Caught in the Crosshairs: Pharmaceutical Pricing and Sales & Marketing Practices

Scrutiny of the industry is on the rise, and Pharma companies must establish compliance programs now.
Apr 01, 2002

The pharmaceutical industry stands in the crosshairs of federal and state law enforcement agencies. It is not being targeted by FDA for regulatory violations, as one would expect, but by many other government agencies. Some of the issues in question are the way pharma companies calculate and report product prices and how they conduct their sales and marketing activities. The new regulatory exposure can also be tied to the substantial amount of industry revenue that comes from federal health programs.

In response to the heightened regulatory scrutiny, many pharma companies have implemented corporate programs designed to demonstrate their commitment to compliance with all applicable laws and regulations. This article examines the impact of recent regulatory scrutiny and law enforcement initiatives in two vital areas: drug price reporting and sales and marketing practices, and it describes the programs that pharma companies are implementing to promote regulatory compliance.

Why Pharma, Why Now?
Why Pharma? When asked why he robbed banks, Willie Sutton replied, "Because that's where the money is." That adage seems to hold true for government law enforcement initiatives as well. To support that premise, one need only look back in time to other industries left in the investigative wake: national defense, banking, healthcare providers, and healthcare insurers. At the time of the investigation, each industry was viewed as a source of excessive federal spending and a "deep pocket" in corporate America. Now, the Department of Justice, whistleblowers, and plaintiff's attorneys are all operating under the belief that the pharma industry's profits make it a clear target for large financial damage awards.

In each prior instance, prosecutors and investigators sounded the same theme: "Wasteful spending, fraud and abuse, and unchecked business activity will be aggressively prosecuted." Add to that both the government's perception that it pays too much for prescription drugs and the historical success its investigations have had on motivating changes in corporate practices, and it is no surprise that the pharma industry is now on the government's law enforcement radar screen. (See "Why Pharma, Why Now?")

The Investigators An impressive number of regulatory agencies have begun to flex their investigative muscles. The industry is under scrutiny from the Department of Health and Human Services, the Office of the Inspector General (OIG), the Department of Justice (DOJ), the Center for Medicare and Medicaid Services, the state Medicaid Fraud Control Units, FDA, the Drug Enforcement Administration, the Federal Trade Commission, the Securities and Exchange Commission, the Occupational and Safety Health Administration, and the Consumer Product Safety Commission.

That extraordinary dedication of government resources is a further testament to the breadth of the regulatory issues facing the industry as well as the high priority that the government is assigning to pharmaceutical investigations. Recent statistics from the OIG indicate that, for every dollar it spent on investigations, federal agencies realized a return of $110 in recoupments, fines, and penalties. To date, across all industries, there have been six settlements, each totaling around $500 million.

Additionally, the 1996 Health Insurance Portability and Accountability Act (HIPAA) dedicated a 15 percent annual increase to regulatory and investigative resources focusing on fraud and abuse related to Federal healthcare programs. The significance of the act is that it guarantees increased funding through 2003 for what was already a robust regulatory and investigative infrastructure. In their Annual Report for Fiscal Year 2000, OIG and DOJ noted that the federal government won or negotiated more than $1.2 billion in judgments and settlements in healthcare fraud cases.

For those in the industry who believe that recent settlements by two major pharmaceutical companies are only flashes in the pan, the aforementioned OIG and DOJ reports provide further insight. Both point to "key wins" in investigations involving pricing and prescription products during the past year. Not only does DOJ acknowledge the settlement with a major pharma company for "inflating drug prices," but it also explains how it will target, in concert with OIG, investigations into "methodologies for setting Medicare prescription drug prices."

Further underscoring the broad-based regulatory focus on the industry is the recently issued OIG work plan for 2002, which lays out planned audits, evaluations, and projects that OIG will undertake this year. The plan is heavily weighted towards the pharma industry, with a specific focus on pricing and sales and marketing practices and is available online at In recent public speeches, the new Inspector General, Janet Rehnquist, has also emphasized a focus on the industry.

Whistleblowing pays
Whistleblowers One of the most powerful civil enforcement tools used by both the government and the general public is the False Claims Act (FCA). Simply put, FCA says that any person who either submits, or causes a false claim to be submitted, to the government violates the law. FCA not only allows DOJ to investigate and bring actions against violators, it also deputizes and provides an incentive for private individuals to bring actions.

Whistleblowers can be anyone who has direct or indirect knowledge of the information on which the allegations are based. Thus, they can be almost anyone with a connection to a company: current employees, former employees, consultants, and, as in a major recent settlement, customers.

Whistleblowing on the rise
Incentives for whistleblowers are quite lucrative. Under FCA, defendants may be liable for treble damages in addition to penalties of $5,500–$11,000 per false claim. In an industry where a claim can be defined as a single prescription submitted for federal reimbursement, it is easy for exponential damages to rack up.

The whistleblower may be awarded anywhere from 15 percent to no more than 25 percent of the proceeds from the action, with the remainder going to the government. For some whistleblowers, it means lottery-like windfalls, a few of which have exceeded $50 million. (See "Whistleblowing Pays," below, and "Whistleblowing on the Rise,")

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