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Fraud And Corporate Wrongdoing In The Healthcare Sector « Back
Matt Atkins, September 2012
 
Early July saw multinational pharmaceutical company GlaxoSmithKline pay the largest healthcare fraud settlement in US history, in a case that highlighted the issue of fraud and corporate wrongdoing in the sector. The subject of fraud has grown in prominence in recent years, with regulators cracking down on activities including Goods Manufacturing Pricing violations, off-label marketing, and kick backs. In light of heightened scrutiny, healthcare companies are encouraged to re-evaluate their anti-fraud and corruption risk provisions, and consider their options in the event they come under the regulatory microscope.

Extent of the problem


There is little doubt that fraud and corruption in the healthcare sector is an extensive problem, although estimates of the cost vary widely. Currently, the US government estimates that fraud against government-sponsored programs may, in 2012, reach as high as $102bn. Meanwhile, according to the FBI, government and private healthcare fraud combined costs the US economy approximately $250bn annually.


There is a level of uncertainty over the figures, however. “In the US, various officials and agencies have attempted to define this level over the past 40 years,” says Mike Loucks, a partner at Skadden, Arps, Slate, Meagher & Flom LLP. “For example, the General Accounting Office of the US government estimates the level of fraud to be between 5 percent and 10 percent, and several US Attorneys General describe the level in the US at 10 percent. In my view, that estimate is too high; if the level is even just half that, in dollar terms the fraud level is very significant.” Globally, $415bn is lost to fraud each year, according to a 2011 report by PKF and the University of Portsmouth – unsurprising given that the types of fraudulent activities and the incentives to engage in fraud are similar worldwide. Whatever the true figure, there is no doubt that fraud in this sector is a multi-billion dollar ‘business’, with healthcare providers, taxpayers, and patients paying the ultimate cost.

In recent years governmental agencies have waged war on healthcare fraud – exemplified by the rise in regulatory scrutiny and prosecution. “The Department of Justice (DOJ) and Department of Health and Human Services (HHS) have recently taken more aggressive positions on when healthcare fraud cases will be charged criminally, when off-label marketing cases will be pursued, and when individuals will be administratively excluded from participating in government healthcare programs,” says Hank Walther, a partner at Jones Day. “Additionally, the cost of resolving healthcare fraud allegations has shot through the roof. The industry was shocked back in 2009 when Pfizer had to pay $2.3bn to resolve an off-label marketing case, but when GlaxoSmithKline resolved its case in July for $3bn, the industry largely yawned.” At the time, Pfizer’s settlement was the largest seen in healthcare fraud litigation, and marked the largest criminal fine ever seen. Just three years later, GlaxoSmithKline has paid a much weightier penalty, and, by agreeing to five years of government monitoring, one with stricter terms. The hike in penalties reflects an attempt to challenge the perception of some healthcare firms that settlements and fines are an acceptable cost of doing business.

There is little question that healthcare fraud enforcement has become a priority in the US. In 2009, the DOJ and HHS amplified their efforts to investigate and prosecute healthcare fraud offenders through the Health Care Fraud Enforcement Action Team (HEAT) initiative. The initiative saw hundreds of new HHS and FBI agents hired to investigate healthcare fraud allegations, along with additional prosecutors to pursue healthcare fraud cases. Healthcare prosecutions have increased since 2009 as a result. 2010 and 2011 saw a sharp spike in the number of healthcare company owners and operators charged with criminal fraud. This has continued into 2012. This year alone, the US Food and Drug Administration (FDA) has issued nearly 300 warning letters to companies – over half of which went to companies within the pharmaceutical, medical device and dietary supplement industries.

The payment of kickbacks to physicians for the referral of business has recently come under the microscope and new disclosure requirements on the payments to providers by companies will take effect in the US in the near future. Similar efforts are being made elsewhere in the world, particularly across Europe. Coordination and cooperation among enforcement agencies is also intensifying. “This pattern seems to occur most frequently within the countries formerly a part of the Soviet Union,” explains Mr Loucks. “Since it is common in many of these former Soviet countries to pay bribes to public officials, perhaps these countries are eager to demonstrate effective anti-bribery enforcement. Therefore, corporate healthcare providers doing business in these countries should expect a higher level of enforcement in their arena. Companies doing business in these marketplaces should also expect that the level of due process protection afforded to corporate defendants in criminal prosecutions will differ, in some cases substantially and even negatively, from the protections they are used to in their home countries.” An awareness of such differences is critical to healthcare companies when establishing compliance programs and mounting a defence in the event of regulatory enforcement.

The risks

The term ‘healthcare fraud’ represents a great number of activities aimed at defrauding healthcare providers and firms, government healthcare initiatives, insurers and consumers. Such activities include billing for services not rendered, billing for unnecessary services, kickbacks, false claims by physicians and patients, and off-label marketing such as that seen by GSK. Off-label marketing represents one of the largest risk areas for pharmaceutical and device companies: the charges against GSK revolved around its illegal promotion of Paxil – which was not approved for under-18s – for treating depression in children from 1998 to 2003, and also the firm’s promotion of Wellbutrin for weight loss, sexual dysfunction and ADHD between 1999 and 2003.
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