$5B: The Cost to the Taxpayer of Drug Company Pricing Fraud

Give the Obama Administration some credit in fighting pharmaceutical pricing scams: It's recovered $5 billion in overcharges by drug companies who took Medicare and Medicaid for a ride. That's much more than the average of $1.1 billion per year for all False Claims Act violations since 1986, when the law was beefed up. And it's an increase from the average recovery during the Bush Administration. Here's who paid what in today's $421 million settlement with the Department of Justice. All the companies are accused of overcharging the taxpayer for drugs:

Abbott Labs (ABT): $126.5 million for dextrose solutions, sodium chloride solutions, sterile water
B. Braun Medical: $14.7 million for dextrose solutions, sodium chloride solutions, sterile water
Roxane Labs (a unit of Boehringer Ingelheim): $280 million for Oramorph SR, Roxanol, Roxicodone

These aren't just mistakes or misinterpretations that could happen to anyone. Big Pharma goes out of its way to steal from the government. The feds recovered $9 billion from all companies -- including defense contractors -- who filed false reimbursement claims with the government in the last two years. Of that, more than $5 billion came from healthcare fraud. Since 1986, the DOJ has recovered $27 billion.

Here's a breakdown of the last six years' of healthcare fraud recoveries by the DOJ:

2010: $2.5 billion
2009: $1.6 billion
2008: $1.34 billion
2007: $1.54 billion
2006: $2.2 billion
2005: $1.1 billion

Those numbers understate the problem because they only count false claims cases. The DOJ gets its "$5 billion since 2009" total by counting other types of healthcare fraud in addition to false claims.

You may be thinking we should rejoice -- here are our tax dollars at work, saving us all money (or at least clawing it back)! Think again. Controlling healthcare costs via prosecutors, no matter how vigilant, is the craziest way of doing it. To get an idea of just how long it takes the Treasury to get its stolen money back, consider this DOJ press release from 2000, 14 years after the act was signed into law:

"It took us 12 years -- to the end of fiscal year 1998 -- to recover $2 billion in civil fraud cases brought under the whistleblower provisions," said Acting Assistant Attorney General David W. Ogden for the Civil Division. "We have reached the $3 billion mark just 16 months later."

The most efficient way to save tax money would be to give Medicare and Medicaid a free hand in negotiating drug prices with companies, which is what most national governments do. In the U.S., both agencies' hands are tied around a formula linked to the "average wholesale price" (AWP) that is supposed to give the government the "best price" available for drugs. That system has only encouraged drug companies to publish falsely inflated best prices -- which the government pays -- while private industry keeps the margin between what the government pays and what companies are actually charging. Drug company execs even have a nickname for the AWP system: "Ain't what's paid."

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Image by Flickr user Brooks Elliott, CC.

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