Kmart: Discount-Club Prices and Government Claims

In the Kmart pharmacy pricing settlement case, Kmart agreed to pay $32.3 million to the United States to resolve allegations that it concealed discounted generic-drug prices when billing Medicare Part D, Medicaid and TRICARE. The government alleged that cash customers could get the lower prices through discount clubs while Kmart reported higher usual and customary prices for reimbursement. If you worked with a pharmacy’s discount program, pricing system or claims, the difference may be familiar: the price available at the counter and the price sent to the payer.

The Justice Department’s December 22, 2017 announcement placed the federal agreement inside a $59 million global settlement that also resolved state Medicaid and insurance claims. A pharmacist brought the qui tam case, and the government declined to join it. His knowledge of what Kmart charged became a comparison of cash sales, reimbursement claims and the contracts governing payment.

How Kmart’s Discount Programs Changed the Price

Kmart’s discount programs offered lower prices on generic prescriptions to cash customers. The whistleblower alleged that Kmart kept those prices out of the usual and customary prices reported to government health programs, even as the discounts became broadly available.

The Seventh Circuit’s account of the programs starts in 2004. Kmart introduced its Kmart Maintenance Program to compete with online and mail-order pharmacies, offering specified generic drugs for $15 on a 90-day prescription.

The opinion describes Kmart’s concern that competing generic-drug discounts would also reduce what third-party payers paid it. In late 2005, Kmart redesigned the program and renamed it the Retail Maintenance Program. The court quoted internal documents describing low prices for cash customers who enrolled, alongside higher usual and customary prices for other cash customers. Those documents stated the purpose plainly:

The company hired Agelity, an outside processor, to administer the Retail Maintenance Program. According to the whistleblower’s evidence described by the court, Kmart still chose the drugs, their prices and which customers qualified.

The program expanded to additional drugs and many 30- and 60-day prescriptions in 2008. The court also described pharmacists routinely overriding official program prices to match competitors. In 2009, Kmart introduced its Prescription Savings Club. Through these changes, the whistleblower alleged the same pricing practice: low discount-program prices for cash customers and higher reported prices on claims to insurers.

An override shows what happened at the counter when the posted program price met a competing offer.

Why the Discount Price Counted as the Public Price

The Seventh Circuit held that Kmart’s discount prices at issue were its usual and customary charges because the drugs were widely and consistently available at those prices. The court examined how the programs actually worked: who could join, what joining required and how long the prices remained available.

Kmart argued that a customer who joined a discount program belonged to a particular group and therefore fell outside the general public. The court found no meaningful selectivity. Typically, a customer needed only to agree, supply demographic information the pharmacy already needed and pay a nominal fee. The court described the barriers to joining as almost nonexistent, where they were enforced at all.

We find that a remarkable definition of the public. An ordinary cash customer supposedly became someone else for pricing purposes by accepting the pharmacy’s offer. A club label did a great deal of work in Kmart’s argument. The court looked at the people buying the drugs.

The fee still mattered to the price comparison. The court described immediate access for a $10 membership fee and treated a paid fee as part of the customer’s cash price. That connects the enrollment record to the receipt: both can affect what the customer actually paid for access to the drug.

Availability over time mattered too. The court described Kmart’s discounts as continuously available across multiple benefit years. Its conclusion rested on that sustained public offer. A pharmacy insider’s knowledge of enrollment practices and the duration of an offer helps explain what the price in a reimbursement field should represent under the applicable payer terms.

What the Receipt and Reimbursement Claims Revealed

The case began with a pharmacist noticing what a competing pharmacy charged his own Medicare Part D insurer for a prescription. According to the court’s account, that charge was far below what Kmart ordinarily charged for the same prescription. He then examined Kmart’s reimbursement claims and found the pattern he brought into the case.

The inquiry went beyond the first receipt. A pharmaceutical economist retained by the whistleblower analyzed reimbursement data and found that nearly all cash customers received discount-program prices. That finding made the discounted sales central to the dispute over Kmart’s public price. The opinion describes the whistleblower’s allegation that Medicare Part D participants were charged sometimes as much as 30 times more than discount-program customers.

An auditor testified about industry practice and the terms of more than 1,000 contracts between Kmart and Medicare Part D intermediaries. The auditor’s position was that those terms required reimbursement requests to use the discount-program prices. The economist’s analysis found that Kmart instead submitted significantly higher prices and received higher reimbursement.

The sales data and contracts answered different questions. Actual transactions showed how broadly the lower price was used. Contract terms supplied the reimbursement obligations against which the reported price could be compared. The internal documents added what the company understood about the financial effect of its pricing policy.

This is where an insider’s account can be unusually valuable. A pricing employee may understand why the program table changed. A pharmacist may recognize when staff enrolled customers or overrode prices. An employee in healthcare billing may see which price the payer received. We connect those views to the same prescriptions and payments.

How Medicare Part D Payments Reached the Pharmacy

Medicare Part D paid through private plan sponsors and pharmacy benefit managers in the system described by the court. The Centers for Medicare and Medicaid Services oversaw the program and paid sponsors fixed monthly amounts, followed by year-end reconciliation using sponsor records. Plan sponsors managed claims and payment processes, and most subcontracted with pharmacy benefit managers that worked directly with pharmacies.

That payment path mattered to Kmart’s defense. Kmart argued that the reimbursement requests did not reach the government itself. The court explained that the False Claims Act reaches false claims paid with government money through private plans.

For someone working in health care billing, the useful connection runs through the pharmacy’s submission, the intermediary’s payment and the government-funded benefit those records served.

What the Settlement Resolved

The federal settlement announced after the pricing ruling resolved allegations that Kmart knowingly failed to disclose its discounted generic prices when reporting usual and customary prices to Medicare Part D, Medicaid and TRICARE.

The Justice Department’s Civil Division and the U.S. Attorney’s Offices for the Southern District of Illinois and Central District of California handled the case. The Department of Health and Human Services Office of Inspector General provided investigative assistance. The U.S. Attorney’s Office for the Central District of California and the National Association of Medicaid Fraud Control Units provided auditing assistance.

Does a Settlement Headline Determine a Reward?

No. The settlement and the whistleblower’s reward are separate amounts. In this pricing matter, the Justice Department announced that the whistleblower would receive $9.3 million.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

Kmart’s Other Pharmacy Settlements Concerned Different Claims

Kmart’s separate 2015 coupon and gasoline-discount settlement concerned alleged inducements to fill prescriptions. The whistleblower’s complaint in that case described a second source of payment:

That allegation follows a coupon payment and a reduced copayment. The discount-club pricing case follows the cash price reported to the government-funded payer.

In March 2018, Kmart paid $525,000 to settle another case, concerning diagnosis and documentation requirements for Medi-Cal prescriptions. The government alleged that Kmart failed to confirm and document required diagnoses and sometimes dispensed drugs for unapproved diagnoses before billing Medi-Cal.

What a Pharmacy Insider Can Connect

A pharmacy pricing case connects the cash offer, the submitted usual and customary price, the payer’s terms and the resulting reimbursement. Kmart’s case shows why the person who knows how the discount was administered may hold a different part of the story from the person who sees the claims.

Pricing tables and enrollment terms explain the offer. Cash receipts show what customers paid. The original claim and payer response show what the pharmacy submitted and how the processor handled it. The network agreement and final remittance connect that submission to reimbursement and later adjustments.

The transaction history matters when a claim changes. New York Medicaid’s electronic pharmacy billing guide distinguishes billing, reversal and rebill transactions. The product code and rebill history help identify which medicine and which version of the claim the payer processed. We use those connections to match the reported price to the cash comparison and the payment.

Your knowledge of the business gives those records context. Who chose the eligible drugs? Who controlled enrollment? What happened when a pharmacist matched a competitor? Those were concrete issues in Kmart’s case.

You Know How the Pharmacy Chose Its Price

If you saw a cash discount kept out of the prices reported to government health programs, speak with our whistleblower experts about the price kept off the claim. We build your strongest pharmacy whistleblower case around the offer, the claim and the payment, and bring in pharmacy fraud whistleblower lawyers who understand reimbursement and discount-program disputes. You bring the view from inside the business; we bring the expertise and partnership to pursue it with you.