Texas Goes After Big Pharma
The Texas Attorney General Goes After Big-Dollar Fraud by Drug Companies
by Robert Bryce
Texas Observer, March 03, 2005
AG Greg Abbott is bringing in millions for the state by going after corporate drug fraudsters.
When 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 totalled 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.
King 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.”
For 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.)
While 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