Pharmaceutical Fraud: Drugs, Biologics and Devices

Modern healthcare relies heavily on the drugs, biologics and medical devices designed, developed and sold by the pharmaceutical industry.  The companies that sell these products can records billions in profits in a single year – for just one drug or device.  A company’s entire portfolio may represent hundreds of billions in profits worldwide.  Here in the United States, the largest purchaser of their products is government funded healthcare programs like Medicare and Medicaid.

The federal government’s Government Accounting Office regularly ranks drugs and biologics as the single largest procurement obligation for civilian agencies, including the Centers for Medicare and Medicaid Services (CMS) and the Department of Defense.  The billions of dollars paid out for these products for the benefit of programs beneficiaries – the elderly, veterans and financially disadvantaged patients – has also been marked by significant fraud.  The pharmaceutical industry has returned more to the government in False Claims Act recoveries than any other industry except defense contractors.  As new products come to market, frauds against these government healthcare programs continue to happen, and whistleblowers remain the government’s best tool in exposing pharmaceutical frauds and the companies perpetrating them.

Types of Pharmaceutical Fraud

Off-Label Marketing

Before any drug, biologic or device may be sold in the United States, the company must demonstrate to the satisfaction of the Food and Drug Administration (FDA) that the product is safe and effective to treat a specific condition.  The rigorous standards for this evaluation are set forth in the Federal Food, Drug, and Cosmetic Act. If the FDA deems a product safe and effective for the specified treatment, the product may be approved for sale in the United States.

When the FDA approves a company’s request to sell a product for a specific use it also approves a label describing that FDA-approved use.  Thereafter, if a company markets or promotes its drug or device for a different use — off-label marketing — and engages in interstate commerce for that unapproved use, the drug is “misbranded.” A company may not sell a misbranded product, and Medicare and Medicaid will not reimburse for the cost of misbranded products.

While pharmaceutical companies may not promote off-label use of an FDA-approved drug, nothing prohibits a doctor from prescribing an approved product for unapproved use if the doctor determines it is beneficial in the treatment of the patient.  When the doctor prescribes a drug or device in this way, the cost of the drug or device may be reimbursed by government funded health care programs.

When pharmaceutical companies realized they could grow their profit exponentially if they could couch their own off-label promotion as the doctors’ independent decision-making and not their self-promotion of unapproved uses, off-label marketing fraud took off.  Companies began secretly funding trumped up studies and journal articles to suggest the benefit of the unapproved use.  They sought FDA approval for limited indications with lower thresholds for approval recognizing that once they got any approval, they could use their off-label marketing apparatus to promote the product for other uses that would make the product profitable – and in some cases a blockbuster.  They also incentivized sales representatives to promote off-label uses to the prescribers.  These efforts included massive budgets to entertain prescribers and to host them at “education” seminars designed to promote the off-label uses.  The goal of these schemes was always to encourage more sales of the products, especially for patients whose drugs and medical devices would be reimbursed by government funded health care programs.  The schemes worked.  The companies realized billions in profits.  However, those increased sales attributed to unlawful marketing schemes were largely paid for by the federal and state governments through Medicare and Medicaid.

Off-label marketing was first alleged as a theory of liability under the False Claims Act in 1996.  The U.S. Supreme Court, in a unanimous decision, confirmed that off-label marketing of drugs to be paid for by government funded healthcare programs is a form of fraud on the government. False Claims Act cases alleging off-label marketing schemes have led to more recovery for the government than any other kind of fraud on the government.   Off-label marketing cases have also included allegations of violations of other laws, including the Anti-Kickback laws.  Federal and state governments have collectively recovered tens of billions of dollars from major pharmaceutical and medical device companies for illegal off-label marketing of hundreds of different drugs, biologics and devices.  Today, off-label marketing schemes are widely recognized as fraud on the government.

Recoveries to date in False Claims Act cases involving off-label marketing schemes are also an indicator of the enormous profits to be gained by drug and device companies when they expand the market for their products.  This financial incentive has continued to fuel new off-label marketing frauds even as the manufacturers get caught and return hundreds of millions of dollars to resolve liability on unlawful schemes involving other products.   Whistleblowers play a vital role in policing this ongoing, costly practice.  They can help make sure that products are ordered for patients based on good science and adherence to the FDA approval procedures, not the profits companies can secure from government funded healthcare programs from off-label marketing.

Kickbacks by Pharmaceutical Manufacturers

Under federal and state laws, every health care provider who provides goods or services to a government funded health care program is prohibited from giving, accepting, soliciting or arranging items of value in any form (gifts, certain discounts, cross-referrals between parties), either directly or indirectly for the purpose of inducing or rewarding another party for referrals of services paid for by those government programs.  The anti-kickback laws are very broad and are intended to make unlawful all the different ways something of value may be given which might influence another person’s decision-making in how government funded care or services are provided.  Kickbacks can include direct payments like cash or bribes, but more subtle arrangements, such as honorariums, research grants, or lavish all-expenses paid vacations disguised as education programs may also be considered kickbacks.

With billions of dollars in pharmaceuticals sold to government health care programs every year, kickback schemes between pharmaceutical manufacturers who make the products, and the health care providers who prescribe them, are too common.  Some of the ways that pharmaceutical manufacturers reward or induce providers to prescribe or use their drugs, biologics or devices include: providing drug samples, expensive meals, travel, tickets to sporting events, golf outings or other entertainment or free gifts; compensating providers for attending conferences and meetings; paying excessive fees to providers for serving as members on advisory boards; awarding generous research funding, educational grants, and bogus clinical trial work to potential prescribers.  These kickback arrangements, to name only a few, create incentives for providers to prescribe drugs or use the manufacturer’s products based on their own interest rather than the best interests of the patient.

Combating these illegal arrangements is a high priority in the government’s ongoing effort to curb health care fraud because these kickback arrangements are not made in the best interest of the patient and also increase the cost to the government of providing health care.  Indeed, in 2010, Congress amended the federal Anti-Kickback Statute (AKS) to make clear that claims submitted to federally-funded healthcare programs in violation of the AKS are false claims for purpose of the False Claims Act (“FCA”).  This means that pharmaceutical manufacturers who offer or provide anything of value to health care providers as incentives to prescribe or use their products, which will be paid for by government health care programs in violation of the anti-kickback laws, also violate the False Claims Act.  Likewise, health care providers who receive money, property or any kind of financial benefit as reward for prescribing or using a manufacturer’s products that is paid for by a government health care program, including Medicare or Medicaid, who violate the anti-kickback laws may be subject to False Claims Act liability.

Price Manipulation

Government funded health care programs buy billions of dollars in prescription drugs and biologics for program beneficiaries every year.  Under both Medicare and Medicaid programs, the government pays for these prescriptions by reimbursing the retail outlets that dispense the prescriptions directly to the consumer, who is the beneficiary of the government funded program (i.e. a Medicare patient).  The price these government programs reimburse for these products is based on a survey of the Average Wholesale Price (AWP) or the sticker price for that prescription.  Commercial publishers of prescription pricing information, such as Red Book or First DataBank, have published AWP data since 1970.  The AWP data in these commercial publications is typically provided by the manufacturers, distributors, and other suppliers of the listed products.

While government reimbursement is calculated according to the AWP, those entities responsible for dispensing the prescriptions to consumers, including pharmacists, Pharmacy Benefits Managers (PBMs), and Group Purchasing Organizations, buy the products from the manufacturers at a different price, known as the Wholesale Acquisition Cost (WAC).  The WAC is always less than the AWP, and the difference between the two is commonly referred to as “the spread.”  The seller makes its profits on the spread.  The bigger the spread, the more profit for the entity selling the products.

Manipulation of AWP emerged as a widespread fraud when pharmaceutical manufacturers realized they could financially induce entities dispensing the prescriptions to sell more of their products to consumers if they could find a way for their products to return a greater profit margin for the seller.  The pharmaceutical manufacturers accomplished this by artificially increasing the AWP and thereby increasing the spread between the WAC and AWP.  With a bigger spread, the manufacturer could then promote the fact that the product would return a bigger profit for insurance companies, drug wholesalers, pharmacists, PBMs and Group Purchasing Organizations.  The scheme became known as “marketing the spread.”

Pharmaceutical companies have sold more of their products and sellers made more profits on those sales with this AWP fraud scheme, but it improperly increases drug costs by billions of dollars every year for government healthcare programs, as well as for consumers who pay certain co-pays for their prescriptions.   AWP manipulation and the improper inducements manufacturers may give sellers to use their products can violate the federal Anti-Kickback Statute, the False Claims Act, and  various state laws and regulations, and may form the basis of a whistleblower complaint.

Schemes involving price manipulation of drugs and biologics sold to the government are constantly evolving. Whistleblowers play a key role in alerting the government to new ways the companies that sell these drugs undertake to increase their profits in violation of laws intended to reduce costs to the government.

Best Price Fraud

Government funded health care programs buy billions of dollars in prescription pharmaceutical products for program beneficiaries every year.  Because the government is a reliable purchaser of such huge quantities of these products year in and year out, it insists that pharmaceutical manufacturers that want to sell their drugs under the Medicare and Medicaid programs must agree to sell their products to the government programs at the lowest or best price at which the manufacturer sells to private non-government buyers, such as wholesalers, pharmacists, HMOs, Group Purchasing Organizations, and other private sector customers.

One way the federal government enforces this condition is through the Medicare Rebate Program, which requires every pharmaceutical company selling its products to Medicare and Medicaid to review its sales every quarter for any special pricing, rebate or discount it might have offered to determine whether the government actually got the Best Price for the company’s products that quarter.  If the government did not get the Best Price that quarter, the company must provide a rebate to the government program.

Pharmaceutical manufacturers too commonly are tempted to go around this requirement because they can often induce private insurance companies, wholesalers, pharmacists and other health care providers to use their products by offering them a price below the best price charged to the government programs.  The pharmaceutical manufacturers intentionally hide these arrangements using separate side agreements with private insurance companies, wholesalers, pharmacists and other health care providers so they can avoid giving the government programs the Best Price. Manufacturers may also intentionally fail to report discounts, rebates or special pricing to avoid paying the rebates contemplated under the Medicare Rebate Program.  In other schemes, manufacturers have re-characterized their deals with private buyers as things like educational grants to conceal instances where a private buyer is getting a better price than the government.  Whatever the scheme, these rebates, hidden price deals or reduced pricing violate the Medicare and Medicaid Best Price requirements can violate federal and state False Claims Acts.

Pharmacy Benefit Managers Fraud

Pharmacy Benefit Managers (PBMs) are third parties who act as administrators for prescription drug programs for insurance plans, self-insured employers, government programs such as Medicare and Medicaid, unions, and managed care companies.  PBMs handle the prescription drug benefit component of health plans and government programs.  PBMs are the middlemen between the government programs and the pharmaceutical manufacturers.  As the middlemen, PBMs have great influence over pharmaceutical costs by using their size to increase the buying power over the plans they administer and negotiate drug prices with pharmaceutical manufacturers and pharmacies.  PBMs buy in bulk and therefore get better pricing than if a single plan were to try to purchase the same drug or medical supply.  Within the United States, approximately two thirds of all prescriptions filled are handled in one form or another through a PBM.  Three companies, CVS Health, Cigna and OptumRx, control nearly 80% of the PBM industry.

Fraud occurs when a PBM induces pharmacies or medical providers to switch from cheaper drugs, like generics, to more expensive drugs or formulary.  Typically, PBMs will induce the pharmacy or provider with rewards or kickbacks for making the switch.  PBMs have also engaged in illegal conduct by failing to refund to government programs rebates received from drug manufacturers based on volume discounts; reusing returned pharmaceuticals that may be potentially unsafe to use; and failing to offer the government program beneficiaries the negotiated pricing.