Drugmakers' Payments Draw Heat
Following its settlement of kickback allegations with Omnicare,
the Justice Dept. continues to probe Johnson & Johnson

Business Week | November 4, 2009
By Harris Meyer

A $112 million settlement involving alleged drug kickbacks that the Justice Dept. announced with the nation's largest nursing home pharmacy and a generic drug manufacturer on Nov. 3 is part of a wide-ranging investigation of suspected Medicaid fraud by the pharmaceutical industry. Critics say the continuing probe, which involves Johnson & Johnson and other major drugmakers, highlights what they describe as an industry practice of paying money to outfits that provide drugs to consumers, in return for preferential treatment.

Because those alleged payoffs have the effect of compromising patient care and driving up costs for government and private health insurers, cases like the settlement unsealed with Omnicare in Covington, Ky., and IVAX Pharmaceuticals in Weston, Fla., could bolster opposition to the controversial deal the Obama Administration reached with the pharmaceutical industry to win its support for health-reform legislation. Many Democrats say the Administration should have asked for much bigger cost savings from drugmakers.

Under Tuesday's settlement, Omnicare will pay $98 million plus interest to the federal government and a number of state Medicaid programs to settle allegations that it participated in kickback schemes with IVAX, J&J, and two nursing home chains. IVAX, a subsidiary of Israel's Teva Pharmaceutical Industries, agreed to pay $14 million plus interest.

Omnicare and IVAX entered "corporate integrity agreements" to establish new training and policies to prevent future problems. Neither company admitted any wrongdoing. An Omnicare spokesman said the company agreed to settle the matter "to avoid expensive and time-consuming litigation" and "to focus on its mission of providing high-quality pharmaceutical care for the frail elderly." In a written statement, IVAX denied any liability relating to the Omnicare contract, which it said was executed years before the company was acquired by Teva.

The investigation of J&J is "ongoing," said acting U.S. Attorney Mike Loucks in Boston, whose office spearheaded the Omnicare probe. Asked whether such alleged kickback schemes are widespread, Loucks, a veteran health-care fraud investigator, said: "Almost invariably if we see one practice in one company, it's happening at other companies." J&J declined to comment directly, saying only that it received a subpoena in 2005 from the government seeking documents related to sales of eight drugs to Omnicare, and that several employees have been subpoenaed to testify before a grand jury.

Patrick Burns, a spokesman for Taxpayers Against Fraud, a nonprofit Washington group that promotes whistleblower suits, says the Justice Dept. is backed up with pharmaceutical fraud cases. Since drugmakers offer so many similar products, he contends, they rely on kickbacks to give their products a market edge. "In the pharmaceutical industry, the business isn't selling the best drug, it's the best scheme of kickbacks to the prescriber. Omnicare is just one of their sales points."

Tony West, assistant attorney general in the Justice Dept.'s civil division, explained the importance of anti-kickback enforcement. "Patients have a right to depend on the integrity of the medical advice they're getting," he said. "When kickbacks are involved, the medical judgment of the provider is corrupted."

The latest cases arose from several whistleblower complaints. One whistleblower was David M. Kammerer, who served as Omnicare's director of Medicaid reimbursement in 2000-02.

Omnicare is a publicly traded pharmacy benefit manager for long-term care facilities that operates in 47 states, the District of Columbia, and Canada. It had revenues of $6.3 billion in 2008.

According to the settlement, Omnicare allegedly received $8 million in payments from IVAX in 2000-04 to buy $50 million in generic drugs and recommend that physicians prescribe them to their nursing home patients. Omnicare entered the contract even though its outside counsel repeatedly warned it might violate the federal anti-kickback law, the government alleged in its complaint, filed in March. Omnicare also took payments from New Brunswick (N.J.)-based J&J from 1999 to 2004 to aggressively persuade doctors to prescribe Risperdal, an anti-psychotic drug, and discourage use of alternative medications, according to the settlement.

In addition, Omnicare allegedly paid $50 million to nursing home chains Mariner Health Care and SavaSeniorCare in 2004 to keep referring their Medicaid and Medicare patients to Omnicare for pharmacy services. According to the government's complaint, Omnicare again ignored its outside counsel's advice that the payment was illegal. The government is proceeding with its case against Mariner and SavaSeniorCare. In a written statement, SavaSeniorCare said the government's allegations involved a transaction that occurred before the company started operations and before its current management team was in place. Mariner did respond to requests for comment.

The settlement also said that in 2005-08, Omnicare gave nursing homes discounts on pharmacy consultant services to persuade the facilities to use the company's other, more lucrative services. Nursing homes are required by federal law to have a consulting pharmacist review each resident's drug regiment monthly.

This isn't the first time Omnicare has had to settle civil fraud complaints filed by the government. In 2006, Omnicare agreed to pay $102 million to settle Medicaid fraud cases in 43 states, without admitting wrongdoing, including a $52.5 million settlement with Michigan. One complaint accused Omnicare of switching two drugs from tablet to capsule form to boost Medicaid payments. Omnicare had to enter a five-year corporate integrity agreement.

Last December, the government filed a False Claims Act complaint along with Kammerer in federal court in Boston naming Omnicare and a number of large drug manufacturers as defendants. On Tuesday, the government gave notice that it declined to intervene in the whistleblower case, which names Abbott, Eli Lilly, Bayer, GlaxoSmithKline, Hoffman-La Roche, Merck, Pfizer, and other big drugmakers. That complaint alleges that for at least eight years Omnicare executives pressured their pharmacy staffers around the country to switch nursing home patients to particular brand-name drugs in return for rebates from the drugmakers. According to the complaint, Omnicare staffers dispensed the drugs even when the patients' physicians had prescribed other drugs; the physicians were not notified of the switches or were given misleading information about the costs and benefits of the alternative drug.

Some observers say paying kickbacks of various types to sell drugs is endemic in the pharmaceutical industry. Brian Smith, president of Cincinnati's Veritas, a pharmacy contract manager for nursing homes, said that when he entered the business in 2002, it was well-known that pharmacists consulting for nursing homes received payments from wholesalers and manufacturers to boost sales of particular drugs. "I thought it was just the industry standard," he said.

The Office of Inspector General of the Health & Human Services Dept. has the authority to bar health-care companies from participating in the Medicaid, Medicare, and other federal health programs as a penalty for violating anti-fraud laws. That's a severe sanction given the huge size of those programs. The settlements with Omnicare and IVAX left open the possibility of exclusion.

Some experts say Omnicare should be barred as a repeat offender, to send a strong message to other pharmaceutical industry players that fraud will no longer be tolerated. "If the government were really serious, they'd give Omnicare the death sentence," said Erik Gordon, a business professor at the University of Michigan who follows the pharmaceutical industry. "Then all the other players would say this isn't just the cost of doing business, this is a bet-the-company thing."

West declined to comment on whether the Justice Dept. will recommended the exclusion of the two companies, saying only that his office works closely with the OIG's office on appropriate penalties.

Burns, with Taxpayers Against Fraud, said the government has been hesitant to exclude health-care companies for fraud, fearing it will be seen as overzealous. But he believes that's the wrong attitude. "Doing business with the U.S. government is a privilege, not a right," he said. "I think Omnicare has abused the privilege."

Harris Meyer is a freelance writer in Yakima, Wash.