Prescription Billing Fraud, Part 1

Usual and Customary Price Prescription Billing Fraud

In 2003, Congress passed the Medicare Prescription Drug Improvement and Modernization Act.¹ This was one of the largest overhauls of Medicare since its initial enactment in 1965.²  A primary feature of the Medicare Modernization Act was the creation of Medicare Part D, a program designed to make available prescription drug coverage for Medicare beneficiaries (senior citizens over 65 years of age and qualified disabled individuals enrolled in Medicare). Medicare Part D prescription drug coverage was implemented on January 1, 2006.³

Medicare Part D is overseen by the Centers for Medicare and Medicaid Services (“CMS”), a branch of the United States Department of Health and Human Services. CMS does not directly administer the Medicare Part D prescription drug program. Instead, it uses private insurance plans known as Plan Sponsors to manage Part D beneficiaries’ claim submissions and payment processes.⁴ Most Plan Sponsors subcontract with other private entities known as Pharmacy Benefit Managers (“PBMs”) who, in turn, contract directly with retail pharmacies in providing prescription coverage for Part D beneficiaries.⁵

The Medicare Part D program is heavily subsidized by CMS with U.S. Treasury funds that cover most program costs to encourage participation and to keep benefits affordable.⁶ Under the Medicare Modernization Act, federal subsidies for most Part D beneficiaries are intended to cover 74.5% of the average premium cost. In most years, the effect of enrollees purchasing less expensive Medicare Part D prescription drug plans results in federal premium contributions in excess of the 74.5% premium goal.⁷

Most, if not all, of the Medicare Part D contracts with pharmacies provide that the pharmacies are to be paid the lesser of either (1) the negotiated contract price of the dispensed prescription or (2) the “Usual and Customary” (“U&C”) price of that prescription.⁸ Prescription billing is done electronically, with the pharmacy entering the prescription and dosage (along with other beneficiary information) in computer software that almost instantaneously communicates with the PBM and responds with the reimbursement amount that the pharmacy will receive for the sale in accord with standards, contract-defined compensation, and data submitted by the pharmacy, including the pharmacy’s reported U&C price.

U&C is a common pharmacy industry term that preexisted the 2006 implementation of Medicare Part D. U&C is typically understood to be the cash price that a pharmacy offers to the general public for a particular prescription.⁹ The National Council for Prescription Drug Programs, which sets standards for the electronic submission of prescriptions, defines the U&C field that needs to be populated in a pharmacy’s claim for payment as the “[a]mount charged cash customers for the prescription exclusive of sales tax or other amounts claimed” which “represents the value that a pharmacist is willing to accept as their total reimbursement for dispensing the product/service to a cash-paying customer. . . .”¹⁰ Likewise, the Academy of Managed Care Pharmacy (a professional association that includes health systems), defines U&C as the “price for a given drug or service that a pharmacy would charge a cash-paying customer without the benefit of insurance provided through a payer or intermediary with a contract with the pharmacy.”¹¹ PBM contracts with pharmacies generally define U&C as the cash price that a pharmacy would charge to a customer, including all discounts.¹² Finally, Medicaid regulations generally define U&C as the “cash price offered to the general public.”¹³

In 2006, soon after Medicare Part D went into effect, Walmart implemented a discount program offering the public a defined formulary of approximately 300 generic drugs for $4 for a 30-day prescription.¹⁴ This new discount program posed a serious competitive threat to other pharmacies since Walmart operates over 4,700 pharmacies in its stores across the United States, with 90% of the population of the United States living within 10 miles of a Walmart pharmacy.¹⁵

Within weeks of Walmart’s rollout of its $4 generic drug program, CMS issued a “lower cash price policy” memorandum to all Medicare Part D Sponsors.¹⁶ In that memorandum, CMS stated that “where a pharmacy offers a lower price to its customers throughout a benefit year” that price is the pharmacy’s U&C price. CMS then cited Walmart’s $4 generic discount program in its memorandum, stating that the $4 price “is considered Wal-Mart’s ‘usual and customary’ price.”¹⁷ The contents of this guidance was incorporated into CMS’s Medicare Prescription Drug Benefit Manual two months later, in December 2006.¹⁸ Thus, a discounted cash price offered to the general public becomes the pharmacy’s usual and customary price and therefore must be the U&C price reported to the government.

In response, pharmacy competitors of Walmart implemented discount programs where they offered to price match the Walmart $4 generic drugs or established membership clubs that sold the same generic drugs for the $4 price. However, unlike Walmart, a number of these pharmacies did not report these cash sales as their U&C price to Medicare Part D, Medicaid, or other Government Healthcare Programs. Instead, they continued to electronically report higher U&C prices to the PBMs so as to be compensated at a higher rate than their actual $4 U&C price. Through these schemes pharmacies endeavored to have their cake and eat it too. They were able to compete with Walmart in attracting and maintaining customers by offering to sell generic prescription drugs at the $4 cash price, while continuing to maintain substantial profit margins by reporting a higher U&C price electronically to third party payers like Medicare and Medicaid for the sale of those same prescription drugs and dosages. This practice resulted in a number of False Claims Act actions, primarily brought by pharmacists who objected to this fraudulent activity.

Helmer Martins Rice & Popham, Co., LPA, routinely represents whistleblowers in complex healthcare False Claims Act actions. Presently, we are counsel for relators in two national False Claims Act cases involving the fraudulent submission of inflated U&C prices to Medicare, Medicaid, and other Government Healthcare Programs: United States ex rel. Schutte v. SuperValu, Inc., et al., No. 11-cv-03290 (C.D. Ill.); and, United States ex rel. Proctor v. Safeway, Inc., No. 11-cv-03406 (C.D. Ill.). For more information, or to discuss a potential case with us, please contact us.

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