Settlements for Prosecution of Fraud by Big Pharma at Record High

The U.S. Department of Justice announced late last year that the pharmaceutical industry was still the biggest defrauder of the federal government under the False Claims Act (FCA), as measured by the size of civil and criminal settlements reached with the federal government in fiscal year 2011.

Public Citizen originally documented this trend in its landmark 2010 report, “Rapidly Increasing Criminal and Civil Monetary Penalties against the Pharmaceutical Industry: 1991 to 2010,” which showed that Big Pharma had long surpassed the traditional offender, the defense industry, to top the list of defrauders of federal taxpayer-funded programs. At the time of the report’s publication, the pharmaceutical industry had paid almost $20 billion over the previous two decades to the federal and state governments in civil and criminal penalties for fraudulent activities ranging from illegal marketing of drugs to widespread bribery of physicians to prescribe those drugs.

In September 2012, Public Citizen published “Pharmaceutical Industry Criminal and Civil Penalties: An Update,” which showed that this trend has continued unabated. From November 2010 through mid-July 2012, drug companies were forced to pay an additional $10 billion to settle allegations of fraud. The first half of 2012 alone saw record financial recoveries, with $6.6 billion paid by the drug industry to the federal and state governments.

States crack down on Medicaid pricing fraud

The 2012 report outlined the focus certain states have placed on rooting out the fraud, as much of the increase in enforcement activity has taken place at the state level. The 2012 report presented for the first time a 50-state analysis of enforcement efforts against drug company defrauding of state Medicaid programs, which assist poor, elderly and disabled patients. The analysis included a ranking of states based on the amount of money recovered through settlements and court judgments.

The report found that individual states are settling more cases than ever with pharmaceutical companies accused of defrauding their Medicaid programs and are recovering record amounts of taxpayer money. Since 2009, state governments have finalized more than twice as many settlements (94 versus 41), for nearly six times more money ($3.7 billion versus $660 million), than they had during the previous 18 years combined.

By far, the most common allegation against drug companies in these settlements has been fraudulent overcharging of Medicaid programs; the way many Medicaid programs pay for drugs has made them uniquely vulnerable to such pricing fraud.

Many Medicaid programs reimburse intermediaries, which include pharmacies and drug wholesalers, using the “average wholesale price” (AWP) for a drug, which is based on the manufacturer’s assessment of value. These value assessments are arbitrary, however, and drug companies often report to Medicaid AWP figures that are much higher than the actual prices they charge intermediaries. The difference between the AWP figures and the actual prices paid by the intermediaries is called the “spread,” and it represents a source of profit for the intermediaries.

By significantly inflating the AWP figures and then highlighting the large profits that will result for pharmacies and other intermediaries, a drug manufacturer can induce these intermediaries to purchase the manufacturer’s drugs. The drug manufacturer ultimately benefits from this fraudulent scheme by increasing its market share.

This practice often has resulted in astronomical overpayments by Medicaid. In 2002, the U.S. House of Representatives Energy and Commerce Committee investigated a case in which a drug manufacturer allegedly charged intermediaries $82.62 for a pack of 2,000 fluoxetine capsules (the generic version of the popular antidepressant PROZAC). The AWP paid by many Medicaid programs for the same product was $5,300, or nearly 65 times the price the intermediaries paid for the drug.

States are cracking down. Since 1991, Kentucky has concluded the most settlements with drug companies — almost all pricing-fraud cases — while Texas leads all states in settlements made possible by private-sector whistle-blowers. Arkansas, Louisiana, South Carolina and Texas have recovered a total of $2.3 billion in penalties, representing more than two-thirds of the financial penalties recovered in single-state settlements since 1991.

Particularly salient in an era of ever-tighter state budgets, 17 states recouped the equivalent or more of their entire Medicaid fraud-enforcement budgets (including that spent on enforcement of nonpharma-ceutical fraud) with money from settlements with the pharmaceutical industry alone. Arkansas, South Carolina, Alabama and Hawaii had the highest return on investment, between $12 (Hawaii) and $84 (Arkansas) for every dollar spent on Medicaid fraud enforcement.

Whistle-blowers key to federal efforts to root out fraud

The federal government has concluded almost as many settlements since 2009 as in the previous 18 years combined (49 settlements since 2009 compared with 55 from 1991 to 2008) and has recovered more in financial penalties from drug companies in that same timeframe ($14.5 billion since 2009 compared with $11.3 billion from 1991 to 2008). Most of these penalties were made possible by the actions of a few private-sector whistle-blowers who have come forward to reveal the widespread fraud perpetrated by the drug industry. Under the FCA, private-sector whistle-blowers (either former company employees or others with knowledge of illegal activities) can be awarded up to 25 percent of any settlement proceeds resulting from an investigation initiated by their revelations.

Whistle-blowers were responsible for initiating investigations that resulted in 21 federal settlements and $6 billion in penalties under the FCA during the most recent period studied, Nov. 2, 2010, through July 18, 2012. Almost half of the whistle-blower-prompted federal and state settlements during this time were made possible by a single informer, Ven-a-Care, which CNBC called “… the most successful — and least well-known — whistleblower operation of all time.” This tiny pharmacy, housed in a nondescript building in Key West, Fla., has been responsible for recovering at least $1.3 billion for the federal government from the pharmaceutical industry since 2001.

Other whistle-blowers were partly responsible for the largest health-fraud settlement in history, which GlaxoSmithKline (GSK) reached with the federal government in July 2012. The settlement required GSK to pay $3 billion to resolve numerous violations, including the concealment of vital data concerning fatal cardiovascular side effects from its dangerous diabetes drug, AVANDIA. GSK has been the worst offender over the past two decades, with more than $7.5 billion in penalties paid to the federal and state governments, according to Public Citizen’s 2012 report.

Deterrent or business expense?

Though the penalties in these settlements are unprecedented in scale compared with any other industry, they are still miniscule compared to the drug industry’s bottom line. The $30 billion paid out by pharmaceutical companies in settlements to the federal and state governments since 1991 represents just a little more than two-thirds of the profits made by the 10 largest drug companies in 2010 alone.

This disparity has led some, including Sen. Bernie Sanders (I-Vt.), to ask whether the penalties are merely a cost of doing business for an industry as large and pervasive as Big Pharma. The revenues generated from illegal activities likely far outweigh current penalties, and as such, the fraud has continued unabated.

To alter the cost-benefit scenario, Sanders introduced legislation in May 2012 mandating that drug companies lose “data exclusivity” privileges (branded drugs’ market monopoly for a number of years after approval, granted by the Food and Drug Administration) for the specific drugs involved in any criminal activity. This could mean a loss of billions of dollars per year in sales and would likely give pause to companies contemplating unlawful behavior. Unfortunately — and perhaps predictably, given the industry’s power as the biggest corporate lobbyist in Washington — the legislation was defeated.

Executive impunity

Regardless of the penalties against companies, the executives responsible for overseeing, or neglecting to stop, illegal activities almost always escape without repercussions. Only a handful of pharmaceutical executives have ever faced criminal charges for presiding over fraud against the federal government, and only one, Marc S. Hermelin, formerly of KV Pharmaceutical, has been handed any prison time (and that for only 30 days).

Executive impunity is more than just a moral issue — it goes to the heart of why fraud continues undeterred. As long as the people who run a company believe they will be shielded from any personal accountability, they are free to pursue the maximization of profits in the short term, leaving long-term costs to their successors. It is precisely for this reason that individuals need to be held accountable through criminal charges.

A well-worn path that must be closed

Pharmaceutical fraud has now become so commonplace that investors barely take notice when a billion-dollar settlement with a major drug company is announced. When the record $3 billion settlement with GSK was tentatively announced, the company’s stock actually rose to a near 52-week high. Les Funtleyder, health care strategist with the New York brokerage firm Miller Tabak, captured the sentiment on Wall Street succinctly in an interview with The New York Times: “This is a well-worn path for big pharma.”

Federal and state governments must prioritize both public safety and the rule of law and increase their efforts to end pharmaceutical fraud.

To read Public Citizen’s 2010 report, “Rapidly Increasing Criminal and Civil Monetary Penalties against the Pharmaceutical Industry: 1991 to 2010,” visit www.citizen.org/hrg1924.

To read the 2012 update, visit www.citizen.org/hrg2073.