Specialty Pharmacies Face Emerging Fraud Risk in 'Usual and Customary' Pricing

Executives of specialty pharmacy companies could be forgiven if they view “usual and customary (U&C) pricing” as a misnomer on par with jumbo shrimp.

Instead of being an easy-to-define, industry-wide standard, U&C pricing is subject to the definition of the term in individual contracts and, in the case of many Medicaid plans, state statutes.

As a result, the calculation of U&C for the same specialty pharmaceutical product from the same company can vary widely among commercial and Medicare Part D plans, and state Medicaid programs, for example. Those discrepancies are at the root of an emerging fraud risk for specialty pharmacy companies.

In a handful of cases that have become public, thus far, whistleblowers are alleging that specialty pharmacies improperly reported U&C prices, and as a result, received greater reimbursement than they were entitled to. A look at a recent federal court ruling suggests some precautions specialty pharmacies should consider to mitigate this evolving risk.

On January 12, 2015, a federal district court in Illinois ruled on a whistleblower lawsuit brought by a pharmacist formerly employed by Kmart Corporation. The whistleblower alleged that Kmart violated the False Claims Act (FCA) by misrepresenting its U&C pricing for various generic prescription drugs, which caused Medicare and other state and federal prescription drug benefit programs to overpay for those drugs.

Similar allegations of manipulation of U&C pricing have been raised in other recent whistleblower actions under the FCA. As part of a discount program, Kmart set low prices for cash customers who signed up for one of Kmart’s discount programs, and charged higher prices for the same generic drugs paid for by third-party insurers, including Medicare Part D and state Medicaid programs, and some non-program cash customers.

The district court ultimately held that the U&C price standard is the cash price to the general public, which is the amount charged to customers for the prescription, unless state law, relevant contract, or payor sheet provide additional guidance. The district court concluded that members of Kmart’s generic discount programs were members of the “general public” for purposes of U&C pricing, at least under the Minnesota, Nevada, and Alabama Medicaid programs.

The district court’s ruling indicates that misrepresentations on pricing to pharmacy benefit managers or Part D plan sponsors, even if not submitted directly to the government, may be sufficient for an FCA violation. The district court found misrepresentation of U&C pricing to be material, even though CMS would have paid the plan sponsor the same amount of money whether Kmart submitted false U&C pricing or not, expanding the scope of FCA liability under Part D.

In May, a federal appeals court upheld this federal district court ruling.

Practical implications

Given recent fraud cases related to U&C pricing manipulation, and in light of the varying definitions of U&C pricing across federal and state health care programs, as well as private payor contracts, pharmacies should institute a U&C pricing policy that includes tracking pricing to all patients and pricing requirements across all payor contracts, if possible.

Creating an overarching policy may be difficult, however, because of the variances in state and payor definitions of U&C, such as differing volume percentage requirements for purchases. Pharmacies should be aware of the price reporting requirements of each payor or program.

Some payors may require billing at the lower of the fee schedule or U&C price, while others may simply require annual reporting. To ensure accurate reporting of U&C pricing, pharmacies should track pricing through the claims adjudication process to avoid potential FCA liability.

Ideally, tracking mechanisms should incorporate different payor and program requirements, including reflecting each payor’s definition of U&C and fee schedule, and be able to generate annual reports.

Tracking payor requirements by fee schedule and varying definitions of U&C would allow pharmacies to tailor their pricing to specific payors, and avoid potential fraud liability for failure to accurately report U&C pricing.

About the Authors

Michael R. Hess is a member of Bass, Berry & Sims PLC and leads its specialty pharmacy, pharma services and distribution practice, and is based in the firm’s Memphis, Tennessee, office. He is the former chief counsel and vice president of strategic development at Accredo Health Group and assistant general counsel for Accredo’s parent, Medco Health Solutions. Bass, Berry & Sims PLC has more than 220 attorneys representing numerous publicly traded companies and Fortune 500 businesses. The firm has three offices in Tennessee (Nashville, Memphis, Knoxville) and one in Washington, DC.

Julia Tamulis is an associate of Bass, Berry & Sims PLC in its healthcare regulatory group and is based in Washington, DC.