Texas Goes After Big Pharma
AG Greg Abbot is bringing in millions for the state by going after corporate drug fraudsters
BY ROBERT BRYCE
hen
it comes to fraud, Enron, Tyco, and Big Tobacco have nothing on Big Pharma.
Some of the world’s biggest pharmaceutical and health care companies are
paying huge fines to settle whistleblower lawsuits that allege they manipulate
the prices of their drugs and services in order to defraud Medicaid and Medicare.
And the state of Texas is leading the charge against the fraudsters.
In September of 2000, Texas became the first state to intervene in whistleblower-initiated
litigation focused on drug-pricing fraud. And although the Civil Medicaid Fraud
Section of the attorney general’s office has only litigated a few cases,
it has already received a total of $45.5 million in settlements. The payments
came from Dey Inc., a subsidiary of German drug giant Merck KgaA (2004 revenues:
$23 billion); and New Jersey-based Schering-Plough Corp. and its subsidiary,
Warrick Pharmaceuticals Corp. (Schering-Plough’s 2004 revenues: $8.2 billion).
The state has also received another $15 million or so from health care providers
in other fraud-related cases. Nationally, fraud-related settlements from these
whistleblower lawsuits have totaled several billion dollars.
More big settlements are coming. The attorney general’s office, in conjunction
with a Florida entity known as Ven-A-Care of the Florida Keys, has lawsuits
pending against a host of other big drug companies including Roxane Laboratories,
Baxter Healthcare, B. Braun Medical Inc., Hospira, Inc., and Abbott Laboratories
Inc. Altogether, the eight lawyers at the AG’s fraud unit are pursuing
about 80 investigations, all of which involve some type of Medicaid fraud.
The health care industry’s enormous size makes it a ripe target for fraudsters:
Medicare and Medicaid are the world’s largest health care underwriters.
Medicaid now covers some 53 million low-income and disabled Americans—about
one of every six people in this country. Over the past 10 years, Medicaid spending
has doubled. In 2004 alone, the program cost taxpayers some $300 billion.
Medicaid’s drug-buying program is a particularly juicy target. Each year,
the program, which is paid for by both state and federal taxpayers, spends about
$30 billion on prescription drugs. And here’s why fraud is rampant: State
and federal health agencies rely on the drug industry to honestly report the
prices on their drugs. But the lawyers at the AG’s office and elsewhere
have found that honesty appears to be a rare commodity in Big Pharma. Drug makers
were publishing one price for their drugs, but were charging their customers
(pharmacists, hospitals, and others) a much lower price. Those customers could
then seek reimbursement from Medicaid at the higher price published by the drug
makers, and pocket the difference. That difference is known as the “spread.”
The bigger the spread, the bigger the profits for drug makers’ accomplices,
and those profits create demand for the drug makers’ products.
In testimony before Congress last December, Patrick O’Connell, the head
of the Texas AG’s Medicaid Fraud Prevention unit, told lawmakers “evidence
we’ve discovered in our lawsuits and investigations shows that some manufacturers
make conscious, deliberate business decisions to create enhanced spreads and
to market the sale of the products based on those spreads.”
For Texas taxpayers, the Medicaid Fraud Prevention unit is a bargain. Working
on a budget of less than $500,000 per year, the eight lawyers in the fraud unit
are getting huge settlement payments from the drug makers. More importantly,
their lawsuits should deter the drug makers from continuing to bilk taxpayers.
And when it comes to Medicaid drug spending, cost-cutting is desperately needed.
Each year, Medicaid spends about $30 billion on prescription drugs. (Medicaid
costs are split between federal and state governments, with the feds paying
about 60 percent of the bill). The Medicaid program is the largest buyer of
prescription drugs in America, accounting for about 14 percent of all drug purchases.
Texas alone spends more than $2 billion per year on prescription drug purchases
through Medicaid. Those drug costs, along with the rest of Medicaid, accounts
for one-fourth of the state’s budget. And that spending is soaring. The
Legislative Budget Board recently reported that between 1994 and 2003, the state
budget grew 65 percent while Medicaid spending grew by 90 percent.
The state cannot count on the federal government to fight fraud within Medicaid.
In August 2004, the General Accountability Office issued a report that said,
in the GAO’s genteel way, that federal agencies were not being vigilant
enough in protecting the Medicaid program against fraud. The GAO found that
there are just eight federal employees who are charged with monitoring state
efforts to fight Medicaid fraud and that oversight, “may be disproportionately
small relative to the risk of serious financial loss.”
With the federal government unable, or unwilling, to properly police Medicaid,
the states have had to do the job. Texas is among 20 states that are suing drug
makers.
And while the drug companies have lost some high profile cases, they are vowing
to fight the state of Texas in this latest round of lawsuits. Deborah Spak,
a spokesperson for Baxter Healthcare, said that her company has “acted
in a responsible, lawful, and transparent manner and we are vigorously defending
the lawsuit.” Abbott Laboratories, one of Baxter’s co-defendants,
issued a statement which said, “This case is similar to other average wholesale
price lawsuits filed against the pharmaceutical industry. Abbott has consistently
complied with all laws and regulations, and we intend to vigorously defend ourselves
against these claims.”
But the drug companies are pitted against a remarkable series of laws that have
endured for centuries, laws that not only provide financial rewards for whistleblowers,
but also encourage them to defend the government against fraud.
ing
Henry III of England was an eminently forgettable monarch. Crowned in 1216,
at the age of nine, Henry’s kingdom was, for most of his life, run by other
people. When he was a youth, a council of aristocrats ruled his land. Later,
he allied himself with the Vatican, which usurped his power and imposed exorbitant
taxes on the kingdom. After that ruinous association, Henry’s power was
wielded by his son, Edward.
During Henry’s five decades as a monarch, England was slowly emerging from
the Dark Ages. Police forces were weak or non-existent. These factors led to
the creation of a set of laws that allowed others to litigate on the king’s
behalf. This practice was known in Latin as qui tam pro domino rege quam pro
se ipso in hac parte sequitur, or “who pursues this action on our Lord
the King’s behalf as well as on his own.” The qui tam laws were nurtured
over the next several centuries and were considered to be such a vital element
of good governance that they were included in the first set of laws enacted
by the first U.S. Congress. But those laws were gradually weakened. By the time
of the Civil War, fraud against the federal government was rampant. Shoddy goods
of all types—uniforms, rifles, and food—were hamstringing Union troops.
With no federal lawyers to pursue the fraudsters, Congress passed the False
Claims Act in 1863, which gave financial incentives to private citizens who
took action against companies or individuals whom they knew were defrauding
the government. The measure became known as “Lincoln’s Law.”
While the statute was effective for a time, it did not stop fraud. During the
Spanish-American War, meat that had been preserved with formaldehyde poisoned
hundreds of American soldiers. Similar misdeeds occurred during World War II.
By the 1980s, fraud against the Defense Department—in the form of $435
hammers and $7,000 coffee makers—was rampant. That fraud led to an unusual
coalition: In 1986, Sen. Charles Grassley, a conservative Iowa Republican, teamed
up with Rep. Howard Berman, a liberal California Democrat, to pass legislation
that strengthened Lincoln’s Law. A key provision in the bill passed by
Grassley and Berman was that it allowed the whistleblowers who launched the
litigation—known in legal parlance as “relators”—to get
up to 25 percent of any money recovered by their lawsuit.
The first qui tam case under the revised False Claims Act was filed
in April of 1987, and, like the current cases being pursued by the state of
Texas, it involved health care. The whistleblower in the case was a doctor who’d
been employed at the Scripps Clinic and Research Foundation in California. The
doctor, an ophthalmologist named Paul Michelson, found that the clinic had been
over-billing Medicare. The following year, Scripps settled the case by paying
a relatively small amount: about $435,000. But the precedent was set. Within
a decade, hundreds of claims under the federal law were being filed each year.
In his excellent book, Giant Killers: The Team and the Law That Help Whistle-blowers
Recover America’s Stolen Billions, author Henry Scammell points out
that health care fraud has been the most common area for lawyers using the qui
tam laws. This is likely due to the overall size of the industry and because
it receives so much federal money. Between 1987 and 2002, the federal government
recovered some $5.2 billion from qui tam cases brought in the health care field.
That’s more than three times the amount the government received from similar
cases brought against defense contractors during that same period.
In the mid-1990s, the surge in health care costs led the Texas Legislature to
strengthen state laws governing fraud. In 1995, Rep. Nancy McDonald, an El Paso
Democrat, wrote a bill that provided for civil penalties against entities that
were found guilty of defrauding the state’s Medicaid program. McDonald’s
proposal, supported by Sen. Royce West, a Dallas Democrat, became law. But it
did not provide any incentives for potential whistleblowers. In 1997, Sen. Judith
Zaffirini, a Laredo Democrat, was the lead author of a bill that strengthened
the penalties for entities who defraud the state Medicaid program, and more
importantly, added qui tam provisions similar to those found in the federal
False Claims Act.
The state’s Medicaid fraud bill was written by Democrats, but enforced
by a Republican Attorney General. In late 1999, then-Attorney General (and now
U.S. Senator) John Cornyn instructed lawyers in his office to begin looking
into the Medicaid fraud issue. In 2000, the attorney general’s office participated
in its first qui tam case under the Texas Medicaid Fraud Prevention Act, when
it joined a case against the Driscoll Children’s Hospital and Foundation
of Corpus Christi. The former chief financial officer of the hospital, William
Goodwin, represented by San Antonio lawyer John Clark, brought the case. In
May of 2001, the hospital and the foundation settled the litigation for $14.5
million. The federal government got the bulk of the proceeds. The state of Texas
got $5.3 million. Goodwin was awarded $2.9 million.
Jim Breen, an Atlanta-based lawyer who represents whistleblowers in a variety
of qui tam cases, says that Cornyn’s decision to intervene in
the Driscoll qui tam case was “vital. You needed a critical mass
of responsible attorneys general to stand up and say ‘I’m going to
enforce the laws, no matter how big the industry.’”
Breen, who identifies himself as a “Republican trial lawyer,” adds
that partisan politics have little to do with fighting fraud. “The pharmaceutical
industry is very influential… if somebody would draw stereotypes, it would
likely be that Republicans would be less aggressive in going against big business
than Democrats.” But given the bipartisan support for the fraud prevention
efforts on Medicaid, Breen says, “this doesn’t fit that stereotype.”
John Clark, Breen’s co-counsel in several of the Texas qui tam
cases, agrees. Clark, a former federal prosecutor, says, “Ideology has
nothing to do with fighting fraud. Some of the most stalwart public officials
I know in this are John Cornyn and [current Texas Attorney General] Greg Abbott.”
In December, one of Clark’s clients, an 83-year-old former Internal Revenue
Service employee, James DeVage, was awarded $8.1 million for blowing the whistle
on HealthSouth. DeVage’s payment was part of the $325 million settlement
HealthSouth reached with the federal government over charges that it had defrauded
Medicare for physical therapy treatments.
Clark, Breen, and an Austin lawyer, Jarrett Anderson, represent Ven-A-Care in
a number of qui tam lawsuits. Founded in 1987, Ven-A-Care was a small pharmacy
in Key West, Florida that sold drugs for AIDS patients. In 1991, Ven-A-Care
was approached by a much larger company, National Medical Care (NMC), which
offered a partnership. NMC said that it could bill the government for far more
than the actual cost of the drugs. When Ven-A-Care declined the invitation,
NMC began competing with them and a short time later, drove them out of business.
But Ven-A-Care decided to check up on NMC’s business.
Ven-A-Care’s lawyers discovered that NMC was prescribing drugs that weren’t
needed, paying kickbacks to doctors, and billing Medicare and Medicaid far more
than the actual cost of the products they delivered to patients. In 2000, NMC
and its parent company, Fresenius Medical Care, settled the case by paying some
$385 million. Ven-A-Care’s share was $44.8 million. But Ven-A-Care and
its legal team was just getting started.
Since taking on NMC, the four owners of Ven-A-Care, along with a fleet of lawyers,
have become litigants in panoply of federal whistleblower lawsuits. The owners,
who just a few years ago were forced out of the pharmacy business, have each
earned millions of dollars—solely by applying the False Claims Act against
the drug companies on behalf of the federal government.
The drug companies dislike Ven-A-Care’s entrepreneurial litigation. But
O’Connell says that whistleblowers like them are an essential part of the
fight against fraud. “They are following through on the fraud they discovered
and that is what the statute is designed to do. The statute is designed to be
financially beneficial; otherwise, whistleblowers won’t come forward.”
or
asthma sufferers, albuterol sulfate is a wonder drug. The drug, dispensed through
an inhaler, relaxes the lung tissue and allows asthmatics to lead normal lives.
Particularly when hit by an asthma attack, patients rely on albuterol to get
their lungs back to normal function. Like many other generic drugs, albuterol
is made by a number of different drug companies and is therefore a commodity.
Drug makers cannot differentiate their albuterol from that made by their competitors,
so they must compete on price. And that price competition opens the door to
Medicaid fraud.
Here’s how it works: Like other states, the Texas Medicaid program relies
on drug companies to honestly report how much their generic drugs cost. This
is often called the wholesale acquisition cost, or, in some cases, the average
wholesale price. These prices are reported to several entities, who then publish
those prices. The published prices for those generic drugs then become the accepted
list price for that product. That list price is used as the basis for reimbursement
from Medicaid. But here’s the catch: The drug makers can gain market share
by inflating their published prices. Here’s why: Pharmacists are reimbursed
based on a given drug’s list price. If a drug maker has a list price of
say, $5, for a specific generic drug, but only charges the pharmacist $1 for
that product, the pharmacist gets an easy $4 profit. If a competitor’s
list price for that same drug is $2, but only charges $1, then that pharmacist
only makes a profit of $1.
Merck subsidiary, Dey Inc. used a similar pricing formula to entice pharmacists
to sell their albuterol rather than the same drug made by a competitor. During
litigation, the AG’s office found that in the year 2000, Dey was reporting
to Medicaid a price of $16.24 for a package of albuterol. But the actual cost
of that package was only $8.50. Indeed, documents obtained from Dey by the AG’s
office showed that the company gave its salespeople a worksheet that they used
to show pharmacists that they could get higher reimbursements by using Dey’s
albuterol. Another Dey document showed that the company was paying its salespeople,
in part, on their ability to get pharmacists to switch to Dey’s albuterol
products (using the inflated reimbursement prices) instead of competitors’
albuterol.
During the litigation with Dey, the state obtained a document dated May 30,
1995, which said that the company was, in essence, keeping two prices of its
drugs—one for internal use and the other was to be “used for calculation
of reimbursement.” The memo went on to say that it had updated its prices
so that they were comparable with those of a competing drug maker, Warrick.
By doing so, the memo said, it would “level the playing field for Medicaid
reimbursement.”
The case against, Dey, which is based in Napa, California, is particularly instructive
because it shows the lengths to which some companies are willing to go in order
to maintain a certain level of profitability. Dey officials also tried to cover
up their fraudulent schemes and even engaged in witness tampering. According
to court documents, Robert Mozak, Dey’s executive vice president for sales
and marketing, provided false testimony on a number of occasions. Mozak originally
claimed he did not know anything about the May 30, 1995 memo regarding Dey’s
efforts to “level the playing field for Medicaid reimbursement.” But
when confronted in a later deposition, Mozak backtracked and tried to alter
his earlier testimony. Mozak also said he did not know the whereabouts of a
former Dey employee, Helen Burnham, even though he had been in touch with her
during the time of the litigation.
Mozak’s prevarications were laid bare on August 15, 2002, when the state
deposed Burnham, who testified that Mozak “knew exactly where I was…
in fact, he’s visited at my house before and he’s called me at home
numerous times.”
Furthermore, Burnham testified that Mozak contacted her after the state filed
its lawsuit against Dey and that he tried to convince her to take the blame
for the 1995 memo—even though she had prepared the memo at Mozak’s
request. She said that Mozak told her that since she wasn’t working in
the drug business, then “it would have no consequences for me if I took
responsibility for having written this memo… and that he had a lot more
to lose than I had, and it was unfair of me to think that he was going to take
responsibility for knowing about this memo, and that it really should —the
blame should fall on me.” In addition, Dey refused to comply with the court’s
discovery orders, delaying the production of some documents for nearly two and
half years.
Dey’s feckless actions led the state to request court sanctions against
the company and against Mozak. In January 2003, Travis County district judge
Suzanne Covington granted the state’s motion, and Dey ended up paying about
$200,000 to the state. The sanctions were among the biggest such sanctions ever
levied in Travis County. But there were more costs for Dey. Five months after
Covington granted the sanctions, Dey settled the lawsuit with the state of Texas
for $18.5 million. In a statement issued at the time of the settlement, Dey
said that the Medicaid reimbursement system is “seriously flawed. The Company
is settling this litigation, as a pragmatic solution, to avoid the costs of
continuing litigation and the vagaries inherent in it.” It added that the
settlement did not “constitute an admission of fault or liability by Dey.”
The whistleblower in the case, Ven-A-Care, got $4.3 million. (Mozak has reportedly
since left Dey. The Dey media office did not respond to requests for comment
on Mozak or the sanctions levied against the company.)
hile
the Dey case was a big win for the state, it faces tough battles with other
drug makers. In particular, litigation against Roxane Laboratories, the Connecticut-based
subsidiary of German drug giant Boehringer Ingelheim GmbH (2003 revenues: $9.5
billion), has been difficult and contentious. The state claims that Roxane knowingly
inflated its prices on about 18 different drugs, including the asthma drug ipratropium
bromide, and continued doing so even after the state began investigating the
company. In a January court filing, the state says that Roxane quadrupled its
prices on a generic drug that was under investigation. The filing quotes an
e-mail from the company’s national sales director, who acknowledged that
there was “political pressure” from regulators over the company’s
price reporting methods. The sales director went on saying that the government
was probably going to punish the industry, “so why not make some money
meanwhile….”
In the court filing, the state says that Roxane “knowingly refused to report
its most up-to-date and accurate… prices because such reports would have
resulted in lower reimbursement for Roxane’s products.”
The state also claims that Roxane was schooled in the questionable ethics of
Medicaid reimbursement by a former Dey employee. The January 20th filing says
that a former Dey employee, Mark Pope, was retained by Roxane and that he “taught
Roxane’s management that customers in the home health care market were
interested in the reimbursement ‘spread’ on Roxane’s Ipratropium
Bromide and that the reimbursement ‘spread’ was a factor those customers
would consider when deciding whether to buy Roxane’s product… Roxane
learned from Mark Pope that having and marketing a higher governmental reimbursement
rate was the way to attract key customers for its new product.”
A Roxane spokesperson, Kelli Schobelock, provided a statement that said the
company “vehemently denies that it knowingly and deliberately inflated
its prices on generic drugs in order to increase profits. Its pricing complied
with all laws and regulations. The evidence demonstrates that it provided the
State exactly what it requested.” The company also insists that the e-mail
from the Roxane sales director “has been mischaracterized and taken out
of context.”
The litigation with Roxane and the other drug makers has taken on even more
importance now that President Bush has proposed cutting federal Medicaid spending
by up to $60 billion over the next decade. The new proposals could place caps
on the amount of federal money paid out to states for Medicaid. Faced with federal
cutbacks and soaring Medicaid costs, several states, including Mississippi and
Tennessee, are planning to cut Medicaid benefits to tens of thousands of residents.
In Florida, the president’s brother, Gov. Jeb Bush, is pushing a plan that
would give private insurers more control of Medicaid and cap the amount that
Medicaid spends on each citizen.
Texas faces similar challenges. The Texas Legislature, which is constantly short
of money, must find an additional $1.6 billion this biennium to fund the state’s
Medicaid program. In mid-February, the chairman of the House Appropriations
Committee, Jim Pitts, a Republican from Waxahachie, told reporters that, “the
growth of Medicaid is a huge problem.” On February 17, the Odessa American
quoted Pitts as saying that if the state cannot stem the growth of Medicaid
costs, “in 10 years, we’ll only be able to fund Health and Human Services.
We won’t be able to afford to build roads or educate our children. We have
to get a grip now.” Gov. Rick Perry made similar comments. During a speech
to the Texas Hospital Association in mid-February, Perry said that unless Medicaid
was reformed, it would “bankrupt the states.”
Perry has a point: Enrollment in the state’s Medicaid program is soaring.
Between June 2002 and June 2003 the number of Texans enrolled in Medicaid grew
by nearly 17 percent. Only two states, Arizona and Utah, had higher growth rates.
Given that type of growth, cutting fraudulent Medicaid expenditures is absolutely
critical. But the lawyers at the AG’s office and the private practice lawyers
who work with them do not expect their litigation against Big Pharma to end
any time soon. “These cases could last another five years or so if industry
wants to continue with its Stalingrad-type defense,” says lawyer Breen.
“But at the end of the day they will have to stand in front of twelve people
and explain why they hiked their prices… And they don’t want to be
in front of a jury.”
Indeed, as more attorneys general file suits against the drug makers, the workload
for all of the attorneys involved becomes heavier. On January 27, Alabama Attorney
General Troy King filed fraud litigation against 79 drug makers. O’Connell
of the Texas AG’s office says that the Alabama litigation may give his
office more information that could be used against additional drug makers. “The
Alabama AG may have information that we don’t,” he said. And if they
do, those companies are going to string out the process for as long as possible.
“We have a limited staff and we can only go after a few of these companies
at a time.” But he added that the state is not going to stop until it recovers
the money it is entitled to. The drug companies “think the Medicare and
Medicaid programs are their personal piggybanks. All we are doing is recovering
the money that was stolen from us.”
The trial against Roxane is expected to begin late this year. The case against
Abbott Labs will go to trial in 2006.
Observer contributing writer Robert Bryce is the author most recently of
Cronies: Oil, the Bushes, and the Rise of Texas, America’s Superstate
(PublicAffairs).
________________________________________________________________________
BIG PHARMA'S HISTORY OF FRAUD | BY ROBERT BRYCE
2004: HealthSouth, the embattled rehabilitation services provider,
agreed to pay $325 million to the settle federal charges that it had overbilled
Medicare. The whistleblower in that case, James DeVage of San Antonio, was awarded
$8.1 million.
2004: TAP Pharmaceutical Products Inc. agreed to pay $150 million
to settle a number of lawsuits about the marketing and pricing of its drug,
Lupron, a prostate cancer drug. That settlement followed a 2001 lawsuit over
Lupron that TAP settled for $875 million.
2004: Schering-Plough Corp., and its subsidiary, Warrick, settled
a whistleblower suit by agreeing to pay the state of Texas $27 million.
2004: Drug giant Pfizer agreed to pay $430 million to settle
charges that it had defrauded Medicaid in the use of its drug, Neurontin. The
company also agreed to sign a “corporate integrity” agreement that
allows outside monitoring of its marketing practices.
2003: Dey, Inc. paid $18.5 million to settle a lawsuit brought
by the Texas attorney general and Ven-A-Care of the Florida Keys, alleging that
it had inflated the cost of its inhalant drugs. The state of Texas got more
than $9 million of the settlement. The remainder was split by the federal government
and Ven-A-Care, the whistleblower in the case.
2003: Bayer Corp. and GlaxoSmithKline paid $344 million to
settle charges that they had inflated the cost of several drugs. The companies
allegedly used a scheme known as “lick and stick,” in which they sold
re-labeled drugs at deep discounts to certain customers and then concealed that
information in order to get higher payments from Medicaid. The settlement was
shared by 49 states and the District of Columbia.
2002: HCA (formerly known as Columbia/HCA Healthcare Corporation)
paid $881 million to settle whistleblower claims that it had submitted false
cost reports, false requests for management fees, and paid kickbacks for referrals
from doctors. The settlement followed a 2001 agreement by HCA to pay $840 million
to resolve similar whistleblower claims. The lead attorney on the case was John
R. Phillips, who played a key role in the 1986 revisions of the federal False
Claims Act.
2001: Driscoll Children’s Hospital and Foundation of Corpus
Christi settled a whistleblower case brought by the state of Texas for $14.5
million. The federal government got the bulk of the proceeds. The state of Texas
got $5.3 million. The whistleblower, the hospital’s former chief financial
officer, William Goodwin, was awarded $2.9 million.
Sources: Alabama Attorney General, Department of Justice
