• OIG Focuses on the Pharmaceutical Industry
  • September 19, 2004
  • Law Firm: Baker, Donelson, Bearman, Caldwell & Berkowitz, PC - Memphis Office
  • Given last year's high profile TAP Pharmaceuticals' $875 million settlement, it is not surprising that the Office of Inspector General ("OIG") has decided to focus its considerable resources on the pharmaceutical industry. Last week, this focus culminated in the OIG taking a number of actions directed towards the pharmaceutical industry:

    • On October 1st, in addressing the Fraud & Compliance Forum, Inspector General Janet Rehnquist announced the OIG's much-anticipated release of its draft compliance guidance ("the Guidance") for the pharmaceutical industry;
    • On October 2nd, the OIG released its FY 2003 Work Plan, which includes a number of new studies targeting how the government pays for pharmaceuticals;
    • On October 3rd, the OIG published the Guidance in the Federal Register; and
    • On October 4th, the OIG posted Advisory Opinion No. 02-13, which refused to issue a favorable opinion regarding a proposed program in which a pharmaceutical company would have established and funded a non-profit foundation to subsidize certain costs incurred by financially needy persons using its product.

    If last week was indicative of the OIG's interest in the pharmaceutical industry, the industry should brace itself for a period of heightened scrutiny similar to what the hospital industry faced in the mid-1990s.

    Although these developments are of particular concern to the pharmaceutical industry, any person or entity that purchases pharmaceuticals, such as physicians, hospitals, retail pharmacies and pharmacy benefit managers ("PBMs"), should be aware of the OIG's position on these issues. After all, the Anti-Kickback Statute allows for the prosecution of both the offer or and the recipient of prohibited remuneration or, as OIG representatives aptly stated in the question and answer section of the Forum, it "takes two to tango." Accordingly, the OIG indicated that its enforcement efforts would soon be focusing on recipients of pharmaceutical company "kickbacks," and several such settlements should be announced in the near future.


    In addition to its standard guidance on developing compliance programs, the Guidance reflects the OIG's particular concerns regarding the following issues:

    Data Integrity Used to Establish Federal Health Care Program Reimbursement

    • The submission of false or misleading price information or sales information may be subject to prosecution under the several federal laws.
    • Prices reported to the government should account for price reductions or price concessions given to purchasers.
    • If a price concession is based on the purchase of several products, the concession should be accurately divided among the products.
    • Documentation should be created showing the company's reasoning and assumptions behind its concessions and records should be retained reflecting reported prices and efforts to comply with program requirements.

    Average Wholesale Price ("AWP") Manipulation

    • Deliberate manipulation of the spread (i.e., the difference between the AWP and the resale price) to induce the purchase of pharmaceuticals is prohibited.
    • The OIG is particularly concerned where the availability of such spread is marketed to potential purchasers.

    Benefits Furnished to Physicians and Others who Order Pharmaceuticals

    • Discounts and other purchase incentives should be structured to comply with the OIG's discount safe harbor.
    • Free or below market non-price terms, such as reimbursement assistance, should be scrutinized to ensure that they are not intended to induce or reward product orders.
    • So called "switching arrangements" whereby potential purchasers are paid or provided a non-cash benefit for switching from a competitor's product should be closely scrutinized for compliance with the Anti-Kickback Statute and the CMP Law.
    • All payments to physicians for consulting or work on advisory boards should be for actual, necessary work and should be structured so that the physician is paid no more than fair market value for services actually performed.
    • The OIG has adopted as a minimum standard that pharmaceutical companies adhere to PhRMA's "Code on Interactions with Healthcare Professionals."

    Compensation Arrangements with Sales Representatives

    • Any arrangement between a pharmaceutical company and persons marketing the company's product implicates the Anti-Kickback Statute when such product may be reimbursed by a federal health care program.
    • Pharmaceutical companies must be proactive in preventing sales representatives from engaging in aggressive marketing or promotional practices.
    • Compensation arrangements with sales representatives must not create an "undue incentive" for the representatives to engage in aggressive marketing or promotional practices.

    Drug Samples

    • Pharmaceutical companies must follow the mandates of the Prescription Drug Marketing Act of 1987.
    • Pharmaceutical companies must take steps to prevent free drug samples from being later billed to either the patient or a federal health care program.


    Last year's OIG Work Plan included nine (9) studies directly focused on Medicare or Medicaid payment for pharmaceuticals. Next fiscal year's Work Plan has twelve (12) studies directly focused on pharmaceutical costs. Of particular interest are new studies to: (a) determine whether pharmaceutical companies are manipulating the Medicaid drug rebate program by making slight changes to an existing drug (e.g., changing a drug's color) in order to obtain a new start for indexing purposes; (b) determine the adequacy of pharmaceutical companies' methods for calculating average manufacturer price and best price for drugs; (c) the adequacy of the federal Upper Payment Limit for drugs; and (d) identify whether chain pharmacies are reporting "dead net" pricing as opposed to purchase invoice prices.

    Historically, the OIG's Work Plan has been a fairly accurate predictor of future enforcement trends in health care. That is, many of the matters currently on the OIG Work Plan are likely to become the subjects of investigations, audits and settlements in the next three to five years. Accordingly, in developing a compliance program, it is incumbent on pharmaceutical companies to monitor the OIG's annual Work Plan and to begin internally investigating how they conduct their operations with respect to matters listed on the OIG's recent Work Plans.


    In Advisory Opinion No. 02-13, the OIG refused to issue a favorable opinion requested by a pharmaceutical company (the "Company") in which the Company proposed to establish and fund an independent, non-profit foundation (the "Foundation"), which would pay all or part of the cost-sharing amounts (i.e., co-payments) incurred by privately-insured and Medicare patients who use the Company's product. The specific product was a drug for the treatment of anemia associated with chronic renal failure (the "Drug"), which is administered through physician's offices. Physicians whose patients receive the subsidy will receive a purchase credit in the amount of the subsidy.

    The OIG found that the following factors posed a significant risk of program and patient fraud and abuse, and therefore, refused to grant a favorable advisory opinion:

    • The proposed arrangement would result in the patient's physician receiving full payment for prescribing the Drug;
    • The availability of the financial assistance would be advertised to physicians and patient advocacy groups;
    • The proposed arrangement would likely provide a competitive advantage to the Company;
    • The proposed arrangement would likely result in increased costs to federal health care programs;
    • The proposed arrangement would likely be profitable for the Company; and
    • The same results can be had through alternative means that do not pose such risks.