Merck KGaA Is Latest Pharma to Settle Justice Department Claims

German pharmaceutical and chemical company Merck KGaA will pay $280 million to settle a claim brought against a former subsidiary, Dey Pharma, regarding Medicare and Medicaid reimbursements, the U.S. Justice Department said. This is the fourth such settlement by a pharmaceutical company this month alone.

According to the Justice claim, Dey charged customers one price, then reported inflated prices to the lists that federal health care programs use to calculate payment rates, which resulted in much higher prices. This created an incentive to purchase the drugs because buyers could pocket the difference between the purchase price and the reimbursement price.

Dey Pharma is now owned by Pittsburgh-based drugmaker Mylan (MYL), but under the 2007 acquisition agreement, Merck is responsible for paying the full amount of this settlement. "The settlement agreement confirms that the resolution of the case does not constitute an admission, finding, or evidence of fault, liability or wrongdoing by Dey," the company said in a statement.

The other pharmaceutical settlements with Justice this month involve similar allegations against Abbott Laboratories (ABT), B. Braun Medical and Roxane Laboratories, which totaled $421.1 million in payments.

Top Defrauders of Uncle Sam

"With this settlement, the Department of Justice has now recovered over $2 billion dollars from pharmaceutical manufacturers arising from similar unlawful drug pricing schemes," said Tony West, assistant attorney general for Justice's Civil Division. "Taxpayer-funded kickback schemes like this not only cost federal health care programs millions of dollars, they threaten to undermine the integrity of the choices health care providers make for their patients."

The settlement comes days after a study found that pharmaceutical companies have become the biggest defrauders of the federal government, surpassing the defense industry.

The Health Research Group at Public Citizen, which looked at payments made for violations of the False Claims Act (FCA), found that pharmaceutical cases accounted for at least 25% of all federal FCA payouts over the past decade, compared with 11% by the defense industry.

"An Alarming Rate"

Indeed, Justice says that since January 2009, its total recoveries in FCA cases approach $6.8 billion, of which $5.3 billion are related to health care programs. This is also in line with findings from Taxpayers Against Fraud published in October (via Pharmalot).

Not only that, but the "frequency with which the pharmaceutical industry has allegedly violated federal and state laws has increased at an alarming rate." Of all the pharmaceutical industry settlements during the past 20 years, 73% of the settlements and 75% of the dollar amount have occurred during the past five years.

Off-label promotion of drugs -- when a company markets the medicine for an unapproved use -- was the single largest category of financial penalties. Another one was exactly what Dey has been charged with: purposely overcharging for drugs under various federal programs.

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More than one-half of the industry's fines, $10.5 billion, were paid by just four companies -- GlaxoSmithKline (GSK), Pfizer (PFE), Eli Lilly (LLY) and Schering-Plough, which was bought by Merck (MRK). The world's largest pharmaceutical, Pfizer, also has the dubious honor of topping the list of fines with $1.2 billion in 2009.

"[S]everal recent prosecutions (and settlements) confirm that the government is now focusing on an industry that has long made significant profits, but has escaped close scrutiny. That is now changing," says Carlos Gonzalez, a partner at Diaz Reus & Targ in Miami, a firm that advises general counsels at major pharmaceutical companies, particularly outside the U.S., regarding FCPA [Foreign Corrupt Practices Act] and FCA issues. Drug companies must closely monitor operations both at home and abroad, he adds. "Either way, in this new era of government scrutiny, executives cannot be too careful."

The U.S. spending on prescription drugs increased from $40 billion in 1990 to $234 billion in 2008. "Given the relatively small size of current financial penalties when compared to the perpetrating companies' profits," Public Citizen calls not only for much steeper financial penalties but for criminal prosecutions of company leadership, including jail sentences, if merited.

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