$345.5 million settlement by Schering-Plough yesterday to resolve a government Medicaid investigation provides a detailed glimpse into how drug companies can manipulate prices to overcharge state and federal programs.
Government officials have taken a keen interest in how drug makers price and market their drugs in recent years, and the settlement is the latest in a series reached with large drug makers over accusations that they have overcharged Medicaid. Last year, Bayer paid $257 million and GlaxoSmithKline paid $86.7 million to settle similar allegations.
During the late 1990's, Claritin, a popular allergy medicine, generated billions of dollars in sales for Schering-Plough, and the company poured tens of millions of dollars into consumer advertising, using the celebrity Joan Lunden to endorse it.
But two of its large customers, the insurers Cigna and PacifiCare Health Systems, were threatening to steer their members to a much cheaper competitor, Allegra, unless Schering-Plough lowered Claritin's price. Schering refused. But it offered both insurers deals that prosecutors say resulted in Cigna's and PacifiCare's effectively paying less than the drug maker demanded from Medicaid, the federal and state health program for the poor. Federal law requires drug makers to offer their lowest prices to Medicaid.
"The bottom line is that we're fighting to keep the costs of health care down for everyone,'' said Patrick L. Meehan, the United States attorney in Philadelphia who brought the criminal case and was involved in yesterday's civil settlement with federal officials and the nation's state attorneys general.
The company said yesterday that the settlement covered activities that took place before the current management was put in place last year.
In the lawsuit brought against Schering-Plough, prosecutors outlined the great lengths to which the company went to try to offer these customers discounts without seeming to lower a drug's price. The $10 million package offered to Cigna involved what Mr. Meehan described as "nothing more than an old-fashioned kickback,'' a payment of $1.8 million that was described as a "data fee'' for information that Schering was already getting.
"It was a clear payment for nothing," Mr. Meehan said. A unit of Schering-Plough agreed to plead guilty to the criminal charges over the kickback and to pay a $52.5 million fine. Schering-Plough, which is based in Kenilworth, N.J., will also sign a corporate integrity agreement whose measures include five years of audits of its Medicaid pricing.
Prosecutors say the company also offered the health plan $3 million in discounts on Claritin Reditabs, a quick dissolving form of the medicine, as well as prepayments that were essentially interest-free loans and services at far below their market value.
The company resorted to similar tactics to offer price breaks to PacifiCare, which included the same kinds of interest-free loans as well as steep discounts on other products, prosecutors say. The company even agreed to cover some of the plan's antihistamine costs if they rose sharply, and Schering paid PacifiCare roughly $25 million under the arrangement in 1998, 1999 and 2000.
Both Cigna, which is based in Philadelphia, and PacifiCare, in Cypress, Calif., said they had cooperated with investigators, and neither company faces any charges. "The responsibility to report the best price lies with Schering," Mr. Meehan said.
The government's inquiry began six years ago after three employees of a unit of Schering-Plough filed a suit under the private whistle-blower provision of the federal False Claims Act. The whistle-blowers, Charles Alcorn, Beatrice Manning and Raymond Pironti Jr., were mid-level executives who approached a lawyer, Neil Mullin, about their concerns over a company executive they say was sexually harassing another employee. The discussions broadened into question about why their unit was losing money, Mr. Mullin said, which led them to realize that they were part of a larger scheme to provide invisible discounts.
"This was a very byzantine and complex fraud," Mr. Mullin said.
All three executives have left the company, and two of them are preparing for different careers while the third contemplates his future, Mr. Mullin said. As part of the settlement, they will divide $31.7 million.
Under new management since 2003, Schering-Plough said it was intent on putting its past activities behind it. "We think we are making progress," said Brent Saunders, a senior executive who oversees compliance and business practices for Schering-Plough.
To encourage ethical behavior, he said, Schering-Plough has changed the way it pays bonuses and is developing new computer systems to better track the kinds of deals it strikes with customers, in order to calculate how much it is really charging. "Our mantra is transparency" to the government, Mr. Saunders said.
But the company has not resolved all of its legal issues, Mr. Saunders conceded. Those include a similar investigation by government officials in Boston. "We are working as hard as we can to be responsive and to bring that to a conclusion as quickly as possible.'' Over the last two years, the company has set aside $500 million to pay fines expected in the various cases.
With word of the imminent settlement first reported on July 16, investors had little reaction to yesterday's news. The stock closed at $19.46, down 7 cents.