Supreme Court Ruling Ends 'Usual and Customary' Pharmacy Overcharging

The case of United States et al. ex rel. Schutte et al. v. SuperValu Inc. et al, 598 U.S. 739 (2023), is not just a story of pharmacy overcharging; it is the most significant Supreme Court ruling on the False Claims Act (FCA) in a generation.

The Core Dispute: What is “Usual and Customary”?

The saga began back in 2006. To compete with the rise of $4 generic drug programs at stores like Walmart, SuperValu (which operated hundreds of pharmacies) launched a “price-match” program. If a customer showed that a competitor had a lower price, SuperValu would match it.

By law, pharmacies billing Medicare and Medicaid must report their “Usual and Customary” (U&C) price. This is essentially the “sticker price” the general public pays. The government uses this number to ensure it isn’t being overcharged.

The whistleblowers—Tracy Schutte and Michael Yarberry—alleged that SuperValu was playing a shell game. While the vast majority of their cash customers were paying the low, price-matched rates, SuperValu continued to report their much higher, non-discounted retail prices as the “Usual and Customary” rate to the government.

The Millions at Stake

The impact was massive. In some instances, the price reported to the government was ten times higher than what the pharmacy was actually charging cash-paying customers. The relators argued that if a discount is offered so frequently that it becomes the norm, that discount is the “Usual and Customary” price. By hiding these discounts, SuperValu allegedly pocketed millions in excess taxpayer funds.

The Legal “Loophole” That Almost Swallowed the Case

Before reaching the Supreme Court, this case hit a major wall in the Seventh Circuit Court of Appeals. SuperValu’s defense wasn’t that they hadn’t overcharged; it was that the term “Usual and Customary” was legally ambiguous.

They argued that because the regulation didn’t explicitly say “you must include price-matches in your U&C calculation,” their interpretation (that U&C meant the original sticker price) was “objectively reasonable.”

The lower courts agreed with them, creating a standard that became a “get out of jail free” card for corporations:

• The “Objectively Reasonable” Standard: If a company’s lawyers could find a plausible legal interpretation that made the company’s actions look legal—even if the company didn’t actually believe that interpretation at the time—they couldn’t be held liable for “knowingly” defrauding the government.

Essentially, it didn’t matter if an executive wrote an email saying “we are totally cheating the government.” As long as a lawyer could later argue, “Well, the law is vague,” the case would be dismissed.

The Supreme Court’s Unanimous Hammer

On June 1, 2023, Justice Clarence Thomas delivered a unanimous opinion that shattered the “objective reasonableness” defense. The Court’s message was simple: Fraud depends on what you actually believed at the time you did it.

1. Subjective Intent is King

The Court ruled that the False Claims Act’s definition of “knowingly” includes:

• Actual knowledge of the falsity.
• Deliberate ignorance of the truth.
• Reckless disregard for the truth.

Justice Thomas used a brilliant analogy to explain this. Imagine a driver sees a sign that says “Drive Only at Reasonable Speeds.” A police officer tells the driver that speeds over 50 mph are “unreasonable.” If the driver then goes 80 mph, they cannot later argue in court that “reasonable” is an ambiguous term and their speed was “objectively reasonable.” They knew what the expectation was and ignored it.

2. No More Post-Hoc Lawyering

The ruling prevents companies from using “post-hoc” (after-the-fact) legal theories to mask intentional dishonesty. If the evidence shows a company suspected they were breaking the rules but chose to submit the claims anyway, they are liable.

“The FCA’s scienter element refers to respondents’ knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.” — Justice Clarence Thomas

The Surprising 2025 Trial Verdict: “No Harm, No Foul”

After the Supreme Court victory, the case was remanded back to a lower court for a jury trial, which concluded in March 2025. This is where the story takes a “bittersweet” turn for the whistleblowers.

While the jury agreed with the Supreme Court’s standard—finding that SuperValu did knowingly submit false claims—they ultimately delivered a “defense verdict.” Why? Because they concluded the plaintiffs failed to prove actual damages to the government.

The Damages Gap: Complex Reimbursement Formulas Thwart FCA Claims

SuperValu’s defense successfully argued that even if the claims were technically “false,” the government’s reimbursement formulas were so complex that the plaintiffs couldn’t prove the government actually paid more than it otherwise would have. It was a “victory on principle, loss on the wallet” for the whistleblowers, highlighting how difficult it is to win these cases even when the law is on your side.

Why This Case Changes Everything for Whistleblowers

Despite the lack of a massive payout in the final SuperValu trial, the Supreme Court’s ruling remains a monumental win for healthcare transparency. Here is why:

• Internal Emails Matter Again: Before this ruling, companies felt safe hiding behind ambiguous laws. Now, “smoking gun” emails—where employees voice concerns about billing—can once again be used as primary evidence.
• Higher Accountability for Executives: Compliance officers can no longer turn a blind eye to “gray areas” in the law. They are now legally obligated to seek clarity rather than banking on ambiguity as a defense.
• Protection for the Public Purse: By closing the “objective reasonableness” loophole, the Court ensured that the False Claims Act remains the government’s most powerful tool for clawing back stolen taxpayer money.

Comparison: Walgreens vs. SuperValu

The PBM Connection: Middlemen of the “U&C” Conflict

In the SuperValu case, PBMs played a pivotal role in three specific ways:

1. The PBMs as “Warning Signs” (Scienter)

A major part of the Supreme Court’s decision on scienter (intent) came from evidence that PBMs had explicitly told SuperValu their pricing was wrong. Whistleblowers presented evidence that SuperValu had received notices from PBMs stating that “Usual and Customary” prices must include any discounts offered to the general public.

Because PBMs are the ones who write the contracts that pharmacies must sign to join a network, their definitions carry immense weight. When a PBM like CVS Caremark or Express Scripts sends a bulletin clarifying a definition, a pharmacy can no longer claim the law is “ambiguous.” The Supreme Court essentially ruled that if your PBM tells you “X means Y,” and you keep billing as if “X means Z,” you are acting with “reckless disregard.”

2. The “Lower of” Rule

PBMs use a standard reimbursement formula for pharmacies. They typically pay the lowest of three numbers:

• The PBM’s negotiated rate (e.g., Average Wholesale Price minus a percentage).
• A “Maximum Allowable Cost” (MAC) set by the PBM.
• The pharmacy’s Usual and Customary (U&C) price.

By artificially keeping their U&C price high, SuperValu ensured that the PBM would almost never pick the “U&C” option for reimbursement. This allowed the pharmacy to maximize its payout from the PBM’s other, higher rate categories. If SuperValu had reported its true $4 price-matched rate as the U&C, the PBM would have seen that lower number and slashed the reimbursement immediately.

3. The Vertical Integration Conflict

There is a deeper irony in these cases: many of the PBMs that were “defrauded” are owned by the very competitors SuperValu was trying to beat. For example, CVS Health owns both a massive retail pharmacy chain (CVS) and one of the largest PBMs (Caremark).

When SuperValu launched its price-match program to compete with CVS and Walmart, it was in a “David vs. Goliath” battle. Critics of the PBM system argue that PBMs create an environment where independent and smaller chain pharmacies feel they have to manipulate U&C pricing just to survive the low reimbursement rates dictated by their vertically-integrated competitors.

Final Thoughts

The SuperValu case is a reminder that the law isn’t just a set of dry instructions; it’s an ethical framework. While SuperValu walked away from the 2025 trial without paying damages, they forever lost the ability for their industry peers to use “we didn’t know what the word ‘usual’ meant” as a shield for fraud.

For whistleblowers, the path remains long and treacherous. But thanks to Schutte and Yarberry, the “subjective belief” of a corporation is now firmly under the microscope.