Publications

Largest Health Care Fraud Settlement Ever and Related Investigation

TAP Pharmaceutical Products Inc.’s $875 Million Settlement

TAP Pharmaceutical Products Inc. (“TAP”), a major pharmaceutical manufacturer that is a joint venture between Abbott Laboratories and Takeda Chemical Industries, Ltd., agreed on October 3, 2001 to pay $875 million to settle criminal charges and civil liabilities with regard to its pricing and marketing of the drug Lupron. Lupron is typically used to treat prostate cancer. Among the important components of the global agreement with the United States Department of Justice are:

1. Criminal Fine. TAP is to pay a $290 million criminal fine, the largest criminal fine ever in a health care fraud case, and plea of guilty to the charge of conspiring to violate the Prescription Drug Marketing Act (“PDMA”), 21 U.S.C. §§ 331(t) and 333(b). TAP admitted that it provided free samples of Lupron to physicians, knowing that those physicians would seek and receive reimbursement for the samples. The plea agreement specifies that the parties estimate that the loss to the United States from TAP’s criminal conduct was approximately $145 million.

2. Civil Settlement. TAP is to pay approximately $560 million to the United States and $25.5 million to the fifty states and the District of Columbia to settle federal civil False Claims Act (“FCA”) charges, 31 U.S.C. §§ 3729-3733. Lupron, unlike most drugs, is reimbursed in part by governmental programs including Medicare and Medicaid, as it must be injected under the supervision of a physician.

The civil settlement agreement provides that, other than the admissions TAP made in connection with its guilty plea in the criminal case, TAP denies the remaining allegations of the United States.

Among the conduct that the United States alleged gave rise to such liability was TAP’s knowing provision of various things of value to certain physicians and health maintenance organizations in order to induce them to order Lupron.

In addition, the United States alleged that TAP knowingly offered illegal remuneration to physicians by marketing TAP’s “Return to Practice” income. This income, the United States alleged, represented the spread between a TAP inflated Average Wholesale Price, used by Medicare and others to reimburse providers for certain drugs such as Lupron, and a discounted price that TAP actually charged providers for the drug.

The United States also alleged that TAP knowingly misreported and underpaid monies that it owed to the states under the federal Medicaid Rebate Program, 42 U.S.C. § 1396r-8. The government contended that TAP was generally required to rebate to each state the difference between the Average Manufacturer Price and its “Best Price” as defined by 42 U.S.C. §§ 1396r-8(k)(1) and 1396r-8(c)(1)(C). TAP, the government alleges, underpaid the states by miscalculating its “Best Price” by failing to include concessions it provided in sales of Lupron, including, for example, volume discounts and rebates.

3. Whistleblower Recovery. Whistleblowers will share approximately $95 million of the civil FCA settlement by whistleblowers, who, under the FCA, were entitled to receive a portion of the amount recovered by the government. It has been reported that one of the whistleblowers was a former TAP vice president of sales who quit his job at TAP because of his concerns surrounding the alleged illegal marketing conduct. He will receive nearly $78 million as a result of the federal settlement.

In addition, a doctor and his health maintenance organization will collectively receive around $17 million. The government stated that its investigation began after the doctor reported to law enforcement authorities that two of the indicted TAP employees offered to provide him an educational grant if he would reverse a decision that the HMO would no longer, absent special circumstances, reimburse physicians for the prescription of Lupron.

4. Corporate Integrity Agreement. TAP has agreed with the Department of Health and Human Services to comply with a detailed corporate integrity agreement to be in effect for seven years that is designed to promote compliance with federal health programs including Medicare and Medicaid. Among the significant components of the agreement are required training of TAP’s sales and marketing staff, as well as changes in TAP’s reporting of pricing information so as to accurately reflect prices at which actual purchasers buy government reimbursed products.

Seven Individuals Face Charges and Others Have Already Pled Guilty in Investigation

In addition to announcing the settlement with TAP, a federal grand jury indictment was also unsealed on October 12, 2001 related to the investigation. The indictment charged one physician and six TAP employees with various health care fraud crimes. Included in the indictment were charges against the TAP defendants of conspiracy to pay kickbacks to doctors and other customers in violation of the Anti-Kickback statute, 42 U.S.C. § 1320a-7b, conspiracy to defraud state Medicaid programs in violation of TAP’s obligation to sell products at its best price, and conspiracy to violate the PDMA by causing free samples to be illegally billed. The indictment also charges that one of the TAP defendants provided illegal remuneration, in the form of debt forgiveness, free samples, and educational grants, to health care providers in violation of the Anti-Kickback statute so as to induce them to order Lupron. One physician was charged with the illegal selling of samples of Lupron to patients in violation of 18 U.S.C. § 333(b)(1)(B).

Prior to this latest indictment, four other physicians pled guilty in this investigation. Three of the doctors pled guilty to conspiring to bill for free samples, and the fourth pled guilty to conspiring to violate the Anti-Kickback statute for demanding to receive free samples in exchange for switching patients to Lupron.

In a related investigation, two Florida doctors have been convicted of criminal charges for their part in a black market Lupron selling operation. The doctors were charged by the United States Attorney for Connecticut with ordering more of the drug than they required for their practices and then selling the drug at a profit to other doctors. Profits were made because of differences in the way TAP priced Lupron in different states.

The Case Reflects Important Issues For Pharmaceutical Companies As Well As All Health Care Entities That Have Relationships With Such Companies

It is clear that the impact of this major case is going to be felt by, and far beyond, the pharmaceutical industry. All health care entities should be aware of the issues raised by the case and the potential impact on their businesses.

1. Increased Scrutiny. There is no doubt that the sales, marketing, and pricing practices of pharmaceutical companies are facing increasing scrutiny by various governmental entities. The case reveals that this focus will involve all levels of production and distribution, including the setting of reimbursement rates, distribution contracts between and among manufacturers, wholesalers and providers, and prescription drug marketing practices.

As the United States Attorney for the District of Massachusetts, Michael Sullivan, noted, “[t]he payment by TAP of nearly $900 million including the highest criminal fine ever imposed on a health care company, and the indictment of the six TAP employees sends a very strong signal to the pharmaceutical industry that it best police its employees’ conduct and deal strongly with those who would gain sales at the expense of the health care programs for the poor and elderly and the persons insured by those programs.”

2. Huge Dollar Recovery. The sheer size of the case ensures that there will be more whistleblowers and civil litigants seeking to exploit this intensified investigative effort. In addition to the tremendous recoveries the whistleblowers in this case will receive, TAP is now faced with putative class action civil lawsuits that are making use of the information gathered in the governmental investigation.

3. Compliance Plans. The investigation exemplifies the need for many in the health care industry, including pharmaceutical manufacturers, health care providers, and health maintenance organizations, to be keenly aware of the various legal rules governing the distribution of pharmaceuticals. In this regard, such entities should have a carefully designed compliance program in place or risk investigation and prosecution by governmental authorities and whistleblowers, as well as exposure from private litigants seeking damages for alleged wrongdoing.

4. Proactive Steps. Likewise, such entities should be aware that the new focus on this particular form of health care crime may present opportunities to recover fraudulent gains from those acting in violation of governing law. Whistleblower statutes, private litigation, and restitution stemming from governmental actions all present methods by which defrauded entities may be able to recoup such losses.

This document is intended as an informational reminder and does not constitute legal advice. If you have any questions or would like to discuss a particular situation, you should contact your usual W&D attorney or one of us. Our phone numbers and e-mail addresses are:

David B. Fein – 203-363-7603 or dfein@wiggin.com

Gates Garrity-Rokous – 203-498-4310 or ggarrity_rokous@wiggin.com

Dylan S. Calsyn – 203-498-4506 or dcalsyn@wiggin.com