Walgreens facing whistleblower lawsuit over Medicaid drug pricing

Filing focuses on generic drug costs levied by pharmacies absorbed by the pharmacy giant.

In 2013, J. Douglas Strauser, a pharmacist, filed a whistleblower lawsuit against Stephen L. LaFrance Holdings Inc. and Walgreens, alleging that they overcharged Medicaid for generic drugs by not giving the government the best price. Stephen L. LaFrance Holdings was the owner and operator of a pharmacy chain in seven states that purchased by Walgreens in 2012 for over $400 million. A few pharmacies that were not acquired by Walgreens are also defendants in the whistleblower suit.

According to the complaint, the pharmacies were offering cash-paying customers generic drugs for $4, but charged Medicaid higher prices for the same drugs. This program was allegedly set up to compete with Walmart’s $4 generic drug pricing for 30-day supplies of common medications, but it only applied to customers who were not insured. However, Walmart charged Medicaid the same price that it charged these customers.

Medicaid bases the amount it pays for drugs on “usual and customary” prices reported by pharmacies. The suit alleges that the rate is commonly understood in the industry to mean the price that cash-paying customers pay for drugs. According to the complaint, the pharmacies were instructed not to advertise the program out of fear of getting detected by state regulators. Much of the conduct occurred prior to Walgreens’ acquisition of the pharmacies. The practice ended when Walgreens converted the acquired pharmacies onto a new software system, which informed Medicaid programs of the low prices offered to uninsured customers.

Last year, the government declined to intervene in the whistleblower suit, and various defendants quickly filed motions to dismiss against the whistleblower who chose to continue litigating his claims without the U.S. Department of Justice or the attorneys general for the states of New Jersey, Oklahoma, and Tennessee. On March 7, whistleblower Strauser defeated the motions to dismiss when a federal judge allowed his case to move forward. In denying the motions, the Court noted six other suits with nearly identical allegations that all survived such motions. The court also dispatched defendants’ argument that “usual and customary” is an ambiguous phrase open to interpretation, calling the defense argument “in tension with the plain meaning of words.”

The case now moves into discovery, and we will keep RACmonitor readers posted on future developments.

This suit is an excellent example of how whistleblower incentive programs like the qui tam provisions of the state and federal False Claims Acts can attract extremely qualified and credible persons to file suit on the government’s behalf. J. Douglas Strauser, the whistleblower, was a pharmacist for almost 40 years before he filed the whistleblower suit. He operated several of his own pharmacies, selling the last one he operated to one of the defendants in 2008. According to the complaint, Mr. Strauser pointed out the alleged fraud to several executives in dozens of conversations before filing this suit. He has also founded a disaster-relief charitable organization, served as the mayor of his Missouri town, acted as local school board president for over a decade, and is on the board of directors of a local bank.

The expertise Strauser brought to the case is obvious from a review of the complaint and his recent survival of the motions to dismiss.