The Four Greatest Risks of a Fraud or False Claims Act Suit against Pharmaceutical Companies

It is almost as if pharmaceutical companies have a large red target painted on them.

The Civil Fraud Section of the Department of Justice (DOJ) has focused heavily upon this industry, even forming a “Pharmaceutical Fraud Team.” Facing a DOJ False Claims Act suit is a very expensive proposition. The combined recovery by DOJ in just 17 pharmaceutical fraud cases exceeds $6 billion. In 2009, one settlement alone topped $2 billion, including criminal fines and civil settlements.

There is a huge incentive for employees of a pharmaceutical company to turn in the company. Under the False Claims Act, the DOJ pays whistleblowers up to 25% of what it recovers from the company. That can add up to tens-of-millions of dollars in rewards.

Just what are the greatest compliance risks to a pharmaceutical company?

The government has honed in on three primary areas where it alleges that a pharmaceutical company commits fraud, which are: (1) off-label promotion, (2) Medicaid rebate fraud, and (3) kickbacks. In addition, there is an emerging new area where the DOJ is beginning to investigate, and just may be next huge compliance risk, namely adulterated products.

Pharmaceutical Company Fraud / False Claims Act Suit Risk Area #1:

Off-Label Promotion by Drug Companies

The Department of Justice is heavily focusing on promotion of off-label use of Food and Drug Administration (FDA) approved drugs.

Specifically, when a pharmaceutical company receives approval of a drug for a specific use, it may not later promote to physicians another or unapproved use. The rationale is that a drug company may reap large profits by only asking the FDA to test and approve the drug for a limited area of treatment, but then promote uses for the drug in treating other illnesses that are outside of its testing and approval.

Since FDA testing is intended to determine the safety and effectiveness of a drug for a particular use, federal law prohibits drug companies from suggesting alternative uses of approved drugs without going through FDA’s approval process for each proposed use.

Consider this example: The FDA approves a drug to be used in the treatment of epilepsy and the pharmaceutical company contacts many psychiatrists to suggest that the drug would be useful in the treatment of depression.

As an initial matter, the FDA rules do not prohibit a medical doctor from prescribing drugs outside of their labeled use. Therefore, the psychiatrists are not at risk of a DOJ fraud suit. However, if DOJ can establish that the company engaged in a pattern or practice of promoting such off-label use, it would not hesitate to open an investigation or even bring an FCA suit against the pharmaceutical company.

The hard part about these cases is proving that the pharmaceutical company actually promoted such off-label uses.

It is not enough to merely show that some doctors prescribed the drug to treat depression. The DOJ must show that the drug company targeted doctors and encouraged them to use the drug for an off-label use. That’s largely why nearly all of these cases are brought by a whistleblower, who is typically a low-level manager or salesman who sat through corporate training on how to promote the off-label use.

Pharmaceutical Company Fraud / False Claims Act Suit Risk Area #2:

Medicaid Rebate Fraud

The DOJ has also targeted Medicaid rebate fraud. In 1990, Congress passed a law known as “The Medicaid Rebate Statute.” It is designed to ensure that the federal government does not overpay for drugs supplied to program beneficiaries. The law is focused upon the drug manufacturers, not local pharmacy stores.

All pharmaceutical companies want to participate in Medicaid. To do so, a company must agree to keep track of the lowest or “best price” charged for each of its drugs sold to private customers. At the end of each quarter, the pharmaceutical company must give Medicaid a “rebate” equal to the difference between what it charged Medicaid for each drug supplied to potentially millions of Medicaid recipients and the best price to its other customers for the same drug.

To illustrate how the system works, assume that a company makes a pain killer and sells that drug to hospitals, distributors, and local drug stores for an average of $1 per pill. Because of the volume of their orders one large hospital demands that it only pay $0.75. Each quarter, the drug company must tell Medicaid the discounted price it accepted from its “best price” customer. Thus, it would need to pay Medicaid $.25 for every pill sold to Medicaid recipients. That could add up to $250 per quarter.

Assume, however, that the company did not want to pay the rebate so it attempted to disguise the discount by giving the hospital a generous “donation” to the hospital for doctor training. The DOJ would consider this fraud and sue for triple damages under the FCA.

The DOJ has also identified a variation of this type of fraud, which it calls “bundling.” For instance, if the drug maker wants to make the customer happy but not pay the Medicaid rebate, it might try to give the hospital a discount for buying two or more drugs. This is known as “bundled sales.”

The problem is that Medicaid does not allow the seller to dictate how the discount is distributed. Instead, it has a specific formula based on volume of sales. Thus, if the drug company sought to give a low discount to one drug to avoid the rebate, Medicaid or DOJ would look behind the transaction and reassign the discounts, resulting in large rebates owed.

Another form of rebate fraud which DOJ has declared to be fraud is known as “nominal price” fraud. Medicaid had what might appear to be a loophole that has recently snared a few pharmaceutical companies. The regulations to not require a drug maker to report as a sale for rebate purposes sales that are discount for a pill is more than 90% off of the regular price. The government did not want to discourage drug companies from essentially giving away drug to companies helping the poor.

The Department of Justice has reached large settlements with at least two pharmaceutical companies alleging that their nominal price programs did not fit the exception. The DOJ considered it simply a variation of bundling because the nominal price was only available if the buyer purchased other drugs or reached a certain overall volume of the drug maker’s line of drugs.

Again, DOJ did not accept the discount as stated in the program, but reassigned it based on volume of sales. Even a small reassignment of discount could push the sales amount of the so-called nominal drug above the 90% discount and outside the exception. In that case, huge rebates are owed.

Finally, DOJ contends that a company cheats on Medicaid rebates if it conceals or lies about its true average manufacture price (AMP). DOJ treats this the same way as if a company lied about the price it sold to its best customer. Providing a wrong AMP can result in owing rebates.

Pharmaceutical Company Fraud / False Claims Act Suit Risk Area #3:

Kickbacks

Kickbacks are a “four letter word” and will always gain the attention of DOJ. However, DOJ pursues far more kickback cases in situations where no cash is paid than what people ordinarily consider to be a kickback.

DOJ will examine with suspicion any remuneration to doctors or hospitals. It has brought FCA suits for paying educational grants (i.e. flying the doctor to Hawaii to attend a seminar), research grants (i.e. paying the doctor to do some research), or consulting contracts (i.e. paying the doctor to do some small amount of work for a large amount of money).

DOJ also is suspicious of paying doctors to participate in studies (particularly where little work is required for large fees) or to be on a board or committee which rarely meets.

Pharmaceutical Company Fraud / False Claims Act Suit Risk Area #4:

Adulterated Drugs or Failing to Follow Manufacturing Procedures

An emerging area of pharmaceutical fraud is adulterated products. This is not the same thing as using ingredients that are dangerous.

The FDA has strict rules and requirements that apply to every drug manufacturer. Before a drug is approved, the pharmaceutical company must not only test the drug and prove its effectiveness, but it must establish tight manufacturing procedures and controls. Once approved, the company may not deviate from that strict process. Any changes must be pre-approved by the FDA.

If a company skips steps or does not conduct each required manufacturing test and protocol, the drug is technically altered or “adulterated.” In other words, if a company tells the FDA that it will use sterile labs and certain processes but then chooses not to use them because they are expensive, the drugs are non-conforming. The FDA treats them as adulterated.

Medicare and Medicaid have rules that prohibit paying for adulterated products. Therefore, if a manufacturer significantly deviates from the approved process, it is not eligible to sell the drugs to the government.

This may be the biggest area of compliance risk because DOJ has not yet brought many fraud actions. However, it is one to be watchful for because DOJ has been dangling the carrot of 25% of what it recovers as incentive to bring these types of False Claims Act cases.

It is just a matter of time before adulterated product fraud allegations become almost common place.

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About the Author

Joel Hesch is a leading expert on government reward programs.

He spent 15 years as an attorney in the Fraud Section of the Department of Justice helping administering the whistleblower reward program. At DOJ, he was a member of the “Pharmaceutical Fraud Team.”

He is the author of Whistleblowing: A Guide to Government Reward Programs (How to Collect Millions of Dollars for Reporting Fraud).

He is a law school professor at Liberty University and represents whistleblowers file for government rewards for reporting fraud. See his website: www.HowToReportFraud.com.