A New Breed of Whistleblower

by Lesley Ann Skillen, Esq.

Published in Pharmaceutical Executive, August 2003

The recent $257 million settlement between the government and Bayer Corporation — $34 million of which will be paid to a whistleblower — is emblematic of a new kind of whistleblowing. The $257 million was the largest Medicaid fraud settlement in history. The whistleblower was a corporate marketing executive at Bayer. So valuable were his efforts on behalf of the Department of Justice that it agreed to pay him 24% of the federal portion of the settlement – just one percentage point less than the statutory maximum.

More whistleblowers than ever are management and executive level employees who turn informer on their own companies. They are empowered by a federal statute, the False Claims Act, whose qui tam whistleblower provisions permit a private citizen with non-public knowledge of a fraud on the government to file a lawsuit and receive a share of the proceeds. The increasing number of state False Claims Acts – there are more than fifteen to date – increases the exposure of pharma companies to qui tam lawsuits targeting dubious Medicaid drug pricing practices.

U.S. ex rel. Couto v. Bayer Corporation was one such case. The qui tam plaintiff (known as the relator), George Couto, contacted our law firm in late 1999. He alleged that Bayer knowingly underpaid its Medicaid rebates through a fraudulent “private labeling” scheme, whereby Bayer omitted from its Best Price reports to the government the heavily discounted “private label” prices paid by the HMO Kaiser Permanente for the popular drugs Cipro and Adalat CC.

Under the Medicaid drug rebate program, manufacturers that sell drugs to Medicaid are required to give Medicaid the benefit of discounts given to commercial customers such as hospitals, HMOs and pharmacy chains. These discounts are passed on to Medicaid in the form of a rebate paid by the manufacturer. Mr. Couto alleged that to circumvent the Best Price requirements and avoid giving Medicaid the 36-40 percent discount it was giving Kaiser on the antibiotic Cipro and the antihypertensive Adalat CC, Bayer substituted Kaiser’s National Drug Code (NDC) number for its own NDC number on the bottles of tablets sold to Kaiser. Bayer then purported to pass the rebate responsibility on to Kaiser, even though Bayer knew that Kaiser did not have a Medicaid rebate agreement and did not pay Medicaid rebates. Bayer then omitted the Kaiser “private label” price from its Best Price reporting. Over time, the difference in the rebates that Bayer owed Medicaid and the rebates it paid grew to more than $100 million

The Department of Justice intervened in Mr. Couto’s lawsuit, leading to a $251.4 million civil settlement and a $5.6 million criminal fine in April 2003. At the same time, GlaxoSmithKline settled similar civil charges, also arising from allegations originally filed in Mr. Couto’s lawsuit, relating to its antidepressant Paxil and its nasal allergy spray Flonase. GlaxoSmithKline agreed to pay $88 million, bringing the total settlement announced by the government in April to $344 million.

Federal and state regulations relating to drug pricing are complex and pharma companies have made strenuous efforts over the years to creatively interpret those rules in the interests of profit maximization. The Bayer case, amongst other recent government initiatives against pharma fraud, shows that the DOJ is in no mood to accept an apology and deliver a slap on the wrist when those practices cross the line into conduct that the DOJ views as fraudulent. And whistleblowers have more incentives than ever to expose such practices. Not only have recent multi-million dollar qui tam awards paid to executives in the pharma industry made headlines, but whistleblowers — as evidenced by Time’s 2002 award of Person of the Year to Enron’s Sherron Watkins and two other whistleblowers – have become the new heroes of corporate America.

But pharma companies need not live in fear of whistleblowers. Mr. Couto consulted our firm about filing a qui tam suit only after he became convinced that top management would neither halt the “private labeling” scheme nor protect him from retaliation if he objected internally. Pharma companies must work hard to maintain an open and ethical culture and an effective compliance program. Crucial to such program is a procedure for employees to report questionable conduct that is effective both to prevent retaliation and to satisfy employees that their concerns will be properly addressed. Both the Sarbanes-Oxley Act and the Department of Health and Human Services’ compliance program guidance for the pharma industry mandate such procedures.

Potential whistleblowers are not the enemy if companies are truly responsive to bona fide reports by employees about suspected misconduct, and truly committed to promoting an environment in which ethical corning-cutting will not be tolerated.