What Kmart’s Settlement Says About Health Care Fraud

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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. Kmart allegedly sold these drugs to cash-paying customers at $5, $10, and $15 for 30-, 60- and 90-day supplies, while charging government payers far higher amounts. For example, “Kmart reportedly sold a 30-day supply of a generic version of a prescription drug for $5 to cash customers, but then filed for reimbursement from the government for $152 for that same drug for its Medicare customers.” This reportedly violated regulations requiring pharmacies to apply their usual and customary charges when billing government payers.

The DOJ claims that “[t]he government’s resolution of this matter illustrates the government’s emphasis on combating health care fraud,” It might more accurately have said that the settlement adds to the mountain of evidence showing that the government cannot control even the most obvious forms of health care fraud, a point we make at length in our forthcoming book, Overcharged: Why Americans Pay Too Much For Health Care.

For one thing, at the very same time government payers were honoring Kmart’s inflated bills, they were receiving bills from retail pharmacies like Walmart that accurately stated the proper charges for the very same drugs. When James Garbe, the pharmacist who discovered what Kmart was doing, had a prescription for Lisinopril/HCTZ filled at Walmart, he paid $10 and Walmart bill his Medicare Part D plan $2, the difference between his copay and Walmart’s cash price of $12. When he had the same prescription filled at Kmart, he again paid $10 but Kmart billed his Part D plan $50.84, bringing the total to $60.84. Because Kmart’s cash price was $15, the additional charge should only have been $5. But, apparently, no one at Garbe’s Part D carrier wondered why Kmart’s charge was 25 times as much as Walmart’s, even though the stores are rivals that compete for the same customers.


Medicare didn’t check Kmart’s cash prices online, either. Had they done so, they’d have found Kmart’s “Preferred Generic Drug List” and seen that a 30-day supply of Lisinopril/HCTZ cost only $5. Kmart’s best defense to the government’s fraud claim might have been, “How can we have deceived anyone when our cash prices were posted for everyone to see?”

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 simvastatin, pravastatin, tramadol, and sertaline, but it charged government payers $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. Kmart billed inflated amounts from 2004 to 2016.

Kmart’s customers, who number in the hundreds of thousands or millions, didn’t discover the fraud either, even though it cost many of them money by bringing them more rapidly to Medicare’s “donut hole”—the space between $2,250 and $3,600 in prescription drug costs where Medicare beneficiaries bear the entire cost themselves. They seem not to have been interested enough or savvy enough to figure out Kmart’s game. But for the efforts of Garbe, a pharmacist who worked for Kmart, and his lawyers, the government would still be paying too much for generic drugs today.

This is the second respect in which the government’s assertion that the settlement demonstrates its “emphasis on combating health care fraud” rings hollow. After Garbe filed his qui tam complaint, the DOJ chose not to intervene in the case. Garbe’s “attorneys, Phillips & Cohen joined by co-counsel Korein Tillery, litigated the case against Kmart on their own without government assistance.” The settlement thus shows exactly what we claim in Overcharged, namely, that the government expends far too little effort and devotes far too few resources to policing fraud.

The settlement also teaches a third lesson: Billing games abound because providers look for opportunities to exploit the government’s payment rules without being caught. In Overcharged, we describe some of these games, which are far too numerous and varied to catalogue comprehensively. But the general point is simple. Every bill that a government payer receives can be tainted by fraud. Consequently, fraud will flourish unless and until are bills are carefully reviewed. Because the government would never agree to bear the cost of reviewing the billions of bills that Medicare, Medicaid, and other payers process every year and providers would use all of their considerable political clout to prevent their bills from being carefully reviewed, fraud will always cost the federal and state governments hundreds of billions of dollars a year.

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