Health care reform likely to increase scrutiny on pharmaceutical industry

By: Kim M. Clarke & Shannon M. Schultz

Over the past several years, the government has recovered billions of dollars from pharmaceutical companies for alleged fraud and abuse activities, such as off-label promotion, anti-kickback violations, and false claims for government reimbursement. The emphasis on health care reform and new legislation expanding government resources to combat fraud and abuse likely means more scrutiny over the pharmaceutical industry and an increase in similar fraud and abuse cases.

An important component to health care reform is the expansion of government efforts to prevent and recover money lost to waste, fraud, and abuse. According to Senator Ted Kaufman (D-Del.), “rooting out waste, fraud, and abuse, in both government and private programs, is critical to making health care reform work.” Not only does President Obama’s proposed 2010 budget request an additional $311 million over two years for activities to fight health care fraud, but both the Affordable Health Care for America Act (H.R. 3962), passed by the House on November 7, 2009, and the Patient Protection and Affordable Care Act (H.R. 3590), introduced to the Senate on November 18, 2009, provide for additional money to the Health Care Fraud and Abuse Control Account (the “Account”). The House bill provides for an additional $100 million to the Account, while the Senate bill provides an additional $10 million each year from 2011 through 2020. Both bills also focus on increased fraud and abuse measures and contain provisions for:

• a reporting requirement for payments made by drug and device companies to physicians;
• mandatory compliance programs for providers and suppliers;
• the reporting and return of Medicare and Medicaid overpayments within 60 days after the overpayment is identified; and
• enhanced civil money penalties.

Other efforts to step up fraud and abuse enforcement have already been established this year. For example, in May 2009, the Health Care Fraud Prevention and Enforcement Action Team (“HEAT”) was formed as a joint effort by the Department of Health and Human Services (“HHS”) and the Department of Justice (“DOJ”) to pool their resources, expertise, and authorities to prevent fraud and abuse in Medicaid and Medicare. This initiative will expand upon and strengthen the efforts of the Medicare Fraud Strike Force teams, which have aggressively pursued alleged fraud schemes in South Florida and Los Angeles since 2007. Other HEAT initiatives include increasing training for providers on Medicare compliance, improving data sharing between the Centers for Medicare and Medicaid Services and law enforcement, and strengthening program integrity activities to monitor and ensure Medicare Parts C and D compliance and enforcement.

Also in May 2009, President Obama signed the Fraud Enforcement and Recovery Act (“FERA”) into law. Although FERA was mostly enacted to address mortgage, securities, and financial fraud, it also affects the health care industry by amending the False Claims Act (“FCA”) and broadening its reach. Amendments to the FCA affecting off label cases include changes to the definition of materiality; presentment; the statute of limitations; the ability for more cooperation among relators, state, and federal authorities; and Civil Investigative Demand (“CID”) provisions. Under the amendments, an alleged falsity is material for an FCA claim if it has the “natural tendency to influence, or be capable of influencing, the payment or receipt of money or property.” 31 U.S.C. § 3729(b)(4). The “presentment” of claims requirement has been clarified to ensure that claims may be presented directly or indirectly to the government. In other words, claims submitted to another party (such as a subcontractor to a primary contractor) before being submitted to the government can satisfy the presentment requirements. It is also not required that the person or entity intended to defraud the government. The amendments make it a violation of the FCA to “improperly” retain an overpayment from the government. The amendments also allow the effective date of the government’s case to reach back to the date of the initial qui tam filing of the case, which could eliminate the statute of limitations defense for many cases. The provisions for sharing information also make it possible for more claims by states because it allows the U.S. Attorney’s Office to share evidence with state and local governments. 31 U.S.C. § 3732(c). The Attorney General also has the ability to delegate its authority to issue CIDs, and any information obtained may be shared with an FCA qui tam relator. 31 U.S.C. § 3733(a). Essentially, the amendments to the FCA have made it easier to prove an FCA claim and therefore may lead to bigger and faster settlements of claims.

On September 2, 2009, the DOJ announced its largest settlement ever with a pharmaceutical company. The Pfizer settlement—totaling $2.3 billion in civil and criminal liabilities for alleged off-label promotion and anti-kickback violations—sends a message to the industry that the government will continue to pursue pharmaceutical companies. As part of the settlement, Pharmacia & Upjohn Company, Inc., a Pfizer subsidiary, agreed to plead guilty to a felony violation of the Food, Drug, and Cosmetic Act for misbranding Bextra, an anti-inflammatory drug. The civil settlement resolved allegations under the FCA that the company illegally promoted and received kickbacks regarding several other drugs. Pfizer was forced to enter a Corporate Integrity Agreement that is unique in its level of oversight regarding sales, marketing, and medical affairs practices, and for requiring public disclosure on Pfizer’s websites of payments to physicians.

In light of the Pfizer settlement, there is little question that the government will continue to target pharmaceutical companies. As one of the prosecutors involved in the case stated:

Illegal conduct and fraud by pharmaceutical companies puts the public health at risk, corrupts medical decisions by health care providers, and costs the government billions of dollars. . . This civil settlement and plea agreement by Pfizer represent yet another example of what penalties will be faced when a pharmaceutical company puts profits ahead of patient welfare. Press Release, United States Attorney’s Office, District of Massachusetts, “Justice Department Announces Largest Health Care Fraud Settlement in its History,” September 2, 2009.

Health care fraud enforcement has been identified by HHS and DOJ officials as a top priority for the Obama administration. Recoveries from health care fraud investigations and prosecutions are expected to contribute to the financing of health care reform. It has therefore become politically, as well as financially, important for the government to crack down on fraud and abuse. Given the expansion of government enforcement efforts and the huge settlements in the pharmaceutical industry, it is likely that False Claims Act actions and government investigations involving pharmaceutical companies will increase. Pharmaceutical companies, particularly those that may have been investigated previously, will need to continue their proactive efforts to ensure compliance with fraud and abuse laws by adopting, monitoring, and enforcing effective compliance programs and training employees on proper sales and marketing practices.

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