Testimony
Before the
House Oversight and Government Reform Committee
u.s. House of Representatives
"Allegations of Waste, Fraud and Abuse in
Pharmaceutical Pricing: Financial Impacts
on Federal Health Programs and the
Federal Taxpayer"
Testimony of Lewis Morris
Chief Counsel to the
Inspector General
February 9, 2007
10:00 a.m.
2154 Rayburn House Office Building
(//
~~+~~
'lli~dm~
Office of Inspector General
Department of Health and Human Services
Daniel R. Levinson, Inspector General Testimony of:
Lewis Morris
Chief Counsel to the Inspector General
Health and Human Services
U.S. Department of 
Good morning, Chairman Waxman, Ranking Member Davis, and distinguished members
of the Committee. I am Lewis Morris, Chief Counsel at the Department of Health and
Human Services' Offce of Inspector General (OIG). I appreciate the opportunity to
appear before you today to discuss health care fraud and abuse involving the
pharmaceutical industry.
fraud and abuse and conducted audits,
OIG has successfully pursued specific cases of 
inspections, and program evaluations to identify systemic vulnerabilities related to
prescription drug coverage under Federal health care programs. My testimony today wil
focus on the enforcement work that OIG and our law enforcement partners have
undertaken to combat fraud in the pharmaceutical industry. I will describe three
fraudulent and abusive schemes that OIG has identified: fraud in
categories of 
prescription drug pricing, fraud in prescription drug marketing, and fraud in the delivery
and dispensing of prescription drugs. I will conclude by presenting some of OIG's
strategies to address the problems identified.
The Medicare and Medicaid programs have paid too much for prescription drugs because
of fraudulent and abusive schemes targeted at Federal health care programs. Some of  this .
behavior increases health care program costs and can distort medical decisionmaking by
putting the financial interest of  the prescribing physician ahead of  the well-being of  the
patient. In other cases, unscrupulous providers exploit vulnerabilities in the
reimbursement systems, resulting in additional costs to taxpayers.
Prescription drugs play an increasingly critical role in health care. Consequently,
expenditures for drugs by the Federal health care programs, including Medicare and
Medicaid, are growing rapidly. Medicaid expenditures for prescription drugs in
more than four-fold increase over the $8.9 billion
2005 were estimated at $41 billion, a 
spent in 1994.1 Prior to 2006, Medicare covered a limited number of prescription drugs.
approximately
Even so, Medicare expenditures for prescription drugs increased from 
$1.4 billion in 1994 to $10 bilion in 2005. In 2006, the Medicare Part D drug benefit
prescription drugs. .
greatly expanded Medicare's coverage of 
Health Care Fraud Involving the Pharmaceutical Industry
Federal and State law enforcement agencies are devoting substantial resources to
investigating and prosecuting fraud schemes involving manufacturers and others in the
pharmaceutical industry. Working with our law enforcement partners, OIG has
1 Sources: National Pharmaceutical Council, Pharmaceutical Benefits Under State Medical Assistance
Programs and CMS, State Drug Utilization Data. -
2 Source: OIG analysis of data from Medicare's Part B Extract Summary System.
House Committee on Oversight and Government Reform
Hearing: February 9,2007
Page 1 participated in the investigation of pharmaceutical fraud cases that have resulted in more
than $4 billion in recoveries.3 Although the specifics of each case vary, the cases can be
genera::iy divided into three categories: 1) pricing schemes, 2) marketing schemes, and
3) drug delivery and dispensing schemes.
Fraud in Prescription Drug Pricing
Average Wholesale Price Manipulation
Priorto 2005, the Medicare Part B and Medicaid programs paid for prescription drugs
based on the manufacturer's "Average Wholesale Price" (A WP), as described below.
The Medicare program has now changed its reimbursement methodology, but many
States continue to use A WPs as the basis for Medicaid reimbursement for certain drugs.
their drugs and report
Generally, pharmaceutical manufacturers set an A WP for each of 
the A WPs to data collection agencies. Each State, in turn, obtains the A WP information
from the data collection agencies and uses it in setting Medicaid reimbursement for
prescription drugs. However, the A WP payment methodology is susceptible to abuse.
For example, if a manufacturer reports an inflated A WP, Medicaid reimbursement for the
drug will, in turn, be inflated. By reporting an A WP that far exceeds the price at which
the drug actually is sold to providers, including physicians, the manufacturer creates a
significant price differential between the provider's cost for the drug and the amount the
provider will receive in reimbursement for the drug from Medicaid. This price
differential is known as "the spread," and physicians who buy drugs administered to their
Medicaid patients can profit from it.
Some manufacturers have aggressively used an inflated price spread as a marketing tool
to gain market share for their products. Purposeful manipulation of the spread to induce
purchases of federally payable drugs implicates the criminal Federal anti-kickback statute
(discussed below). For example, a manufacturer manipulated a drug's A WP to create an
artificially high spread and then had its sales representatives show doctors reimbursement
comparison sheets that graphically demonstrated the profits the doctors would realize by
purchasing one product over another.
The Government has settled several cases involving price manipulation schemes of  the
sort I have described. These settlements illustrate how manufacturers have used the
the pharmaceutical market. For
spread to sell drugs in particularly competitive sectors of 
example, Glaxo Wellcome and SmithKline Beecham Corporation were competing with
each other in the market for anti-emetics, drugs that help control nausea in patients
receiving oncology and radiation treatments. According to the Government's
investigation, both companies reported fraudulently inflated A WPs and used the resulting
spreads to gain market share. The companies eventually merged, and in 2005,
GlaxoSmithKline settled a $149 million case with the United States in connection with
these drugs.
the ilegal pricing and marketing of 
3 This figure includes criminal and civil resolutions with pharmaceutical manufacturers, pharmacy benefit
managers, retail pharmacy chains, and institutional pharmacies since 1999.
House Committee on Oversight and Government Reform
Hearing: February.9,2007
Page 2 The Government also resolved criminal and civil cases against two other market
competitors who used an artificial A WP spread to promote their products to treat prostate
cancer. In 2001, TAP Pharmaceutical Products, Inc., pleaded guilty to criminal charges
and paid a total of $875 million to resolve an investigation relating to the marketing of
Lupron. In 2003, AstraZeneca Pharmaceuticals LP entered into a $355 million settlement
with the Government for similar conduct relating to its drug, Zoladex. Duringthe
the two companies had
investigation, OIG learned that the sales representatives of 
routinely called on the same urologists and employed a variety of  tactics, including
"marketing the spread," to persuade the physicians to prescribe their respective
continued to inflate their A WPs to create an
company's drug. Over time, the companies 
even more lucrative illicit spread for their drugs, and some physicians even switched their
patients back and forth between Lupron and Zoladex to profit from the artificially
inflated spreads. Moreover, the Government contends that the scheme enabled the
the physicians' extra profits on to the Federal health care
companies  to pass the cost of 
programs.
Fraud in the Medicaid Drug Rebate Program
Another area of pricing fraud involves the Medicaid drug rebate program. This program,
designed to reduce expenditures by the Medicaid program, mandates that drug
manufacturers provide Medicaid with certain rebates on drugs provided to Medicaid
patients. The amount of a rebate is determined by a statutorily defined rebate formula.
Manufacturers must report to CMS certain pricing information by drug, including the
"Average Manufacturer Price" and, for some drugs, the "Best Price." OIG cases have
focused primarily on abuses related to Best Price, which, subject to certain exceptions,
most discounts and rebates) at which a manufacturer
should be the lowest price (net of 
sells the drug. For many drugs, the lower a manufacturer's Best Price is, the higher that
manufacturer's potential rebate liability wil be.
Most discounts must be included in the Best Price calculation, and manufacturers
understand that providing a discount could increase the rebate owed to the Medicaid
program. Because the rebates are based on the total volume of the drug reimbursed by
the State, even a small per unit increase in the rebate can dramatically increase the
the total rebate owed to the State. To avoid this, some manufacturers have
amount of 
knowingly mischaracterized discounts by structuring them as educational grants, sham
data processing fees, or similar arrangements in an attempt to disguise their status as
discounts. The objective is always the same-the preferred customer gets the drug at a
deep discount and the manufacturer avoids additional rebate obligations to the State
Medicaid programs.
Two cases illustrate how pharmaceutical manufacturers have circumvented the Medicaid
drug rebate program. In the first case, according to the Government's investigation,
Warner-Lambert paid unrestricted grants to a managed care organization (MCO) in return
for favorable formulary treatment for its drug Lipitor. The grant, in effect, substituted for
the drug. However, Warner-Lambert did not include the value
a discount in the price of 
House Committee on Oversight and Government Reform
Hearing: February 9, 2007
Page 3 this grant when calculating its Best Price for Lipitor. In 2002, the United States
of 
entered into a $49 million settlement with Pfizer Inc., the company that acquired
Warner-Lambert, to resolve the case.
In the second case, the Schering-Plough Corporation allegedly provided financial
incentives to two MCOs after they threatened to remove Claritin from their drug
formularies, absent deeper discounts on the product. Schering-Plough chose not to lower
its price. Rather, it offered the MCOs an array of incentives, including a series of large
cash payments described as "data processing fees." Schering-Plough did not include
these incentives and "fees" in its calculation of  the Best Price for Claritin. In reality, the
investigation showed that the data furnished in exchange for the fees had no practical
value to Schering-Plough and were already required under the MCO's contract with the
manufacturer. According to the Government's investigation, the phantom data
processing fees simply substituted for a discount in the price of Claritin. In 2004, the
United States entered into a global settlement for almost $293 milion with
Schering-Plough relating to this scheme.
Impact of Medicaid Drug Rebate Fraud on the 340B Program
Errors or fraud in Medicaid drug rebate information also adversely affect the
340B program. The 340B program, which is  managed by the Department's Health
Resources and Services Administration (HRSA), provides for sales of outpatient drugs at
or below a specified maximum price to certain health care safety net providers
(340B entities) such as disproportionate share hospitals, federally qualified health centers,
and the Ryan White CARE Act's AIDS Drug Assistance Programs. HRSA estimates that
the nearly 12,000 340B entities wil spend $4 billion on outpatient drugs in FY 2007.
Although the 340B program differs fundamentally from Medicare and Medicaid in that it
does not entail the submission or direct payment of claims, the prices at which
340B entities purchase drugs are statutorily linked to the Medicaid drug rebate program.
Under the 340B program, participating drug manufacturers sign an agreement stipulating
that they will charge 340B entities at or below a maximum amount, known as the
340B "ceiling price." Ceiling prices are guaranteed whether the 340B entity purchases
drugs directly from a manufacturer or through a wholesaler. The ceiling price for each
drug is calculated using a statutorily defined formula that is based on the drug's Average
Manufacturer Price and the Medicaid rebate amount per unit. Thus, if a drug
manufacturer reports a Best Price that does not include all discounts for Medicaid rebate
purposes, both the rebate amount and the 340B ceiling price may be adversely
affected-the Medicaid program may receive smaller rebates, and the 340B entities may
pay too much for the drug.
In view of the connection between the Medicaid drug rebate program and the
340B program, the Government has resolved the 340B pricing fraud during settlement
negotiations in Medicaid drug rebate cases. In several instances, manufacturers
(including King Pharmaceuticals, Inc., Schering-Plough, Bayer Corporation, and
GlaxoSmithKline) have agreed to reimburse the 340B entities for what the Government
House Committee on Oversight and Government Reform
Hearing: February 9, 2007
Page 4 believes were overpayments that resulted from ilegal manipulation of the Medicaid drug
rebate data.
Fraud in the Marketing of  Drugs 
Ilegal Kickbacks
The Federal anti-kickback statute is a criminal prohibition against remuneration (in any
form, whether cash or in-kind, direct or indirect) made purposefully to induce or reward
Federal health care business. Marketing practices involving
the referral or generation of 
remunerative arrangements implicate the statute. Thus, sales practices that may be
common or longstanding in other business sectors are not necessarily acceptable or
lawful when Federal health care programs are involved. Ilegal marketing activities,
including the payment of kickbacks to prescribing physicians or the use of kickbacks to
promote drugs for unapproved uses, pose a risk to patients, as well as to the integrity of
unlawful kickback schemes may be subject
Federal health care programs. Perpetrators of 
to criminal, civil, and administrative sanctions.
The anti-kickback statute exists for a number of important reasons, two of  which are
particularly relevant in the context of the marketing and sale of prescription drugs.
Kickbacks potentially increase the costs to Federal programs because they encourage
overutilization and may encourage the prescribing of more expensive drugs when
clinically appropriate and cheaper options (such as generic drugs) may be equally
effective. Equally troubling, kickbacks can compromise the independence of medical
the patient. .
the welfare of
decisionmaking by putting the financial interests of  the physician ahead of 
In OIG's experience, kickbacks offered to prescribing physicians by pharmaceutical
manufacturers take a variety of forms, ranging from free samples for which the physician
bils the programs to all-expense-paid trips and sham consulting agreements. For
example, the TAP and AstraZeneca cases discussed previously involved several different
the companies' prostate cancer drugs.
kickback schemes designed to increase sales of 
One scheme involved manipulating A WPs and "marketing the spread." The artificially
inflated profits realized by the physicians were, in the Government's view, unlawful
the companies' products.
kickbacks to induce the purchase of 
second scheme, TAP and AstraZeneca sales representatives gave physicians free
Under a 
samples of their prostate cancer drugs in return for ordering their products. Although a
for use by his or her
drug manufacturer may lawfully give a physician drug samples 
patients, the physician may not sell the samples. If  the samples  are sold, the profits
realized are remuneration that may implicate the anti-kickback statute. The sales
representatives knew and expected that the physicians would bil Medicare and other
Federal health care programs for the samples and be reimbursed between $400 and
the drug. The consequence for patients was harmful as welL.
$500 for each unit of 
Senior citizens suffering from prostate cancer paid their physicians a 20 percent Medicare
House Committee on Oversight and Government Reform
Hearing: February 9, 2007
Page 5 copayment (approximately $100) for drug samples that should have been provided to
them for free.
OIG has found that some drug companies, aided by aggressive sales forces intent on
meeting their sales goals, can be very creative in finding ways to induce physicians to
the $704 milion global settlement with
order their products. For example, one aspect of 
Serono, Inc. involved a kickback in the form of an all-expenses-paid trip for a select
high-prescribing physicians (and their guests) to a conference in Cannes, France.
group of 
concerted sales campaign by the Serono sales force to generate
This trip was part of a 
$6 million in sales of its AIDS wasting drug in 6 days from those same physicians.
The $430 milion settlement with Pfizer Inc., demonstrates another common form of
kickback: the sham consulting agreement. In that case, OIG's investigation showed that
substantial fees for attending expensive dinners or conferences,
physicians received 
purportedly for serving as "consultants." The physicians also participated in promotional
events, including lavish weekends at resorts and events held at the 1996 Atlanta
Olympics and in Hawaii. The Government's investigation found that, in reality, the
physicians provided few or no significant consulting services.
OffLabel Promotion
fraud involves improper "off-label promotion." Off~label
Another significant area of 
promotion is the promotion of a product for a use not approved by the Food and Drug
Administration (FDA). FDA approves drugs for only those particular uses proven to be
safe and effective and sometimes approves a product for only a single, narrow use.
While physicians may lawfully prescribe a drug for an off-label use, manufacturers are
prohibited from promoting a drug for uses other than FDA-approved uses.
OIG has identified many instances in which promotional and marketing efforts have gone
far beyond the approved use. By promoting their products for non-FDA-approved uses,
manufacturers may cause the submission of false or fraudulent claims to Medicare,
Medicaid, and other Federal health care programs. Moreover, many of  these off-label
marketing schemes also involve illegal kickbacks to induce sales for non-FDA-approved
uses.
OIG's investigations suggest that some pharmaceutical manufacturers may be engaged in
. a wide range of abusive practices that provide false and misleading information about the
safety or effcacy of products for non-approved uses. These practices include:
.
using so-called "medical science liaisons" that present themselves (often falsely)
as scientific experts in a particular disease to promote off-label uses;
.
sponsoring purportedly objective "independent" medical education events
designed to discuss off-label uses. In fact, the manufacturer provides extensive
subjective input about the topics, speakers, content, and participants of  these
events; and
House Committee on Oversight and Government Reform
Hearing: February 9, 2007
Page 6 .
proffering ghost-written articles about off-label uses. In these schemes,
manufacturers pay physicians to "write" advocacy articles about off-label uses of
products that are, in fact, written by the manufacturer. This practice is
particularly insidious, because the publication of such articles in certain medical
compendia may be sufficient to qualify the off-label use for reimbursement under
some State Medicaid programs. .
Financial harm to Medicare and Medicaid is only one problem caused by off-label
promotion. Off-label promotion may lead physicians to prescribe a product for a
non-approved use based on false, misleading, or erroneous information to the medical
their patients. In addition, off-label promotion fundamentally circumvents
detriment of 
the FDA drug approval process, on which Americans rely to evaluate the safety and
effcacy of pharmaceutical products.
Fraud in the Delivery of Prescription Drugs
In addition to investigating fraud by pharmaceutical manufacturers, OIG has investigated
and resolved cases involving pharmacies and pharmacy benefit managers (PBMs). These
schemes typically involve fraud and abuse in the delivery of drugs or other operational
aspects of the programs.
For example, OIG has investigated a number of cases involving retail pharmacy chains
that allegedly billed Medicaid for prescription drugs that were not provided to
beneficiaries. Since the late 1990s, the United States has entered into a series of
settlements with national retail pharmacy chains (including CVS, Eckerd, and Rite-Aid)
relating to claims submitted by these pharmacies to Medicaid for alleged "short-filled"
prescriptions. Based on our investigations, the Government found that when pharmacies
the medication prescribed, they nonetheless
were unable to provide the full amount of 
the prescription. In total, this short-fill fraud
billed Medicaid for the entire amount of 
resulted in the collection of more than $30 milion in settlements with these pharmacy
chains.
OIG and its law enforcement partners also have pursued cases in which pharmacies
switched the drug prescribed to the patient to exploit Medicaid reimbursement rules. For
instance, in November 2006, the Government entered into a $49.5 milion settlement with
pharmacy that exclusively serves nursing home
Omnicare, Inc., a nationwide institutional 
patients. The investigation found that Omnicare switched generic Zantac tablets with
capsules to avoid a Federal payment upper limit set by CMS and the "maximum
allowable cost" set by State Medicaid programs for the tablets. By these and other drug
switches, Omnicare gained additional Federal and State dollars to which it was not
otherwise entitled.
PBMs undertake several functions in- the provision of prescription drug benefits. These
functions may include price negotiations with drug manufacturers, the development of
formularies, and the provision of mail order pharmacy services to members of health
House Committee on Oversight and Government Reform
Hearing: February 9, 2007
Page 7 plans. The Government's recent $155 milion settlement with the Medco Health
Solutions, Inc., a PBM, involved a range of alleged improper conduct that harmed
Medicare and other Federal programs, including the Federal Employee Health Benefits
Program. The Government's investigation found that Medco had solicited and received
kickbacks from manufacturers to induce Medco to promote their products submitted false
claims to health plans for services allegedly provided by Medco's mail order pharmacy
business, and offered and paid kickbacks to health plans to induce them to enter contracts
with Medco.
These cases serve as cautionary tales about the activities of pharmacies, PBMs, and
others who playa role in the delivery of drug benefits and who have incentives to exploit
the reimbursement rules at the expense of the public and program beneficiaries.
OIG Strategies To Promote Integrity
Federal and State law enforcement agencies continue to investigate many fraud schemes
similar to those outlined in my testimony. Criminal and civil investigations are resource
intensive, time consuming, and require extensive coordination between Federal and State
agencies. Furthermore, the parties engaged in these frauds are adept at modifying
schemes in response to Government efforts to strengthen program integrity. The large
Federal expenditures for prescription drugs will continue to attract
and growing size of 
those intent on defrauding Medicare and Medicaid. Accordingly, we intend to enhance
our existing fraud prevention and detection efforts to meet new challenges as they arise.
GIG is increasingly using its administrative authorities to sanction individuals engaged in
fraudulent and abusive practices. Administrative sanctions complement criminal and
civil enforcement, providing an additional avenue for Government enforcement. OIG has
the Federal health care programs
the authority to exclude individuals and entities from 
and to impose civil monetary penalties for a range of abusive practices, including
kickbacks and false claims.
For example, GIG has pursued administrative cases involving kickbacks to physicians,
including those involved in the TAP and AstraZeneca schemes described previously. A
physician who accepts a kickback from a pharmaceutical manufacturer in return for
prescribing its drugs to Medicare patients is as culpable as the drug company that
provided the kickback. In some cases, the physician has initiated the crime by
demanding the kickback as a condition of prescribing a drug to patients.
In the past, criminal prosecutors targeted their limited resources on companies paying
kickbacks and generally did not focus on these physicians. This may have created the
misimpression by some physicians that they can demand kickbacks from drug companies
with impunity. However, GIG has stepped into this breach and is using its authority to
impose program exclusion and significant monetary penalties to target these kickback
recipients. Hopefully, GIG administrative enforcement also will prompt physicians to
think twice before accepting kickbacks from pharmaceutical companies.
House Committee on Oversight and Government Reform
Hearing: February 9, 2007
Page 8 not adequately address the problem. For this
"Pay-and-chase" enforcement alone will 
reason, OIG remains fully committed to promoting the prevention of  fraud and abuse
through voluntary compliance efforts by the regulated community. We are committed to
working with industry stakeholders to ensure the integrity of the Federal health care
programs. OIG cannot do it alone.
To this end, OIG issued a "Compliance Program Guidance for Pharmaceutical
Manufacturers" (CPG), one in a series of compliance program guidances that
OIG developed for the various health care sectors. The CPG provides detailed
information for drug manufacturers on establishing and operating an effective internal
compliance program and identifying fraud and abuse risk areas. The guidance describes
the relevant fraud and abuse authorities and the major risk areas under these laws. It also
offers concrete suggestions on ways manufacturers can mitigate their risk. The risk areas
include, for example:
.
reporting data used to establish or determine Government reimbursement,
.
discounts,
.
product support services,
.
educational grants,
.
research funding,
.
relationships with formulary committees,
. payments to PBMs, -
.
formulary placement payments,
.
Average Wholesale Price,
.
"switching" arrangements,
.
consulting and advisory payments,
.
business courtesies and other gratuities,
.
relationships with sales agents, and
.
drug samples.
Although the guidance is targeted at manufacturers, much of its content pertains to
PBMs, customers, prescribers, and other parties involved in the provision of prescription
drugs. It is important guidance for participants in the new Part D drug benefit. OIG also
encourages health care entities who uncover violations of program requirements to use
OIG's Self-Disclosure Protocol to resolve their potential  liabilities. The Protocol has
proven a successful means for OIG to collaborate with health care companies in resolving
issues that are identified as part of an effective compliance program.
In addition, OIG issues advisory opinions, fraud alerts, and advisory bulletins on issues of
concern to the pharmaceutical industry and other health care entities as part of its overall
strategy to encourage compliance. These guidance products, including the CPG, are
available to the public on OIG's web site at www.oig.hhs.gov. OIG supplements these
guidance efforts with frequent outreach efforts to the regulated industry, its counsel, and
the public.
House Committee on Oversight and Government Reform
Hearing: February 9, 2007
Page 9 Conclusion
As I have testified, the Medicare and Medicaid programs are vulnerable to fraud and
abuse through a number of schemes related to prescription drug pricing, marketing, and
delivery. There are no simple solutions to these problems. Those intent on gaming
Federal health care programs are adept at modifying their schemes in response to changes
in the reimbursement systems and Government enforcement tactics. Consequently,
Federal and State agencies must continue to develop proactive enforcement strategies.
Of equal importance, pharmaceutical manufacturers and other participants in the health
care system should be encouraged to embrace policies and procedures that promote
compliance with Federal program requirements.
OIG shares the Committee's commitment to protect the integrity of  Federal health care
programs and the health and safety of  beneficiaries. We wil continue to fight fraud in
Medicare and Medicaid and promote compliance by the pharmaceutical industry. We
our enforcement and oversight experience to bear as we work to protect
will also bring 
the Medicare Part D drug benefit. As set forth in more detail in the OIG's
the integrity of 
2007 Work Plan, we are undertaking an ambitious effort to monitor the integrity and
effective operation of this benefit. -
This concludes my testimony. I would be pleased to answer your questions.
House Committee on Oversight and Government Reform
Hearing: February 9, 2007
Page 10