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Brent Saunders and Anthony Farino are partners in, and Pharmaceutical Industry Compliance and Risk Management Practice at PricewaterhouseCoopers LLP.
Brent Saunders and Anthony Farino are partners in, and Pharmaceutical Industry Compliance and Risk Management Practice at PricewaterhouseCoopers LLP.
Jonathan Kellerman is manager of, the Pharmaceutical Industry Compliance and Risk Management Practice at PricewaterhouseCoopers LLP.
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
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.
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.
Why Pharma, Why Now?
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?")
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.
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.
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.
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,")
As demonstrated by the government's two recent major pharma industry settlements and its related reports, the two main areas of vulnerability are:
Although there are many other areas of potential risk for pharma companies, those two issues are currently the center of the government's investigative efforts.
At the heart of the drug pricing issue is the government's contention that companies have failed to provide the accurate and complete information the government needs to ensure that it pays the appropriate amount-as defined in the applicable pricing rules-for prescription products.
The government's primary concern is that pharma companies are inflating the reported prices that are used for reimbursement by Medicaid and Medicare. Consequently, the government alleges that inflated prices result in inflated reimbursement. Much of the press around the issue has focused on the average wholesale price (AWP), which is used to set reimbursement rates for select products covered by Medicare. But recent settlements make it clear that price reporting under Medicaid, the Veterans Administration, and state programs will also be investigated.
The primary sales and marketing concern is whether certain key activities violate anti-kickback laws, which impose criminal penalties on individuals or entities that knowingly offer, pay, solicit, or receive remuneration (anything of value) to induce the referral of business reimbursable by a federal healthcare program. (See "Kickback or Legitimate Marketing Technique?" PE, May 2000.)
The government has consistently claimed that payments tied to referrals corrupt the healthcare system, thus increasing the risk of overuse of drugs and services, increasing costs to federal healthcare programs, inappropriately steering patients to providers, and generating unfair competition. Examples of the types of activities that may be the focus of future DOJ and OIG investigations include:
It is important to note that when evaluating those activities, the government will also consider their possible impact on drug price reporting.
Corporate integrity agreements (CIAs) are a key enforcement tool the OIG uses to settle allegations of fraud related to certain business practices. A CIA is the contract between the government and a private entity that outlines specific corrective action that the entity must undertake as part of the resolution of a civil or criminal settlement. Essentially, the agreements are probation-like mechanisms that give OIG authority to evaluate a company's business practices and compliance program at any time. CIAs have been required in each of the three major settlements in the pharmaceutical industry to date.
The typical agreement is for a term of five to seven years, depending on the magnitude of the settlement. It usually requires the company to implement various compliance measures under time frames that will severely tax company resources if a compliance program is not already in place. Additionally, in two of the three pharma CIAs, the companies were required to contract with an independent review organization (IRO) to conduct annual testing of their compliance program activities and of the specific activities that got them in trouble in the first place. The cost of those independent reviews can be very significant-potentially exceeding $1 million in fees.
The requirement generally includes the hiring of a compliance officer, development of written compliance polices and procedures, establishment of a comprehensive employee training, audits of risk areas, establishment of a confidential disclosure program, restrictions on employment of ineligible persons, and periodic reports to OIG.
The two most recent pharma CIAs require an IRO to conduct an annual review of the company's compliance program activities and to extensively test what OIG considers high-risk activity: price reporting for government reimbursed therapies and sales and marketing activities.
In response to the government crackdown, many pharma companies have begun to invest in compliance programs. When properly designed and implemented, such programs can detect, deter, and eliminate misconduct and wrongdoing within an organization. They can also help mitigate fines and penalties against a company, because they offer objective criteria by which prosecutors can assess the company's attempt to protect against fraudulent practices within its structure. Beyond legal protections, compliance programs also can improve operations and create an atmosphere conducive to ethical behavior.
The pharma industry has a long tradition of operating compliance programs. Most of the experience is in manufacturing, research, and development where lapses in internal controls can lead to millions of dollars in lost profits. Today, many companies have begun to more broadly implement compliance activities for all applicable laws and regulations-particularly those that relate to price reporting and sales and marketing activities. Specifically, companies are strengthening their internal policies and control procedures for those and other high-risk areas. They are also providing the communication and training needed to back up the message to their employees that regulatory compliance is a critical element of their business.
OIG recently initiated a process to develop a model compliance guidance that is unique to the industry. Last summer, OIG petitioned the pharma industry for comments concerning that guidance. The industry responded, in part, by forming a coalition of 17 companies whose goal was to draft a compliance guidance that promotes adherence to the laws governing federal healthcare programs. OIG is expected to release the first draft of the guidance this spring.
In today's world, in which compliance lapses or unethical decisions routinely make front page headlines, pharma companies should make compliance a core competency. When built and administered properly, such programs demonstrate a commitment to relevant laws, regulations, and business practices. They also help protect employees by establishing a framework for ethical decision making.
In 1991, the Federal Sentencing Guidelines for the Sentencing of Organizations took effect. It was the first time that the government provided a legally recognized definition of a compliance program. Still regarded as the definitive source, the guidelines provide seven basic elements that any well designed compliance program should include. Although there is no legal requirement for companies to include those elements, most experts agree that they have become a de facto standard. The seven standards may be summarized as:
Overall compliance program oversight. A compliance officer and some form of a compliance committee will be responsible for
Centralized policies and procedures. To successfully implement a corporate compliance program, senior management must first communicate to employees the company's standards of conduct. They should then support those standards with a series of written policies and procedures that focus on specific risk areas such as
Employee training and education. A comprehensive compliance initiative should make participation in employee training programs mandatory. There are two recommended training and education programs: general compliance training and specialized training in areas or issues relevant to specific categories of employees.
Effective lines of communication. For a compliance program to work, employees must have a mechanism through which they can ask questions and report problems. An "open door" policy is as critical to compliance programs as is the role of first-line supervisors and managers. To supplement that open communication, companies should consider adopting a hotline telephone number or e-mail system that is available to all employees and contractors.
Monitoring and auditing systems. Pharma companies are accustomed to intense regulatory scrutiny and have processes in place designed to assure compliance with applicable laws and regulations. The model compliance guidance recommends that companies augment those processes with monitoring and auditing procedures, especially in the key risk areas.
Consistent enforcement and discipline. An effective compliance program will also include standards for disciplining individuals who violate laws, regulations, or the company's standards of conduct. Additionally, companies should publicize those disciplinary standards to ensure that they are consistently enforced and that all employees understand the consequences of violations.
Response and corrective action. Companies should have a solid process by which they can address potential or alleged violations of laws, regulations, or standards of conduct through corrective action measures. Key components of a response mechanism are
The current scrutiny is only the opening salvo in a broader enforcement initiative by numerous government agencies that will likely expand their efforts into other aspects of marketing and promotion, clinical operations, and manufacturing. Highly publicized settlements within the industry and events like the recent Enron failure-with its implications that the lack of a robust compliance program could contribute to a business' demise-ensure that compliance will remain in the spotlight for the near future.
That reality requires companies to definitively align their organization and business processes with compliance initiatives designed to address the new regulatory agenda. Historically, the pharma industry has shown remarkable agility in adapting to market and regulatory dynamics and it is-again-rising to the new challenges.