James G. Sheehan Associate United States Attorney 615 Chestnut Street, Suite 1250

1. FRAUD CONTROL ISSUES AFTER THE START OF MEDICARE PART D PRESCRIPTION DRUG PROGRAMS HCCA JANUARY 23, 2006 James G. Sheehan Associate United States Attorney 615 Chestnut Street, Suite 1250 Philadelphia, PA 19106 Phone: (215) 861-8301 E-mail: Jim.Sheehan@usdoj.gov

2. USUAL DISCLAIMERS • HUMBLE ASSISTANT- NOT DOJ POLICY • NEW PROGRAM - DETAILS STILL BEING WORKED OUT • PRESUMPTION OF INNOCENCE • CANNOT ADDRESS PROBLEMS SINCE 1/1/06 – NOT ENOUGH INFORMATION

3. WHAT WE ARE ABOUT • PROTECT PROGRAM AND BENEFICIARIES: • DETER FRAUD BY INDIVIDUALS AND ORGANIZATIONS • DETECT FRAUD • PREVENT FRAUDULENT PAYMENT, RECOVER MONEY PAID • OBTAIN PROOF OF INTENT • PUNISH, EXCLUDE FRAUDSTERS

4. WEBSITES YOU SHOULD KNOW ABOUT • NABP (National Association of Boards of Pharmacy) - www.nabp.net • FDA counterfeit drug initiative –www.fda.gov/oc/initiatives • CMS- www.cms.hhs.gov/pdps

5. WHERE THERE IS FEDERAL MONEY, THERE IS RISK OF FRAUD AND ABUSE • $60 billion plus in new federal money per year • Businesses new to federal contracting requirements and controls • New data systems • Questionable existing practices in some industry segments

6. WHERE THERE IS FEDERAL MONEY, THERE IS FEDERAL OVERSIGHT • MANDATED COMPLIANCE PROGRAMS UNDER PART D • MEDICARE INTEGRITY CONTRACTORS (MEDICS) • LAW ENFORCEMENT COMMITMENT • HOT LINES, PUBLIC COMPLAINTS, MEDIA

7. OUR TOP TEN LIST-#1 • COUNTERFEIT,DILUTED, MISMARKED DRUGS(SEE NABP DIRTY THIRTY-TWO HANDOUT ) • World Health Organization-10% of global pharmaceutical sales in 2005 will be counterfeit • Congressional hearings-Committee on House Govt Reform, Subcommittee on Criminal Justice 11/2/05

8. COUNTERFEIT DRUGS • Pfizer sues Albers Medical and repackager Med-Pro in 2003-recalls 200,000 bottles of Lipitor • The(alleged) Lipitor Gang of Kansas City-$42 million in counterfeit drugs-indictment of Albers Medical in August,2005.

9. FOCUS ON FALSE CLAIMS VIOLATIONS-WHY • PHARMACEUTICAL FRAUD INVOLVING ANY MAJOR MANAGED CARE PLAN OR PDP(Medicare) - NOW A FRAUD/FALSE CLAIM ON UNITED STATES • Over - 65 population - largest per capita users of prescription drugs • Pharmacy - largest number of claims in health system - exceeds physicians and hospitals combined - $5000 per claim • Whistleblowers will bring cases to DOJ - for 15-25% of recovery

10. WHAT MAY BE A FALSE CLAIM UNDER PART D? • Prescription claims to PDPs • Prescription claims to Medicare Advantage Plans (managed care) • Prescription claims for over - 65s to employer prescription plans receiving the 28% subsidy from CMS(8 million beneficiaries) - even if managed by insurer, PBM, or TPA • Kickbacks, sample sales, research or marketing frauds on any of these drugs sold to any Medicare beneficiary on Part D • Identity theft

11. WHAT MAY BE A FALSE CLAIM UNDER MEDICARE PART D • CERTIFICATIONS TO CMS BY PDPs and Medicare Advantage Plans about their actual costs (for risk corridor calculations and payment) • CERTIFICATIONS TO CMS ABOUT CONCESSIONS FROM MANUFACTURERS WHICH FAIL TO DISCLOSE OTHER PAYMENTS BY MANUFACTURERS TO PLANS • CERTIFICATIONS BY INSURORS, TPAS, PBMs TO EMPLOYER PLANS ABOUT COSTS, CLAIMS,Fraud Controls • WARNING-MANY PRIVATE PLANS WILL NOW BE THE BASIS FOR CHARGES OF FALSE CLAIMS AGAINST THE UNITED STATES

12. WHAT WILL PLANS (or PBMs) DO? • Data review and analysis • Technique for capturing, recording complaints • Internal (or contract) investigative capability • Record of investigations and actions • Watch list - pharmacies, drugs, prescribers, patients

13. UNDERSTANDING INCENTIVES: BUSINESS MODELS AND FRAUD RISKS • RETAIL PHARMACIES • MAIL PHARMACIES • NURSING HOME PHARMACIES/CONSULTANTS • PBMs/PDPs

14. PROFIT IN PRESCRIPTION DRUGS-RETAIL • Average profit per third - party prescription = $.50 • Business Model: Make money by drawing people into store to buy higher-profit items • Costs of drug acquisition, storage, inventory, spoilage • Pharmacy Model: Repeat customers, personal interaction, convenience

15. PROFIT IN PRESCRIPTION DRUGS-RETAIL • Pre-Part D - Pharmacy prescription drug dispensing profits come primarily from over - 65 cash customers • Post-PART D Most prescription drug purchases will be priced and processed through pharmacy benefit management (PBM) companies,EVEN WHEN THE CUSTOMER IS PAYING CASH, because-- • Beneficiary responsible for 100% of drug costs between $2500 and $5000, and 5% over $5000 but cannot get credit for expenditures unless claim is priced and processed through PBM system • RESULT - retail pharmacy loses its primary profit stream

16. HOW WILL SOME PHARMACIES REACT? • “SATISFICING” - people are more likely to use extreme measures to maintain standard of living vs. improving it • Owners will face being put out of business • Managers of chain pharmacies will face increasing corporate pressure to maintain profit margins, outdo colleagues • Chain executives (of chains without their own PBMs) will have difficulty meeting Wall Street profit expectations

17. PHARMACY FRAUDS-GRAY MARKET DRUGS,COUNTERFEIT DRUGS • Where do prescription drugs come from? • Manufacturer, who ships to “big three” or specialty wholesaler, who ships to purchaser (retailer, hospital, nursing home) • Secondary wholesaler (usually member of the Pharmaceutical Distributors Association), who buys from someone other than manufacturer or big three • BUT – WHO IS SELLING TO SECONDARY WHOLESALER?

18. BUYING FROM SECONDARY WHOLESALERS • Where are their drugs coming from? • How can they charge prices less than Big Three? • What assurances does a pharmacy have that their drugs are properly labeled and safe?

19. SECONDARY WHOLESALERS • POTENTIAL BAD SOURCES OF PRESCRIPTION DRUGS FOR SECONDARY WHOLESALERS • Throwaway,expired, over-ordered drugs • Samples (from reps and physicians) • “Gold Pill” purchases from Medicaid /Medicare beneficiaries • Gray market drugs purchased for hospitals, nursing homes

20. WHO REGULATES SECONDARY WHOLESALERS • What about the FDA? • Prescription Drug Marketing Act - requiring pedigree from manufacturer to ultimate purchaser-FDA has six times extended the pedigree requirement deadline, most recently to 2007 • Terry Vermillion - the pedigree requirements are so weak “you can satisfy the pedigree requirement by writing it on a paper napkin” (quoted in Dangerous Doses by Katherine Eban, 2005)

21. FDA-MAJOR INCREASE IN GRAY MARKET ENFORCEMENT ACTIVITY • 2004 Report • Doubling of referrals - proactive investigations • NABP TASK FORCE - susceptible list of 32 drugs(see attached list, Exhibit 1) • BUT • Crooks getting smarter • Better printers, scanners,pill machines • Greater demand • Higher prices for newer drugs • Overseas sources

22. #2-Short fills • Short fills-Wal-Mart paid $2.8 million in 2004 to settle False Claims allegations • Filled partial prescriptions(allegedly due to insufficient stock)billed program for full amount • Walgreen’s settlement-$7.6 million in 1999 • Eckerd settlement-$5.8 million in 2002

23. #3 Return to Stock • Rite-Aid 2004 $7.0 million to USA and states for false Medicaid billing-products billed to program, then returned to stock w/o credit

24. #4 Recycling of patient purchases • AIDS Drugs • Other expensive treatments

25. #5 Kickbacks to Prescribing Physicians • Astra Zeneca - settlement • TAP – settlement • Quitams

26. OTHER WAYS TO STEAL IN RETAIL PHARMACY • CHARGE BRAND, DELIVER GENERIC • IDENTITY BORROWING/THEFT • BILLING UNINSURED PATIENTS ON INSURED ACCOUNTS • ELIMINATE THE WHOLESALER - buy direct from the thieves • FALSE STATEMENTS ABOUT PHYSICIAN APPROVAL FOR CHANGES

27. PROFIT IN PRESCRIPTION DRUGS-MAIL ORDER • Average profit per prescription = $2 • Average additional profit per switched prescription = $30 • Business Model - Make money by getting large number of beneficiaries using chronic disease drugs, earn spread on generics • Costs-labor from interacting with patients, performing professional prescription services • Pharmacy Model: Volume, refilled prescriptions, minimum patient interaction

28. HOW TO STEAL IN MAIL ORDER PHARMACY • SHORT PRESCRIPTIONS • BILL/NO CREDIT FOR RETURNED PRESCRIPTIONS • SWITCH PRESCRIPTIONS TO PREFERRED MEDS WITHOUT AUTHORIZATION FROM DOCTOR • FAIL TO PERFORM REQUIRED PROFESSIONAL SERVICES • THROW AWAY, CANCEL DIFFICULT PRESCRIPTIONS

29. PROFIT IN PHARMACY/ CONSULTING – NURSING HOMES (AND OTHER FACILITIES) • Largest source of profit in nursing home and ESRD facilities • Business model: Make money from captive patient and physician population, volume of drugs prescribed, payment from manufacturers

30. HOW TO STEAL IN PHARMACY/CONSULTING – NURSING HOME (AND OTHER FACILITIES) • Sell gray market/black market drugs • Short prescriptions • Sell the same drugs twice • Charge brand and deliver generic • Identity borrowing/theft • Switch patients at risk • Kickbacks from pharmaceutical manufacturers

31. HOW TO STEAL IN PHARMACY/CONSULTING – NURSING HOME (AND OTHER FACILITIES) #2 • Unnecessary drugs • Unused drugs • Billing family and program, Medicare and Medicaid, Part B and Part D

32. PROFIT IN PHARMACY BENEFIT MANAGEMENT(PDPs) • Average profit per prescription = $2 mail order (captive), $.50 retail (rough estimate) • Business Model: Make money on the spread between what retail is paid and what payor is charged • .Business Model: Move beneficiaries from retail to mail order, with greater switch potential • Business Model: Obtain discounts from PHARMA by promising market share, make PHARMA eat risk • Business Model: Make money by moving patients to generics (if multisource)

33. CONCERNS IN PHARMACY BENEFIT MANAGEMENT • SECRET PAYMENTS TO REFERRAL SOURCES • SECRET PAYMENTS FROM MANUFACTURERS • MISLEADING PRICING (e.g., AAWP, big bottles/little bottles, sales tax) • PATIENTS AT RISK FROM SWITCHES • SHUT-OFF OF DIFFICULT PATIENTS • DOUBLE BILLING

34. CONCERNS IN PHARMACY BENEFIT MANAGEMENT • Will they provide the needed drugs if they are at risk • How will they treat patients with significant drug management and cost issues? • How will they push costs to other payors (Part B, DVA, self-pay) • How will they move people past the hole in the donut?

35. Data Warehouse/Fraud Detector • If PBMs want to help, they can make a huge difference in fraud control-lots of low-hanging fruit • Largest non-governmental computer system • Single biggest point of interaction between health plans and consumers - more transactions, more information • connections in most PBM/insuror systems between med/surgical information and drug information – is this a treating physician? Is this drug for a diagnosis for which patient is being treated?

36. State Enforcement Issues • Unfair Trade Practices • Pharmacy Board Regulations • Commercial Bribery/Kickback Statutes • State Insurance Regulation • False Claims Act (some states)

37. CONCERNS ABOUT FRAUD CASES UNDER PART D • COMPLEXITY OF PROGRAM • DOZENS OF PDPs and Medicare Advantage Plans • Variations in covered drugs, per cent co-pay • Regional variations in programs • Physicians, Pharmacies dealing with multiple contractors and data systems

38. CONCERNS ABOUT FRAUD CASES UNDER PART D • We want this program to work-avoid unnecessary burden on participating plans and pharmacies, especially in first year • Who is the victim? Will they support the case? (existing contractual relationships) • Is there a loss to the Government (yes, but proving it will be tough) • What is the False Claim?

39. OPPORTUNITIES OF FRAUD INVESTIGATIONS IN Prescription Drugs • Excellent data - frequent data points for each patient, physician, retailer, PBM • Redundant data - same information available from multiple sources • Excellent existing system used by commercial players - IMS Health, drug companies for tracking sales, utilization, rebates

40. CONSIDERATIONS FOR FRAUD INVESTIGATION IN Prescription Drugs • Multiple professionals with knowledge, and some independence and loyalty to profession, ethic of concern for patients • Risk of harm to patients - both from bad drugs and from denial of needed drugs • Compelling jury story - most trusted profession, interaction familiar to most jurors

41. WE CAN MAKE THIS PROGRAM WORK • Identify fraud early • Work closely with physicians, pharmaceutical manufacturers to identify third-party frauds • Bring cases early and quickly • Bring cases that matter to citizens and beneficiaries • Encourage effective compliance programs and reporting • Focus efforts on risk areas

42. WE NEED YOUR HELP TO MAKE THIS PROGRAM WORK