A federal district court in Illinois has held that a trial is necessary to determine whether a pharmacy took sufficient steps to prevent gift cards and loyalty rewards from being provided to government health plan (GHP) beneficiaries. The suit, filed by a Kmart pharmacist, alleges that Kmart offered coupons redeemable for gift cards for consumers who switched their prescriptions to Kmart pharmacies, and operated a loyalty program whereby customers could earn points for spending money at Kmart which could be redeemed for merchandise. Kmart’s policies expressly prohibited the provision of coupons and gift cards to beneficiaries of government programs and prohibited coupons from being used to pay for any prescriptions covered by government programs. Notwithstanding those policies, Kmart issued over 76,000 gift cards in the same transaction as a purchase of a prescription drug by a GHP beneficiary between November 2007 and May 2013. The relator alleged, and the Court concluded, that the provision of these incentives violated the Anti-Kickback Statute. However, Kmart contended that it did not “knowingly” violate the AKS.

In November 2009, Kmart developed an automatic flag system that allowed pharmacists to identify a GHP beneficiary who was ineligible for a gift card or coupon, providing for the first time an automated way for Kmart to “flag” customers who were GHP beneficiaries and thereby prevent them from being offered or utilizing prohibited incentives. Prior to November 2009, Kmart pharmacists could determine whether a customer was a GHP beneficiary through various manual checks, such as reviewing the customer’s health insurance card. However, the relator submitted declarations and deposition testimony from Kmart pharmacists to argue that, prior to implementation of the automated system, there was no reliable way of identifying GHP beneficiaries. That evidence, the Court held, was sufficient to create a triable issue of fact as to whether Kmart’s alleged violation of the AKS prior to November 2009 was “knowing.” “If it is true that Kmart did have all the information it needed to identify GHP beneficiaries for its pharmacy employees, but failed to have an adequate system in [place that allowed them to identify these beneficiaries,” the court held, “then this may be sufficiently reckless to yield False Claims Act liability.”

The November 20 opinion in U.S. ex rel. Yarberry v. Sears Holdings Corporation, et al., Case No. 09-CV-588-MJR-PMF, can be accessed here.