The avalanche of civil whistleblower and class-action lawsuits, state and federal criminal investigations and antitrust inquiries involving the marketing and pricing practices of the prescription-drug industry is likely to ripple throughout the healthcare industry, leaving few provider sectors untouched, government officials and healthcare lawyers say.
Although most of the targets of the lawsuits are the pharmaceutical companies and their relationships with physicians and drug wholesalers, hospitals and healthcare systems are unlikely to completely dodge the latest antifraud bullet.
Even when hospitals aren't the subjects of the investigations, they could still be affected by consent decrees, settlement agreements and an end to some purchasing practices and industry patent-protection schemes.
The onslaught of litigation facing the rich and powerful prescription-drug industry, a relatively recent phenomenon, would seem overpowering to any another business. But Americans bought $132 billion worth of retail outpatient prescription medications last year, an increase of 19% compared with 1999, according to a study from the National Institute for Health Care Management Foundation, and steep increases are projected to continue. With profits fat, pharmaceutical companies are taking heat from consumers who have grown increasingly irritated at rising drug costs, prompting calls for Congress and federal regulators to take action.
Because drug manufacturers don't bill Medicare or Medicaid healthcare programs directly, healthcare lawyers say the companies escaped the antifraud scrutiny that has focused on hospitals, physicians, nursing homes and clinical laboratories for nearly a decade. While pharmaceutical manufacturers have always faced product liability litigation, to date they've mostly dodged government fraud scrutiny because they aren't direct providers of care.
New scrutiny for drugmakers
Times have changed for the pharmaceutical companies, thanks to newly tested legal vehicles, including the use of the federal False Claims Act to punish the billing of government programs for allegedly fraudulent claims, as well as a better-trained and -financed cadre of state and federal investigators and prosecutors. Armed with growing antifraud budgets and insider information to guide them, regulators are scrutinizing business practices in the pharmaceutical industry designed to encourage customer loyalty and boost drug sales, sometimes in violation of state and federal laws.
Consider these cases:
* Mylan Laboratories agreed to repay more than $100 million in allegedly ill-gotten profits as part of a 2000 settlement with the Federal Trade Commission. The FTC and 45 states alleged in a lawsuit that Pittsburgh-based Mylan conspired with several producers of raw materials to keep those vital drug ingredients-and generic competition-off the market, enabling them to charge as much as 30 times Mylan's previous price for two of its generic anti-anxiety drugs.
* Former German company Hoechst Marion Roussel (renamed Aventis in 1998 and based in Strasbourg, France) paid $80 million to generic competitor Andrx Corp., based in Fort Lauderdale, Fla., not to produce a generic version of its popular hypertension drug, Cardizem CD, according to the FTC. The FTC filed an antitrust complaint against the companies, which signed a consent decree prohibiting similar future conduct.
* In May 2000, the FTC issued a complaint and consent order against Abbott Laboratories, Abbott Park, Ill., and Broomfield, Colo.-based Geneva Pharmaceuticals, charging that Abbott paid Geneva approximately $4.5 million per month to keep Geneva's generic version of Abbott's brand-name hypertension drug, Hytrin, off the U.S. market.
* In May, a Philadelphia lawyer filed a private civil class-action suit on behalf of his client, a retired engineer, against Lake Forest, Ill.-based TAP Pharmaceutical Products, a joint venture between Abbott Laboratories and Takeda Chemical Industries of Japan, alleging that the company illegally inflated the price for which Medicare reimbursed doctors for administering its prostate cancer drug, Lupron. The suit alleges that by manipulating prices, TAP forced Medicare beneficiaries to make required copayments far higher than they should have.
* In Connecticut, Florida, Indiana, North Carolina and South Carolina, drug wholesalers, physicians and a former TAP sales representative pleaded guilty to criminal kickbacks, illegal drug sales, the selling of free drug samples and conspiracy charges in connection with a joint state and federal investigation of TAP. The company is close to paying more than $800 million to resolve several civil whistleblower fraud lawsuits as well.
* In January, New Haven, Conn.-based drug giant Bayer Corp. paid $14 million to settle a civil whistleblower lawsuit alleging it had manipulated the average wholesale price of several of its drugs, resulting in overpayments by Medicaid programs. The suit, which was filed by Ven-A-Care of the Florida Keys (See related story, p. 32) and remains mostly under seal, accuses at least 20 more drug companies of inflating the average wholesale price they reported to Medicare.
In addition, state and federal agencies are looking into allegations that drug manufacturers, through repackaging schemes, avoided paying Medicaid rebates. The 1990 Medicaid rebate law requires that drug companies, as a condition of participation in the program, pay rebates to state Medicaid programs based on the difference between the drug's average manufacturer's price and the lowest, best price offered to their best commercial customer.
Also under renewed fire are the decades-old practices by drug manufacturers of courting physicians with tickets to professional sports events, weekend trips, consulting fees and lavish dinners, and treating physician office staff to catered lunches. Critics have called them disguised inducements to prescribe their drugs and a potential violation of antikickback laws.
Warnings for hospitals
How will this tsunami of litigation play out for hospitals? Will the drug industry's legal woes reduce supplies and increase already steep drug prices? Or could the wave of antitrust consent decrees, costly fraud settlements and behavior-altering corporate integrity agreements bring down drug costs? What legal liability are hospitals likely to face?
There's always been a firewall between drug companies and hospitals, says Richard Wade, senior vice president of communications at the American Hospital Association.
"Most (hospitals) purchase drugs through large purchasing cooperatives, such as Novation and Premier," Wade says. "They write contracts and negotiate prices. Most state hospital associations have group purchasing plans, and hospitals look to those groups to deal with these issues."
Healthcare lawyers say that although those relationships do not legally insulate hospitals from the fraud inquiries, the indirect reimbursement makes it less likely that hospitals will be affected.
Wade says hospitals, because of their recent experiences, understand too well the pressures drug companies face from government investigations. "They are an enormous distraction that take a great deal of time, and whether or not the government finds a problem, they can be awfully expensive. The cost of prescription drugs is high enough. This could add to the cost of those drugs," he says.
Wade says hospitals should be cautious in establishing relationships with drug companies. Although the drugmakers offer valuable expertise in staff training, education and service, he says grants and other forms of financial support to hospitals and physicians "raise legitimate concerns" and should be evaluated.
One pharmaceutical industry business practice coming under increased scrutiny involves hospital formularies, or lists of approved drugs, says James Sheehan, the assistant U.S. attorney who heads the civil division in Philadelphia. Sheehan says the government is examining whether drug companies are offering inducements in exchange for placement of certain drugs on the formularies.
"Every drug company sales representative, or detailer, has a list of `influentials' in their territory, prominent physicians on hospitals' pharmacy and therapeutics committees who decide which drugs will appear on hospital formulary lists," Sheehan says. "You hope that decisions about those drugs will be made in the best interest of the hospital and the patient. But there have been efforts by drug companies to influence those decisions in the form of unrestricted grants or educational grants to `influentials' on the committee making those decisions."
Mark Grayson, a spokesman for the Pharmaceutical Research and Manufacturers of America, a drug industry trade group, says it's unclear now how the legal attack on the industry affects hospitals. "Most of what we do is at the retail level, and marketing practices within the hospital industry don't get much play," he says. "Except for paying lower prices sooner for generics, it's hard to see how any of the antitrust cases will affect hospitals."
He also says he's not aware of financial arrangements allegedly made between drug companies and hospital buyers to get drugs placed on hospital formularies. He says drug companies have policies on marketing practices targeting doctors and hospitals. "And they will be looking at those far more closely," Grayson says.
Steve Sheaffer, president-elect of the 30,000-member American Society of Health-System Pharmacists, says medical staff department heads and the chief of the pharmacy department usually make up a hospital's pharmacy and therapeutics committee. Sheaffer says he is aware of drug company grants and speaking honoraria to hospital medical staff but says hospital compliance programs increasingly are requiring disclosure statements from committee members.
"While most hospitals still don't have them (disclosure statements), they are becoming more common," says Sheaffer, who is pharmacy director at 250-bed Mercy Fitzgerald Hospital in Darby, Pa. "When do those relationships cross the line? When there is a real or perceived threat that those perks could influence someone's decision to add or not add a drug to a formulary. I personally have never seen that happen and always felt the medical staff in my organization has looked objectively at the literature on the drugs and not allowed external influences to affect their decisions."
Craig Holden, a healthcare lawyer with the Baltimore office of Ober Kaler Grimes & Shriver who has defended drug companies, says that formulary placement is important to pharmaceutical companies, especially the formularies of hospital chains and healthcare systems. "If people buy their way onto formularies, that's a problem," Holden says.
Although Holden and Sheaffer say they don't know of any cases of payment for placement, other healthcare lawyers and government officials say they're sure the practice exists, even if it has not been prosecuted yet.
Paul Kalb, a nonpracticing physician and healthcare lawyer with the Washington office of Sidley & Austin, says hospitals need to be concerned about even a hint of inducements relating to formulary placement.
"The (HHS) inspector general has warned that research grants with no strings attached or educational grants may be viewed as problematic," Kalb says. "Though the government investigations have focused on physicians and HMO deals with drug companies, hospitals will clearly be in the mix."
Other issues confronting the drug industry are likely to be less of a threat to hospitals, because most facilities now have compliance programs in place designed to catch billing problems and review suspicious relationships.
Sheaffer says most of the issues related to price-fixing schemes between generic and branded drug manufacturers have affected community pharmacies the most, with little spillover onto hospitals. He says the national investigations into average wholesale price manipulation by drug companies have a limited impact on hospitals because hospitals are reimbursed differently under Medicare's prospective payment system. Under DRGs, drug costs are built into the payment for a given diagnosis, so it's harder for hospitals to financially benefit by manipulating the drug prices.
Kalb, who represents drug companies, predicts the government will step up prosecution of individual physicians and drug company employees on criminal charges while continuing to pursue big-dollar civil settlements against the drug companies and other providers.
"In the TAP case, the government has indicted doctors, and it wouldn't surprise me to see a pharmacy director or hospital official indicted down the road," he says. "The government wants to send a message."
At an American Bar Association healthcare fraud conference in Miami last month, U.S. Justice Department Attorney T. Reed Stephens disputed Kalb's assertion that the focus of the investigation into the prescription-drug industry is shifting from civil to criminal. He described it as something approaching critical mass that until recently had evaded government attention.
"We're not seeing a criminalization of conduct but a new focus on the criminal conduct of an industry that has escaped scrutiny because it doesn't directly provide care and hasn't been subjected to the (whistleblower lawsuit) activity facing doctors and hospitals," says Stephens, who is leading the Justice Department's investigation into average wholesale price manipulation.
Stephens compares the legal onslaught against drugmakers with a wave of suits that vastly changed another business sector.
"I see the pharmaceutical industry today in the same context as the defense industry in the 1980s," he says.