Pharmaceutical Pricing: State and Federal Enforcement

The onslaught of legal action against pharmaceutical companies continues to grow as the state of New York adds its name to the list of states that have taken legal action against drug manufacturers. On February 14, New York Attorney General Eliot Spitzer announced that several large pharmaceutical manufacturers were being sued for allegedly scheming to inflate the price of prescription drugs. Previously, California, Texas, Minnesota, Montana, and Nevada had filed similar suits alleging manipulation of the average wholesale price. In addition, U.S. Attorney's Offices in a number of locations are investigating or pursuing pharmaceutical companies regarding their pricing and marketing practices.

At the center of this controversy is the concept of "average wholesale price" ("AWP"). Given the fact that this term is not well defined, it is no wonder that controversy abounds. Moreover, federal and state governments clearly have a financial interest in pursuing these cases. In addition, Medicare and Medicaid regulations are less than clear regarding the nuances of the calculation necessary for determining reimbursement. However, government enforcement agencies allege that the reported AWP is utilized as a marketing tool, especially when there is a significant difference in the spread between the AWP and the actual purchase price. Under this theory, physicians and other healthcare providers are allegedly incentivized to use a particular product because of the profit margin that can be realized on the product.

Many commentators do not believe the government's allegations are supported by strong legal foundations. In fact, some believe that the enforcement agencies are attempting to change the reimbursement system without resorting to the legislative or regulatory process. However, regardless of the sense of frustration, many pharma companies conclude that the risk and expense of litigating such allegations are too significant and, therefore, many ultimately resolve the matter through negotiated settlement. Such settlements, while less costly and risky than litigating the matter, typically result in a significant fine, as well as imposition of a corporate integrity agreement.

For those companies that have not yet been the target of the government's efforts, the question is, what should they do to avoid becoming tomorrow's news. The following are a few suggestions:

• If you have not adopted a compliance program, do so promptly - the Office of Inspector General recently proposed guidance regarding compliance programs for the pharmaceutical industry, and all pharma companies should seriously consider adopting such a program. Those with existing programs should make sure their program effectively focuses on pricing and marketing activities.
• For those companies just implementing a compliance program, special attention to these issues may pay dividends down the road. If budget or time constraints force the compliance officer to prioritize his or her efforts, pricing and marketing are obvious choices for "front burner" priority.
• A careful review of the prices reported by the company to the government should be conducted, possibly under the protection of the attorney-client privilege. However, the company that undertakes such a review must be fully prepared to deal with the results.
• The company's marketing practices should be analyzed to ensure that such practices do not provide the government with the kind of inferences that support the allegations typically brought in these cases.
• Structured education sessions for pertinent employees should be conducted, especially those whose duties involve the setting or reporting of its pricing structure and all sales and marketing personnel.

While these precautions will not absolutely guarantee that the government enforcement agents do not knock on your door, they should provide substantial risk reduction to the organization. While the overall objective is to prevent the occurrence of any circumstance of noncompliance, a well structured, focused compliance program can provide defenses in the event of investigation, and can result in reduced penalties in many circumstances.

As we have previously reported, government scrutiny of suspected fraud and abuse, and concern over promotion for unapproved issues, have begun to impact medical device companies as well as the pharmaceutical industry. Our team of attorneys is well versed in the laws and regulations governing these and related issues and have experience with the enforcement initiatives pursued by FDA, CMS, OIG and state Medicaid fraud units. Our multidisciplinary team is well situated to assist with proactive and remedial measures.

Donald E. Segal contributed to this advisory.