What Kmart’s Settlement Says About Health Care Fraud

David A. Hyman
Charles Silver

Perhaps because its size was so small—“only” $59 million—the press paid little attention to Kmart’s recent settlement of False Claims Act (FCA) litigation in which it was accused of overcharging Medicare, Medicaid, Tricare, and private insurers for generic drugs.

But it is worth discussing both the conduct that got Kmart in trouble and the way that conduct came to light.  The former shows how dysfunctional the market for pharmaceuticals is and the latter nicely demonstrates the severe limits on the government’s ability to police fraud and abuse.

The nub of Kmart’s scheme was that it sold generic drugs to cash-paying customers at very low prices while charging governmental payers vastly more.  For example, Kmart sold a 30-day supply of a generic version of a prescription drug for $5 to cash customers, but then billed Medicare $152 for that same drug.  Because pharmacies can only bill the government for their “usual and customary charges,” Kmart was pocketing millions of dollars that it was not entitled to.

When it announced the settlement, the DOJ said, as it always does, that “[t]he government’s resolution of this matter illustrates the government’s emphasis on combating health care fraud.”  In truth, both the success of Kmart’s scheme and the settlement show exactly the opposite: The government can neither prevent nor police even the most obvious forms of health care fraud.  We make this point at length in our forthcoming book, Overcharged: Why Americans Pay Too Much For Health Care.

Consider a few facts.  While public payers were happily paying Kmart’s inflated bills, they were also receiving bills from Walmart that accurately stated the far lower market price for the very same drugs.  When James Garbe, the pharmacist who discovered what Kmart was doing, had a prescription for 90 days of blood pressure medication (Lisinopril/HCTZ) filled at Walmart, it billed the government $2—the difference between his copay ($10) and Walmart’s cash price ($12).  When he had the exact same prescription filled at Kmart, it billed the government $50.84, even though the charge should only have been $5 because Kmart’s cash price was $15.  No one in the government (or at the private carrier that administered the part D program for Medicare) wondered why Kmart’s charge was 25 times as much as Walmart’s, even though the two stores compete directly with one another.

Nor did anyone responsible for protecting taxpayers’ dollars bother to look at Kmart’s website, where it posted its cash prices for pharmaceuticals.  Kmart’s “Preferred Generic Drug List” shows that a 90-day supply of Garbe’s high blood pressure medication cost at most $15—far less than the $60.84 that Kmart was charging.

By examining hundreds of Kmart’s billing records, Garbe learned that overcharges for cheap generic drugs were routine.  Kmart charged cash-paying customers $5 for 30-day supplies of four commonly dispensed generic drugs (simvastatin, pravastatin, tramadol, and sertraline), but it charged the government $152.97, $148.97, $77.09, and $92.97, respectively.  All of these bills, as well as those for many other generic drugs, should have set off warning bells.  None did.  And, this wasn’t a one-time thing.  Over a twelve-year period Kmart over-billed the government for generic drugs in forty-six states!  But for the efforts of Garbe and his lawyers, the government would still be paying too much for generic drugs today.  The harm to taxpayers is clear, but patients also ended up bearing some of these inflated costs.

The settlement also makes another point that we develop in Overcharged: providers are constantly gaming the government’s payment rules.  Every bill that a government payer receives might be fraudulent or abusive, in whole or in part.  Consequently, fraud and abuse will flourish unless and until all bills are carefully reviewed and punishments are ramped up to the point where providers are deterred—which likely means throwing people in jail.  But the government will never agree to bear the cost of reviewing the billions of bills that it receives every year, and providers will use all of their considerable political clout to prevent pre-payment audits from happening.  They’ll kill any attempt to increase the penalties for fraud too, and they’ll continue their efforts to neuter whistle-blowers.

If we want to address these problems, we need to change tactics.  When we start paying for medications and other medical treatments directly, fraud will largely disappear.  Kmart couldn’t have billed cash-paying customers exorbitant amounts for generic drugs when the identical items were available much more cheaply at the Walmart around the corner.  As long as we keep relying on third party payment (whether governmental or private), we’ll continue to play a losing game of Whac-A-Mole against fraudulent and abusive providers—a losing game because there are far more moles than there are mallets with which to whack them.


David A. Hyman and Charles Silver are professors at the Georgetown Law Center and the School of Law at the University of Texas at Austin, respectively, and coauthors of Overcharged: Why Americans Pay Too Much For Health Care, which will be published by the Cato Institute in April, 2018.

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9 replies »

  1. Well-written and informative. True that patients also end up paying some of the inflated cost. Thanks for the post.

  2. The answer has got to be that providers feel the patient is paying at least part of the bill. And the patient has to feel that he is paying part of the bill.

    Cash won’t work. It is too cruel.

    We have to use refundable vouchers. Medi-bucks.

    Using these, we can be as altruistic as needed, but we stll buy and sell health care services with a sort of faux cash. The government can give out these as needed and everyone sees them as virtual cash because they can be converted into cash if they are not used or if the patient dies.

  3. The real false claim is that Medicare will be a responsible purchaser for the public. They willfully and knowingly purchased drugs at an outrageous price comparatively without due diligence. So “Overcharged” is a nice idea, but it is really “Overpaid”. In addition to the tax money they squandered on this scheme, they also had to utilize the justice system, costing taxpayers even more. This laziness and lack of oversight is offensive to physicians as well as patients. Considering the amount of reporting physicians have to do, the price fixing by Medicare, the regulatory burden, and the insulting posture of CMS blaming doctors for driving up medical costs. I expect more application of their intrusive and feckless management strategies applied to Pharmaceutical and device companies. But we don’t see it. Why? Why should CMS be so liberated to micromanage the practice of medicine on the one hand, and shooting money out of a cannon so irresponsibly with the other? Thank you for this exposition.

  4. Not really sure what solution, if any, you are advocating for here. Take the government out of this? Medicare works through private carriers. That leaves those private carriers and the KMarts in charge if govt is out of the picture. Not reassuring.

  5. When your industry has a very unique business model, anything can and does occur. The PHARMA business model is: 40% of cash income is allocated to promotion and profit. It a corrupting influence on all that they touch. And, the “search for the cure” continues unabated with its attendant disconnect within the COMMON GOOD of each citizen’s community that influences the nerves and arteries of our nation’s healthcare.

  6. All true.

    But it also speaks to the supply side minions in whom some would place the trust of our health care system into–if regulators and watchdogs, dysfunctional as they might be, disappeared.

    • Do you think Job Public would pay $152 if the pharmacy down the street only charged $5? Overregulation causes the need for regulators and in this case until caught permitted K-Mart to directly bill Medicare and Medicare directly paid. The bureaucracy failed, not the marketplace.

      • Thank you. No real consumer gets 52 mil into a purchase over several years before they catch on. DOJ has a lot of nerve patting itself on the back over this. Any moron with internet access could have identified this before they even paid the first prescription.

        • Yes, a simple check of the Good Rx app shows that every pharmacy in my area charges between $4.00 and $10.00 for a 30 day supply of Lisinopril tablets.

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