To The Point

Health care fraud includes biggest names in drug industry

Are government-imposed penalties just part of drug companies' "cost of doing business"?

By Michael J. Moody, MBA, ARM

Recent press releases coming out of the Department of Justice (DOJ) and the Food and Drug Administration (FDA) have been announcing the settlement of the largest single case of health fraud in U.S. history. The $3 billion DOJ/FDA settlement culminates an investigation that stretched over five years.

Who are the perpetrators of this largest ever health care fraud? Could it be a group of disbarred lawyers, or unlicensed doctors preying on the elderly? Who could have committed such a heinous crime? The organization that agreed to plead guilty to misdemeanor charges associated with the largest case of health care fraud in U.S. history was GlaxoSmithKline P.L.C. (Glaxo). That's right, one of the world's largest pharmaceutical and health care companies. The practices that this case pertains to occurred between January 1997 and 2004.

Fraudulent practices

Few people are fully aware of just how devastating health care fraud has become. U.S. government officials have indicated that, in total, our national health care costs have been running between $2.7 trillion and $3 trillion annually. Typically, this figure includes an inflationary trend number that outpaces general inflation by a significant percentage. While this trend number primarily reflects higher costs of health care goods and services, it is not the only reason for the increases. According to the FBI, health care fraud is another reason for these higher costs, and it is a growing epidemic that currently exceeds $80 billion annually. By any measure, this number adds significantly to the nation's health care costs.

A review of the court records regarding Glaxo's $3 billion settlement reveals some surprising and troubling trends. The allegations against Glaxo involve several important areas. According to court records, the settlement involves $1 billion in criminal fines and $2 billion in civil fines in connection with the sale of Paxil, Wellbutrin and Avandia products. The charges against Glaxo include, but are not limited to:

• Routinely bribed doctors with luxury vacations and paid speaking gigs

• Fabricated drug safety data

• Defrauded Medicare and Medicaid out of billions

• Deceived regulators about the effectiveness of its drugs

• Relied on deceptive sales practices to "earn" billions of dollars selling potentially dangerous drugs to unsuspecting consumers and medical patients

While there are any number of aspects to this case that can be called out for further attention, one of the most alarming parts of the case is the fact that U.S. sales representatives of GlaxoSmithKline—which incidentally is a British multinational pharmaceutical, vaccines, biologics and consumer health care company that prides itself on the slogan "Do more, feel better, live longer"—were encouraged to "mis-sell" drugs to doctors.

According to court records, the doctors who helped promote the unapproved drugs were treated to "lavish hospitality—including trips to resorts in Bermuda, Jamaica and California—and kickbacks to those who agreed to write extra prescriptions." All this was part of the pharmaceutical giant's paying in compensation for what the government calls "the company's illegal promotional practices and payment to physicians." Painting a more scandalous picture of Glaxo's deplorable antics, the government provides details about how these illegal promotional practices would involve the company flying psychiatrists and their partners to five-star hotels to attend eight lavish three-day events put on by Glaxo to promote the drugs to doctors for "unapproved use."

Another especially egregious aspect was that Glaxo illegally promoted the drugs Paxil and Wellbutrin for uses that "had not been approved by the FDA." The unapproved uses of these adult anti-depressant drugs included prescribing them to treat children with depression, as well as treating patients with obesity, anxiety, addiction and ADHD. Glaxo also paid for articles about these unapproved drugs to be published in medical journals, and "independent" doctors were recruited by Glaxo to promote the treatments.

The tip of the iceberg

While the current focus is directed at Glaxo, it is not the only drug manufacturer to have distinguished itself for inappropriate actions. Drug and vaccine manufacturer Merck was caught red-handed by two of its own scientists faking vaccine efficacy data by spiking blood samples with animal antibodies. Pfizer, meanwhile, has been sued by the nation's pharmacy retailers for what is alleged to be an "overarching anticompetitive scheme" to keep generic cholesterol drugs off the market and thereby boost its own profits.

Merck recently paid a settlement of $950 million in relation to its drug Vioxx; Johnson & Johnson added $600 million to its settlement reserves for dealing with allegations that it offered kickbacks to nursing homes to market one of its drugs falsely; Eli Lilly has paid a settlement amount of $1.4 billion in relation to its drug Zyprexa; and Novartis had to pay $99 million in settlement money to its sales reps and staff.

While Glaxo's $3 billion settlement may sound like a lot of money, the company will be able to pay it out of current revenues. One concern that many for-profit organizations have in situations similar to this is an adverse reaction from the investing community. However, for the most part, Glaxo's stock price remained near its 52-week high following the settlement. Some on Wall Street indicated that they had expected a much higher settlement, and $3 billion was no big deal. The same is true of the other pharmaceutical companies that were involved with earlier settlements. Make no mistake. The investment community knows all too well that this is the most profitable industry in the world.

Conclusion

Without question, the $3 billion settlement with Glaxo was a win for the federal government. They did their job and the settlement is proof that the system works. But did tireless investigation by the government uncover this gross disregard for the public good? No, in fact it was the direct result of four Glaxo employees who tipped off government investigators about the improper activities at their company. Would the government have found this on its own? If so, how much longer would it have taken? No one knows the answer to that question.

At the end of the day, what real effect has the settlement had on Glaxo? Among other things:

• Glaxo agreed to pay $3 billion in fines for improperly pushing antidepressants Paxil and Wellbutrin, and diabetes drug Avandia, for many years. However, it's a pittance to Glaxo, which had $44 billion in sales in 2011 alone.

• The settlement is billed as "the largest health care fraud settlement in U.S. history." But Glaxo had already saved up to pay the fine. The settlement will barely affect the bottom line, and the news of the settlement actually sent the stock price up slightly on the day of the announcement.

• Glaxo pleaded guilty to health fraud but no one is going to prison. No executive was even charged.

The emergence of this extraordinary evidence of bribery, scientific fraud, lying to regulators and monopolistic practices that harm consumers should be an eye opener to all consumers as well as health care providers. However, since this is such a profitable business, too many companies are willing to admit to criminal charges and pay fines and penalties because, to them, it is just a cost of doing business. As long as this is the case, the industry is, in effect, tacitly encouraged to continue its illegal activities.

Bottom line, it appears that until more meaningful penalties—including the prospect of prison time for responsible company management—become commonplace, pharmaceutical firms will continue to defraud the government and put patients' lives in danger.

The author

Michael J. Moody, MBA, ARM, retired as the managing director of Strategic Risk Financing, Inc. (SuRF), a firm that had been established to advance the practice of enterprise risk management. As a regular columnist, he continues to actively promote the concept of enterprise risk management by providing current, objective information about the concept, the structures being used, and the players involved.