Insurance Fraud NEWS
The U.S. gets hundreds of millions from bug Pharma in co-pay settlements
June 24, 2019, Philadelphia, PA
The federal government has secured almost $850 million in settlements from the pharmaceutical industry since a Barron’s investigation revealed how companies used charities in ways that undermined efforts to hold back skyrocketing drug prices.
Scrutiny of industry-supported charities is continuing at Medicare, the Internal Revenue Service, and the Senate Finance Committee, so the practice remains a risk factor for drug makers and the charities they continue to underwrite. Just this month, a civil fraud suit was filed by the U.S. Attorney in Philadelphia against Mallinckrodt Pharmaceuticals (ticker: MNK), the seller of the expensive and controversial anti-inflammatory drug H.P. Acthar Gel, whose promotion we cited in 2013.
Medicare tries to constrain drug price inflation by requiring co-payments of 5%, to incentivize patients and doctors to consider cheaper treatment alternatives. But as drug prices soared in the past decade—to hundreds of thousands of dollars for some treatments—the co-pays became unaffordable for most patients.
That created an obstacle for drug company sales. To sell expensive drugs, pharma companies can subsidize co-pays for patients with private insurance. But it’s illegal for them to do so for those covered by Medicare. So a nonprofit cottage industry sprang up of pharma-funded foundations that assist Medicare patients in making co-payments. A drug company can then bill Medicare for the rest of a drug’s price.
In the lawsuit filed on June 6, the Justice Department alleged that Mallinckrodt illegally funneled cash through a Plano, Texas-based co-pay foundation called the Chronic Disease Fund, causing the submission of millions of dollars in false Medicare claims. “The scheme allowed the company to continually raise Acthar’s price yet market it as ‘free’ to patients and doctors,” the complaint said, “shifting the drug’s ever-increasing cost to Medicare.”
Mallinckrodt declined to comment beyond a statement, which announced the government lawsuit while saying the company believes its behavior was “lawful and appropriate,” and vowing to vigorously defend itself. It hadn’t yet answered the government’s fraud complaint in court as of Friday. The company has until August to do so.
The Mallinckrodt charges follow similar government allegations settled in recent months by Alexion Pharmaceuticals (ALXN), Amgen (AMGN), Astellas Pharma (4503.Japan), Jazz Pharmaceuticals (JAZZ), Johnson & Johnson (JNJ), H. Lundbeck (LUN.Denmark), Pfizer (PFE), and United Therapeutics (UTHR) over the companies’ deals with a variety of co-pay charities.
The companies all denied wrongdoing in settling the cases. The settlements have totaled $841 million.
In suing Mallinckrodt, the federal government is joining two previously-sealed whistleblower cases filed by former employees of the drugmaker, as well as almost 30 cities and states. The complaint quotes emails allegedly sent by Mallinckrodt executives, which the government says showed the company planning programs with the Chronic Disease Fund to cover co-pays for just Acthar and no other company’s drugs—a practice that would break the rules set by Medicare for co-pay charities to operate.
The Chronic Disease Fund isn’t named as a defendant in the new lawsuit, and it didn’t respond to requests for comment. But the charity is in litigation with the IRS. It’s asking federal courts to quash IRS subpoenas of Bayer Healthcare (BAY.Germany), Biogen (BIIB), Celgene (CELG), Novartis (NVS), Teva Pharmaceutical Industries (TEVA), and the Genentech unit of Roche Holding (ROG.Switzerland)—all part of an IRS investigation of the foundation that started after our 2013 article.
A 2017 declaration filed by an IRS agent in New Jersey’s U.S. District Court said the agency was investigating whether the co-pay programs were true charitable missions, or just conduits to drive drug company sales. Some 95% of drug company donations to the Chronic Disease Fund typically found their way back to the company as co-pays, the declaration said. The agent also said the charity promised that the resulting sales and tax-benefits would generate a 185% return on each dollar donated by pharma companies.
The charity’s attorneys at the firm Venable didn’t respond to questions from Barron’s, but their memos filed in federal court said any benefits to drug companies that donated were permissibly “incidental” to the charitable assistance that needy patients get from the co-pay fund. The lawyers said the Chronic Disease Fund had difficulties providing records in the IRS audit because all but one of its directors resigned in November 2013—one month after the Barron’s article. The charity now operates under the name Good Days.
It’s taken time for the market to price in these concerns. Mallinckrodt paid $5.6 billion for Acthar’s owner Questcor Pharmaceuticals in 2014—double Questcor’s value at the time of our 2013 story. Mallinckrodt’s market value topped $15 billion in 2015, before tumbling to a recent $800 million as government officials have increasingly scrutinized spending on Acthar.
Barron’s reached out to drug companies that have been subpoenaed by the IRS or other government agencies. Those that answered said their actions complied with the law and that co-pay charities help needy patients get medicine. “Novartis is pursuing a mutually acceptable resolution of this issue,” a company spokesman said, “to allow the company to move forward and focus on providing access to innovative medicines.”
Medicare’s parent agency, the Department of Health and Human Services, has tightened its rules for all co-pay charities in recent years. In a First Amendment lawsuit before Richmond’s federal district court, the not-for-profit Patient Services Inc. complained that a 2017 pronouncement from the Inspector General of the Health and Human Services Department hampers communication between co-pay charities and their drug company donors. Eleven charities petitioned the agency last year to authorize their activities under the federal anti-kickback statute.
They may have an uphill fight. In March, Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and ranking member Ron Wyden (D-Ore.) announced an investigation into what they called “pharma kickbacks” paid to co-pay charities.