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Supreme Court vetoes efforts to limit anti-fraud law aimed at government contractors

The Supreme Court as seen on April 21.
Kent Nishimura
Los Angeles Times via Getty Images
The Supreme Court as seen on April 21.

The U.S. Supreme Court on Thursday revived two whistleblower lawsuits that allege Safeway and SuperValu overcharged the government for prescription drugs to the tune of $200 million.

The cases involved allegations that major retail pharmacies across the country knowingly overcharged Medicaid and Medicare by overstating what their "usual and customary prices" are. If they did, the pharmacies could be liable for triple damages.

The issue before the court was what the standard of proof is for determining whether the pharmacies acted "knowingly" under the False Claims Act, a federal law that dates back to the Civil War when it was enacted to combat fraud by private contractors who were overbilling or simply not delivering promised goods for the war effort.

Writing for a unanimous court on Thursday, Justice Clarence Thomas said that the modern-day version of that law clearly provides that vendors billing the government are liable for damages if they "believed that their claims were not accurate."

The decision overturned a ruling by the Seventh Circuit Court of Appeals, which had ruled the term "usual and customary charges" was sufficiently ambiguous that almost any definition, even after the fact, would be acceptable. The Supreme Court, with one voice, rejected that, declaring that even an ambiguous term "is not sufficient to preclude a finding that [the pharmacies] knew their claims were false."

The case essentially began in 2006, when Walmart upended the retail pharmacy world by offering large numbers of frequently used drugs at very cheap prices — $4 for a 30-day supply — with automatic refills. That left the rest of the retail pharmacy industry scrambling to figure out how to compete.

The pharmacies came up with various offers that matched Walmart's prices for cash customers, but they billed Medicaid and Medicare using far higher prices.

Walmart did report its discounted cash prices as "usual and customary," but other chains did not. For example, between 2008 and 2012, Safeway charged just $10 for almost all of its cash sales for a 90-day supply of a top-selling drug to reduce cholesterol. But it did not report $10 as its usual and customary price. Instead, Safeway told Medicare and Medicaid that its usual and customary price ranged from $81 to $109.

Acting under the False Claims Act, two whistleblowers brought suit on behalf of the government alleging that SuperValu and Safeway bilked taxpayers of $200 million. But the Seventh Circuit Court of Appeals ruled that the chains had not acted knowingly, even if they "might suspect, believe, or intend to file a false claim." And the appeals court further said that evidence about what the executives knew was "irrelevant" as a matter of law.

The whistleblowers appealed to the Supreme Court, joined by the federal government, 33 states and Sen. Chuck Grassley, a longtime proponent of the False Claims Act.

"It's just contrary to what we intended," the Iowa Republican said in an interview with NPR in April. "That test just makes a hash of the law of fraud."

The statute is very specific, he observed. It says that a person or business knowingly defrauds the government when it presents a false or fraudulent claim for payment. And it defines "knowingly" as: "actual knowledge," "deliberate ignorance" or "reckless disregard of the truth or falsity" of the claim. "These are three distinct mental states," Grassley said, "and it can be any one of them."

The Supreme Court on Thursday clearly agreed with that assessment. Just over six weeks after the case was argued, the justices produced a unanimous opinion siding with Grassley, the Biden Administration and the whistleblowers who brought the case.

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Nina Totenberg is NPR's award-winning legal affairs correspondent. Her reports air regularly on NPR's critically acclaimed newsmagazines All Things Considered, Morning Edition, and Weekend Edition.