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Government lets fraudulent drug companies deal with Medicare 

Wednesday, Jan 19 2011
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Seven years ago, Lee Chartock, a psychiatrist in South Weymouth, Mass., got a visit from a drug saleswoman offering to pay his expenses to an "advisory meeting" in Boca Raton, Fla.

There, hucksters encouraged him and other attendees to prescribe the drug Zonegran, approved by the Food and Drug Administration (FDA) as one of several medications to treat epilepsy seizures in adults. That small market wasn't growing. But physicians had been paid up to $1,250 to attend Florida sessions where they were encouraged to increase the drugs' sales by prescribing it "off-label" as a diet pill, to treat mood disorders, and for epilepsy in children.

Back in Massachusetts, the saleswoman offered to pay him to give speeches on behalf of the drug's maker, an Irish firm with R&D and other operations headquartered in South San Francisco called the Elan Corporation.

Chartock declined. Instead he filed a federal whistle-blower complaint describing an illegal marketing scheme by Elan to market Zonegran for "off-label" uses.

On Dec. 15, the Justice Department announced that Elan would pay criminal and civil penalties totaling more than $200 million. As part of a legal settlement, Elan signed a so-called corporate integrity agreement, designed to ensure it doesn't repeat this kind of practice. For the next five years, it will employ a "compliance committee" and regularly report back to the government on whether employees are breaking the law.

U.S. Attorney General Eric Holder said in a Dec. 16 speech that the cash settlement and the agreement were examples of how the Obama administration is "fighting back in bold, innovative ways" against health care fraud.

"Ironic" might be a word more apt than innovative. That's because, when it comes to pharmaceutical companies, the federal government's antifraud strategy has itself smacked of flimflam.

Elan is one of hundreds of entities under corporate integrity agreements requiring them to audit their own behavior under the supervision of the U.S. Department of Health and Human Services. Such negotiated deals have quietly become America's preferred method of battling criminal activity in Big Pharma, the largest source of documented fraud against the U.S. government.

But even the feds' top cop in charge of investigating Medicare fraud points out these agreements can be shams. "Sometimes you can dance around corporate integrity agreements and still be in compliance," said Timothy Menke, deputy inspector general for investigations with the U.S. Department of Health and Human Services, during congressional testimony in March.

Peter Rost, a former Pfizer marketing vice president who blew the whistle on drug marketing fraud, takes Menke's criticisms a step further. "In my opinion, this whole thing is a bit of a circus for the consumption of the masses," he says. "The Department of Justice can say we've extracted hundreds of millions of dollars in fines. But it's a game, and the reason it's a game is that it really doesn't change anything."

As if to confirm Rost's point, Elan's official statements seem to suggest the company got caught up in a minor legal quibble and emerged with hardly a scratch. "We are pleased to have reached this agreement, which concludes a longstanding legal matter on a product Elan divested over six years ago," counsel John Moriarty said. "Elan is committed to adhering to the highest ethical and legal standards."


Management of health care is one of America's greatest concerns. In California, new Gov. Jerry Brown's austere 2011-2012 budget included more than $41 billion to fund Medi-Cal payments for disabled and elderly residents. The federal HHS budget, which includes Medicare and Medicaid health insurance programs for the elderly and poor, is $880 billion.

Medicare fraud, meanwhile, is estimated to take up $60 billion per year of these funds. Much of that problem can be traced to Big Pharma, which can sometimes earn a quarter of its income selling medicine paid for by the government.

Drug company reps can boost sales radically by bribing doctors to prescribe medicines for conditions for which the FDA has not approved them. Laws prohibit off-label marketing to prevent snake-oil salesmen from poisoning the public. For example, the FDA specifically did not approve Zonegran for use in children because of severe potential side effects of heat exhaustion and dehydration. Nonetheless, according to a federal indictment, one sales rep went so far as to instruct physicians to administer the drug to a child by emptying a capsule into applesauce.

According to Chartock's complaint, between 2001 and 2003 Zonegran's sales increased 87 percent to more than $80 million "due in large part to" bribes and off-label marketing.

Medicare rules banish companies convicted of felony fraud. But that rarely happens, even in cases of multibillion-dollar fraud.

The reason is simple: Like Bear Stearns and AIG, pharmaceutical giants seem too big to fail. Felony convictions would require banning big drug companies that defraud the government. That would make certain types of medicine unavailable to Medicare patients. And given pharmaceutical companies' reliance on Medicare sales, banishment would drive companies out of business, eliminating thousands of jobs.

So instead of pursuing felony cases, companies get fines and wrist-slaps in the form of corporate integrity agreements. There's no drug industry equivalent to Martha Stewart, a famous cheating executive who was jailed as a warning to others.

Pfizer, a $146 billion company, entered one integrity agreement, committed more fraud, entered another agreement, committed fraud again, and entered another agreement.

"When deciding whether to exclude or debar any company, we have to ask, 'What is in the best interest of our program and our beneficiaries?'" Lew Morris, chief counsel to the Health and Human Services Inspector General, was quoted last year as saying. "We have decided that it is better to keep Pfizer in the program providing critical services and drugs."

In the case of Elan, the penalty included $100 million in criminal fines for promoting Zonegran as an off-label treatment for pain relief, psychiatric disorders, and migraines. The company pleaded guilty to a misdemeanor, rather than a felony, and thus won't be barred from selling medicine to federal programs. As for other pharmaceutical companies, fraud seems like just another manageable cost of doing business.

Patrick Burns, a spokesman for the Washington group Taxpayers Against Fraud, said the kid-glove policy is changing, if gradually. In November, the Justice Department announced it had indicted a former vice president of the British drug company GlaxoSmithKline on charges of making false statements and obstructing a federal investigation into illegal drug marketing.

More typical, however, are cases such as Elan's, which announced in November just as settlement negotiations were winding up that CEO Kelly Martin would be leaving — but not until 2012.

"Most of these corporate integrity agreements are not much better than birdcage lining," Burns says.

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Matt Smith

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