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What Kmart’s Settlement Says About Health Care Fraud

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.

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