Prescription for Peril

Executive summary

America faces an explosive epidemic involving the illegal use of legal drugs, usually highly addictive painkillers. The crime wave is called drug diversion. It involves the abuse, and illegal obtaining and resale of prescription drugs on the black market.

Prescription drug diversion is one of the defining drug crimes in America today. It has few equals for sheer size, speed of growth, resistance to deterrence, harm to people from so many strata of society, and large costs to insurers. Overdoses, deaths and injuries continue growing at an alarming rate. In fact, more than 20 million Americans-nearly 7 percent of the population-will abuse prescription drugs in 2007, based on the National Survey on Drug Use and Health. Drug diversion's alarming spread over the last five years is well-chronicled. This white paper breaks new ground by revealing a major unexplored aspect:

Insurance fraud is the main financier and enabler of drug diversion. Even so, few health insurers understand the pivotal role insurance fraud plays in a diversion epidemic that costs insurers up to $72.5 billion a year.

More specifically:

• Swindlers and drug abusers obtain the bulk of their illicit prescription narcotics through fraudulent insurance claims for bogus prescriptions, treating phantom injuries and other illegal deceptions;

• Drug diversion drains health insurers of up to $72.5 billion a year, including up to $24.9 billion annually for private insurers. The losses include insurance schemes, plus the larger hidden costs of treating patients who develop serious medical problems from abusing the addictive narcotics they obtained through the swindles;

• Some health insurers are responding decisively, but far too many don't know if they even have a drug-diversion problem, let alone much it costs them annually. Drug diversion simply hasn't registered on most insurer radar screens as a serious fraud problem, financial drain or deadly threat to their plan members. Insurers generally are ill-prepared to stanch the large flow of bogus claims that allow drug diversion to flourish; and

• Insurers are potentially vulnerable to enormous liability lawsuits for failing to reasonably prevent fraud schemes that kill and injure people addicted by diversion schemes. Drug manufacturers and pharmacists already face such lawsuits. Insurers could be next.

• This report reviews the vast dimensions of America's drug-diversion epidemic. It also explores the large role that insurance and insurance fraud play. Finally, it reveals practical solutions for combating this troubling problem. At bottom, loosening the grip of drug diversion will require closer cooperation by the insurance, drug, medical and other industries.

The perfect storm

The nation's drug-diversion epidemic has spread rapidly over the last 10 to 15 years, with gathering speed in recent years. Among the causes:

• Widespread underwriting of prescription drugs by private and public insurers. Consumers now pay less than 20 percent of the nation's $230-billion drug bill. This compares with 56 percent in 1990;

• Explosion of prescribing and consuming legal narcotics and controlled drugs. The U.S. population grew 13 percent between 1992 and 2002, but prescriptions for controlled drugs rose 154 percent;

• Overdue recognition of pain as a medical condition, and emergence of pain management as a needed and legitimate medical discipline. However, this also has spawned "pill mills" and other schemes that masquerade as legitimate pain treatment;

• Development of more-powerful pain medications. These newer drugs have legitimate treatment value, but their greater potency also increases their appeal to addicts, and thus raises their street value;

• Widespread and legal "off -label" prescribing of drugs to treat conditions beyond their FDA- approved uses. Most notable is Actiq. Approved for treating cancer pain, it is one of the most commonly prescribed painkillers for workers compensation injuries;

• Inadequate training of physicians and pharmacists in drug diversion. Formal school curricula and continuing education programs both are lacking;

• Rapid spread of rogue Internet providers who sell OxyContin, Vicodin and other addictive narcotics to almost anyone, with few questions asked; and

• Increasing numbers of drug thefts. They range from robberies of pharmacies by addicts to large-scale heists of warehouses by rings that resell on the black market.

Detailed findings

Schemes are diverse

Diversion schemes run the gamut. But their connecting thread is that the drugs are often obtained by bogus insurance claims.

Among the common schemes: Addicts forge prescriptions using stolen prescription pads; physicians sell prescriptions to abusers or street dealers; pharmacists are part of organized rings that resell drugs in high volume on the black market.

Insurance costs high

Conservatively, drug diversion costs insurers as much as $72.5 billion a year, including up to $24.9 billion annually for private insurers. Individual plans each lose between $8.6 million and $857 million a year, depending on the plan's size. Large diversion losses affect both traditional health insurers and workers compensation insurers.

Doctor shopping by addicted health-plan members is the largest form of drug diversion, and takes the largest financial toll on insurance companies. Almost half of Aetna, Inc.'s 1,065 member fraud cases in 2006, for example, involved prescription benefits. Most of those were doctor-shopping cases.

But the insurance costs go well beyond prescription payments. Insurers also pay for related emergency room treatment, hospital stays, physician office visits, diagnostic tests and rehabilitation. The typical doctor shopper costs insurers $10,000 to $15,000 a year. Behind such cost breakdowns are large add-on expenses: In one study, WellPoint, Inc. — the nation's largest publicly traded commercial health insurer — paid $41 in related medical claims for every $1 it paid in narcotic prescriptions for suspected doctor-shopper plan members.

Insurer responses inconsistent

Despite such immense losses, the response by most private insurers has proven inconsistent and ineffective.

Many insurers focus almost entirely on traditional frauds by healthcare providers. They generally ignore scams by their plan members, who account for the bulk of drug-diversion costs. Insurers that do identify doctor-shopping members often inaccurately view diversion schemes merely as low-dollar irritants that deserve low investigative priority. These insurers fail to grasp their total diversion losses.

Many insurers have pharmacy benefit management firms (PBMs) oversee their prescription payouts.

But most PBMs have no anti-fraud units. They rely instead on basic audits to identify suspicious costs.

And, the few PBMs that do have fraud units can address only prescription costs. They can't piece together the larger diversion cost picture, thus leaving a serious gap in analysis.

Some insurers and PBMs do impose controls such as quantity limits and prior authorizations for highly abused drugs. But they often overlook other increasingly diverted, and deadly, drugs such as methadone.

Some insurers do not cover prescriptions for off-label uses; some do on a case-by-case basis, and others have not addressed the problem at all.

Diversion has deadly impact

The diversion epidemic also is measured, even more importantly, in human tragedy. Some 19,838 people died in the U.S. from accidental drug overdoses in 2004. This is the second-leading cause of accidental deaths, behind vehicle crashes.

Much of the recent five-year surge in overdose deaths stems from prescription narcotics and sedatives, says the U.S. Centers for Disease Control and Prevention. Consider:

• Overdose deaths from prescription drugs first exceeded deaths from heroin and cocaine in 2002;

• Nearly 4,000 people died from methadone overdoses in 2004. This is more than from any other narcotic, and an increase of nearly 400 percent over five years. Methadone is so popular among abusers that a tablet retailing for $.25 can cost $20 on the streets; and

• Nearly 600,000 of the nation's 1.4 million drug-related emergency-room visits in 2005 involved prescription drugs-mostly narcotic painkillers.

Insurers face liability exposures

Private insurers could face a potentially enormous liability exposure from lawsuits by plan members and other victims who allege the insurer failed to detect diversion and forcefully act against it.

The alarm went off when a woman died from an overdose of multiple prescription drugs. Her estate sued two pharmacies and a doctor. Pharmacists have a "duty to warn" patients given prescriptions for dangerous quantities or combinations of drugs, the Florida Supreme Court affirmed in June 2006. With this precedent now in play, insurers could face lawsuits alleging their own failure to warn plan members who later overdose.

At bottom, insurers who passively pay claims without trying to forcefully uncover and curtail diversion could be found civilly liable if a plan member overdoses. Liability also could arise from outside the plan if, for example, a truck driver high on prescription drugs kills or injures others in a crash.

Needed responses


Insurers should devote more attention to detecting suspicious activity in their prescription benefit plans. Specifically:

• Conduct ongoing datamining to identify schemes by prescribers, dispensers and plan members. Doctor shopping should be a special focus;

• Develop and implement protocols for comparing prescription and medical-claim data. This will help identify inconsistencies and define the true costs of doctor-shopping cases;

• Develop restrictions against doctor-shopping abusers at the pharmacy counters. Document those programs as they apply to specific plan members;

• Develop relationships that encourage more case referrals. Insurers should work more closely with drug-diversion specialists in law enforcement. Insurers also should develop closer ties with local and county district attorneys, who often are the main sources of prescription-drug prosecutions;

• Ensure controls on approved prescription drugs are updated and meet drug-diversion concerns. Also consider more point-of-sale controls such as photo identification;

• Consider tightening coverage for off-label prescriptions; and

• Increase their role in national campaigns to increase awareness of drug diversion, and seek greater involvement in the National Association of Drug Diversion Investigators.

State authorities

State prescription monitoring programs (PMPs) are among the strongest defenses against drug diversion. These databases house records of controlled-substance prescriptions dispensed in a state. The data can reveal patterns of illicit use and distribution. The data are readily available to prescribers, dispensers, licensing authorities and law enforcement.

But only half of states have PMPs. States that do have PMPs vary widely in the kind and amount of data collected, who can access the data, and how well the data can be mined for suspicious patterns. States without PMPs should seek to establish them. Insurers and other involved parties should actively support such efforts. The PMPs should follow federal criteria that attract federal funding and maximize a program's effectiveness.

Insurance fraud bureaus should better understand the complete insurance costs of drug diversion, and better support case referrals from insurers.

Similarly, state medical and pharmacy licensing boards should familiarize themselves with the seriousness of this crime, and act decisively to penalize offenders.

Medical & pharmacy professions

The medical and pharmaceutical professions should:

• Provide their members better training in prescribing narcotics and identifying their potential abuse;

• Support strong sanctions against offenders;

• Support strong requirements for a) specializing and credentialing in pain management, and b) receiving authority to prescribe controlled substances;

• Consider reducing their off-label prescribing of frequently diverted drugs, and reexamine the large influence drug makers have in encouraging off-label prescribing; and

• Support creation and effective use of PMPs.

Pharmaceutical industry

The potential for the pharmaceutical industry to worsen America's drug-diversion problem was highlighted by the May 2007 guilty pleas by OxyContin's maker, Purdue Pharma, and three senior executives. They were convicted of criminal misbranding and misrepresenting the drug's potential for addiction and abuse.

Drug makers face a paradox: The same products that treat pain lead a double life as illegally obtained and addictive narcotics. Their challenge thus is to reduce their drugs' illicit appeal and availability while maintaining their effective and legitimate use.

Pharmaceutical companies thus should work with drug prescribers, dispensers and diversion authorities to:

Educate the public about given drugs' potential for abuse and addiction;

Provide case leads to authorities when their purchase data reveal possible signs of diversion; and

Comply with the letter of the law and use prudent restraint with off-label uses of their drugs.

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