, as Justice Sonia Sotomayor summarized, “whether the intent of someone to make a false statement is actionable, even if later they come up with … an objectively reasonable argument.”
Tejinder Singh, JD, a partner at Sparacino PLLC, the attorney representing the whistleblowers and the U.S. government before the high court, called on the justices to start from the premise that the two pharmacies indeed presented false claims.
“They took money they weren’t supposed to take,” he said. “And now the question is, did they do so with the sort of mental state that would allow the imposition of the False Claims Act’s remedies?”
When only a “small fraction” of cash customers are charged a higher non-discounted price, “I think calling it your usual and customary price is always understood — [has] been understood to be a false statement,” he added.
Singh disagreed with the lower court’s view that an individual who knows in the moment that he or she is “doing the wrong thing” can get away with it due to some “objectively reasonable sanctuary” that that individual later devises.
A view of the False Claims Act in which an individual or entity’s “beliefs about the lawfulness of its conduct is irrelevant” would cause serious harm and “permit some of the worst offenders to escape liability,” he said.
The pharmacists represented by Carter G. Phillips, JD, of Sidley Austin LLP, held that their central defense was not at all, as Singh contended at one point, a “post-hoc justification” of their actions.
Instead, Phillips argued that the usual and customary prices had been offered and audited “in one instance … 12,000 times over a decade,” without any complaints, and that the federal government “steadfastly refused” to offer pharmacies guidance that would have addressed the problem.
Experts Weigh In
The False Claims Act is the government’s “weapon of choice” for seeking out healthcare and other types of fraud, Patric Hooper, JD, founding partner of Hooper, Lundy & Bookman, a law firm dedicated to healthcare clients, told MedPage Today.
Under the law, whistleblowers can sue on the government’s behalf if they believe an individual or entity knowingly submitted false claims. If the government wins, whistleblowers receive a percentage of the reward.
But to prove liability, it must be shown that an individual or entity not only made a mistake, but also knew their claim was false and submitted it anyway, Hooper said. “Or they acted in reckless disregard of the law [or] stuck their head in the sand.”
The law has failed at times when applied to doctors who didn’t believe they were doing anything wrong, but whose careers were ruined nonetheless, he added.
While trying to predict the high court’s decisions based on oral arguments is always difficult, Hooper thinks the lower court’s decision “might be reversed” — in other words, the Supreme Court may side with the government.
Stephen Kohn, JD, a partner at Kohn, Kohn & Colapinto, a Washington, D.C.-based law firm specializing in employment law, agreed. Kohn said the pharmacies’ argument “went over like a lead balloon. They clearly understood that … subjective intent is a critical element in proving liability under the False Claims Act.”
And if there’s evidence that a company knew that they were overcharging, “they can’t escape liability by post-hoc justification,” he added.
At its core, the False Claims Act is a “whistleblower law” that incentivizes individuals to share evidence of fraud, Kohn noted. Importantly, that evidence is often subjective — for example, a comment a manager makes at a meeting.
If the high court does ultimately side with the whistleblowers, that would bring home the message, “Don’t shoot the messenger. Don’t try to hide misconduct from the government,” he said.
Settlements and judgments under the False Claims Act surpassed $2.2 billion in the fiscal year ending Sept. 30, 2022, according to the DOJ.
