The Exclusion Illusion - Fixing A Flawed Health Care Fraud Enforcement System

Article by David W. Ogden1 and Elisebeth Collins Cook2 Executive Summary

Judging by the headlines, the federal government's efforts to prosecute fraud against the government in health care have been a great success. In the last decade, the annual fines imposed on pharmaceutical companies alone have increased 813 percent and approached a total of $25 billion in health care fraud recoveries,3 with more promised for 2012.4 But a deeper examination of these numbers suggests that the headlines may not reflect reality, and that there are significant problems with current enforcement of anti-fraud statutes.

A rational, effective, and fair health care fraud enforcement system should:

1) impose appropriate penalties on companies and individuals who defraud the government and generate appropriate recoveries for the public fisc; 2) afford those who believe they are wrongfully accused a meaningful opportunity to test the government's charges against them; 3) allow the courts to serve as the ultimate arbiter of the facts and the laws that govern the area, providing clear notice of what the law requires; and 4) ensure that companies that provide medicines and medical devices for patients in federal health care programs adopt and operate the most effective corporate integrity systems to minimize future violations.

These should not be controversial points. Yet the enforcement regime that has evolved in the United States over the last 15 years does not reliably accomplish any of these basic goals. Indeed, a review of the current enforcement regime reveals dysfunctional dimensions.

First, even on its own terms, a system yielding huge and escalating settlements is not sustainable. The settlements themselves impose high costs on businesses that produce important—even life-saving—products and thus are harmful to the health care system and bad for the economy. The federal government's goal should be to reduce these losses to the health care system by focusing on increased compliance with clear rules, thereby obviating any call for the imposition of penalties. Yet the government appears to be advocating more of the same—extracting ever larger sums from pharmaceutical and medical device companies, without apparently giving genuine consideration to whether alternatives might produce better compliance at lower costs.5 Second, the current system of huge out-of-court settlements fails to provide clear rules because enforcement avoids the courts almost entirely, leaving companies who want to understand and comply with the law without meaningful guidance in many areas. Third, those unusual cases that have gone to trial (almost invariably against individuals, after the government has obtained a major out-of-court settlement with their manufactureremployer) often demonstrate that the government's case was overblown, or in some cases completely unfounded, leading to acquittals that in turn suggest that the settlements were unsound. Finally, the government has pursued criminal charges or career-destroying exclusion from the industry against individuals even where the government admits that the individuals played no role in the alleged crime. Despite the patent unfairness of the idea, and despite the government's selfcongratulatory press releases about major settlements, government officials themselves openly question whether the escalating payments extracted through settlements and corporate pleas can bring about better compliance. Their disturbing solution is to increase recourse to punishing individuals who are without fault.6 Preventing waste, fraud, and abuse in our health care system is of course an important objective; billions of dollars are at risk, and strong prevention and enforcement is critical. But the government's goals for the health care system should be to reduce fraud and reduce unnecessary costs. Measured against those goals, the current enforcement headlines are more a mirage than an indication of a successful enforcement program, and heaping on larger and larger fines and/or punishing innocent people will not fix the system and would be inconsistent with our core values.

A relatively simple but fundamental change could promote significantly improved corporate compliance across industry, help restore the courts to their appropriate role in interpreting and applying the law, thereby affording better notice of what the law requires, and increase the fairness of outcomes in this area, all while avoiding the jarring prospect of the federal government choosing to punish the innocent on the theory that it will deter the guilty.

A substantial part of the dysfunction in the present enforcement system emanates from a core flaw: the way the threat of "exclusion" from federal health care programs is utilized. Exclusion is an enforcement tool wielded (in the main) by the Inspector General of the Department of Health and Human Services ("HHS"), pursuant to which an individual or company is banned for a period of time from participating in federal health care programs, including Medicare and Medicaid. Originally and for many years exclusion was applicable only to so-called "direct" providers of products or services to program beneficiaries—doctors and hospitals, for example.7 But 14 years ago, HHS dramatically expanded exclusion's potential reach by making entities that are indirectly reimbursed for products prescribed to program beneficiaries, including pharmaceutical and medical device companies, subject to exclusion.8

There are effectively two types of exclusion that can apply to companies. Under current regulations, a pharmaceutical or medical device company faces "mandatory" exclusion from all federal health care programs based on a variety of statutorilydesignated offenses, whether or not the company provides a valuable, unique, or essential product for program beneficiaries. A company may also suffer "permissive"— or "discretionary"—exclusion based on the HHS Office of the Inspector General's ("OIG") judgment in a range of circumstances, even, for example, when prosecutors decline to indict.

Extended to "indirect" providers, the threat of exclusion therefore has enormous power. Put simply, because federal programs constitute an enormous and growing portion of the respective markets,9 essentially no pharmaceutical or medical device manufacturer can survive exclusion. For that reason, a concrete threat of exclusion—in the form of an indictment for an offense mandating exclusion—itself threatens to destroy a company in the way a mere indictment destroyed the accounting firm Arthur Andersen.10 Thus, a company will logically accept a settlement or plea agreement largely on the government's terms so long as exclusion is not among them.

In fact, ironically, as discussed below, exclusion is an objectively undesirable outcome for federal programs and their beneficiaries, because patients benefit from the products of the companies in question. And so the OIG typically agrees not to exclude pharmaceutical or medical device companies in exchange for their adopting a "Corporate Integrity Agreement" ("CIA") requiring compliance practices approved by OIG, and thus corporate exclusion in this area virtually never happens.11 It might be thought, then, that the threat of exclusion is an empty one, one that cannot be taken seriously by companies considering whether to accept the government's demands for settlements or guilty pleas. But to the contrary, indictment for an offense carrying mandatory exclusion makes clear that upon conviction, the interests of the federal government will be irrelevant and exclusion will follow as a matter of law. And in the charging process and the process of considering discretionary exclusion, the fact remains that the balance of harms between the company and the government entirely favors the prosecutors: While a federal program and the care offered to beneficiaries will be diminished by exclusion, unlike the company at issue, the federal program will not be destroyed. Exclusion is likely an acceptable (if sub-optimal) outcome for the government. But for companies, by contrast, exclusion means destruction. This complete imbalance of bargaining power drives the dysfunction of the present system, compelling companies to accept settlements largely on the government's terms, effectively without the power to contest the government's theories of liability or damages in court.

The public policy goals motivating the current enforcement regime would be better served by a system that encouraged all companies to adopt and maintain stateof- the-art corporate integrity programs, certified as such by a rigorous and credible third-party certifying organization. Exclusion should remain available in appropriate cases for companies that do not adopt or maintain a certified corporate integrity program, and for officers or employees who acted with scienter (i.e., individuals who are personally culpable). But for companies that have adopted such programs, the threat of exclusion and nofault punishment of officers and employees should be eliminated, so that federal programs cannot be deprived of medical products produced by companies with reliable compliance systems, and so that such companies have a meaningful ability, when accused of wrongdoing, to take their case to court if they believe they are not guilty or that any violation has caused less harm than the government contends.

This proposed approach would retain the virtues of the present system: strong deterrence and effective compensation for fraud and other culpable behavior related to federal health care programs and strong incentives for adopting aggressive corporate integrity plans induced by the desire to avoid exclusion. Indeed, the proposed approach would give companies powerful incentives to adopt and maintain state-of-the-art corporate integrity programs. But this new approach would also mitigate the extremely counterproductive aspects of the current...

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