Bottles of prescription pills go through an automated packaging machine in a pharmacy plant. The Supreme Court on Tuesday will hear a case considering whether pharmacies knowingly overcharged Medicare and Medicaid under the False Claims Act.
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Stan Honda/AFP via Getty Images
Bottles of prescription pills go through an automated packaging machine in a pharmacy plant. The Supreme Court on Tuesday will hear a case considering whether pharmacies knowingly overcharged Medicare and Medicaid under the False Claims Act.
Stan Honda/AFP via Getty Images
The US Supreme Court will hear arguments on Tuesday in a case that could undermine one of the government’s most powerful tools for fighting fraud in government contracts and programs.
The False Claims Act dates back to the Civil War, when it was enacted to combat rampant fraud by private contractors who were overbilling or simply not delivering goods to the troops. But the law was weakened over time by congressional amendments.
Then, in 1986, Congress strengthened the law, and then strengthened it again. The primary Senate sponsor was – and still is – Iowa Republican Charles Grassley.
“We wanted to anticipate and block every avenue that creative lawyers … could use to allow a contractor to escape liability for overpayment,” Grassley said in an interview with NPR.
He is alarmed by the case before the Supreme Court this week. At issue is whether hundreds of major retail pharmacies across the country knowingly overcharged Medicaid and Medicare by charging what were their customary and customary prices. If so, they would be liable for treble damages.
What the pharmacies charge
The case essentially began in 2006, when Walmart upended the retail pharmacy world by offering a slew of frequently used drugs at very low prices — $4 for a 30-day supply — with automatic refills. This has left the rest of the retail pharmacy industry desperately trying to figure out how to compete.
The pharmacies came up with several offers that matched Walmart’s prices for cash customers, but they billed Medicaid and Medicare using much higher prices, not what they purported to be. -usual and their usual.
Walmart reported its discounted prices as usual, but other chains did not. Even as the discounted prices became the majority of their sales in cash, other retail pharmacies continued to pay the government the previous and much higher prices.
For example, between 2008 and 2012, Safeway charged just $10 for nearly all of its cash sales for a 90-day supply of a top-selling cholesterol-lowering drug. But she did not report $10 as the usual and usual price. Instead, Safeway told Medicare and Medicaid that its usual and usual price ranged from $81 to $109.
How the whistleblowers responded
Acting under the False Claims Act, two whistleblowers filed a lawsuit on behalf of the government alleging that SuperValu and Safeway defrauded taxpayers of $200 million.
But the Seventh Circuit Court of Appeals ruled that the chains did not act knowingly, even if they “may have suspected, believed or intended to file a false claim.” And the appeal court went on to say that the evidence about what the executives knew was “irrelevant” as a matter of law.
The whistleblowers appealed to the Supreme Court, along with the federal government, 33 states and Sen. Grassley.
“It’s just contrary to what we thought,” Grassley said. “That text alone makes a hash of the law of fraud.”
The statute is very specific, he observes. It says that a person or business knowingly defrauds the government when they submit a false or fraudulent claim for payment. And it defines “knowingly” as: “actual knowledge”, “willful ignorance” or “reckless disregard of the truth or falsity” of the claim.
“These are three distinct mental states,” Grassley said, “and it could be any one of them.”
The defense of companies
SuperValu and Safeway would not allow their lawyers to be interviewed for this story, but in their briefs, they argue that a strict intent requirement is needed to hold businesses liable under the statute. That is to ensure that companies have fair notice of what is and is not legal. The companies are backed by a variety of business interests, including defense contractors represented by attorney Beth Brinkmann in this case.
Brinkmann maintains that the False Claims Act is a punitive law because it imposes severe monetary penalties for misconduct without clear enough agency guidance. Ultimately, she argues, the issue is not one of fact.
“If there’s more than one reasonable interpretation of the law,” Brinkmann said, “you don’t know it’s false.”
Tejinder Singh, who represents the whistleblowers, disputes that interpretation, calling it an after-the-fact justification for breaking the law.
“It has nothing to do with what you believe at the time you acted,” Singh said, “and everything to do with what you do afterward.”
A decision in the case is expected by the summer.
