Editor's note: The following article was distributed at the December, 1997 annual meeting of the Food Drug & Cosmetic Law Institute, and is re-printed here with the permission of the authors.

Off-Label Promotion, Fraud And Abuse And False Claims Act Concerns In Pharmaceutical Promotional Grants

It is hard to believe that giving away money can be a crime, expose a company to massive fines, or cause approval nightmares for a company's next great product. But it can. And the prospect that giving away money can lead simultaneously to exposure under both the food and drug laws and traditional healthcare laws often is overlooked.

Grant giving, as the practice of giving away money is more commonly known in the industry, is of course a ubiquitous practice. Manufacturers all dispense research grants -- often in the form of "grants-in-aid" -- and "educational" grants to support CME-related and other educational programs. Not surprisingly , these grants are often disbursed to customers or potential customers.

When a grant is provided to a customer (or potential customer), it may violate the Anti-Kickback statute if one purpose is to induce e the customer to buy the company's product. On an entirely separate front, the same grant -- if it is viewed as a discount in disguise --- may have implications for a drug's or biologic product's "best price" and hence the amount the manufacturer owes to the states under the Medicaid rebate program. And, to add insult to injury, the same grant -- if it supports an educational program on an unapproved use -- may be viewed by the FDA as off-label promotion which may violate the Federal Food, Drug and Cosmetic Act.

This litany of potential legal troubles is not a hypothetical one. To the contrary, the industry's promotional practices, including grant giving, are being subjected to unprecedented scrutiny by law enforcement agents -- both federal and state --under not just the FFDCA, but also the traditional health care fraud statutes, including the False Claims Act and the Anti-Kickback statute. As James Sheehan, Assistant U.S. Attorney for the Eastern District of Pennsylvania and a leader in the healthcare fraud prosecution, recently told the American Society of Consultant Pharmacists, "since the [recent] creation of dedicated healthcare fraud units in every U.S. Attorney's office and in every Inspector General's office and in mots FBI offices, there are now people whose full time job is to focus on healthcare fraud cases and to bring them to proper resolution." And, more pointedly," [w]ith the greater importance of drugs and drug regimens in treating patients... this is now a major focus of U.S. Attorneys' offices around the country."

Grants are but one example of the promotional practices coming under increasing scrutiny. "Value added programs," speaker programs at exotic locales, HMO formulary placement practices and other promotional efforts are on prosecutorial radar screens as well. Grants, however, are a paradigmatic example of how promotional practices can implicate seemingly unconnected legal disciplines.

The Anti-Kickback Statute

Whether a grant violates the Anti-Kickback statute generally turns on a set of complex considerations. The statute provides, in pertinent part, that whoever "knowingly and willfully" "offers or pays" any "remuneration" to any person to "induce" that person to "purchase, lease, order or arrange for or recommend purchasing, leasing, or ordering any good, facility service or item" which is reimbursable under a federal health program shall be guilty of a felony. Under the terms of this statute, paying money or transferring value to a customer (or potential customer) is not per se illegal; instead, whether it is illegal depends on whether the payment fits within a statutory or regulatory "safe harbor" (for personal services, discounts, GPO administrative fees, or "risk sharing agreements") and whether it was provided with improper intent. Those determinations tend to be highly fact-specific.

As followers of the industry are well aware, federal authorities have already prosecuted industry players under the Anti-Kickback statute for grant-giving practices. Grants, for example, were at the heart of the $161 million Caremark settlement. And several years ago, Hoffman-LaRoche paid $450,000 to settle allegations that certain research grants were in fact kickbacks.

Notwithstanding these cases, Mr. Sheehan, a bellwether on these matters, recently warned that "in...the pharmaceutical industry, for so long there has not been a lot of enforcement [under the Anti-Kickback statute] but I think there are a lot of practices out there that people have taken for granted." In particular, he singled out as a current focus grants (and other payments) intended to influence formulary decisions by managed care organizations and their representatives. In his words, "payment in order to induce a shift [in market share] is just as much of a 'kickback' from our perspective as" frequent flyer awards and other more straightforward kickback violations.

Medicaid Rebates

Grant giving, like other payments to customers, can also impact the Medicaid rebate system. Under that system, manufacturers are obligated, with certain exceptions, to rebate to the state Medicaid programs the difference between their average manufacturer's price and their best price for covered outpatient drugs. Grants, of course, are not the primary determinant of "best price," but could theoretically impact "best price" if they are, in effect, rebates in disguise. Or, put another way, seemingly innocuous grants can be transmogrified into hidden discounts unless proper steps are taken to evaluate the purpose and effect of the grants.

Manufacturers' rebate practices are currently under scrutiny by the Justice Department, the Office of Inspector General and several states. As has recently been reported in the press, these law enforcement agencies are conducting a relatively wide-ranging inquiry into whether rebate practices have run afoul of the False Claims Act. Thus, potential liability under the False Claims Act, like liability under the Anti-Kickback statute, is a very real threat.

Off-Label Promotion

Finally, grants designed to support educational programs may expose a manufacturer to liability under the Federal Food, Drug and Cosmetic Act if the supported educational programs relate to unapproved uses of a drug or biologic product. Under the FDA's guidance on industry support for educational programs--issued in final form last week-- a manufacturer may not support such "off-label" programs unless those programs are "independent" of the manufacturer's influence, as evidenced by a written agreement or other safeguards. This sort of "off-label promotion" can expose a company to sanctions under the FFDCA's criminal provisions, as well as to civil and administrative remedies.

The threat of prosecution for off-label promotion is a real one. FDA has recently ramped up its off-label investigations, utilizing both civil and criminal avenues. Investigations by DDMAC may now end up in the Office of Criminal Investigations, in the Justice Department, or in a grand jury.

As in the fraud and abuse arena, intent plays a significant role in the examination of grants under the FFDCA enforcement microscope. The DDMAC CME guidelines are helpful predicates, but not final arbiters, of the legality of individual grants.

Why Has Enforcement Increased?

The recent increase in prosecutorial activity in the health care industry generally and the pharmaceutical sector in particular can probably be traced to two significant trends. First, as Mr. Sheehan noted, Congress has recently devoted substantial funds towards efforts to identify and prosecute healthcare fraud, in whatever segment of the industry it may lie. This increase in prosecutorial resources has followed closely on the heels of a rapid increase in the size of the FDA's Office of Criminal Investigations. And, on a related note, the Justice Department has identified the eradication of healthcare fraud as its number two priority, immediately behind violent crime.

Second, employees have become increasingly aware of the economic benefits of becoming a "whistleblower." Under the qui tam provisions of the False Claims Act, individuals who bring violations of that Act to the attention of the Government may be entitled to a very significant percentage of any recovery. And, in cases that do not involve the False Claims Act, employees are filing employment actions, claiming that they suffered adverse employment action because they refused to go along with illegal promotional or payment practices.

The High Cost of Non-Compliance

Non-compliance with any of these statutory schemes can extract a high price. Most obviously, each of these schemes carries potential criminal penalties and violations of the False Claims Act, the Medicaid rebate provisions, and the Anti-Kickback statute may carry very substantial financial penalties as well. But in many instances the highest price may result from agency delay in approving an NDA.

Beyond this, there is a new potential cost of noncompliance on the horizon. In September of this year, the Department of Health & Human Service's Office of Inspector General proposed to amend its current rules governing both mandatory and permissive "exclusion" from the government health programs to reach manufacturers of drugs, devises and durable medical equipment even though such manufacturers are not traditional "providers" -- i.e., they do not submit claims directly to the federal (or state) programs. Under this proposed rule, providers would not receive reimbursement for products purchased from an "excluded" manufacturer, which, of course, would be a virtual death knell for the manufacturer.

Third, whether or not a company is ever sanctioned, government investigations can themselves impose significant costs on companies. They often are big, complex and time-consuming. And, unless properly managed, they can consume an undue portion of a company's intramural resources and distract manufacturers from doing what they are supposed to be doing -- researching, manufacturing, and selling products.

Finally, investigations can lead to an additional set of problems for public companies. The failure properly to disclose an investigation -- or even the company's underlying activities -- may lead to exposure under the federal securities laws. Moreover, directors may face charges of mismanagement for failing properly to manage either the underlying activities and the relevant disclosure.

What Can Manufacturers Do?

Manufacturers, of course, are not defenseless against government investigations. In Anti-Kickback cases, the government, among other burdens, faces the burden of proving that a person paid any kickback "knowingly and willfully," which is an extremely high mens rea standard. And in False Claims Act cases, even civil ones, the government must prove that the defendant "knew" that it was submitting a claim that was false. Finally, defendants in cases involving off-label promotional practices have a host of defenses, including factual arguments -- e.g., they did not act with an intent to defraud or mislead, and hence did not commit a felony -- and legal arguments concerning the proper scope of the FFDCA and the protections afforded by the First Amendment.

But more importantly, manufacturers can take numerous measures to stay out of trouble in the first instance. While the full range of prophylactic measures is well beyond the scope of this paper, there are a number of steps that all companies should consider.

First, they should determine whether they have exposure under any of the relevant statutory schemes. Second, they should either develop policies and procedures designed to address potential exposure or amend their existing policies to address weaknesses and areas of undue exposure. Third, they should train -- and retrain -- their employees, including management. Many of these statutory schemes are complex even for lawyers, and non-lawyers need constant reminding -- not just about what they cannot do, but also about what they can do consistent with the various laws. Fourth, manufacturers should have state-of-the art compliance programs designed to detect and root out illegal practices. The existence of such a program can be a major factor in avoiding indictment and in minimizing penalties in the event of a conviction or plea. For these reasons, at lease one court has held that officers of public companies have a fiduciary responsibility to ensure that their companies have adequate compliance programs in place. Finally, companies should heighten internal awareness of the fact that FFDCA, fraud and abuse and False Claims Act issues are not so distinct in practice -- a grant by any name may be a violation of multiple regulatory schemes.

* Mr. Bass and Dr. Kalb are partners in Sidley & Austin's Washington, D.C. Food and Drug Law and Healthcare groups, and devote a substantial portion of their practices to the investigation and defense of FFDCA off-label, False Claims Act and Anti-Kickback claims.

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