Pharmaceutical Fraud: Off-Label Marketing and Kickbacks

cGMP (Current Good Manufacturing Processes) Fraud

The Food and Drug Administration maintains a set of specific standards for the production of drugs. These are known as the cGMP (current Good Manufacturing Processes) and all pharmaceutical and biotech companies must observe them.

These standards are in place to ensure that drugs are clean and safe, and that they contain the proper proportions of each active ingredient. Drugs must perform as intended when prescribed by medical professionals and the government must be charged a legitimate price.

These standards also exist to ensure that the Government does not pay atypical amounts for the drugs they purchase. The public health programs Medicare, Medicaid and Tricare purchase billions of dollars worth of drugs every year. Together, they make up the largest purchasers of prescription medications in the United States.

It is not typical for FCA cases to be brought against manufacturers for drugs that are simply substandard. If patients are harmed by substandard drugs, they may still choose to file civil suits.

However, when pharmaceutical manufacturers submit falsified documents in order to claim compliance with standards that are not followed, it can lead to massive liabilities under the FCA.

In one of the first and largest cases involving cGMP standards specifically, the manufacturer GlaxoSmithKline settled with the Justice Department for $750,000,000. ^[1] This massive settlement resolved civil and criminal penalties created by series of longstanding quality control failures and defects.

Best Price Fraud

In order for their drugs to be available to Medicaid patients, pharmaceutical manufacturers must agree to rebate a portion of the sale price of each drug back to the states where the drugs are sold. Medicaid represents a huge market, and therefore drug companies are highly incentivized to agree to these conditions.

As part of the agreement, each manufacturer must submit a quarterly report that covers information about each covered drug, including…

• The AMP (Average Manufacturer Price)
• The Baseline AMP
• The Best Price (inclusive of cash discounts, volume discounts and other rebates)

The information from these reports is then used by the Center for Medicaid and Medicare (CMS) to determine the rebate for each drug that the state is entitled to recover. For brand-name drugs, this is calculated as the greater of 23.1% (raised from 15.1% by the Affordable Care Act in 2010), or the difference between the average price and the best price the drug goes for when sold to non-public health services.

Best price fraud occurs when a manufacturer misreports information in their quarterly report in order to reduce the rebate that is owed to the states. This may be done in several ways.

For example, if the manufacturer provides their lowest price on a given drug (the best price) to a private partner, but disguises how low that price is by providing the savings through grants or other schemes that don’t appear on the invoice, so a higher price may be listed as the “best price”.

This is considered to be fraud. Whistleblowers who have knowledge of these schemes and how they work may be able to prosecute under the False Claims Act, and claim a share of funds recovered.

340B Drug Diversion

The federal 340B program requires drug makers to sell heavily discounted drugs to hospitals and clinics that serve low-income patients. The fraud runs in both directions. A covered hospital that diverts those discounted drugs to ineligible patients, or buys at the 340B price while billing Medicare and Medicaid at full price, pockets the spread. A manufacturer that overcharges a 340B provider above the ceiling price also violates the program. Both can become false claims.

Average Wholesale Price (AWP) and "Marking the Spread"

Medicare and Medicaid have historically reimbursed many drugs based on the manufacturer's reported Average Wholesale Price. When a manufacturer reports an inflated AWP while selling the drug to providers far cheaper, it creates a "spread," then markets that spread to providers as a reason to buy and bill the drug. Inflating the reported price to drive sales is a classic qui tam theory under the False Claims Act that has produced some of the largest pharmaceutical recoveries on record.

Unapproved Drugs

Under certain conditions, doctors may be permitted to prescribe drugs that have not been approved by the FDA, or that are still classified as Less than Effective (LTE) by the Drug Efficacy Study Implementation Program (DESI). These drugs may be prescribed as part of medical trials, for example.

However, healthcare providers are not permitted to claim reimbursement from Medicare or Medicaid for unapproved and LTE drugs. They also may not bill these programs for drugs that were approved, but have been altered or adulterated so that they no longer match the formula that was approved.

Unapproved drug fraud occurs, and can be prosecuted under the FCA, when healthcare providers provide fraudulent documentation to make unapproved drugs appear to be approved drugs.

Improperly Manufactured Compound Drugs

Pharmacists have authorization from the FDA to create new mixtures of drugs, called compounds, based on the instructions given to them by doctors. Compounded medications are vital to doctors, because they fill a gap that is created when a certain combination of active ingredients is not manufactured or sold commercially.

However, compounded drugs are meant to be created in limited quantities in response to the individual needs of physicians. When pharmacies begin to mass manufacture these drugs so that they can be shopped wholesale, those pharmacies are in violation of the Federal Food, Drug and Cosmetic Act (FFDCA).

Pharmacies that engage in this practice may be accused of operating as drug manufacturers themselves. Drugs can only be manufactured with the proper licenses, and the criminal penalties and liabilities for operating as an unlicensed manufacturer can be massive.

Medicare and Medicaid prohibit coverage of any claims for compounded medications that are improperly produced at large scale by pharmacies. When claims are altered to make these medications appear to be legitimately produced so that they can be covered by public programs, the resulting fraud may be covered by the False Claims Act.

The FDA is currently engaged in an ongoing campaign to deliver warning letters to pharmacies that may be illegally mass-producing drugs. Both criminal and civil penalties have been applied in cases where pharmacies and individual pharmacists have failed to adhere to FDA rules.

Off-Label Marketing Fraud

Pharmaceutical companies are generally not permitted to market drugs to healthcare providers for any use other than the one that has been expressly approved by the FDA.

However, that is not always consistent with how medicines are used by physicians working in the healthcare systems. Physicians retain the right to use their judgement when prescribing medications for off-label use. Multiple times in medical history, off-label uses have saved lives and became widespread practice before approval was provided by the FDA.

Physicians are expected to make such decisions independently in these cases, and the makers of the drugs can open themselves up to liability if they advertise or promote the drugs based on the off-label use.

Recent court decisions, including the 2012 Caronia case, have called the strictness of this interpretation into question. In that decision, the Second Circuit Court of Appeals vacated the conviction of a pharmacy rep who was charged after he told physicians that his drug had a list of other, off-label uses.

This decision ultimately rested on the fact that the rep in question knew his statements to be accurate. It was declared to be a violation of the reps first-amendment rights to charge him for true statements. The Caronia decision has discouraged recent cases involving off-label marketing fraud, enough so that some whistleblowers have been discouraged from making cases.

While the court claimed that criminal liability couldn’t be imposed for truthful statements, that still leaves the possibility of criminal liability for statements that are disputable or blatantly false. Manufacturers and their reps should practice extreme caution when discussing the off-label potential of any drug with physicians.

Laboratory & Clinical Trials Fraud

The FDA strongly regulates the approval of new medical devices, treatments and drugs. Each drug that is approved must go through a rigorous testing process.

To qualify for FDA approval (and in some cases, public funding during the trial stages), certain standards must be observed, and accurate reports must be filed. During pre-clinical trials, researchers must observe Good Laboratory Practices (GLPs). A separate set of standards, Good Clinical Practices (GCP), applies to the clinical trial stage.

Meeting these standards can be expensive and time-consuming for pharmaceutical companies who want to see their medicines on the market as quickly as possible.

Laboratory and clinical trial results that show medicines to be highly effective may encourage regulators to prioritize approval, saving time and research costs by extension. Unfortunately, in the past, these and other incentives have resulted in the alteration or misrepresentation of trial data. Any manipulation of trial data can result in serious criminal and civil liabilities.

In addition to changes to data, several other types of fraud have been noted in recent drug trial cases...

• Overlooking data known to be flawed
• Changes to methodology in response to pressure from funding sources
• Concealing of data that contradicts trial results
• Inadequate design of experiments, so that the preferred result is predetermined

Fraud may also occur in the funding stage, if misrepresented information is used to secure public grants, or if public programs are improperly billed for trial costs that are not meant to be covered.

In recent years, the government has been expanding efforts to prosecute those who falsify clinical trial data. Whistleblowers who have knowledge of manipulated clinical data or public grant requests may be able to use the False Claims Act to prosecute their employers.

PBM (Pharmacy Benefit Managers) Fraud

Pharmacy Benefit Managers are third-party companies that exist to administer large-scale prescription-drug programs for both private insurance companies and public prescription drug plans (PDPs) such as those offered by Medicare Part D.

PBMs manage the massive amount of bureaucracy, documentation and data processing that is necessary to distribute drugs in compliance with the law. In order to manage prescriptions programs, PBMs nurture highly complex agreements with pharmaceutical manufacturers.

These agreements, often confidential and sometimes informal, partly determine what drugs are offered “in-network” by PDPs. This in turn affects how much those drugs cost to health providers and patients. As a result of this unique position, PBMs can exercise an extraordinary amount of power over the market.

For example, when PBMs favor one type of drug, they can dramatically increase the market share of that drug. In the same way, they can suppress the sales of other drugs by choosing to keep them out-of-network.

This power has caused pharmaceutical companies and PBMs to develop inappropriate relationships in the past. PBMs are supposed to make their classification decisions independently, but in the Medco Health Solutions case of 2006, one PBM was found to be accepting kickbacks from a pharmaceutical companies.

There are also other areas for potential fraud. PBMs deal with a massive amount of medications, including some that are delivered and returned through the mail. Recycling and shipping these returned medications (some of them expired or degraded) as a cost-saving measure has been attempted and prosecuted.

Additionally, the privileged nature of the agreements that PBMs make with drug providers can lead to the masking of rebates and other cost savings that must lawfully be passed on to providers and patients.

Here are some other types of PBM fraud that have been revealed by whistleblowers.

• Pressuring care providers to switch to prescribed medications to more expensive ones
• Failing to disclose or pass on lower negotiated prices
• Retaining overpayments of government funds

PBM fraud is rapidly becoming one of the most prosecuted areas of fraud that involves pharmaceutical products. Whistleblowers inside PBMs and pharmaceutical companies alike have been able to use the False Claims Act to prosecute on the government’s behalf

Kickbacks to Physicians and Patients

providers who participate in Medicare, Medicaid and other public healthcare programs must comply with the US Anti-Kickback Statute (AKS).

The AKS was enacted in 1972 and significantly strengthened in 1977 following public concern that payoffs from pharmaceutical companies and other entities were resulting in care decisions that were medically unnecessary and even harmful. While the AKS is not part of the False Claims Act, all violations of the AKS that involve public programs may also create liabilities under the FCA. As a result, private citizens have standing to pursue qui tam actions as whistleblowers for AKS violations.

Kickbacks are broadly defined, and when involving drug manufacturers and physicians, and may refer to the following practices…

• Cash or in-kind bribes
• Personal gifts
• Contractual discounts including discounted leases on residences and office space
• Grant programs

This is not a complete list. Any remuneration between the two parties that has the arguable intent of influencing medical decision-making may be considered a kickback.

Exchanges from drug manufacturers and patients that influence the selection of particular devices or drugs may also be considered kickbacks.

Not every exchange is necessarily a kickback. The Office of Inspector General has clarified that companies and their reps, as part of marketing or retention efforts, may provide patients with small gifts. The value of these gifts cannot exceed a retail value of $15 individually, or $75 in total per patient, per year (limits the OIG raised from $10/$50 in 2016).

CME (Continuing Medical Education) Fraud

Medicine is a rapidly-changing field, so medical licensing boards require some medical professionals, including physicians, to participate in Continuing Medical Education (CME) annually. Approved activities range from course credits to literature, conventions and workshops.

CME can be a large expense for physicians, so they may feel incentivized to choose the programs that can minimize their expenses. For example, programs may offer free attendance fees, and other perks like free accommodations in luxury hotels. When these programs are managed by pharmaceutical companies, serious conflicts of interest can arise.

Those who design and schedule CME events, or disseminate literature are required to be independent so that they can offer an unbiased look at new technology, trends and discoveries. When the content, presenters and other factors for an event are determined exclusively by pharmaceutical companies, several different of types of fraud may result.

First, the perks provided during CME events have been considered sufficient to constitute illegal kickbacks in the past. When these perks are overly generous, they may be seen as attempts to influence the attending physicians to choose drugs from the hosting company.

CME events may also run afoul of the law when they discuss off-label uses of medicine without disclosing the sources of their funding or materials. The discovery of new off-label uses of medicines are a legitimate topic of discussion and debate for these events, but not when the content is being created by the marketing departments of drug manufacturers.

Long-Term Care Pharmacy Fraud

Long-term care pharmacies exist to service the large-scale prescription needs of retirement homes, skilled nursing facilities and hospice centers. These facilities often make thousands of orders every month, and must often return a significant amount of drugs that are not used to the pharmacy.

Drugs may be returned to long-term pharmacies for many reasons. Most often, it’s because the patient has stopped taking the medication. This may happen because the underlying issue has been resolved, because the medication has been switched, or because the patient has passed away.

In many cases, the drugs that are returned to long-term care pharmacies must be destroyed . However, in some cases, the drugs may be recycled or returned to circulation. This is one major area for abuse.

When drugs are disposed of improperly, it can become a violation of the False Claims Act. All of the following are examples of violations…

• Exposure of drugs to unsterile environments
• Distribution of drugs that are degraded/adulterated
• Distribution of drugs that known to be expired
• Presentation of recycled drugs as new drugs

If any improperly-processed drugs are billed or distributed to public health programs, the fraud may fall under the False Claims Act. Violations of this nature may expose long-term facilities to qui tam lawsuits by whistleblowers.