In October, Bristol-Myers Squibb agreed to pay the Securities and Exchange Commission (SEC) $14 million in order to settle charges that the company had bribed doctors in China in order to encourage prescriptions of its drugs. And then earlier this month, the pharmaceutical giant Novartis settled a U.S. False Claims Act whistleblower suit for $390 million (it was originally a $3.3 billion lawsuit).
Extravagant settlements such as these are all-too-commonplace in the biopharma industry, which was seen fines range from chump change to several billion dollars (such as GlaxoSmithKline's infamous $3 billion 2012 settlement).
You take a couple million here, a couple billion there, and soon it starts to add up to real money. But where does all that cash go, anyway?
BioPharma Dive spoke with Patrick Burns, Co-Director of Taxpayers Against Fraud, an organization that's intimately involved in bringing forward many major False Claims Act cases, to try and clear up the haze surrounding the ultimate fate of biopharma fines and to discuss whether such a monetary punitive system really does much to prevent bad behavior in the life sciences.
Where do the funds flow?
When a company is fined by the Department of Justice under the False Claims Act (the law that most often dogs pharma), that money begins a journey deep into the heart of the federal government's coffers. And it's not always easy to keep track of exactly where it goes.
A portion of the money is paid out to the whistleblower(s) who brought the illicit activity to regulators' attention and launched the so-called "qui tam" suit in the first place. According to the Justice Department, whistleblowers (or "relators") can nab as much as 30% of the recovered money. Out of a record $3 billion in False Claims settlements in 2014, these relators received $435 million.
The Crime Victims Fund, HCFAC, & the slush fund
After that, things get a little more complicated. "In a world in which we are all looking for accountability, there isn’t real good accounting on where the money goes," said Burns.
The DOJ has a fund known as the Crime Victims Fund that is supposed to be used to make victims of crimes whole. For instance, if you're shot during the commission of a bank robbery, or were bilked by a federal fraudster, this fund pays out to you.
But the money from the CVF only stems from criminal, not civil, fines (not that pharma companies are never fined this way, as Glaxo's 2012 settlement, which had a $1 billion criminal fine element, demonstrates). And there is some question about how effectively this money is used for victim recompense. Critics point to the fact that, at this very moment, the Fund has a balance of about $9 billion.
When it comes to civil and False Claims fines, the destination is a bit more murky. And largely, that's by design.
"There is a law that was passed initially in 1884 when rocks were soft and dinosaurs still ruled the Earth. It is called the Anti-Deficiency Act," explained Burns. "The Anti-Deficiency Act basically says that any money that is collected for Uncle Sam–criminal fines, civil fines, tax, user fee, whatever, however you want to call it—it all goes back to the Treasury and it has been appropriated from the Treasury.
"It has first got to go to the bank and then the Congress can say where it goes... So the Anti-Deficiency Act is the law that basically prevents law enforcement from feathering its own nest by sort of bringing bogus prosecutions."
A portion of this civil fine money goes to the Healthcare Fraud and Abuse Control Program (HCFAC), which was established under HIPAA in order to tighten the government's anti-fraud measures against healthcare providers, insurance companies, and pharmaceutical companies.
For instance, this program has been used in recent years to try and pinpoint regions that seem to attract an unusual amount of illicit activity such as Medicare fraud and apply extra scrutiny to these areas. The Obama administration has ramped up use of this program in new ways using new technologies and data-mining features.
But there's diminishing returns on funneling funds into HCFAC, according to Burns. And the money that's supposed to wind up in this collection pot isn't always exactly used that way and may ultimately become part of what is essentially a slush fund.
"When $30 million goes to the DOJ for the HCFAC, DOJ, which is very thirsty for money for other sectors of the Department, says we will just move this money over here to deal with whatever arsonists, or anti-trust, or murders, or terrorists, or whatever," said Burns. "I remember calling the FBI back in 2004 and asking them what they did with the $105 million we gave them [from a certain settlement], and their answer was a variation on ‘Screw you kid, we are chasing terrorists.’
"They were very blunt and it was kind of refreshing. ‘Screw you. We are chasing terrorists.’ And they didn’t want to be nickel and dimed."
The DOJ and HHS civil division's thirst for these funds shouldn't be surprising. While many civil federal entities wind up being net takers from the federal budget, False Claims cases (particularly healthcare ones) are a very different story.
"The civil division at HHS, all of it, under the False Claims Act, we get back—in the healthcare arena—we get back 20 to 1. $20 back for every dollar we invest in prosecutions and investigations."
Getting more bang out of pharma's buck
The question is: How can this money better be utilized? One way would be to reinvest in pursuing even more False Claims suits against bad actors, considering the massive return the government secures on such litigation.
"The Department of Justice can move about 150 cases a year under the False Claims Act," said Burns. "It gets about 600 or 700 cases a year... But there are a lot of cases where the DOJ just does not have the resources to move on. That is the core problem."
But unless literally all of the money collected via qui tam cases are reinvested into pursuing even more such cases, this doesn't solve the issue of using biopharma fines more effectively and not as ad hoc band-aids for other parts of the federal budget.
There are several potential areas that Congress could appropriate these funds if it wanted to. For instance, both the NIH and the FDA are in desperate need of more money to carry out operations. One idea that fits under the mold of having the punishment fit the crime would be to use fine money to beef up the FDA's budgets for inspectors so that the agency can go forth and more closely monitor companies' manufacturing and compliance practices.
Can fines alone ever ensure high ethical standards?
At the end of the day, however, all the money in the world will likely do little to discourage certain people within the extraordinarily wealthy biopharma industry from acting illegally.
"Back in 1986, we in the 'integrity business'–for lack of a better word–believed that if we fined people a lot of money, that companies did fraud for profit and they would stop doing fraud because it became too expensive," said Burns. "Looking back, that is such a charmingly naïve and silly way to look at it. Because the truth of the matter is that the way to think of corporate fraud is this: We privatize the profits and we communitize or communize, if you will, the costs."
So what does Burns mean by that? "If a fraud is not caught, the costs are borne by taxpayers," he said. "We get that. The benefits, however, are actually privatized to people inside the company.
"But when the company is caught, who pays the cost? The answer is nameless, faceless stockholders. So if the fraud is not caught, nameless, faceless taxpayers foot the bill for the private profit. If the fraud is caught, nameless, faceless stockholders foot the bill. But, either way, whether the fraud is caught or not caught, people inside the company personally profit from the fraud."
There's a striking contemporary example of why such a punitive model is likely ineffective for curbing bad behavior. Activist investor Bill Ackman explained in a recent conference call discussing his support for the embattled Valeant Pharmaceuticals that even if Valeant is found to have done something wrong, the worst that will happen is the company will take a short-term hit from a fine and then simply move forward.
Burns suggests a far more aggressive, and controversial, means of ensuring ethical compliance: Go after individuals.
"You have to make the pain personal. If you bring the pain, you bring the change," he said bluntly. "First, we are going to recover our money. We are going to recover more money from you than you stole. We are going to do that so we can pay off the whistleblower and we can cover the cost of lost interest, lost investigation, and quite frankly, just to show you we can take a bite out of crime.
"But we are also, if we are serious about stopping fraud, we have to move beyond that." Burns doesn't endorse the politically expedient answer of jailing CEOs, arguing that these individuals harbor so much power that they will never actually wind up in jail.
"The answer is breathtakingly simple," he said. "It doesn’t actually involve putting anyone in jail. It involves doing something to the people who operationalize the fraud, who made the fraud happen. Do to them exactly what is done to whistleblowers, which is make them unemployed and unemployable."
And how could the government chase that end? "We have a law that does this. We have something called Personal Exclusion. We are not excluding the company. We are excluding individuals [from doing business with the government]."
That would mean that if a company's sales team is bribing doctors in order to promote the firm's drugs, then the higher-ups of that specific marketing department would be put under a Personal Exclusion list that would prevent them from being employed by any company that has dealings with federal healthcare programs.
This is, to put it lightly, an extremely controversial tactic. The logic behind it is that individuals will become far more motivated to change what may be a seedy culture from within the industry and company itself. But controversial or not, it's not as if such methods haven't been pursued before.
For instance, the HHS-OIG went after Forest Laboratories CEO Howard Solomon after that company's criminal and civil settlements with the federal government in 2011 in an attempt to exclude him from being associated with government health programs using the agency's exclusion authority under Section 1128(b) of the Social Security Act.
There haven't been many high-profile instances like that since. But as pharma comes under the spotlight during the 2016 presidential election cycle, the advent of the government pursuing extreme measures such as these exclusions may not be as far-fetched as one might think.