Dealing with Fraud

Health care fraud is so entrenched and widespread particularly in the Medicare and Medicaid programs, and has a profound impact on the whole of the American Healthcare system from healthcare providers, hospitals, pharmacies and physicians. Qui ta m actions is a Latin phrase meaning “he who sues for the king and himself” that falls under the False Claims act; It allows private citizens to act as whistleblowers to sue corporations in the healthcare industry for fraudulent activities within the government. In return the “relator” receives a percentage of the claims made against these organizations if the case is successful. The act further protects whistleblowers from discharging the duty by their employers (FCA, 1986).

Qui tam suits have increased dramatically in the past few years, majorly against pharmaceutical companies for fraud against the federal government’s healthcare programs. Although Qui tam provisions date back to the Civil War but have been dormant until 1986 when they were revived by the Congress following unprecedented claims on the healthcare system. As a result, the pharmaceutical companies have experienced increased costs in litigations and scrutiny arising from whistleblowers in the system.

The FCA act has greatly expanded the federal government’s ability to punish fraud more than the Department of Justice could handle or unravel at the same time. By giving a substantial incentive to private individuals, the government avoids incurring huge costs in litigation on weaker but ultimately successful cases. As much as this is a proper justification for the government’s endorsement, there are nevertheless concerns that the suits may be abused leading to excessive and undesirable litigation.

The False Act was originally passed in 1863 to check the contractors for the United States government who have been committing fraud by submitting fraudulent claims. The President Abraham Lincoln, frustrated by the Justice Department urged the Congress to enact the legislation and allow the whistleblowers to be awarded half of the damages (Helmer, B. Jr. & Clark R., Jr., 1991)

The qui tam provisions have seen the cases against the pharmaceutical industries, rising dramatically with relators coming up with creative ways to prove the violation of the FCA recently through certain types of marketing practices.

However, as the case against TAP pharmaceuticals demonstrates, the suit has had possibly harmful and unwarranted effects on the pharmaceutical industry. The unprecedented fine in excess of $1 billion paid by TAP in both criminal and civil proceedings is a significant development of the Qui tam provisions. The case initiated by the Vice President in charge of sales, Douglas Durand, whose major responsibility was to sell the prostate cancer drug - Lupron, a valuable product for the company, generating $800,000 equivalent to about 25% of the company’s annual revenue.

TAP Pharmaceuticals stayed at the top of the market despite a cheaper alternative drug, Zoladex, produced by the rival pharmaceutical company AstraZeneca. TAP managed to establish Lupron as the best drug in the market in part because the injections were less painful comparing to Zoladex.

Nevertheless, Durand was suspicious of the sales tactics the company employed. He was soon to discover in his forays to the Financial Department that the company had given out large-screen television sets among other expensive electronic products. Also, they provided the trips to resorts for a large number of doctors who were prescribing Lupron to patients. He soon found out that samples of the drug were not properly accounted for. At tines they were gifted to doctors who would in turn sell them for a profit. As per the Qui tam provision, a failure to account even for a single sample of a drug could result in a fine of US 1 million.

In 1995, sales staff planned to award 2 per cent of administrative fees to the doctors who prescribed the drug upon which Durand decided to take legal action to ensure that he was not engaging in the fraud, something that could waive any right to the damages accruing from the case as per the provisions of the act.

The fact that Durand stayed on in the company for another five months despite the apparent fact that he could not tolerate the sales practices and the fact that he did not take any action to prevent the fraud despite being in an influential position and believing that the practice was fraudulent raised questions as to the effect on societal values of the act.

While he implemented a plan of bonuses to sales managers based on the number of samples they accounted for and abandoning it three months later after an apparent failure to deal with the problem of fraud, Durand continued to stay in the company for another two months after contacting the attorney who advised that the case at that point stood a good chance of succeeding under the Qui tam provisions. He spent the last two-month period gathering evidence for his case before accepting a post at Astra Merck.

In May 1996, Durand filed a suit in which he alleged that TAP paid 2 per cent administration fees as kickbacks to doctors as a bribe for prescriptions of Lupron, and that the company and doctors conspired to charge wholesale prices to Medicare for samples that doctors received for free or at a discounted price. Although there might be no apparent benefit to the company accruing from overbilling of Medicare, the practice ensured that doctors had been motivated to prescribe Lupron over Zoladex, owing to the fact that they would make a lot of profit from selling the drug that was given to them for free or at a discounted rate. Durand also alleged that the average wholesale price for the drug was inflated in public reports, a fact that made doctors overcharge. This meant that granting discounts to doctors was therefore less expensive as the prices were already inflated, practices known collectively as “marketing the spread.”

The government finally intervened five years later in 2001 after Durand had cooperated in the secret investigation and provided over 200 pages of information. The same year, TAP pleaded guilty to criminal conspiracy arising from its tactic to provide doctors with free samples which were subsequently billed on the government.

TAP was fined $559 million payable to the federal government, $25.5 million to state governments, and another $290 million in criminal charges, all equivalent to annual sales of the drug Lupron. Durand received 14 per cent of the settlement and another unrelated employee who assisted in the investigations received 3 per cent.

TAP settled the full amount with the government but refused to admit publicly to any wrongdoing asserting that the practice was legitimate alleging that fraud arose not from its offering free samples, but by doctors themselves claiming reimbursement from Medicare. TAP’s justification for the settlement was based on the fact the consequences of losing the subsequent trial would be dire including a possible exclusion of its drug from the government Medicare system. But as it surfaced later, Durand’s claims were not that accurate. His claims were exaggerated to achieve the effect, and as it was later reported the bribes that Durand claimed had been paid to doctors during a conference were unsubstantiated and it later emerged that the attendees in fact had paid their own fees.

The claims of Durand were based on TAP’s conduct some of which did not constitute in any violation of the federal statute. The percentage of unaccounted samples was, in fact, lesser than Durand claimed, and two per cent in administrative fees paid to doctors allegedly as kickbacks were, indeed, legal. Ironically, despite the settlement, TAP’s sales employees were not found guilty of fraud charges.

This has elicited a debate and the question of prosecutorial discretion by the government against pharmaceutical companies arose, given that the financial incentive was motivating prosecutors to extort money from corporations. That Durand with the knowledge of the FCA stayed in the company for several months to assist the government with investigations whereas he held an influential position as the Vice President, sales means that he could implement plans that would favor his case later. He had the responsibility despite his earlier frustration with the plan he had put in place to combat the vice to inform the management of the negative practices by the sales department.

As illustrated in the case illustrates, he charged a subordinate to handle a case of a sales representative whose practices were deemed fraudulent, and subsequently forwarded correspondence about the case to the attorney. If senior executives, such as Durand, who are supposed to provide oversight cannot report violations due to the incentives provided in Qui tam, then corporations would be unable to detect such malpractices. Given the substantial reward, the employees will be inevitably motivated by the provision to pursue any hint of fraud despite being in position to prevent them, and instead gambling with the possibility of their cases being successful.

Whilst Durand’s surprised reaction by the huge settlement and that he feared being sued for complicity, the case offered evidence that the cases could be pursued purely for financial gain by individuals. The number of cases in the healthcare industry similar to the TAP case, have increased dramatically hence the proposition that stringent caps be put in place regarding Qui tam rewards rather than the percentage caps.

However, some defend the current provisions given the risks that the realtors expose themselves to asserting that this is the right approach to encourage the unearthing of such harmful practices. The overwhelming involvement by the government in the case shows the motivation of the government as the attorneys will prosecute cases that they are uncertain in hoping that they will result in a settlement.

The debarment weapon which the government can use to bar a company from serving in the Medicare system or any healthcare program by the state or exclusion for a number of years also elicits the fear of the companies which may opt for settlement even when they could have won a case. The Inspector General for the Department of Health and Human Services can also initiate proceedings to exclude a corporation from the state healthcare programs.

The threat of debarment is so great that the companies are forced to settle even when their exposure is so low. This threat may partially explain why the TAP president has been defending on public his reimbursement and pricing policies as legal when in fact the company pleaded guilty to accusations that violated the Prescription Drug Marketing Act.

In fact he stated publicly that the reason for the settlement was the fear of debarment by the government. The debarment tool that the government has to its advantage means that the companies are compelled to settle even if they would be found guilty of only a flimsy fraud and the settlement figure could be inflated by other flimsier suits. This is the reason that the debarment has been equated to the greenmail and a death penalty to pharmaceutical companies.

The huge rewards to the prosecutor’s office resulting from the fines and settlements also means that the prosecutors have ‘a conflict of interests’, inclined to pursue Qui tam cases given the resources. The cases against the corporations increase disproportionally. The aggressive nature with which the prosecutor’s office pursues such cases is indicative of the financial incentive that will accrue to the office.

The remedy of the situation lies in part in the ‘prosecutorial discretion’ wielded by the prosecutor’s office. This power should be checked closely or abolished altogether. In order to prevent such abuses the oversight bodies should also be set up to check the prosecutor and stringent regulations to deter abuse should be put in place. Where a suit initiated by a whistleblower contains a number of claims, the prosecutor is motivated to intervene regardless of the fact that the claims may be meritless. The corporations opt to settle in light of the threat of debarment (Sturycz, 2009).

A similar case regarding Qui tam involved SmithKline Beecham Clinical Laboratories Inc as GlaxoSmithKline in 1997. It resulted in a settlement of $325 million for alleged false claims filed against Medicaid and Medicare as well as other government health agencies. About $52 million was divided between seven different whistleblowers in rewards. In the suit, it was alleged that the corporation also gave kickbacks to doctors and that the government was improperly billed.

However, it emerged later that the bills to the government indeed did not relate to drugs but laboratory tests carried out by the company. The trend followed that of TAP Pharmaceuticals with the president denying any wrongdoing.

Subsequently, motivated by the success of these lawsuits and the large settlement more lawsuits were filed and in 2003. AstraZeneca PLC pleaded guilty to criminal conspiracy and agreed to pay $355 million as fines, $266 million attributable to FCA. The lawsuit again was initiated by Douglas Durand, the same whistleblower against TAP who gave incriminating documents which were traded between TAP and AstraZeneca containing accusations of illegal tactics regarding the prostrate cancer drugs Lupron and Zoladex. AstraZeneca, which was later renamed as Zeneca was accused of providing free samples to doctors as bribes and kickbacks in the form of educational grants.

The corporation took responsibility but noted the malpractice happened in the 1990’s when the company has not been merged but noted it was taking corrective action. Durand nevertheless was paid another $47.5 million adding his total in Qui tam rewards to $126 million (Salcido, 1999).

In May 2004, Pfizer also paid $430 million in civil and criminal charges for allegedly paying doctors to prescribe Neurontin, an epilepsy drug which had not been approved by the federal government at the time. The whistleblower was David Franklin who worked with Warner-Lambert before it was acquired by Pfizer. He quit four months into the acquisition citing disagreement with marketing practices employed by Pfizer. He received $26.6 from the lawsuit in rewards.

His other claim was that Warner Lambert promoted Neurontin for treatment of bipolar disorder and attention deficit among others. As much as doctors were allowed to prescribe approved drugs, the pharmaceutical companies were prohibited to promote them for unapproved purposes. It therefore means that the patients who were qualified for Medicaid were given the drug when they should not have been given implying an illegal practice. This is a case not directly related to improper billing demonstrated by the other cases showing the ubiquitous nature of the FCA and its ability to restrict activities outside improper billing. It is in fact projected that such cases involving off-label uses will be the next frontier for whistleblowers (Sturycz, 2009).

Schering-Plough similarly paid $345 million, $293 under FCA for fraudulent pricing of Claritin, an allergy drug in a case similar to that of TAP as a way of discouraging customers from buying Allegra, a cheaper alternative from another company.

These cases demonstrate that the financial incentive which motivates whistleblowers to file lawsuits even when it is under their responsibility to prevent harmful and illegal practices. This is coupled with the prosecutorial discretion that the prosecutors wield and their power to negotiate, a perfect opportunity to extort companies with the threat of debarment. The law runs the risk of perpetuating more fraud, an unintended purpose that should be corrected by the Congress. The interpretation of statutes and regulations should be made clearer and the huge financial incentive should be reduced with a hard cap rather than the one currently based on a percentage of damages (Bucy, 2000).

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