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A Bitter Pill For Nation's Drug Makers

Fines make Schering-Plough and others rethink aggressive sales practices

Aug 1, 2004 | The Star-Ledger It was the late 1990s, and the big drug company Schering-Plough had a wonderful problem: It was selling too much of its Claritin prescription allergy medicine.

But because it was more expensive than a rival drug, Claritin's runaway success meant two huge HMOs suddenly were paying more to treat watery eyes and runny noses.

Faced with a profit squeeze, the health maintenance organizations gave Schering-Plough an ultimatum: Cut the price or they would stop reimbursing clients who bought Claritin.

Schering-Plough blinked.

Its sales managers offered price incentives to the HMOs to lower their costs. Deals like that are common in business, but this time there was a problem. Schering-Plough didn't tell the government.

By law, the federal government, which is the country's largest buyer of prescription drugs, must receive a manufacturer's lowest price. Because the government didn't get the same price break as the HMOs, Medicaid paid about $100 million more than it should have for Claritin between 1998 and 2002.

Now Schering-Plough is paying for its mistake.

On Friday, the Kenilworth-based drug maker agreed to pay a $345 million fine and plead guilty to a single criminal charge to settle a fraud case brought by federal prosecutors in Philadelphia.

The settlement is the most recent of 10 involving some of the nation's biggest drug makers, which over the past three years have paid nearly $2.5 billion in criminal fines and civil penalties to settle charges they defrauded the government.

The Schering-Plough case, which was outlined by prosecutors, provides a window into the aggressive sales and marketing practices of drug makers, which some critics blame for the high cost of prescription medicine a lively issue for politicians and consumers.

And it comes at a precipitous moment for the industry. Big drug makers, several of which are based in New Jersey or have substantial operations here, are battling efforts to allow the importing of cheaper medicines.

Schering-Plough and other companies that have settled similar cases say they have changed their ways. Some experts agree.

"The Wild West days of such aggressive efforts may be by the board," said Robert McNair, a Philadelphia attorney who represents many big drug makers. "These widely publicized cases and big fines have made the industry more conscious."

One Schering-Plough executive insisted the company is changing. Almost the entire senior corporate leadership has been revamped in the past 16 months, said Brent Saunders, the drug maker's senior vice president for global compliance and business practices. In addition, 40 percent of the company's 200 district sales managers nationwide are new.

But other officials said the problems won't disappear as long as drug makers still face pressure to boost sales and stock prices at a time when few blockbuster medicines are being discovered. In such an environment, wheeling and dealing becomes increasingly important.

Prosecutors developed their case against Schering-Plough after three company employees filed such a whistle-blower suit, which occurs when one or more employees claim their employer broke the law. Prosecutors can join the lawsuits and file criminal or civil charges.

By law, whistle-blowers are entitled to 15 percent to 25 percent of the money that is recovered. In this case, the three former Schering-Plough workers and their attorney will share $31.7 million.

The government, meanwhile, "continues to scrutinize pharmaceutical manufacturers' compliance," said Dana Corrigan, acting principal deputy inspector general at the U.S. Department of Health and Human Services.

The Schering-Plough case began in 1998, when its managed care unit was grappling with complaints from Cigna and PacifiCare the two big managed-care customers, or HMOs.

At issue was the price for Claritin, which had become a $2 billion a year product thanks to a groundbreaking TV advertising campaign.

Cigna complained the pill was much more expensive than Allegra, a rival drug from Aventis Pharmaceuticals. When Schering-Plough refused to lower the price, Cigna threatened to drop Claritin from its formulary a list of drugs its clients can buy.

But maintaining its relationship with Cigna was crucial to Schering-Plough.

Each year, Cigna's clients, including employers, unions and government agencies, bought more than $100 million of Schering-Plough drugs. And Claritin was at the top of the list.

In February 1999, Schering-Plough found a solution.

Instead of slashing prices, the drug maker offered Cigna an unusual package of freebies that included cash rebates, deeply discounted medicine and an interest-free loan worth more than $10 million a year.

One item, in particular, gained the attention of prosecutors. A so-called "data fee" was paid to Cigna for a report summarizing the use of Schering-Plough drugs by Cigna clients. The only problem was a similar report was already being generated by the company. Prosecutors said the fee amounted to an old-fashioned kickback.

"Schering used terms like 'data fee' and 'value added' as camouflage," said Patrick Meehan, U.S. Attorney for the Eastern District of Pennsylvania.

The goodies paid off. When it was all added up, Cigna pocketed $10 million in incentives per year from Schering-Plough and the drug stayed on the formulary.

That solved one problem but created the big one with the government, which spends about $28 billion per year on drugs.

In a statement, Cigna said it cooperated with prosecutors. The Philadelphia-based company said no criminal charges or civil claims have been brought against it and none are anticipated.

The deal with the other HMO, PacifiCare, was similar. In that case, the California-based HMO saved $25 million when Schering-Plough agreed to cover a portion of its total antihistamine costs between 1998 and 2000.

In a statement, the insurer said it cooperated and has never been implicated in any of the charges. A PacifiCare official declined further comment.

The schemes unraveled after three senior analysts at Schering-Plough working down the hall from the company's top executives discovered the deals and filed their whistleblower suits.

Over the next few years, they worked undercover and provided more than 5,000 documents to federal prosecutors.

"Hopefully we've sent a message to this industry," said Beatrice Manning, one of the three whistleblowers. "You can't count on all employers to beg off and stay silent."

Now, the question is whether the overcharging cases will attract the attention of lawmakers, who could make life more difficult for an industry already under scrutiny.

On Friday, Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee, promptly wrote the nation's biggest drug makers, urging them to inform employees about the whistleblower law.

"With billions of dollars of profit at stake in the health care industry, more must be done to deter the perception that fraud settlements are the cost of doing business with the federal government," Grassley said. "Taxpayers can't continue to subsidize those drug companies that rely on ill-gotten profits."

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