Is Everyone a Target?

Michael D. Lam is Pharmaceutical Executive's Associate Editor.

Pfizer is embroiled in a whistleblower lawsuit based on an unproven legal theory with the potential "to scare the hell out of a lot of drug companies," says attorney Alan Minsk of Arnall Golden Gregory. If upheld, even those compliant with FDA regulations for off-label promotion might still be liable for Medicaid fraud under the federal False Claims Act (FCA).

The cost of losing the case, known as Franklin v. Parke-Davis (a unit of Warner-Lambert, acquired by Pfizer, liabilities and all, four years ago), could be enormous. Violators of FCA are excluded from government business and pay triple damages and civil penalties between $5,000 and $11,000 for each false claim-all of which likely motivated Pfizer to set aside more than $400 million recently, presumably to settle the matter.

What does this suit mean for pharma? US Attorney James Sheehan, a veteran healthcare fraud investigator, sees the suit as a "green light" for whistleblowers, the first of many to come. To James Moorman, executive director of Taxpayers Against Fraud, an organization that supports whistleblowers and their attorneys, it's an "outlier," one of a kind.

Who's right? What's at stake? And what can pharma do?

Not as Directed

Like the flu, off-label promotion problems seem to afflict the industry in a new form every year. The Parke-Davis bug is not only the latest strain, but in certain respects the most unlikely. The plaintiff, David Franklin, PhD, a microbiologist employed by Parke-Davis as a medical liaison for five months in 1996, filed a lawsuit that year alleging that the company had engaged in unlawful activities, including kickbacks and sham research, to promote off-label use of Neurontin (gabapentin), an anti-convulsant approved for the treatment of epilepsy.

Much of the misbehavior alleged in Franklin echoes previous actions against pharma firms. (See "Whistleblower Fraud Cases.") But Franklin's suit contains a troubling new legal theory that to date has withstood the court's scrutiny. It has two parts. The first, Minsk says, is the contention that, although Parke-Davis never directly submitted a Medicaid claim the company "in effect caused the false claim to be made."

In a motion to dismiss the suit, the company argued, as Minsk put it, "Wait a second, we don't submit the paperwork. That's the doctors and the pharmacies. Throw the claim out." But the court didn't.

Why not? Because the allegation is not so outlandish after all. First, there's the basic legal principle, articulated by William Vodra, senior partner with Arnold & Porter, "that a company remains responsible for the foreseeable consequences of its activities." In particular, the FCA statute imposes liability on any person who "knowingly presents, or causes to be presented ... a false or fraudulent claim," with "knowingly" defined as actual knowledge, reckless disregard, or deliberate ignorance. It's easy to see that a company that promotes off-label use, however circumspectly, might reasonably foresee that a Medicaid claim would be submitted for that use.

The second part concerns why the claims are fraudulent. Medicaid programs in most states cover the cost of off-label drug use (for which they are reimbursed by the federal government) as long as the unapproved indications are listed in any of three standard reference works (Drugdex, AHFS Drug Information, and US Pharmacopeia). However, eight states do not cover any off-label use under any circumstance. Because Medicaid reimbursement was sought for off-label use of Neurontin in these states, the claims were materially false.

For Whom the Whistle Blows

"Franklin was a surprise for the industry," says a consultant who advises pharma on compliance issues. The connection between drug maker and the person who actually bills Medicaid is so attenuated, he says, "that this issue probably was not on the compliance radar screen of any pharmaceutical company." He likens it to "waking up one morning ... and wearing pants is suddenly viewed as inappropriate. If you're asked, 'Did you ever wear pants?' you have to say yes. But you never thought you were violating the law."

Minsk says, "The majority of drug companies promote off-label. If the court determines that a company can be held responsible for causing a false claim to be made, the US Attorney could shoot fish in a barrel if he or she wishes to go after almost any of them."

Then there are qui tam incentives to consider. "If Franklin walks out of this thing with $100 million," says Vodra, "I can certainly see people saying, 'This is something to get into.' Every single person in a marketing organization, from the bottommost sales rep up to the top levels of the company, might blow the whistle," he says. "Even the secretaries at headquarters can walk out, taking all the documents with them."

Government Muscle

So far, the claims in Franklin are just theoretical. And they are likely to stay that way. Every pharmaceutical company in a similar position has settled. So, the consultant says, "there's never been any proof that these theories really stand up."

If Franklin is settled, as seems likely, the trial court's rulings won't be reviewed by an appellate court, and will be "interesting opinions from one district court judge with no binding effect on any other," Vodra says. "That doesn't mean the court says it's a silly claim," says Minsk. "It doesn't mean the court says it's a victorious claim. It just simply means that somebody else is probably going to bring the issue up at another time."

Why do companies uniformly settle FCA lawsuits? David Hyman, a professor at the University of Maryland school of law, says, "[Healthcare] providers who believe they are blameless are under tremendous pressure to settle, because of the legal expenses associated with mounting a defense and the high probability of bankruptcy and professional disgrace if the jury does not see things the same way."

It is interesting to note that the costliest penalty is the seemingly paltry civil fine of $5,000–$11,000 per false claim. But, as Hyman points out, "because most healthcare providers typically submit a large number of modest claims, this structure means that statutory penalties generally dwarf actual damages, and quickly rise to staggering levels—as much as $1.1 million for every 100 false claims."

What's more, companies "also run the risk of being excluded from federal programs and procurement," according to the compliance consultant, "which means not only that your products cannot be reimbursed by any federal program, but you may be excluded from all the other government contracts you have. That is a death sentence." As if that weren't enough, FCA cases need not be proved "beyond a reasonable doubt," the familiar standard in a criminal case. The plaintiff's charges must only be proved by a "preponderance of the evidence." No wonder that "prosecutors like the FCA," says attorney John Bentivoglio of Arnold & Porter, not just for its "broad scope of liability and expansive definition of knowledge," but also for its lesser burden of proof.

Add it all up, the consultant says, and most companies decide a trial is not worth the risk. In Hyman's view, "The FCA makes it possible for the government and qui tam relators to extract the healthcare equivalent of 'greenmail.'"

Finally, the consultant says the government "always looks for a case that is easy to win or settle because they don't want to set any bad precedents." Moorman agrees: "This may not be the general perception, but the Justice Department is fairly conservative. They win over 95 percent of these False Claims Act cases. Does that strike you as risk taking?"

Many Benjamins, Few Franklins

Moorman believes Franklin is unlikely to spawn many imitators. First, he says, "There's a rumor flying around that the Justice Department intends to extract a large amount of money from Pfizer in the form a huge criminal fine instead of False Claims Act damages, as part of a global settlement combining all civil and criminal liability in one shot. If they assign $300 million of that as a criminal fine and the rest as civil penalties, that means Franklin, whose share is based only on the civil penalty portion, gets less money, even though he did all the work." This, he believes, would discourage similar cases. "Most False Claims Act lawyers are going to say, 'This is a long tough slog.' If the US Attorney's office allocates all the money to criminal penalties? Talk about killing the incentive."

Furthermore, Moorman holds that the industry has already solved its off-label Medicaid fraud problem. He says the 1997 authorization of Thomson's Drugdex compendium, which lists many more off-label indications than the other two books Medicaid programs refer to, effectively "legalizes, in some Byzantine way, off-label use so these kinds of cases really can't be brought anymore."

Minsk agrees with Moorman's conclusion but for a different reason. "Drug companies in the last year or so are trying—at least in their legal departments and senior management—to maybe not be as aggressive as they were a few years ago." However, he says, "You'll probably continue to see subpoenas for drug companies based on past activities. One, because there's money to be made. Two, because whistleblowers are reading these things in the paper. Three, because drug companies are not particularly popular right now, and somebody's got to take the fall. The pendulum is shifting toward enforcement against the drug industry for past activities. That will probably persist for several more months, if not for another year or so."

Shooting From the HIPAA

To return to the initial questions ...

Will there be many more suits á la Franklin, few, or none? The consensus among those that Pharmaceutical Executive contacted, corporate and qui tam attorneys alike, is that there will be others but few, if any, based on contemporary activity. Why then is US Attorney Sheehan, who is in a position to know, traversing the nation calling Franklin a "watershed"? Perhaps it's his way of firing a warning shot across the industry's bow.

Whatever Sheehan is up to, and even if Franklin v. Parke-Davis is one of a kind, it is almost certainly not the last qui tam action pharma will ever see for these reasons:

The increased federalization of healthcare, most notably the new Medicare drug benefit, will increase the scope of FCA.

Inventing new prosecutorial theories for the pharmaceutical industry "is not that difficult," the consultant says, because "pharmaceutical manufacturers have many different relationships with physicians and providers and are involved in many different aspects and forms of education and promotion, condoned by law." Its very complexity makes it "fertile ground" for new notions of wrongdoing.

Although "the aggressiveness with which healthcare fraud has been pursued has waxed and waned over the decades," according to Hyman, "we are currently at an all-time high in terms of the level of enforcement and the associated 'law and order' rhetoric." Blame the 1996 Health Insurance Portability and Accountability Act (HIPAA). It has spurred, Hyman says, a "drive for accountability that has resulted in an unprecedented number of civil and criminal enforcement actions; the transfer of billions of dollars from providers and insurers to the federal government and whistleblowers; the expenditure of tens of millions of dollars on lawyers, accountants, consultants, and compliance programs; and vehement protests by providers." Fraud control, it turns out, "is like most other goods and services: the more one is prepared to spend, the more one can purchase."

What's at stake? Obviously, pharma's pocketbook. To paraphrase Senator Dirksen, a couple of hundred million dollars here and there, and pretty soon you're talking real money. But neither the solvency nor survival of the industry is at risk, not in the short run anyway. Its reputation is, however—which may, in the long term, amount to the same thing. If public trust declines, increased regulation and enforcement are likely.

What can pharma do? The big picture requirement—beyond the necessary off-label audits, training, and supervision, beyond FDA "safe harbors" and the PhRMA code—may be an attitude adjustment.

It's worth heeding Moorman: "Businessmen have a tendency to be contemptuous of regulation. My father was in the securities business and he hated the Securities and Exchange Commission. The drug industry views FDA as a nuisance. It could be a little more statesmanlike and recognize that the FDA is what stands between them and crime."

Yes, the recent surge in healthcare fraud enforcement has its share of aggressive and selective prosecution."It is relatively easy," as Hyman says, "to condemn billing by sham entities, billing for services not provided, or billing for 12.5 miles of one-inch adhesive tape for a single patient (sufficient to wrap the patient head-to-toe six times a day for six months). But it is quite another matter when the issue involves novel services, delivery arrangements, 'creative billing,' the consequences of the exercise of clinical discretion, compliance with relational contracts, and other 'gray areas' in the law."

But many instances of off-label promotion have been similarly aggressive. "Drug manufacturers have acted as though Medicare/Medicaid was free money they could grab any way they wanted," says Moorman. "If you read the complaint in the Neurontin case, it's clear that Warner-Lambert was so contemptuous of FDA it turned the preparation of research papers over to its marketing department. Boy, that is asking for trouble. And when you ask for trouble, sooner or later it comes."