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Bush Administration Rule Angers Lawmakers, Attorneys General

Donna Young

A government rule permitting pharmaceutical manufacturers to destroy product-pricing data after three years would make it easier for drug companies to defraud programs serving the poor, 46 attorneys general and 2 members of Congress have charged.

The final rule, which takes effect January 1, 2004, would allow drug makers that participate in the Medicaid rebate program to dispose of information used to calculate average manufacturer prices (AMP) and best prices three years after a company has reported the data to the Centers for Medicare & Medicaid Services (CMS).

Under the Medicaid rebate law, manufacturers that give large discounts to private-sector purchasers must give the same discounts to Medicaid and 340B-covered entities.

The policy requires manufacturers to pay rebates to state Medicaid programs based on the difference between a drug’s AMP and best price, with a minimum rebate of 15.1% of AMP.

340B discounts are based on the same pricing data and variables that are used to calculate Medicaid rebate amounts.

Congress created the 340B program in 1992 to ensure access to low prices on pharmaceutical products for certain hospitals and federally funded grantees.

Ted Slafsky, director of the Public Hospital Pharmacy Coalition, expressed concern that the final rule would have a potentially negative impact on 340B-covered entities.

“We are very concerned about any efforts that would undermine the ability of federal and state investigators to combat fraud and abuse. We think that this proposal would do just that.”

Fraud can go back years. Many of the “dozens of pending cases and investigations” involving allegations of fraudulent pricing practices by prescription drug manufacturers “look back well beyond the last three years,” attorneys general from 44 states, the District of Columbia, and the Commonwealth of Puerto Rico complained to Department of Health and Human Services (HHS) Secretary Tommy G. Thompson and CMS Administrator Thomas A. Scully in an October 28 letter.

Attorneys general from California, Connecticut, Florida, Kentucky, Massachusetts, Minnesota, Montana, Nevada, New York, Texas, and West Virginia have filed suits against various drug makers, alleging “improper data reporting practices from the 1990s to the present,” the 46 chief law officers declared.

David Parrella, chairman of the National Association of State Medicaid Directors, said his organization is concerned that if the three-year limitation on record keeping is imposed, states would have difficulties claiming rebate amounts owed to them.

“Losing any access to that information could inhibit investigations,” he said.

The administration’s rule, the attorneys general warned, could seriously interfere with states’ ability to “investigate and prosecute the systematic fraud that is at the heart of pending cases, ongoing investigations, and qui tam filings”—a provision in the Federal Civil False Claims Act that allows citizens, often referred to as whistleblowers, to file a lawsuit in the name of the government charging fraud against a government contractor.

Under the False Claims Act, a plaintiff has 6 years from the date of the violation, or 3 years after the government is aware of the violation—but no longer than 10 years after the violation—to file a suit.

Different requirement for drug industry? Representative Henry A. Waxman (D-California), in an e-mail response, said he fails to see why the standard for maintaining drug-pricing data should be any different from the requirements under the False Claims Act.

The rule allowing drug companies to destroy their pricing data after three years, he asserted, is “an open invitation for abuse.”

When 46 attorneys general “are in agreement that there is a serious problem with what CMS has proposed, it’s a pretty good indication that CMS has made a mistake,” the California lawmaker contended.

At Waxman’s request, HHS’s Office of Inspector General (OIG) in 1999 investigated allegations that drug companies had bypassed Medicaid’s requirements by excluding sales to repackagers from best-price calculations.

OIG found that seven manufacturers had excluded sales to repackagers from their best-price determinations, including sales to three HMOs.

Medicaid’s rebate law requires manufacturers to include sales to HMOs in best-price computations. In a March 2003 report, OIG found that 5 manufacturers of 11 prescription drugs had overcharged 340B-covered entities $6.1 million for sales to HMO repackagers occurring from October 1998 through September 1999.

Settlements. Drug makers Bayer AG and GlaxoSmithKline agreed last April to pay a combined total of $344 million after the companies were caught hiding lowest prices from Medicaid by using an HMO to repackage and sell products at discount prices.

Some of the drug-pricing irregularities in those settlements date back to the first quarter of 1996, the 340B Coalition, a group of safety-net providers, noted in an October 24 letter to CMS’s Scully.

Had the final rule’s three-year recordkeeping limitation already been in effect, the coalition asserted, crucial evidence—the pricing data—may not have been available to government investigators in the Bayer and GlaxoSmithKline cases.

In a settlement announced in June by the Department of Justice, AstraZeneca Pharmaceuticals LP agreed to pay $355 million to resolve criminal charges and civil liabilities in connection with its drug-pricing and marketing practices involving the company’s prostate cancer drug Zoladex.

Among a list of charges of Medicaid and Medicare fraud and abuse, the Justice Department said that AstraZeneca had falsely reported the best price for Zoladex because the company had calculated its best prices “without accounting for off-invoice price concessions provided in various forms including cash discounts in the form of grants, services, and free goods contingent on any purchase requirement.”

Pricing data examined by investigators in the Zoladex case dated as far back as 1991, according to the Justice Department.

The government investigated the case after a whistleblower filed a false claims suit.

A senator’s opinion. In an October 17 letter to HHS’s Thompson, Senator Charles Grassley (R-Iowa) said that the proposed rule would “dramatically limit the ability of a whistleblower to review and rely upon old records to prove liability and/or damages because there will be no records available going back further than three years.”

An additional complication, Grassley noted, is that False Claims Act cases are filed under seal and, in most cases, preliminary investigations are done without the manufacturer’s knowledge.

“Drug manufacturers may not be on notice to suspend the destruction of documents,” Grassley warned.

The Bush administration’s rule would require drug companies to keep records beyond three years only if the manufacturer is aware of a pending audit or government investigation related to best prices and AMP.

However, some investigations are confidential and are “by necessity” conducted without notification to the manufacturer, according to the 46 attorneys general.

As drafted, Grassley said, the regulation “is just plain wrong-headed and should not take effect.”

“Indeed, it is my opinion that HHS should not take any actions that would make it easier for those defrauding the Medicaid drug rebate program to get away with breaking the law,” he maintained. “Instead, we should be making it easier to identify and prosecute those who are ripping off the Medicaid drug rebate program, rather than creating an environment where the record retention policies implemented by HHS assist criminals and complicate cases for whistleblowers and Justice Department attorneys.”