Pharmaceutical Fraud

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Pharmaceutical Fraud Overview

Whistleblowers, including our clients, who have filed qui tam complaints under the False Claims Act (FCA) alleging pharmaceutical fraud have allowed the government to recover billions of stolen health care dollars. Indeed, the largest FCA recoveries in history have involved pharmaceutical fraud.

While some think of only Medicare as the victim and drug manufacturers as the fraudsters, there are, in fact, multiple government programs affected, and drug manufacturers are but one of the potential wrongdoers in the national drug supply chain. The system is complex, and there are many opportunities for fraud and abuse. The most common fraud schemes identified and prosecuted over the last several years have involved the following areas.

“Off Label” Marketing

This occurs when a manufacturer (or an entity partnering with the manufacturer) markets a pharmaceutical drug for a use that is not “on the label” approved by the Food and Drug Administration (FDA). This means that the FDA has not approved the safety or efficacy of the drug for the purpose for which it is being marketed. In doing so, the manufacturer “misbrands” the drug, encouraging its use even in situations where the use may be unsafe or even life threatening. Some of the largest False Claims Act pharmaceutical settlements have involved off-label marketing, often in conjunction with illegal kickbacks used to influence health care providers to prescribe the drug off-label.

Examples of off-label marketing cases include where manufacturers:

  • marketed an anti-depressant drug approved only for use in adults to doctors who were treating children and adolescents.
  • promoted an atypical anti-psychotic drug and a schizophrenia drug off-label to treat behavioral disturbances and conduct disorders in elderly nursing home residents, children, and individuals with mental disabilities.
  • “misbranded” a painkiller by promoting the drug for a variety of conditions and at dosages other than those for which its use was approved by the FDA.

Pharmaceutical Drug Kickbacks

The Anti-Kickback Statute (AKS) prohibits kickbacks in any form, including (but not limited to) cash, free goods, reduced rent, expensive hotel stays and meals, excessive compensation for medical directorships, consultancies, studies, and more that are intended to induce a provider or a patient to use the drug product. Kickbacks can occur at any point in the drug supply chain and involve any two or more players, including patients. The insidious corrupting nature of kickbacks makes it a high priority for prosecutors.

Examples of pharmaceutical fraud kickback cases are plentiful and include:

  • paying physicians for speaking at or attending programs, or providing trips, expensive meals, educational grants, or tickets to sporting events to induce doctors to write prescriptions.  Biogen settled one such case in 2022 for $900 million. 
  • waiving or subsidizing patient co-pays and deductibles to induce patients to use a particular drug.
  • giving discounts on drugs or giving free drug products to doctors (which increases the physician’s profit when they bill the government for that very drug) to induce them to use that drug instead of a competitor drug.

Improper Billing

Medicare and other government health care program laws and regulations set rules about when an approved drug (or class of drugs) is eligible to be reimbursed for a patient. Claims submitted to the government for payment that violate these rules give rise to FCA violations. The most basic reimbursement requirement is that the drug must be reasonable and necessary for the diagnosis or treatment of illness or injury or to improve the functioning of a malformed body member of a patient.

In addition to requiring that the drug be reasonable and necessary for the patient, the law prohibits the following common fraud schemes:

  • multiple billing for the same drug dose.
  • billing for a drug (or dosage) that was not actually provided to the patient.
  • billing the incorrect price for the drug.
  • misrepresenting the patient’s condition to make it appear that the drug is reasonable and necessary.

Medicare Parts A and B: Pricing Fraud

The government has established various pricing constructs to ensure that Medicare Parts A and B obtain prices on a drugs that are appropriate and in line with or cheaper than the prices negotiated by private insurers. Misrepresenting data to the government to undercut its pricing constructs can give rise to a FCA violation. Examples include:

  • Medicare Part A (drugs administered in a hospital or nursing facility): Private hospitals are reimbursed by the government for Medicare and Medicaid patients. Under Part A, reimbursement is generally based on the procedure or type of stay, with Medicare paying the hospital a bundled rate per day or procedure. That bundled rate is meant to cover services, supplies, and drugs provided by the hospital during the patient’s stay. Medicare bases its reimbursement rates on information provided by hospitals about the costs of caring for its patients — including the costs of drugs that it administers and the medical supplies it uses. Accordingly, misreporting the costs of such items can give rise to an FCA violation.
  • Medicare Part B (drugs administered in an outpatient setting): Under Medicare Part B, the government will reimburse the provider an amount equal to the manufacturer’s “average sales price” (ASP), plus a set profit percentage to account for the doctor’s services in administering the drug. Medicare relies on information provided by the drug’s manufacturer to set the ASP for each drug. Thus, if the manufacturer provides false information to the government by, for example, not reporting discounts given to certain buyers, a claim for that drug can be false or fraudulent and the manufacturer can be held responsible under the FCA.

Medicare Part C: Medicare Advantage Plan Fraud

Most people opt to enroll in the traditional Medicare Parts A and B for their medical coverage and in Medicare Part D for their prescription drug coverage. However, there is the option through Medicare Part C to enroll in a plan offered through a private insurance company and approved by Medicare. These plans, known as Medicare Advantage, offer similar coverage to Parts A and B and sometimes include Medicare Part D drug coverage as well. If the plan does not include Part D coverage, the patient can enroll directly in Medicare Part D for prescription drug coverage.

Common frauds occurring under Medicare Part C are discussed on Managed Care.

Medicare Part D: Insurance Company and Pharmacy Benefit Manager Fraud

Medicare Part D provides and subsidizes outpatient prescription drug coverage to all Medicare-eligible persons who choose to participate in Part D Prescription Drug Plans (Part D Plans). Insurance companies submit bids to the government each year to be allowed to offer and administer a Part D Plan. The government pays a portion of the premium for members enrolled in the plan using direct and indirect subsidies and prospective and retroactive payments. At the end of the Plan year, there is a final reconciliation by CMS based in part on risk adjustment and actual costs incurred. At that time, retroactive payments may be warranted.

Medicare Part D insurance plans typically contract with a Pharmacy Benefit Manager (PBM) to negotiate and contract with dispensing pharmacies to serve Medicare beneficiaries in the insurer’s network. PBMs submit claims for payment and important data to the Part D insurer, and they negotiate prices to be paid to the pharmacies by the insurance company. One of the most important pieces of data submitted is the “negotiated price” that the insurer actually pays the pharmacy for the prescribed drug. The negotiated price is supposed to include any discounts, subsidies, rebates, or other price concessions that decrease the amount that the Part D plan actually paid for the drug.

Insurance Plans and their PBMs find various ways to inflate their expenses so the premium per patient, per month that the government pays is higher than justified while, at the same time, reducing their costs — thus increasing their overall profit. These schemes can enable them to win a bid for a government contract, to avoid repaying the government at the end of the plan year, and/or to ensure that premiums will be inflated in future years.

The government has identified several common fraud schemes in the Medicare Part D program, including:

  • submitting a bid that inappropriately overestimates or underestimates the bid to manipulate risk corridors and/or payments, including miscalculations of administrative ratio costs within the bids (wrong service lines).
  • submitting claims for the same prescription to more than one government payer (except as required for coordination of benefits), such as the same prescription being covered and paid for under Medicare Part A or Part B, and then a second time under Part D, and/or possibly Medicaid.
  • misrepresenting or falsifying information furnished to Medicare or to an individual under the Part D drug benefit program.
  • submitting inaccurate or incomplete prescription drug event (PDE) data or Part D plan quarterly data to the government.
  • failing to report to the government all the rebates, discounts, or price concessions by any party, including gifts and price cuts offered by pharmaceutical manufacturers.

Drug Rebate Fraud

Medicare and Medicaid cannot negotiate drug prices the way private insurers can. This creates a risk that the public will pay too much for needed drugs.

The Medicaid Drug Rebate Program (MDRP) program covers prescription drugs to individuals with a qualifying financial need. Each state has its own Medicaid program, which is partially funded by the federal government. Since 1990, the MDRP has required manufacturers to pay rebates to state Medicaid programs so they do not overpay for drugs.

Medicare covers prescription drugs under its Part B and Part D benefits and is federally funded. Until recently, not only was Medicare unable to negotiate drug prices, it also had no rebate program. The Inflation Reduction Act of 2022 (“Act”) changed that by requiring drug manufacturers to pay rebates on drugs used by Medicare beneficiaries whose prices rise faster than inflation. The Act also requires drug manufacturers to negotiate prices for certain costly drugs. (However, that provision does not apply to all drugs and any prices negotiated will not take effect until 2026.)

The MDRP requires manufacturers to charge Medicaid a price equal to or better than the “Best Price” offered to a private purchaser. To implement this system, manufacturers must report sales and pricing data to the government on a quarterly basis – both Best Price and Average Manufacturer Price (or AMP). The government relies on this data when calculating whether the manufacturer owes the government any rebates and, if so, how much. Accordingly, reporting inaccurate data can lead to liability under the FCA. Likewise, failure to offer Medicaid the best price initially or to pay correct rebates, can violate the FCA.Medicaid Rebate Program Flowchart

Successful Cases and Awards

Examples of FCA settlements in this area include:

Mylan, Inc: False information and underpayment of rebates:

The drug manufacturer Mylan, Inc. — in the largest settlement in 2017 — paid $465 million to resolve allegations that it falsely reported the classification of its drug EpiPen. As a result, it underreported and underpaid the rebates owed to Medicaid.

Mylan misclassified the EpiPen as a generic drug rather than a brand name drug. Since the EpiPen had no therapeutic alternatives available, Mylan was able to charge incredibly high prices on the private market for the EpiPen. However, misclassifying the EpiPen as a generic drug to Medicaid allowed Mylan to pay only 17% of AMP instead of AMP minus Best Price. As a result, even though the EpiPen price increased at a rate much faster than inflation, Mylan did not have to pay a large additional rebate to offset those price increases. This is because the rebate formula differs for brand name and generic drugs.

Learn more about our successful case against Mylan, Inc.

Mallinckrodt: Underpayment of Inflationary Rebate

In 2022, Mallinckrodt ARD agreed to pay $234 million to resolve allegations that it improperly used a base AMP from 2010 for its high-priced drug Acthar.

Because Acthar first entered the market in the 1950s, its base AMP should have been calculated from 1990. From 1990 to 2010, Acthar’s price dramatically outpaced the inflation. Reporting a later base AMP resulted in Mallinckrodt paying additional rebates only on price increases after 2010. This reduced the additional rebate owed to Medicaid by hundreds of millions of dollars.

Learn more about our successful case against Mallinckrodt ARD.

Medicare Drug Rebate Program

The Medicare rebate program is similar to the MDRP but not identical. Like the Medicaid program, it requires manufacturers to report accurately a drug’s AMP so that rebates can be calculated and paid when the drug’s price outpaces inflation. As with the MRDP, actions by a manufacturer to manipulate a drug’s AMP to reduce its rebate obligations to Medicare could lead to False Claims Act liability.

Federal Supply Schedule and 340B Drug Pricing Program Fraud

Drug manufacturers who participate in Medicaid must also enter into pricing agreements with government hospitals, such as those operated by the Departments of Defense and Veterans Affairs. Like private hospitals, these facilities purchase drugs for use with their patients. As a general rule, pricing is based on the Federal Supply Schedule Agreement in conjunction with the Medicaid Drug Rebate Program agreement. Overcharging these hospitals for drugs can give rise to an FCA violation.

In addition, the federal 340B Drug Pricing Program requires drug manufacturers to offer special pricing to eligible private health care centers, clinics, and hospitals that treat a disproportionate share of financially-needy patients. These entities can realize significant savings on pharmaceuticals because the program sets “ceiling prices” based on data reported by the manufacturer under the Medicaid Drug Rebate Program. Manufacturers who falsely report prices and overcharge 340B entities may be violating the FCA.

Manufacturing Quality: Violations of the FDA’s cGMP Regulations

The FDA regulates the manufacture of drugs approved for marketing in the U.S. to ensure safety and quality. Its primary mechanisms for doing so are the FDA’s Current Good Manufacturing Practices (cGMP) regulations. Violation of cGMPs can lead to significant FCA liability.

Successful Cases and Awards

Examples of FCA settlements involving violations of cGMPs include:

  • Adulterated drugs: A drug manufacturer paid $750 million to settle civil FCA and criminal charges that (i) it manufactured and sold adulterated drug products (including drugs produced in a non-sterile environment), (ii) the factory’s water system was contaminated with micro-organisms, and that (iii) other medicines were being made in the wrong doses.
  • Adulterated drugs: Wholesaler AmerisourceBergen Corp. paid $885 million to settle civil FCA and criminal charges that it repackaged drugs in an unlicensed, unregistered facility with non-sterile conditions resulting in bacterial and other contamination.
  • Adulterated drugs: Healthcare company Baxter Healthcare Corporation paid $18.158 million to resolve its criminal and civil liability arising from Baxter’s failure to follow cGMP when manufacturing sterile drug products in North Carolina,

Clinical Trial and Post-Marketing Study Fraud

Before a new drug can be approved for marketing in the U.S., it typically has to pass a series of clinical tests or studies (including human trials) that show its safety and efficacy. In order to obtain FDA approval, drug manufacturers must submit extensive data regarding these trials.

In addition, FDA law requires that adverse events occurring after the drug is marketed be reported, and often FDA approval is conditioned on the manufacturer doing post-market studies of adverse events.

Failure to comply with these FDA laws or approval requirements or misconduct in clinical trials or post-marketing studies may give rise to an FCA action.

Unapproved or Adulterated Drugs

No drug is allowed to be sold without first obtaining FDA approval. This includes instances where a drug has been approved for one or more indications (i.e., purposes) by the FDA but is then modified in some way without following FDA requirements. Such a drug is considered unapproved or “adulterated.” Violation of the FDA’s “new drug” laws can result in FCA violations.

Successful Cases and Awards

Indeed, the largest FCA settlement of 2018 (and one of the largest in history) involved one of our cases, in which AmerisourceBergen paid a combined $885 million in criminal and civil remedies for introducing adulterated drugs into commerce. The company was opening drug vials purchased from manufacturers, pooling the vial contents, repackaging the drug product into pre-filled syringes, and selling the syringes to doctors for a profit. Reconstituting and repackaging the approved packaged drug vials in this way violated FDA law and in turn the FCA.

Patient Co-Pay and Deductible Kickbacks

Patient cost-sharing via co-payments and deductibles is an integral part of Medicare and Medicaid, ensuring that patients are sharing the costs of the treatment decisions they make. Studies have shown that if patients are required to pay even a small portion of their care, they will be better health care consumers and select items or services because they are medically needed, rather than simply because they are free. When companies improperly waive co-payments or deductibles, it can lead to unnecessary use of their product which, in turn, has a significant financial impact on federal health care programs. This is because, when the government pays for unnecessary or more expensive drugs, fewer funds are available to pay for truly needed services.

The government has made clear that waiving copayments and deductibles is reserved for cases of true patient financial hardship, an exception that should be rare, and that in most cases a good faith effort must be made to collect deductibles and co-payments. Otherwise, forgiving or subsidizing financial obligations to induce patients to use the item or service is considered an inducement in violation of the AKS, which explicitly enumerates waiver of copays and deductibles as a form of remuneration. That, in turn, gives rise to a FCA violation.

Examples of unlawful schemes include:

  • drug manufacturers that set up “patient assistance programs” to pay or defray the cost of co-pays and deductibles for the manufacturer’s drug regardless of the patient’s financial situation.
  • providers that overcharge the government by not charging and collecting patient co-pays. For example, a provider that tells Medicare it charges $100 for a drug but routinely waives the 20% patient co-payment has falsely represented the price as $100 instead of $80.
  • In December 2023, pharmaceutical company Ultragenyx paid $6 million to settle allegations that it offered free genetic tests to beneficiaries to receive test result information for marketing purposes, to collectively induce prescriptions of its drug Crysvita,  and referrals of health care providers.

Pharmacy Fraud

There are many different types of pharmacies, including:

  • retail pharmacies where a patient goes to get an outpatient prescription filled;
  • hospital/facility pharmacies which purchase and provide the drugs used in hospitals or for patients upon discharge;
  • specialty pharmacies that handle what are known as “specialty drugs,” often meaning high-cost drugs that treat complex diseases and require special handling or administering, shipping or storage; and
  • compounding pharmacies that combine, mix, or alter ingredients “to create a medication tailored to the needs of the individual patient.”

Each type of pharmacy has run afoul of the FCA, some in numerous ways. Examples include:

  • retail pharmacy chains failing to substitute a less expensive generic drug for a brand name drug; billing for a prescription that the patient never picks up (or later returns); programming its software to dispense (and auto-refill) insulin pens only in 5-pen cartons regardless of the amount of insulin prescribed; and overbilling Medicaid by failing to disclose its true “Best Price”– the lower drug prices it offers the public through its discount program.
  • hospitals accepting kickbacks to place one drug on the hospital’s formulary instead of a competitor’s drug.
  • specialty pharmacies switching patients from one drug to a different specialty drug based on kickbacks received from the drug manufacturer.
  • compounding pharmacies billing for invalid prescriptions that were not reimbursable because the pharmacy bribed doctors who had never seen the patients to write unnecessary prescriptions for their compounded products (e.g., pain or scar creams) or certain ingredients that were not medically necessary.

How to Report Pharmaceutical Fraud

The above are just some examples of the many different types of pharmaceutical fraud that can be prosecuted under the FCA. Unfortunately, fraud continues to plague Medicare, Medicaid, and other government health care programs and is not limited to the acts or settings described above. If you think you have information related to pharmaceutical fraud, please contact us for a free, confidential consultation.