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Pharmaceutical Industry Continues to Defraud Federal, State Governments

Health Letter, April 2016

By Sammy Almashat, M.D., M.P.H.

Marketing drugs for unproven and often dangerous uses. Paying kickbacks to doctors to increase prescriptions of expensive medications. Concealing from the Food and Drug Administration (FDA) critical data on drug safety.

These are just a few of the illegal activities drug companies have committed over the past 25 years, as revealed in a Public Citizen report published in March.[1] The report compiled all settlements that the pharmaceutical industry has been forced to sign with the federal and state governments for engaging in such illegal activities from 1991 through 2015 — and noted a concerning decline in such settlements and fines over the past two years.

Overall findings

Public Citizen’s report is an update of two previous undertakings (in 2010 and 2012) that scoured federal and state government websites for press releases announcing settlements with drugmakers for illegal behavior.[2] The latest report indicates that 92 different companies have finalized 373 settlements with, and paid nearly $36 billion to, the federal and state governments for wrongdoing from 1991 through 2015.[3]

While this seems like a large sum, it is effectively a drop in the bucket for an industry in which the top 11 companies alone generated $711 billion in profits during just 10 (2003-2012) of those 25 years.[4]

Federal investigations and unlawful promotion

The most common violation resulting in a federal settlement was unlawful promotion, which most often involved companies marketing their drugs to doctors for unapproved uses.

For example, in a 2013 settlement, Johnson & Johnson paid a $2 billion penalty for promoting its antipsychotic Risperdal for off-label use in elderly patients with dementia, even though the company allegedly knew — from its own concealed study findings — that the drug may cause strokes in those patients.[5]

The government further alleged that the illegal marketing continued even after the FDA, in April 2005, required a black-box warning that atypical antipsychotics, including Risperdal, increased the risk of death in patients with dementia-related psychosis.[6] (For an in-depth look at Johnson & Johnson’s alleged wrongdoing in the marketing of Risperdal, see “America’s Most Admired Lawbreaker” by Steven Brill in The Huffington Post.[7])

Other violations prosecuted by the federal government include kickbacks to physicians in Third World countries (a violation of the Foreign Corrupt Practices Act) and monopoly practices intended to impede competition from rival drug companies.

For example, a 2015 settlement for $1.2 billion involved Teva Pharmaceuticals’ subsidiary Cephalon allegedly engaging in so-called pay-for-delay deals: paying off four different generic manufacturers to delay the introduction of generic competitors to Cephalon’s lucrative sleep medication Provigil.[8]

State investigations

State governments have reached 233 settlements and recovered a total of $3.8 billion from drug companies since 1991. Overall, 30 states have successfully pursued investigations on their own (without the aid of either the federal government or other states) against drug companies suspected of defrauding their health programs.

Those states have recouped $2.3 billion in settlement money since 1991. The investigations have been very cost-effective, with 17 of these 30 states recovering $1 or more for every dollar spent on enforcement of Medicaid fraud regulations. South Carolina has recouped the most money ($12.25) per enforcement dollar spent, while Hawaii recovered the most money as a proportion (15 percent) of Medicaid drug spending.

Decline in settlements and lack of enforcement

Despite these tallies, however, the most striking finding of Public Citizen’s report was that both federal and state settlement activity has decreased sharply over the past two years, with fewer settlements and financial penalties in 2014-15 than any two-year period since approximately the middle of the last decade.

The decline in settlements is due mainly to far fewer states successfully prosecuting drug companies on their own, while fines have decreased because of fewer large federal settlements involving off-label promotion.

The reasons for this decline are unclear, and it remains to be seen if the decline represents an emerging long-term trend. But before this recent decline, settlements were already far too small to deter systematic wrongdoing. Risperdal alone brought in $11.7 billion in sales for Johnson & Johnson, or almost six times the $2 billion settlement, in just the first 12 years after the drug’s approval (1994-2005).[9] In two of the years (2002-03) during which the fraud allegedly occurred, 75 to 84 percent of Risperdal use in elderly patients was off-label, with approximately half of this use in patients with dementia.[10]

Legislation introduced by Sen. Bernie Sanders (I-Vt.), first in May 2012[11] and again in September 2015,[12] seeks to prevent companies that have pleaded guilty to, or been convicted of, illegal activity involving lucrative drugs from continuing to generate astronomical profits off the drugs. The legislation would mandate that such companies lose FDA-granted marketing monopolies for the specific drugs involved in criminal activity. The Sanders legislation would serve as a far more effective deterrent against pharmaceutical fraud than current settlement penalties, while increasing access to cheaper generics for patients.

With a few exceptions, the federal government has historically avoided holding accountable the executives and senior employees of drug companies that engage in illegal behavior. This changed with the recent announcement in October 2015 that three former district managers and the former president of Warner Chilcott (now a subsidiary of Actavis ) had been criminally charged with conspiring to submit fraudulent forms for the company’s drugs and paying kickbacks to physicians.[14] Two of the former district managers pleaded guilty to, among other charges, “conspiracy to commit health care fraud,” while the former president, Carl Reichel, was arrested on the same day that Department of Justice announced a $125 million settlement with the company over the allegations.[15]

These recent indictments were a welcome — but long overdue — development, and many more such indictments are urgently needed. Not only must the government hold accountable individual executives, it must impose penalties on their companies that actually reflect the profits made from the blockbuster drugs involved in illegal activity. Such efforts would go a long way toward changing the cost-benefit equation that has made fraud effectively a business model within the pharmaceutical industry, a model where crime does in fact pay.

To read Public Citizen’s report, visit: https://www.citizen.org/hrg2311


[1] Public Citizen. Twenty-Five Years of Pharmaceutical Industry Criminal and Civil Penalties: 1991-2015. March 31, 2016. https://www.citizen.org/hrg2311. Accessed April 1, 2016.

[2] Public Citizen. Rapidly Increasing Criminal and Civil Monetary Penalties Against the Pharmaceutical Industry: 1991 to 2010. December 16, 2010. https://www.citizen.org/our-work/health-and-safety/rapidly-increasing-criminal-and-civil-monetary-penalties-against#overlay-context=our-work/health-and-safety/letter-unaids-guidance-document-hiv-preventive-vaccine-research; and Public Citizen. Pharmaceutical Industry Criminal and Civil Penalties: An Update. September 27, 2012. https://www.citizen.org/our-work/health-and-safety/pharmaceutical-industry-criminal-and-civil-penalties-update#overlay-context=our-work/health-and-safety/pharmaceutical-industry-continues-defraud-federal-state-governments. Accessed March 10, 2016.

[3] Public Citizen. Pharmaceutical Criminal and Civil Settlements Through 2015. March 31, 2016. https://www.citizen.org/hrg2311. Accessed April 1, 2016.

[4] Health Care for America Now! Big Pharma Pockets $711 Billion in Profits by Price-Gouging Taxpayers and Seniors. April 8, 2013. http://healthcareforamericanow.org/2013/04/08/pharma-711-billion-profits-price-gouging-seniors/. Accessed March 10, 2016.

[5] The company also allegedly ignored repeated FDA warnings that its promotional practices were “misleading”: Department of Justice. Johnson & Johnson to Pay More Than $2.2 Billion to Resolve Criminal and Civil Investigations. November 4, 2013. http://www.justice.gov/opa/pr/johnson-johnson-pay-more-22-billion-resolve-criminal-and-civil-investigations. Accessed March 10, 2016.

[6] U.S. District Court, Eastern District of Pennsylvania. United States of America v. Janssen Pharmaceuticals. Criminal Information. http://www.justice.gov/sites/default/files/opa/legacy/2013/11/04/janssen-info.pdf. Accessed March 10, 2016.

[7] Brill S. America’s Most Admired Lawbreaker. The Huffington Post. http://highline.huffingtonpost.com/miracleindustry/americas-most-admired-lawbreaker/. Accessed March 10, 2016.

[8] Federal Trade Commission. FTC Settlement of Cephalon Pay for Delay Case Ensures $1.2 Billion in Ill-Gotten Gains Relinquished; Refunds Will Go To Purchasers Affected By Anticompetitive Tactics. May 28, 2015. https://www.ftc.gov/news-events/press-releases/2015/05/ftc-settlement-cephalon-pay-delay-case-ensures-12-billion-ill>. Accessed March 10, 2016.

[9] U.S. District Court, Eastern District of Pennsylvania. United States of America v. Janssen Pharmaceuticals, Inc. Filed November 4, 2013. http://www.justice.gov/sites/default/files/opa/legacy/2013/11/04/janssen-info.pdf. Accessed March 10, 2016.

[10] Ibid.

[11] Maxmen A. Vital prescription-drug bill plods though Senate. Nature Newsblog. May 23, 2012. http://blogs.nature.com/news/2012/05/vital-fda-bill-plods-though-senate.html. Accessed March 10, 2016.

[12] Congress.gov. S. 2023 – Prescription Drug Affordability Act of 2015. Introduced September 10, 2015. https://www.congress.gov/bill/114th-congress/senate-bill/2023/text#toc-id949AFDF5ED7747CA94B46DFDA34D7130. Accessed March 10, 2016.

[13] Reuters. Actavis says Warner Chilcott unit held talks to settle U.S. probe. May 14, 2015. http://www.reuters.com/article/2015/05/15/us-actavis-ie-walter-chilott-idUSKBN0O004O20150515. Accessed March 10, 2016.

[14] U.S. Department of Justice. Press release. Warner Chilcott Agrees to Plead Guilty to Felony Health Care Fraud Scheme and Pay $125 Million to Resolve Criminal Liability and False Claims Act Allegations. October 29, 2015. http://www.justice.gov/opa/pr/warner-chilcott-agrees-plead-guilty-felony-health-care-fraud-scheme-and-pay-125-million. Accessed March 10, 2016.

[15] Ibid.