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James Garbe, an experienced pharmacist, began working at Kmart pharmacy in Ohio in 2007. One day, Garbe picked up a personal prescription at a competitor pharmacy. When he reviewed his receipt, Garbe got a surprise: the competitor pharmacy had charged his Medicare Part D insurer far less than Kmart ordinarily charged it for the same prescription.

Curious to see whether his discovery was a one-off, he started inspecting Kmart’s pharmacy reimburse-ment claims. His amateur detective work revealed that Kmart routinely charged customers with insurance – whether public or private – higher prices than customers who paid out of pocket.

Not all cash customers were charged the same price: people in Kmart’s “discount programs” paid much less. But the ensuing investigation revealed that nearly all cash customers received the lower “discount program” prices. Meanwhile, those “discount program sales were ignored when Kmart calculated its “usual and customary” prices for its generic drugs for purposes of Medicare reimbursement.

Garbe shared his discovery with the government and filed a qui tam suit against Kmart Corporation on July 12, 2008 in the federal district in Los Angeles and later transferred to the Southern District of Illinois. He claimed that Kmart knowingly failed to disclose those discount  prices when reporting to federal health programs its usual and customary prices, which are typically used by those programs to establish reimbursement rates.

Now Kmart Corporation has agreed to pay $32.3 million to the United States to settle allegations that in-store pharmacies in Kmart stores 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 Justice Department announced today.

The agreement resolves allegations arising from a lawsuit brought under the qui tam, or whistleblower, provisions of the False Claims Act, which permit private citizens with knowledge of fraud against the government to bring an action on behalf of the United States and to share in any recovery.

The settlement agreement with the United States is a part of a global $59 million settlement that includes a resolution of state Medicaid and insurance claims against Kmart. Garbe, who litigated the case after the government declined to intervene in the action, will receive $9.3 million.

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.

The lawsuit is captioned U.S. ex rel. Garbe v. Kmart Corp., Case No. 12-CV-881-NJR-PMF (S.D. Ill.). The claims settled by this agreement are allegations only, and there has been no determination of liability.m