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The Federal Courts Just Legalized Kickbacks in the Drug Business

In a ruling that favors Pfizer (PFE), a federal court judge has made it easier for drug companies to bribe doctors with cash and gifts to prescribe their products. It's at least the fourth recent case in which federal courts have held that as long as the person who fills out the forms to claim reimbursement from Medicare or Medicaid does not know of the kickbacks, then the pharmaceutical company that allegedly arranged the scheme is off the hook.

The ruling ends a celebrated case in the lore of Big Pharma management and will be closely read all over Pfizer, the world's largest drug company. The plaintiff is Peter Rost (pictured), Pfizer's former vp/marketing for Genotropin, a human growth hormone drug. Rost alleged that Pfizer acquired Pharmacia knowing that Pharmacia was actively marketing human growth hormone to quack doctors as an anti-aging cure. It is a crime carrying a punishment of five years in prison to promote HGH for unapproved purposes.

Even former Pharmacia CEO Fred Hassan was embroiled in the scheme, having initialed a letter that eventually led to an anti-aging doctor receiving a $50,000 HGH contract with Pharmacia.

In alleged retaliation, Pfizer stripped Rost of his work duties and staff, and abandoned him in an empty office in Peapack, N.J., where he was forced to show up every day even though he had no work to do. The company even demolished the office around him before Rost was finally fired, according to "Selling the Fountain of Youth," a new book about the anti-aging business. Pfizer eventually settled the case, pled guilty, and paid $35 million in a deal with the Department of Justice. The DOJ eventually joined Rost's civil suit against Pfizer and started a separate criminal investigation.

The case made Rost famous. He appeared on 60 Minutes, testified before Congress, wrote a book and ran a massively popular blog. He's currently an expert witness for drug litigators.

But Rost's civil whistleblower case ended today with a whimper, not a bang. Judge Patti Saris ruled that Rost failed to show that Pfizer's off-label promotion of HGH for adults -- in which doctors were given trips to fancy resorts in France and Puerto Rico to goose Genotropin prescriptions -- resulted in Medicare wrongly reimbursing patients or doctors.

Part of her ruling revolves around who exactly submitted a false claim. Generally, doctors and pharmacies submit claims for government reimbursement, not drug companies. The question is:

... whether or not the claims submitted by the innocent third parties, the pharmacies, can be "false or fraudulent" under a theory of implied certification when the drug manufacturer allegedly violated the Anti-Kickback Statute (AKS), 42 U.S.C. § 1320a-7b, by paying kickbacks to doctors
Saris ruled that if the pharmacy does not know that the prescription was only written because a drug company gave a kickback to a doctor, then no illegal false claim has been made:
The government argues that when you bill Medicaid you are impliedly certifying that no kickbacks have been paid in any of the underlying transactions. However, there are no statutes, regulations, or express certifications by pharmacists cited to support this argument.
Saris cited two other pharmacy cases which have held that false claims apply only to the person making the claim, not to a third party who may have induced a person to unknowingly make a false claim. The Rost case follows a ruling in an Amgen case which reached a similar conclusion. In the Amgen case, the judge ruled that as long as the doctors making the reimbursement claims did not expressly know the compensation they were receiving from Amgen was illegal, then they have not made a false claim.

Clearly, this is a terrible loophole in the law. It provides a clear map for drug companies who want to boost sales illegally. As long as the kickback goes to the doctor, and the pharmacy making the reimbursement claim doesn't know about it -- and why would they in an illegal scheme? -- then no violation has occurred. Kickbacks are a tax on all customers (and in this case taxpayers). Congress should act to end this flaw.


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