7th Circuit Rules “Usual and Customary Pricing” Can Include Discount Programs


A recent whistleblower case could have a significant impact on Medicare Part D charge limits and corresponding reimbursement and could have ripple effects for aspects of other Medicare programs. The Seventh Circuit Court of Appeals ruled that reduced prescription prices offered by a large retail pharmacy (here Kmart) to participants enrolled in a popular discount program constitute the pharmacy’s “usual and customary” pricing for purposes of Medicare Part D prescription drug program claims. In US ex rel. Garbe v. Kmart Corp., the court ruled that Kmart’s discount drug program could not be distinguished from its non-discount pricing and excluded for determination of its “usual and customary” pricing, which functionally lowers the floor for Part D plan payments.

Many Medicare Part D plans require that aggregate pharmacy provider charges to not exceed the “usual and customary price.” The court notes that the term “usual and customary price” is generally understood to be the “cash price offered to the general public.” The question addressed here by the court was whether Kmart’s membership discount program, called the “Kmart Maintenance Program” (“KMP”), offering discounted prices to KMP members while charging higher prices to non-program insurers and cash customers was available to the “general public” and therefore considered the pharmacy’s usual and customary pricing.

In administering the KMP, Kmart hired a third-party processor to maintain the discount program. Kmart then determined its “usual and customary” price exclusive of the prices offered in the KMP, arguing that members of its discount programs were not part of the “general public.” The court disagreed with Kmart’s position and found that KMP pricing representing the usual and customary price. First, the court noted that the barriers to joining the discount programs were almost nonexistent and that members of the “general public” could easily become members of the discount programs by paying a small fee. Second, the court found that Kmart was not selective in who it permitted to join the program given that membership was offered to anybody who purchased prescription drugs. Third, the members of the programs were unlikely to consider themselves as belonging to any particular group because of their membership in the discount programs.

Going forward, the court affirmed the trial court’s denial of Kmart’s request for summary judgement with regard to calculation of Kmart’s “usual and customary” price, affirmed that the False Claims Act applies to almost all of the plaintiff’s claims and remanded the case to the district court for further proceedings.  The ultimate implications of the trial court’s holding on “usual and customary” meaning “cash price to the general public” will be fact-specific and must take into account specifically defined terms contained in individual state statute and PBM/administrator contracts/payor sheets in determining if there is False Claims Act liability with regard to various Medicare Part D claims.

Health Care Takeaway

Providers should carefully monitor the progress of this case. Pending a final resolution, they should consider whether their discount programs are structured such that they might be construed as being offered to the general public and whether such programs must be considered in determining “usual and customary pricing.” While it is by no means clear that all discount programs must be considered when calculating usual and customary pricing, discount programs that might affect usual and customary pricing should be carefully evaluated in coordination with claims processing and prescription drug plan contracting activities.

If you have any False Claims Act questions, please contact David B. Honig at dhonig@hallrender.com or (317) 977-1447 or your regular Hall Render attorney. David is in our Indianapolis office.

If you have any pharmacy questions or specific questions about pricing, please contact Todd Nova at tnova@hallrender.com or (414) 721-0464, Rachael Ream at rream@hallrender.com or (216) 513-1314 or Stephen Rose at srose@hallrender.com or (425) 278-9337. Todd is in our Milwaukee office, and Rachael and Stephen are in our Seattle office.