Uncle Sam is sending a strong message to the pharmaceutical industry to take the False Claims Act seriously.
For the second year in a row, the federal government collected a record amount from drug companies and medical suppliers in 2011 stemming from FCA violations. In all, the Justice Department recovered nearly $2.2 billion in civil claims against the pharmaceutical industry in fiscal year 2011, including $1.76 billion in federal recoveries and $421 million in state Medicaid recoveries.
Worse still for drug makers, 2012 is already poised to top those numbers.
“These record-setting results reflect the extraordinary determination and effort that this administration … has put into rooting out fraud,” Tony West, assistant attorney general for the Civil Division, said in a statement.
Despite that appetite for prosecution from the feds, the biggest threat to corporations may actually be from within. The Fraud Enforcement and Recovery Act of 2009 brought sweeping changes to the False Claims Act, which prohibits government contractors from overcharging or otherwise defrauding the U.S. government. Among those changes was a simplified process for insiders to file whistleblower claims—so-called qui tam claims, where individuals can sue on behalf of the government.
According to Justice Department statistics, most of the $2.8 billion in recoveries last year came from cases first filed via qui tam lawsuits. Those whistleblowers can collect 15 to 30 percent of the proceeds of a successful suit; last year, qui tam whistleblowers collected a total of $532 million, topping 2010's take by more than $140 million.
Even before the recent amendments to the FCA, however, the proliferation of whistleblower actions dates back to the 1980s. “Since that time, what has developed is a very sophisticated qui tam plaintiffs' bar that knows how to evaluate cases very well and has quite a bit of experience in how to bring these cases,” says Joseph Warin, a partner at the law firm Gibson Dunn & Crutcher.
The pharmaceutical industry has been a particular target for False Claims enforcement, given the industry's deep pockets and pervasive exposure to the government via Medicare and Medicaid. “Virtually every major pharmaceutical company has or had an impending False Claims Act matter,” Warin says, and the settlements are getting larger. Off-label marketing—that is, promoting a drug to treat some illness without the Food & Drug Administration's specific approval—is a particular weakness, since it can happen so easily.
Among the significant False Claims settlements that the Justice Department reached with pharmaceutical companies last year was the $102 million deal struck with Elan Pharmaceuticals for the illegal promotion of the epilepsy drug Zonegran. Elan also was sentenced to pay a criminal fine of $97 million and forfeit $3.6 million in substituted assets. In another case, the Justice Department agreed to $900 million in settlements from eight drug and medical products manufacturers, including Abbott Labs, B. Braun Medical, and Roxane Labs, to resolve allegations that they had engaged in unlawful pricing.
“These record-setting results reflect the extraordinary determination and effort that this administration and Attorney General Eric Holder, in particular, have put into rooting out fraud.”
Assistant Attorney General, Civil Division,
Department of Justice
“FCA cases and settlements that you see now are related to past issues, some of which are many years old,” says Kate Connors, a spokesperson for the Pharmaceutical Research and Manufacturers of America. “The feedback we've had from companies is that their willingness to settle these cases is based on their interest in moving forward with their current efforts to ensure compliance today.”
That doesn't mean that once the current crop of cases is settled, FCA actions will recede. In fact, the federal government is doubling down on its pursuit of fraud in the healthcare system. Healthcare reform provides an extra $350 million to crack down on Medicare fraud and similar abuse over the next decade, of which $250 million is front-loaded into fiscal years 2011 through 2016.
Among the largest settlements ever, GlaxoSmithKline has already agreed to pay $3 billion to resolve claims from federal government investigations that began in 2004 into GSK's drug sales and marketing practices, and overbilling of Medicare and Medicaid.
In response to the settlement, GSK Chief Executive Officer Andrew Witty said in a statement that the company has “fundamentally changed our procedures for compliance, marketing, and selling in the United States to ensure that we operate with high standards of integrity and that we conduct our business openly and transparently.” Among those changes, GSK established in 2008 a new compliance framework in the United States, supported by a larger compliance staff and strengthened training programs that require certification by employees.
The following excerpt from the Department of Health and Human Services and Justice Department annual report from 2010 shows overall recoveries made by the Federal government in 2010:
During this fiscal year, the Federal government won or negotiated approximately $2.5 billion in judgments and settlements, and it attained additional administrative impositions in healthcare fraud cases and proceedings. The Medicare Trust Fund received transfers of approximately $2.86 billion during this period as a result of these efforts, as well as those of preceding years; and another $683 million in Federal Medicaid money was transferred to the Treasury separately as a result of these efforts.
In addition to these enforcement actions, numerous audits, evaluations and other coordinated efforts yielded recoveries of overpaid funds, and prompted changes in Federal healthcare programs that reduce vulnerability to fraud.
The return-on-investment (ROI) for the HCFAC program, since 1997, is $4.9 returned to every $1.0 expended. The 3-year average (2008-2010) ROI is $6.8 to $1.0, which is $1.9 higher than the historical average. Due to the fact that the annual ROI can vary from year to year depending on the number of cases that are settled or adjudicated during that year, DoJ and HHS use a three-year rolling average ROI for results contained in the report. Additional information on how the ROI is calculated can be found in the Appendix.
All signs indicate that the trend of record settlements will continue this year. Several companies have already agreed in principle to a settlement or have set up reserves to settle FCA cases. The Taxpayers Against Fraud Education Fund, a non-profit, public interest group dedicated to combating fraud against the federal government, estimates that false claims cases will garner roughly $9 billion in 2012 in settlements and fines.
Justice Department data also revealed that $2.4 billion of the $3 billion collected in FCA penalties last year went to settle fraud committed against federal healthcare programs, most of which can be attributed to the Medicare and Medicaid programs administered by the Department of Health and Human Services. Since January 2009, the Justice Department has recovered more from healthcare fraud under the False Claims Act ($6.6 billion) than it has recovered during any other three-year period in its history.
The largest FCA risks for pharmaceutical and medical products companies stem from overpayments from Medicare. If a healthcare provider identifies billing mistakes in the course of an audit, it has 60 days to refund any overpayments, or risk fraud liability under the FCA.
Regulators do have larger enforcement budgets, but greater cooperation among agencies also amplifies enforcement risk as well. For example, the Health Care Fraud Prevention and Enforcement Action Team (HEAT) was created in 2009 to increase coordination and optimize criminal and civil enforcement. The establishment of HEAT certainly generates “shared ideas and a keen focus on enforcement priorities, and that inevitably leads to more enforcement actions,” Warin says.
So how can pharmaceutical companies reduce the risks of running afoul of FCA rules? In a training video produced by the HHS Department's Office of the Inspector General, OIG attorney Heather Westphal offered the seven basic elements OIG has identified as fundamental to any compliance program. They are:
Written policies and procedures. “Putting policies and procedures on a shelf only to collect dust is not an effective compliance program,” Westphal said. “You have to update your policies periodically as your organization grows and changes.
A compliance professional. “Even the smallest organization needs to have someone who is keeping up with state and federal compliance requirements and recommendations,” Westphal said. If resources allow, designate a compliance officer “and empower that compliance officer with independent authority and a connection to people throughout the organizations.”
Effective training. Ensure that all employees understand the compliance program policies. “The more creative and interactive you can make your training sessions, the better results you'll get,” Westphal said.
Effective communication. Comment boxes, anonymous hotlines, and even an open door policy are all great options, Westphal advised. Give employees some way to report misconduct and protect those who do from retaliation.
Internal monitoring processes. Westphal describes this element as “the heart of any effective compliance program.” A good compliance program will identify problems from time to time. If it does not, that may be a sign of an ineffective program.
Compliance standards. Make sure to take actions upon learning that someone has not complied with procedures.
Prompt responses to issues. Upon receiving a report of misconduct, look into it right away. Then take steps to resolve the issue as quickly as you can.