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United States ex rel. Garbe v. Kmart Corp.

United States District Court, S.D. Illinois

November 7, 2014


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For United States of America, ex rel, Plaintiff: Aaron M. Zigler, Korein Tillery - St. Louis, St. Louis, MO; George A. Zelcs, Korein Tillery - Chicago, Chicago, IL; Gerald M. Burke, Assistant U.S. Attorney - Fairview Heights, Fairview Heights, IL.

For State of California, State of Delaware, State of Florida, State of Georgia, State of Hawaii, State of Illinois, State of Indiana, State of Louisiana, State of Massachusetts, State of Michigan, State of Nevada, State of New Hampshire, State of New Jersey, State of New Mexico, State of New York, State of Oklahoma, State of Rhode Island, State of Tennessee, State of Texas, State of Virginia, State of Wisconsin, State of Montana, Plaintiffs: Aaron M. Zigler, Korein Tillery - St. Louis, St. Louis, MO; George A. Zelcs, Korein Tillery - Chicago, Chicago, IL.

For James Garbe, Plaintiff: Erika A. Kelton, LEAD ATTORNEY, Phillips & Cohen LLP, Washington, DC; Larry P Zoglin, LEAD ATTORNEY, Phillips and Cohen LLP, San Francisco, CA; Aaron M. Zigler, Christopher A. Hoffman, Robert L. King, Stephen M. Tillery, Korein Tillery - St. Louis, St. Louis, MO; George A. Zelcs, Korein Tillery - Chicago, Chicago, IL.

For State of Colorado, State of Iowa, State of Maryland, State of Minnesota, State of North Carolina, State of Washington, Doe States 1-18, ex rel., Plaintiffs: Aaron M. Zigler, Korein Tillery - St. Louis, St. Louis, MO.

For Kmart Corporation, Defendant: John F Farraher, LEAD ATTORNEY, Jeffrey W Greene, Greenberg Traurig, LLP- Massachusetts, Boston, MA; Catherine M. O'Neil, Christopher C. Burris, Coleen Schoch, David E. Meadows, Kristen A. Lynn, Phyllis Buchen Sumner, Stephen P. Cummings, King & Spalding LLP, Atlanta, GA; Felicia V. Manno, John F. Gibbons, Kimberly D. Annello, Greenberg Traurig - Chicago, Chicago, IL; Robert P Charrow, Greenberg Traurig, LLP-Washington, DC, Washington, DC.

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NANCY J. ROSENSTENGEL, United States District Judge.

Pending before the Court are five motions filed by Defendant Kmart Corporation (" Kmart" ): a Motion for Partial Summary Judgment Based on Payers Definitions of Usual and Customary Price (Doc. 204); a Motion to Exclude the Expert Testimony of Dale A. Chamberlain (Doc. 212); a Motion for Partial Summary Judgment Based on Claims in Other Than 90-Day Quantities (Doc. 203); a Motion for Partial Summary Judgment Based on Pre-FERA Claims Relating to Medicare Part D (Doc. 205); and a Motion for Partial Summary Judgment Based on All Claims Submitted to Medicare Part D (Doc. 206). For the reasons set forth below, the Court grants in part and denies in part the Motion for Partial Summary Judgment Based on Payers Definitions of Usual and Customary Price (Doc. 204), denies the Motion to Exclude the Expert Testimony of Dale A. Chamberlain (Doc. 212), denies the Motion for Partial Summary Judgment Based on Claims in Other Than 90-Day Quantities (Doc. 203), denies the Motion for Partial Summary Judgment based on Pre-FERA Claims Relating to Medicare Part D (Doc. 205), and denies the Motion for Partial Summary Judgment Based on All Claims Submitted to Medicare Part D (Doc. 206).

Summary of the Relevant Facts & Procedural History[1]

Relator James Garbe (" Relator" ) has brought this action qui tam on behalf of the United States Government.[2] Relator was an employee of Kmart and worked in Kmart stores in Ohio and Michigan as a pharmacist from May 2007 through October 2010, when he resigned (Doc. 207, p. 1). Relator is currently retired ( Id.).

Kmart Corporation currently operates 780 pharmacies in its stores in forty-six states, Puerto Rico, and the Virgin Islands (Doc. 207, p. 1). In 2005, Kmart operated 1,120 pharmacies in its stores, and the number has been declining since then ( Id.). Kmart's current national market share for pharmacy is less than one percent of the market ( Id.).

Relator asserts that from approximately 2005 to the present, Kmart has violated the False Claims Act, 31 U.S.C. § 3729(a)(1), § 3729(a)(2), § 3729(a)(7) (Count I) (" FCA" ) and the related false claims acts of twenty-six states (Counts II, IV-VIII, XI, XIII-XXXI), and four other related state statutes (Counts III, IX, X and XII),[3] by misrepresenting its " usual

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and customary" prices for certain generic prescription drugs and thereby overcharging Medicare Part D programs, Medicaid, Tricare, state and federal worker's compensation programs, and other state and federal prescription drug benefit programs. By specific example, Relator alleges in paragraphs 145-146 of his Second Amended Complaint as follows:

145. Relator discovered this scheme through his own experience as a Medicare Part D beneficiary. For example, on September 22, 2007 Relator (a Medicare Part D beneficiary) had Kmart fill a prescription for generic [Lisinopril]. [Lisinopril] is among the drugs covered by Kmart's RMP Program, and Relator expected that, after his $10 co-payment, Kmart would claim a $15 charge (the same amount paid by the cash-paying public) to his Part D plan (Paramount Elite), and seek reimbursement from Paramount for the remaining $5 (Doc. 98, p. 47).
146. Relator discovered, however, that his Part D plan received a claim for $60.84 charge for the [Lisinopril], and billed the Part D plan $50.84 ($60.84 - $10.00 co-payment). Kmart was reimbursed $35.84, about 240 percent more than the true " usual and customary" price ( Id.).

In order to understand the way in which Kmart allegedly committed this fraud, it is important to understand the process by which prescriptions are dispensed. Each party's position as to how this process works is summarized as follows. A patient comes to the counter with a prescription (Doc. 207, p. 2). The pharmacist validates the prescription and submits the prescription claim through Kmart's dispensing system (referred to as a " PDX" system) ( Id.). The PDX system enables the entry of patient information, prescriber and prescription information, and insurance or other benefit information ( Id.). Once the appropriate information is entered (or verified - if the patient is a returning customer), the prescription is submitted for dispensing and " adjudication." ( Id.).

Adjudication is the process by which a prescription claim is submitted, generally to a third party processor, to check patient eligibility for any insurance benefit, discount card, or other prescription benefit ( Id.). As part of the adjudication, the processor returns to the Kmart pharmacy the correct pricing for the drug and any patient pay amount (copay or co-insurance) ( Id.). Relator asserts that this process of adjudication is unnecessary for cash transactions ( i.e. those involving self-paying customers that are not using insurance) (Doc. 236, p. 2). More specifically, Relator asserts that adjudication did not occur in any of Kmart's generic drug programs, because they did not involve insurance ( Id.).

Kmart asserts that third-party processors adjudicate prescription claims to third-party payers, or a pharmacy may utilize a " switch vendor" or " pharmacy benefit manager" (" PBM" ) (Doc. 207, p. 3). To submit a pharmacy claim for adjudication by the third-party processor or PBM, Kmart explains that the pharmacist looks up the patient in PDX (or, in the case of a new patient, enters the information into PDX), selects the applicable insurance, government, or discount program benefit to which the patient wishes to adjudicate his or her claim, sends the claim through the switch vendor to the processor, and waits for the processor to process the claim and either return a price or reject the claim ( Id.). As part of this process, the third-party processor or PBM submits the claim to the appropriate private or government payer for reimbursement ( Id.). Specific identifiers, referred to as the BIN/PCN combination, are used in a

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pharmacy system to designate the specific processor to which a specific pharmacy claim should be routed ( Id. at 4).

Over the years, Kmart has implemented various drug discount programs. In 2004, Kmart implemented a pilot generic drug discount program at a single pharmacy in Ohio, which was known as the Kmart Maintenance Program (" KMP" ) (Doc. 207, p. 5). The program was designed to compete with mail order pharmacies that were taking customers away from retail pharmacies ( Id.). Kmart alleges that this program only applied to ninety-day supplies of certain generic maintenance medications and was enrollment based ( Id.). But whether this program applied only to ninety-day supplies is in dispute.

In 2006, Kmart expanded KMP chain-wide, and the program became known as the Retail Maintenance Program (" RMP" ) (Doc. 207, p. 6). Kmart asserts that this program also was limited to ninety-day supplies of certain generic maintenance medications ( Id.). This fact, however, is also in dispute, because Relator asserts that Kmart also provided discounts on thirty-day and sixty-day supplies of drugs (Doc. 236, p. 8). Kmart asserts that if the RMP member had a thirty-day or sixty-day prescription, pharmacists would call the doctor and get a new prescription for a ninety-day supply so that the customer could receive the RMP price (Doc. 207, p. 6). Kmart alleges that, although there were isolated instances where an individual pharmacist conducted a price override to provide a discount for a different days' supply, such overrides were expressly discouraged by Kmart ( Id.). Kmart further asserts that, in order to participate in the RMP, customers were required to complete an " enrollment process" ( Id. at 7). Any Kmart pharmacy customer was eligible to enroll in RMP ( Id. at 8). The enrollment aspect of this program is disputed ( see Doc. 236, p. 11).

In June 2008, Kmart expanded its generic drug discount program to include additional generic drugs (Doc. 207, p. 9). This program was formally known as " Generics Plus," but sometimes was still referred to as RMP ( Id.). Kmart alleges that this program was enrollment based and, during a period in time, Kmart may have permitted verbal enrollment ( Id.). As with RMP, the " enrollment" aspect of this program is in dispute.

In July 2009, Kmart implemented the Prescription Savings Club (" PSC" ). Kmart required a ten dollar " enrollment fee" to join this program (Doc. 236, p. 16). Participants of the program received discounts on thirty, sixty, and ninety-day supplies of certain generic drugs on the PSC formulary (Doc. 207, p. 11). They paid five, ten, and fifteen dollars for these prescriptions ( Id.). Participants were ultimately mailed a permanent ID card which could be shown at the counter to identify the individual as a PSC enrollee ( Id. at 12). In June 2011, the RMP and Generics Plus were eliminated. Kmart has operated only the PSC program from June 2011 to the present ( Id.).

Medicaid is a cooperative program between the government and the states that provides health care benefits mainly to indigent and disabled individuals. Medicaid is funded in part by the relevant individual state and by the federal government. (Doc. 207, p. 13). To qualify for federal funding, state Medicaid programs must satisfy certain federal requirements ( Id.). See, e.g. 42 U.S.C. § 1396a(a)(1); 42 U.S.C. § 1396b. Once the Centers for Medicare and Medicaid Services (" CMS" ) determines that a state Medicaid program meets those requirements, the state becomes responsible for administering its own program ( Id.). A pharmacy provider like Kmart submits claims for prescription

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drug reimbursement directly to state Medicaid programs ( Id.).

Medicare is a federally funded and administered health insurance program available to certain eligible groups -- primarily older and disabled persons - administered by the Department of Health and Human Services through CMS ( Id. at 14). There are four major components to the Medicare program: Parts A, B, C, and D ( Id.). Part D provides a voluntary prescription drug benefit program to eligible Medicare beneficiaries, funded both by the government and the beneficiaries themselves ( Id.).

The Medicare Prescription Drug Benefit - Medicare Part D, which became effective on January 1, 2006 - gives beneficiaries otherwise eligible for Medicare the option of enrolling with private insurance plans that cover prescription drug benefits ( Id. at 15). CMS, which administers Medicare and Medicaid, selects Prescription Drug Sponsors (" Plan Sponsors" ) to provide drug coverage to Part D beneficiaries ( Id.). The Plan Sponsors participate in an annual competitive bidding process ( Id.). The bids are used by CMS to establish a national benchmark per member/per month base amount that CMS will reimburse the Plan Sponsors ( Id.). The amount a Plan Sponsor is paid by CMS is not calculated based on actual prescriptions dispensed ( Id.).

Part D Plan Sponsors provide at least a standard level of coverage through various established benefit stages dependent upon the amount of out-of-pocket drug spend ( Id.). When a certain out-of-pocket spend level is reached, the beneficiary enters the Coverage Gap stage or what has been termed the " donut hole." ( Id.). In this stage, the beneficiary is responsible for their own pharmacy expenses ( Id.). If the out-of-pocket costs of a beneficiary in the donut hole reach a certain dollar value, the beneficiary enters the " catastrophic coverage" stage under which the Plan Sponsor pays for additional pharmacy costs ( Id.).

CMS pays Part D Plan Sponsors " interim payments . . . based on the Secretary's best estimate of amounts that will be payable after obtaining all of the information." (Doc. 236, p. 19). 42 U.S.C. § 1395w-115(d)(1). To allow CMS to determine the monthly amount, the Plan Sponsors submit a bid in the year prior to the calendar year in which it will deliver Part D benefits (Doc. 207, p. 16). CMS pays each Plan Sponsor advance monthly payments tied to the Plan Sponsor's standardized bid and other factors ( Id.). CMS's monthly payments to Plan Sponsors cover three " subsidies" based on the Plan Sponsor's approved bids ( Id.). These subsidies are: (1) the " direct subsidy," which is calculated to cover the Plan Sponsor's cost of providing pre-donut hole pharmacy benefits; (2) the " reinsurance subsidy," to cover the government's share of drug costs for beneficiaries who receive " catastrophic coverage; " and (3) the " low-income cost sharing subsidy" (" LICS" ) to cover the government's portion of the cost-sharing payments for certain low-income Medicare beneficiaries in the donut hole ( Id. at 17).

At the end of a benefit year, CMS reconciles these advance monthly payments to the Plan Sponsors with the Plan Sponsor's actual costs ( Id.). Following reconciliation, CMS reimburses a Plan Sponsor for a percentage of any excess claims for standard beneficiaries ( Id.). CMS also reimburses a Plan Sponsor for a percentage of excess claims for other beneficiaries, if the excess cost exceeds a certain threshold amount (called a " risk corridor" ) ( Id.).

Plan Sponsors are responsible for the administration and payment of individual prescription drug claims, but most contract with PBMs which enter into arrangements with the pharmacies that will actually fill prescriptions ( Id. at 18). The PBMs then

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further subcontract with those individual pharmacies ( Id.). Thus, unlike in the state Medicaid programs, a pharmacy does not submit a claim directly to the government, it submits a claim to the PBM (or Plan Sponsor, if there is no PBM) ( Id.). When a pharmacy dispenses a prescription to a Medicare Part D beneficiary, it submits an electronic claim to the PBM (or Plan Sponsor) in accordance with the contract it has with the relevant PBM (or Plan Sponsor) ( Id.). The pharmacy is then reimbursed for that prescription according to the contract ( Id. at 19).

The PBM submits its own claim to the Plan Sponsor in accordance with its contract with the Plan Sponsor ( Id.). It is then paid under that contract ( Id.). CMS subsequently receives a Prescription Drug Record (PDE) from the Plan Sponsors ( Id.). A PDE is an electronic document that includes at least thirty-seven fields of information about a specific drug transaction ( Id.). The PDE includes the amount the Plan paid the person (or pharmacy) for the dispensed drug ( Id.). It does not identify the U& C price originally reported by the pharmacy ( Id.).

This case has generated a lengthy procedural history, which is only briefly summarized here. The case was originally filed in the Central District of California. See United States ex rel. Garbe v. Kmart Corp., No. 08-cv-4669 (C.D. Cal. filed July 16, 2008). It was unsealed on September 2, 2010, while it was still pending in the Central District of California. The case was then transferred to this Court on August 8, 2012 ( See Doc. 1). The case was originally assigned to Judge William D. Stiehl, who recused on August 27, 2012 (Doc. 71). The case was then reassigned to Judge Michael J. Reagan ( Id.). Judge Reagan assigned the case a Track C and set a final pretrial conference for December 6, 2013, and a firm trial date of December 16, 2013. On November 17, 2012, Relator filed his Second Amended Complaint (Doc. 98). On December 13, 2012, Kmart filed a Motion to Dismiss the Second Amended Complaint (Doc. 102), which Judge Reagan denied on September 18, 2013 (Doc. 118). On May 20, 2014, the case was reassigned to the undersigned District Judge.

Numerous discovery disputes were resolved by Magistrate Judge Philip M. Frazier and Judge Reagan prior to reassignment. On June 23, 2014, the undersigned held a Status Conference to address the state of the litigation. On July 29, 2014, Kmart filed a Motion for Partial Summary Judgment Based on Claims in Other Than 90-Day Quantities (Doc. 203), a Motion for Partial Summary Judgment Based on Payers Definitions of Usual and Customary Price (Doc. 204), a Motion for Partial Summary Judgment Based on Relators Pre-FERA Claims Relating to Medicare Part D (Doc. 205), a Motion for Partial Summary Judgment as to All Claims Submitted to Medicare Part D (Doc. 206), and a Motion to Exclude the Expert Testimony of Dale A. Chamberlain (Doc. 212). On September 30, 2014, the undersigned District Judge held a hearing and heard oral argument on all five motions. The motions are now ripe for ruling.

Relevant Legal Standards

I. Summary Judgment Standard of Review

The standard applied to summary judgment motions under Federal Rule of Civil Procedure 56 is well-settled and has been succinctly stated as follows:

Summary judgment is proper when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. In determining whether a genuine

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issue of material fact exists, [the Court] must view the record in a light most favorable to the nonmoving party. Because the primary purpose of summary judgment is to isolate and dispose of factually unsupported claims, the nonmovant may not rest on the pleadings but must respond, with affidavits or otherwise, setting forth specific facts showing that there is a genuine issue for trial.... A mere scintilla of evidence in support of the nonmovant's position is insufficient; a party will be successful in opposing summary judgment only when it presents definite, competent evidence to rebut the motion.

Albiero v. City of Kankakee, 246 F.3d 927, 931-32 (7th Cir. 2001) (citations and quotations omitted). The Court neither weighs evidence nor resolves material factual issues, but only determines whether, after adequate discovery, any such issues remain unresolved because a reasonable fact finder could decide for either party. See Anderso ...

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