Kmart to Pay Feds $32M to Settle Drug Overbilling Suit

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By Dana A. Elfin

Kmart Corp. will pay the government $32.3 million to put to rest claims its in-store pharmacies overbilled federal health-care programs for generic drugs, the Justice Department said.

The agreement, part of a global $59 million settlement that includes state Medicaid and insurance claims against Kmart, resolves whistleblower allegations Kmart pharmacies failed to report discounted prescription drug prices to Medicare Part D, Medicaid, and TRICARE, the health program for uniformed service members and their families.

The settlement reflects whistleblowers’ recent litigation successes alleging False Claims Act violations through retail pharmacy discount programs. For example, in November 2016, a federal court refused to toss a similar whistleblower suit against Safeway Inc.

The lawsuit against Kmart, filed by whistleblower James Garbe in 2008, alleged Kmart pharmacies offered discounted generic drug prices to cash-paying customers but didn’t disclose those prices when reporting its usual and customary prices to federal health programs.

The usual and customary prices are generally what a retail customer pays out-of-pocket for a particular drug and are used by the government for Medicare and Medicaid drug pricing.

Masking Prices

“Pharmacies that are not fully transparent about drug pricing can cause federal health programs to overpay for prescription drugs,” Chad A. Readler, acting assistant attorney general for the Justice Department’s Civil Division, said in a Dec. 22 statement.

“This settlement should put pharmacies on notice that there will be consequences if they attempt to improperly increase payments from taxpayer-funded health programs by masking the true prices that they charge the general public for the same drugs,” he said.

Garbe, who litigated the case after the government declined to intervene in the action, will receive $9.3 million.

Government Didn’t Intervene

“The settlement shows we were right to continue to litigate the case, even though the government declined to intervene,” Garbe’s attorney, Erika Kelton of Phillips & Cohen LLP in Washington, told Bloomberg Law Dec. 26.

“This case was a battle almost every step of the way,” Kelton said in an email, “but we felt it was important to pursue because the alleged fraud was costing government healthcare programs many millions of dollars.”

“Pharmacies cannot be allowed to charge government healthcare programs more than they charge cash-paying customers for the same prescription,” Kelton said. “We are proud of our client for speaking up when he saw conduct he believed to be wrong.”

Meanwhile, Howard Riefs, a spokesman for Kmart’s parent corporation, Sears Holding Corp., told Bloomberg Law Dec. 26 the company was “pleased to put this case behind us so that we can focus on the needs of our members and customers, and our company’s transformation.”

The claims settled by the agreement are allegations only, and there has been no determination of liability, the government said.

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

King and Spalding LLP represented Kmart. The law firms of Phillips & Cohen LLP and Korein Tillery represented Garbe.

The case is United States ex rel. Garbe v. Kmart Corp. , S.D. Ill., No. 12-CV-0881-NJR-PMF, settlement announced 12/22/17 .

To contact the reporter on this story: Dana A. Elfin in Washington at

To contact the editor responsible for this story: Brian Broderick at

For More Information

The executed settlement agreement is at

The complaint is at

A searchable database of health care FCA settlements is available on Bloomberg Law.

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