On October 26, 2010, the Justice Department announced a $750 million settlement of criminal and civil actions stemming from a whistleblower suit against the pharmaceutical manufacturer GlaxoSmithKline (GSK). The settlement, which included a record $96 million award to the whistleblower, reflects the growing number and scale of False Claims Act (FCA) suits against the health care industry. In announcing the settlement, the Justice Department noted that the FCA has been used to recover approximately $4.2 billion since January 2009 in health care fraud cases. Recent statutory amendments are likely to further accelerate growth in the number of FCA cases filed by whistleblowers. The staggering civil and criminal penalties imposed in cases like the one against GSK should serve as a wake up call to health care companies. A robust compliance program is essential to ferret out potential fraud and abuse problems before they become the subject of costly whistleblower claims.

GSK Allegations Based on Implicit "False or Fraudulent" Claims Under FCA

The action against GSK was initiated in 2004 by Cheryl Eckard, a GSK quality control manager who had been recently terminated. Eckard filed suit under the FCA, which allows whistleblowers to bring qui tam suits on behalf of the government in order to recover money paid out by federal programs. The FCA authorizes the recovery of treble damages, statutory fines and attorneys' fees. Whistleblowers are also awarded a percentage of the recovery, which varies depending on whether the federal government chooses to intervene.

In her suit, Eckard alleged that she repeatedly complained to her superiors that a GSK plant in Puerto Rico fell below federal standards. For instance, she pointed out that drugs were exposed to contamination, improperly tested or improperly mixed together so that different pills were found in the same bottle. Eckard's superiors allegedly disregarded her complaints because they were more concerned about interrupting production or losing FDA approval of GSK drugs. As a result, Eckard alleged that federal health programs such as Medicare and Medicaid were paying for drugs that failed to comply with FDA quality assurance regulations or the conditions of the FDA's New Drug Application approval.

The allegations are a prime example of a growing trend in FCA cases where defendants are not accused of explicitly making "false or fraudulent claims" to the federal government for Medicare or Medicaid reimbursement, but rather are held liable because they implicitly certified that their product or service complied with "the conditions of payment" for federal health programs. Under FCA case law, the "conditions of payment" include compliance with statutes and regulations that have a nexus with the government's payment decision. In this way, the federal government can use the FCA as a means of penalizing the health care industry for failing to comply with a broad array of laws and regulations, such as the quality assurance standards that apply to pharmaceutical or medical device manufacturers, or the Anti-Kickback statute that applies to health care providers. Just last year, Pfizer entered a record $2.3 billion FCA settlement with the federal government to settle charges that it promoted off-label uses of its drugs and paid kickbacks to physicians to induce them to prescribe Pfizer drugs.

Whistleblower Suits May Lead to Government Intervention and Criminal Sanctions

The federal government intervened as a plaintiff in the civil suit against GSK, and 17 states and three cities also joined the suit, seeking recovery of Medicaid payments under state false claims act statutes. The DOJ brought separate criminal charges against GSK, which were settled for $150 million, the largest criminal fine ever assessed for a manufacturer of unadulterated drugs. The DOJ would not comment on whether criminal charges would be filed against individual GSK employees because the investigation is ongoing.

The criminal settlement comes just one week after the Department of Health and Human Services Office of Inspector General (OIG) released a new guidance notice stating that officers and managers of health care entities will be excluded from participation in federal health care programs if their employer is excluded or convicted of certain offenses. The OIG notice makes clear that it may use this authority even if the officer or manager had no knowledge of the unlawful activity, so long as they were in a position to prevent or influence the unlawful conduct. This notice is yet another signal that federal authorities have stepped up their enforcement of health care fraud and abuse laws, and those enforcement efforts are likely to expand because the health care reform bill significantly increased anti-fraud funding.

Strong Compliance Programs and Internal Investigations Reduce the Risk of FCA Liability

On top of these developments, the FCA statute was recently amended to remove certain barriers to whistleblowers and expand the definition of false claims. Whistleblowers suits have also generated publicity because of a whistleblower provision in the new Dodd-Frank Act regulating the financial industry. The recent publicity about large whistleblower recoveries, in conjunction with the statutory revisions expanding the scope of the FCA, increase the risk that employees will pursue whistleblower actions upon discovering health care-related fraud. Therefore, it is essential now more than ever for those in the health care industry to establish strong compliance programs to detect and remediate any fraud or misconduct that could otherwise form the basis for very costly whistleblower suits. Possible steps to avert FCA actions include:

  • Giving employees incentives to report compliance failures up the chain of command first, so that they can be remedied immediately;
  • Engaging outside investigators in response to serious complaints of misconduct when company officers may be prone to biased decision making; and
  • When misconduct is found to have occurred, consider whether early disclosure to the government is preferable to the possibility of a subsequent whistleblower suit or government investigation.

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