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?

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 http://oig.hhs.gov/publications/docs/workplan/2002/cms.pdf. In recent public speeches, the new Inspector General, Janet Rehnquist, has also emphasized a focus on the industry.

Whistleblowing pays

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

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,")