AEI Presents Study on the Effects of Anti-Industry Bias

Last Thursday, June 21, 2012, the American Enterprise Institute held a panel, entitled “Muzzle pharma, harm patients: The dangers of anti-industry bias.”  Sitting on the panel were George Chressanthis, a professor at Temple University, Nitin Jain, a principal at ZS Associates headquarters, Thomas Stossel, a hematologist and oncologist, and J.D. Kleinke, a health care business expert.  The panel presented a new study which aimed at determining the relationship between physicians’ choices of drugs and their access to sales representatives from pharmaceutical companies.  The study looked at between 58,000 to 72,000 cases for three different drugs, Januvia, Vytorin, and Avandia, in an attempt to cover a broad range of cases which would inspire a change in drug choices.  Januvia was their sample for a first-in-class drug, Vytorin, for a negative clinical trial, and Avandia, for an FDA imposed black-box warning.  All the physician and prescription information for the cases were provided by the pharmaceutical companies and no patient outcomes were evaluated.  The study found that, generally, doctors take longer to change to first-in-class drugs but also take longer to switch away from drugs that had a negative clinical trial or for which the FDA had issued a black box warning.  Ultimately, it concluded that access limits are a part of an institutional framework whose anti-industry bias, manifested in access limits, have harmful consequences for patients.  Doctors need to operate from the largest body of information, they argued, and that to restrict them from information in any way adversely affects patient health.

Though the study presented clearly and incontestably that access to representatives caused a change in how physicians made decisions regarding drugs, without a further study of patient outcomes, there’s no basis from which to decide whether or not these changes were productive or effective.  The panel wanted to say that doctors should not rely solely on sales reps for their information but at the same time wanted to say that these same sales reps made a significant impact on physicians’ decision-making procedure.  The intimated bias was that these changes were positive changes, but without more concrete data on the practical results of these prescription changes, it is impossible from this study alone to judge decisively whether access limits have unintended and adverse consequences for patient health.

Why Fighting Government Contract Fraud Makes a Difference

As the fate of a government shutdown last week was teetering over budget cuts of between $20-$40 billion, I could not help remind myself that only last year the Deputy Attorney General of the United States estimated that Medicare-Medicaid fraud alone costs the government up to $60 billion.

Of course, this figure does not even account for precious healthcare dollars spent to treat injuries caused by misbranded drugs and defective medical devices. Taking into account over-billing by defense contractors in Iraq and Afghanistan, the for profit colleges whose degrees are not worth the tuition financed with government grants, the construction contracts designed to create good paying jobs but whose workers are not being paid prevailing wages, or the large scale procurements made under the Buy American Act where the goods are actually manufactured abroad, and the government has either wasted a massive amount of money or the money has been spent in ways that will not bring anticipated returns. Worse yet, as in the case of misbranded drugs, taxpayers may also face physical injury or illness.

Unfortunately, instead of jail time or debarment, fraudsters are often rewarded with more government business. Even when they pay fines, the fines are so disproportionally small that they amount to a fee for the license to break the law. Consider the government’s $2.3 billion dollar settlement with Pfizer in 2009, which encompassed a pattern of alleged wrongdoing including misbranding of a drug for pediatric use. The combined civil and criminal penalty seemed large but actually paled in comparison to the $171 billion that the drug giant pulled in from sales of the pharmaceuticals encompassed by the complaint during the damage period.

Now it seems that a business model bent on paying a small fee for the right to break the law is not enough for big corporations. Recently, the Supreme Court heard oral arguments in a case known as Schindler Elevator where the Court is being asked to opine on whether a False Claims Act (FCA) lawsuit can in part be based on information secured from a Freedom of Information Act (FOIA) request. The FCA expands upon the compliance enforcement abilities of the government by allowing private citizens who have independent knowledge of government contract fraud to bring suit, on behalf of the government, to recover damages. In the Schindler case, a Vietnam veteran, who alleged that his employer was not according proper affirmative action consideration to veterans, used information from such a FOIA request to confirm what he believed were violations of government contract requirements.

Concerned about the potential for expanded compliance enforcement, the Chamber of Commerce, the American Hospital Association and the American Pharmaceutical Association have argued that suits predicated on information secured through FOIA requests should be barred. By their lights, it makes no difference that the whistleblower knew enough to ask for the information in the first place.

Though not technically an issue before the Court, the Chamber and its allies argue that providing a remedy for a contractor that fails to comply with “legal technicalities” like the Buy American Act, veterans preferences, affirmative action requirements or environmental regulations, is a bit much. They question the audacity of a law – the False Claims Act – which would actually allow taxpayers to penalize contractors that dishonor their commitments.

Perhaps the next time lawmakers work through the weekend searching for change under sofa cushions in hopes of balancing the budget, they should read the Chamber’s brief in Schindler and remind themselves where at least some of the money went.

The Schindler Decision: Now It’s Congress’ Turn

With the heightened pleading standard established by the Supreme Court in Twombly and Iqbal, it must follow that Plaintiffs are entitled to some accommodation in the manner and methods used to muster the facts now required to properly plead a case. Apparently this is not so.

In issuing its 5-3 decision (Justice Kagan did not take part in the decision) in Schindler Elevator Corp. v United States, No. 10-188 (May 16, 2011), the Court held that a whistleblower litigating under the Federal False Claims Act (FCA) does not have standing if his or her claims are based on information secured from a Freedom of Information Act (FOIA) request. The FCA precludes whistleblowers from basing claims on government “reports” and in Schindler, the Court had to decide whether the Government’s response to a FOIA request constituted a government report. Justice Thomas opined that because a response to a FOIA request provides information, it must therefore be a “report” within the meaning of the statute. While this may be good news for college students seeking support for the proposition that a one page document suffices as a term paper or report, it is indeed a blow to whistleblowers seeking redress from private contractors that cheat the government.

The whistleblower in Schindler, Daniel Kirk, a Vietnam veteran, claimed that his employer, a government contractor, failed to honor a veterans job preference, which in turn violated a government contract. In support of efforts to prove his claims, Schindler’s wife secured information from the Department of Labor (DOL) through a FOIA request. Mrs. Kirk’s efforts, according to the Court’s opinion, proved fatal to the complaint.

The False Claims Act’s public disclosure bar is designed to preclude the filing of parasitic lawsuits or lawsuits based on public information readily known to the government. Specifically, the statute bars suits based on government audits and reports. If a government agency issues a report documenting fraudulent conduct by a contractor, it would make sense that a private citizen should not be able to use that report, file a lawsuit, and claim a bounty for bringing attention to that which is already known. But a response to a FOIA request is different. First, as a document generated at the behest of a private citizen, it would never be revealed if the private citizen did not know to ask for it. Second, the document may only provide raw data or information absent any analysis and its relevance may only be understood by the individual seeking the information. As Justice Ginsburg noted in her dissent, quoting the Opinion of the Second Circuit which was reversed, the Department of Labor’s responses “did not synthesize the documents or their contents with the aim of itself gleaning any insight or information, as . . . It necessarily would in conducting a ‘hearing” or ‘audit.’ ”

The truth is that Daniel Kirk, the relator in Schindler, was doing exactly what the Court in Iqbal and Twombly required of him; he was mustering very precise facts in order to plead a case. And though he may have filled his complaint with some facts secured from the government itself, there is no evidence that the government was able to put the pieces together absent his aide.

With so much public money being injected into the private sector these days and with insufficient oversight of contractors, does this case — like other recent Supreme Court decisions — merit corrective legislation? As Justice Ginsburg noted in her dissent: “[a]fter today’s decision, which severely limits whistleblower’s ability to substantiate their allegations before commencing suit, that question is worthy of Congress’ attention.

Medicare Decides It Takes a Thief to Catch a Thief

With Medicare fraud costing the federal government an estimated $60 billion a year, it makes perfect sense that the Centers for Medicare and Medicaid Services has tapped aerospace innovator Northrop Grumman to create a predictive model that will detect fraud. Or does it?

With all the great technology and healthcare companies out there, Northrop Grumman may not be the obvious choice, but in some ways it is perfect for this role. After all, Northrop is one of the worst perpetrators of fraud against the U.S. government. While some could see this as an unfortunate decision to reward a chronic offender, maybe the government is using a “takes a thief to catch a thief” model.

The reality is that the government’s decision to call on Northrop as its designated fraud detector shows a complete unwillingness to punish wrongdoers. A quick perusal of Northrop’s rap sheet shows how little the company respects the law. Indeed, the Project on Government Oversight—a Washington, D.C.-based public interest watchdog—has identified 33 instances where Northrop Grumman has had ugly dust-ups with the law, from False Claims Act violations to derelictions in environmental compliance and the failure to pay workers in accordance with regulatory and contractual requirements.

And the company has had to pay for its transgressions. That includes a $325 million penalty that Northrop paid on behalf of its aerospace subsidiary to settle claims that defective parts were used for a satellite project. Or the $700,000 in fines the company paid to settle claims that it submitted improper invoices to the Defense Department for lodging expenses. Northrop also settled claims that it installed substandard parts in military drones and even misled the Air Force about paint used on aircrafts.

In announcing the new contract, Peter Budetti, CMS’s new Medicare anti-fraud czar, noted that Northrop would be able “to translate its experience from the private sector to the public sector.” That statement is dubious. Would the Federal Parks Department hire Yogi Bear to guard picnic baskets at Jellystone Park and announce the appointment by saying that “the government hopes that Yogi will translate his experiences from the private sector to the public sector?” Mr. Budetti’s comment is similarly curious because with whatever private sector origins its constituent companies may have had, with over $20 billion a year in government revenue, Northrup now seems more of a permanent government appendage than a true private company.

Northrop isn’t the only violator to remain on the public take. While the average citizen who commits a crime undoubtedly has a hard time finding a job, the same cannot be said for government contractors.

Take the case of one of Northrop’s top competitors, Boeing, which enjoys more than $20 billion in government business each year even though it has settled multiple claims alleging violations of the False Claims Act, including allegations that it sold defective military hardware to the government.

Booz Allen, a mainstay of the government contracting world, generates more than $3 billion annually in government contracts even after settling two false claims cases involving allegations of overbilling and the submission of false reimbursement claims. SAIC, another large technology and services contractor, averaging more than $6 billion a year in government revenue, has settled or been held liable for more than one violation of the Federal False Claims Act. These are not isolated examples. These days it may actually be easier to find a billion-dollar government contractor that has settled allegations of wrongdoing than it is to find one that has never had an encounter with the law.

While it is bad enough that our government continues to reward wrongdoers with more business, the Northrop contract sets a new low. Does CMS really want to send the message that wrongful conduct can be rewarded with a lucrative contract to help the government detect wrongful conduct?

With a wealth of talent in our nation’s great universities, and with the fantastic work done by so many technology companies, it is hard to fathom that Northrop Grumman has a lock on the design of software to detect fraud. CMS’s Mr. Budetti is right about one thing: there is something to learn from the private sector and perhaps even Northrop Grumman. Rather than continue to reward wrongdoers, government contracting officers need to study them, and their misdeeds, in order to be in a position to exercise adult supervision over them.

It is possible that hiring a thief to catch a thief just might send the wrong message about the government’s seriousness in cracking down on fraud. Hiring Northrop and saying that there is much to be learned from its private sector experiences sends exactly the wrong message to American business.

Fraudsters lobby to muzzle whistleblowers Commentary: Corporations have proven they can’t police themselves

Last October, representatives from Pfizer Inc., Tyco International Ltd., Citigroup Inc. and other major companies met with officials from the Securities and Exchange Commission to share their views on rules implementing the Dodd-Frank whistleblower law. Not surprisingly, they want the rules watered down.

What these companies have in common is that they each have been involved in a massive corporate scandal that victimized consumers or shareholders. Had a whistleblower come forward early, their wrongful conduct could have been averted.

Despite their checkered past, these corporations apparently have no shame in seeking to limit the government’s ability to catch future wrongdoers. Having this rogues’ gallery advise the SEC on policing corporate misdeeds is akin to Dillinger, Capone and Babyface Nelson meeting with J. Edgar Hoover to share their views on criminal law enforcement.

In practically every financial scandal that has rocked the corporate world, whistleblowers have been ignored or punished for their attempts to ward off catastrophe. Recognizing the critical role that whistleblowers can play in preventing harm before it reaches catastrophic proportions, Congress passed special whistleblower provisions in the Dodd-Frank law. Those new provisions include bounties for whistleblowers who provide valuable information to the SEC that leads to the recovery of sanctions against wrongdoers. The SEC has issued proposed regulations to implement the new law.

It is those regulations that have set off a flurry of corporate lobbying. Claiming that they can police themselves and do not need whistleblowers reporting wrongdoing to the government, corporations are now lobbying hard to cut back on Dodd-Frank. In particular, they want the SEC to structure regulations that require whistleblowers to use internal corporate compliance programs first.

The essence of their argument is that big corporations can police themselves and provide adequate forums for employees to report wrongdoing. This position may be true, for say, a report of an employee who is stealing from the cash register of a big-box store. But this does not make sense where the company is following a corporate policy of stealing from consumers or cheating shareholders or investors. A corporation simply cannot police itself when its senior officials are the culprits.

By definition, securities fraud requires intentional conduct at the most senior levels of a corporation. Therefore, a whistleblower who must use internal compliance procedures faces a hopeless task of relying on an internal process that in all likelihood was designed as an impediment to anyone reporting pervasive wrongdoing.

Pfizer PFE -0.92% , Tyco TYC -1.29% and Citigroup C -5.99% are poster children for the proposition that internal compliance cannot address pervasive fraud or fraud committed at the senior levels of a corporation.

As a result of wrongful conduct that was not halted by its internal compliance program, Citigroup recently settled fraud claims with the SEC for $75 million, and was bailed out by taxpayers to the tune of $45 billion. Its wrongful conduct diminished the value of the corporation between October 2007 and January 2009 by more than $225 billion. Tyco paid $3 billion to settle shareholder claims, and its former chief executive and chief financial officer are in prison. Tyco shareholders lost $130 billion in value during a six-month period in 2002.

In 2009, Pfizer paid the largest criminal fine ever — $2.3 billion — to settle claims of Medicare and Medicaid fraud with the federal and state governments. The pharmaceutical giant not only had a vaunted internal compliance program, but also was already subject to two federal government corporate integrity agreements, which were the result of past derelictions of law. Pfizer had twice managed to convince federal and state officials that internal compliance should be left to the company. The third time around, multiple whistleblowers had no choice but to go to federal officials with claims that the company had illegally marketed multiple drugs including at least one to children.

How strong were the whistleblowers’ claims against Pfizer? In a ruling against Pfizer in the case, U.S. District Court Judge Jed Rakoff noted that “to put it bluntly, the allegations of the Complaint evidence misconduct of such pervasiveness and magnitude, undertaken in the fact of the board’s own express formal undertakings to directly monitor and prevent such misconduct, that the inference of deliberate disregard by each and every member of the board is entirely reasonable.”

Undoubtedly, they had a hard time getting the company to right its wrongful conduct through internal procedures, especially where it was making $171 billion (during the period of alleged wrongdoing) from the drugs encompassed by the whistleblower claims. Pfizer was doing so well that just from 2007-2008 its CEO, Jeffrey Kindler, took home almost $28 million.

The lesson of these cases is clear. Where the highest officials in the corporation perpetrate the wrongdoing, internal compliance cannot work. From Enron to Pfizer, consumers, shareholders and the economy as a whole have suffered too much harm from promises of unworkable compliance programs. The SEC must stand up for whistleblowers and ignore the complaints of these egregious offenders.

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