1. 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 FRAUD CONTROL ISSUES AFTER THE START OF MEDICARE PART D PRESCRIPTION DRUG PROGRAMS HCCA JANUARY 23, 2006

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 Qui tams

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 1.Unfair Trade Practices 2. Pharmacy Board Regulations 3.Commercial Bribery/Kickback Statutes 4.State Insurance Regulation 5.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