Drug Lobbyists Argue Kickbacks Lower the Cost of Healthcare

Last Updated Nov 30, 2010 10:08 AM EST

The drug industry's lobby group is arguing in federal court that kickbacks are legal even if the cost of them is footed by the taxpayer -- a position that will not endear Big Pharma to those who wonder why the cost of prescriptions always goes up and never goes down.

The case at hand is the infamous Omnicare (OCR) whistleblower litigation, in which the nation's leading pharmacy benefit manager for old folks' homes is accused of receiving bribes from most of the top drug companies in return for pushing their expensive new medicines over older, cheaper alternatives. The companies agreed to offer Omnicare rebates on any medicine it bought from them, thus lowering the net price of the drugs. When the net price got so low that it threatened to trigger a law requiring Medicare and Medicaid to pay only the "best price" on offer, the companies then allegedly made bogus payments for Omnicare's prescription data and for various educational programs, thus lowering the net price even further. That net price was not reported to the government, allegedly, and thus taxpayers overpaid for drugs prescribed via Omnicare.

Omnicare has entered two settlements worth $147.5 million to extract itself from this litigation. Remaining on the hook, however, are the drug companies that allegedly paid the kickbacks: Abbott Labs (ABT), Johnson & Johnson (JNJ), AstraZeneca (AZN), Teva (TEVA), Bayer (BAY), Eli Lilly (LLY), GlaxoSmithKline (GSK), Roche (RHHBY), Merck (MRK), Novartis (NVS), Novo Nordisk and Pfizer (PFE).

PhRMA and its biotech sister lobby group BIO argue that the anti-kickback law actually regards these payments as legal discounts that lower the overall cost of healthcare:

Discounts from pharmaceutical manufacturers to healthcare providers reduce costs and promote competition, benefitting federal healthcare programs, the government, and patients. The government's Complaint in this case seeks to expand liability under the False Claims Act into uncharted territory, sweeping in a wide swath of socially beneficial discount arrangements.

If accepted, the government's overbroad theory potentially could criminalize and chill a host of beneficial discount programs that are commonplace in the healthcare industry â€" programs that lower costs, promote competition, and improve patients' access to care.

Congress broadly carved out "discounts or other reductions in price" from the payments prohibited by the anti-kickback statute.

PhRMA even expressly argues that discounts designed with drug company profits rather than patients' needs in mind are also legal:
Discounts intended to increase a product's market share, including rebates and discounts tied to preferential formulary placement, are an indispensable cost saving mechanism in private contracts and are also routinely used by federal healthcare programs to reduce costs and promote competition.
Games with false claims
The Department of Justice sees it differently. It notes that if the kickbacks were legal then Omnicare (or the drug companies) would have alerted the government to their existence at the time they asked for reimbursement:
... the claims at issue were false because Omnicare submitted all of them without disclosing the material fact that it was taking kickbacks from J&J at the same time.
J&J allegedly sold up to an extra $280 million in drugs through Omnicare as a result of the scheme. It was so profitable for J&J that the company made a PowerPoint slideshow congratulating itself on its financial acumen.

The DOJ also picks up an argument I've previously made on BNET about the way federal judges have interpreted the False Claims Act recently. In five recent cases, including one against Amgen (AMGN), judges have required that conspirators expressly acknowledge they are breaking the law when applying for reimbursement for drug prescriptions. The DOJ now argues that the Amgen precedent (United States ex rel. Westmoreland v. Amgen) is plain wrong:

The government plaintiffs respectfully submit that the Westmoreland decision misconstrued the nature of a Medicare provider's certification by failing to consider the materiality of kickback violations to the government's decision to pay Medicare claims. In this case, the claims at issue were false because Omnicare submitted all of them without disclosing the material fact that it was taking kickbacks from J&J at the same time.
Should the judge rule in favor of the government, it would set up a conflict between rulings in various courts that have ruled such discounts and rebates are legal. That conflict can only be settled in the appeals courts.

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Image by Flickr user quaziefoto, CC.