May 13,2004

Chairman Grassley Comments on Pfizer Settlement, Medicaid Fraud

M E M O R A N D U M

To: Reporters and Editors
Re: Pfizer, Inc. Settlement
Da: Thursday, May 13, 2004

Sen. Chuck Grassley, chairman of the Committee on Finance, today commented the announcement that Pfizer, Inc. has agreed to pay a Medicaid fraud settlement totaling $430 million, including a $240 million criminal fine and $190 million in civil settlements.

Based on today’s development, Sen. Grassley has written to the Attorney General asking fora briefing on its ongoing drug company investigations, including whistleblower cases. The textof that letter follows Sen. Grassley’s comment, along with the news release and text of a letterSen. Grassley sent last month with Sen. Max Baucus to various drug companies about Medicaiddrug pricing.

Sen. Grassley was the Senate author of the qui tam whistleblower amendments to the FalseClaims Act. Enforcement of the False Claims Act and its whistleblower provisions has returnedmore than $12 billion to the U.S. Treasury since it was updated in 1986. According to theCenters for Medicare and Medicaid Services, approximately 550 pharmaceutical companiesparticipate in the Medicaid drug rebate program. Forty-nine states and the District of Columbiacover drugs under the program.

Grassley comment —

“We need to see continued aggressive investigation and pursuit of fraud against the taxpayersby pharmaceutical drug manufacturers. Whistleblowers can be a valuable part of that effort, aswe’ve seen in this case, and the Justice Department obviously must stay committed and send aclear message of zero tolerance. Drug companies that illegally pad their profits with Medicaiddollars that should be going to help low-income people, including pregnant women and children,must be held accountable.”

Grassley letter to Ashcroft —

May 13, 2004

The Honorable John Ashcroft
Attorney General
Department of Justice
950 Pennsylvania Avenue, NW
Washington, DC 20530-0001

Dear Attorney General Ashcroft:

The Committee on Finance (Committee) has jurisdiction over the Medicare and Medicaid programs in the United States Senate. The Committee is presently reviewing some business practices among drug companies participating in the Medicaid drug rebate program. Thus, Inoted with great interest today, that Pfizer, Inc. has reportedly agreed to pay a Medicaid fraud settlement with the Department of Justice (DOJ), totaling $430 million, including a $240 million criminal fine and $190 million in civil settlements.

As the Committee focuses on the numerous problems and challenges that confront theMedicaid program, it is no small concern that Medicaid spending continues to skyrocket eachyear. Medicaid spending for 2004 is projected to be over $300 billion and has surpassedMedicare as the largest government health program in the United States. Hundreds of billionsof taxpayer dollars are at stake and oversight of the Medicaid program appears to be a decade ormore behind oversight of the Medicare program. As Chairman of the Committee, among theissues that are most troubling to me is the extent to which the drug industry is profiting at theexpense of America’s taxpayers. According to the non-profit organization, Taxpayers AgainstFraud (TAF)1:

Since 2001, the Department of Justice (DOJ) has settled seven cases involvingallegations of Medicare and Medicaid drug pricing and marketing fraud against sixpharmaceutical manufacturers: AstraZeneca, Bayer, Dey, GlaxoSmithKline, Pfizer,and TAP Pharmaceuticals . . . [a]mong these are three of the top five companies (bysales volume) in the industry: Pfizer (#1), GlaxoSmithKline (#2), and AstraZeneca(#5). The total paid out by these manufacturers to settle these cases is nearly $1.66billion. ... Remarkably, these recoveries resulted from allegations involving just ahandful of drug products...(emphasis added).

Every one of these settlements involved Medicaid liability and likely represent just the tipof the proverbial iceberg. With astronomical profits at hand, it appears that some drug companiesare not always abiding by the letter of the law, and in other cases not abiding by the spirit of the law.During the remainder of this session of Congress, this Committee will continue to look closely atdrug companies’ business practices with respect to federal programs and the exorbitant costs thatAmerica’s taxpayers are paying for drugs. Any drug company that improperly lines its pockets withMedicaid dollars, which are intended to benefit low-income Americans, pregnant women and poorchildren, should know that America’s taxpayers, myself included, expect that it should be held fullyaccountable.

In light of the Pfizer settlement announced today, coupled with the aforementionedsettlements, there are a great many questions that demand answers and issues that merit review bythis Committee. It is incomprehensible that settlements involving billions of dollars may be viewedwithin the pharmaceutical industry as the cost of doing business with government. Any companydoing business with the United States must be disabused of the notion that it can wash its hands ofa fraudulent business practice and move onto the next, while continuing with business as usual.

Accordingly, I request that the appropriate DOJ staff provide a confidential briefing to mystaff about the scope and subject matter of all pending drug company investigations, including allwhistleblower qui tam cases, whether DOJ has intervened or declined to intervene. Additionally,please fully brief my staff about the claims and allegations against drug companies that have resultedin settlements over the past five years. By this letter, I am also requesting that the Office of InspectorGeneral, Department of Health and Human Services, provide a confidential briefing for mycommittee staff on its ongoing investigations with respect to drug companies’ business practices.

Sincerely,

Charles E. Grassley
Chairman

cc: Dara Corrigan, Acting Principal Deputy Inspector General
William E. Moschella, Assistant Attorney General

For Immediate Release
Thursday, April 29, 2004

Grassley, Baucus ask drug manufacturers questions about how they price drugs for Medicaid

WASHINGTON - Sens. Chuck Grassley and Max Baucus are asking drug companies toprovide information about how they price drugs because certain pricing practices may have asubstantial impact on the cost to taxpayers of drugs purchased by the Medicaid program.Grassley is chairman and Baucus is ranking member of the Committee on Finance.The senators made their request in letters to 19 drug companies about eight classes ofpharmaceutical drugs. These companies were industry leaders in sales in 2003, and the eight drugclasses included in the request were top sellers in 2003.

Grassley and Baucus said they want to know if drug companies are inappropriately usingan exception to the best-price reporting requirements that apply to the Medicaid drug rebateprogram. To participate in the drug rebate program, a drug company must report to thegovernment its best price, which is the lowest price its drug was sold to any purchaser in theUnited States. Congress created an exception to best-price reporting to encourage drugcompanies to continue making drugs available to charitable organizations at cheaper than marketrates.

Grassley said the question is, "are drug companies abiding by both the letter and spirit ofthe law with regard to that exception?"

Baucus said, "I am very concerned about Medicaid's continued ability to provide prescription drug coverage to the nation's neediest population. By making sure that drugcompanies are playing by the rules, we can help ensure that these folks have access to themedications they need to get and stay healthy."

Grassley and Baucus have been working to bring down the high costs of prescriptiondrugs. The new Medicare prescription drug benefit program they successfully shepherdedthrough the Senate last year encourages private plans to drive hard bargains in negotiations withdrug makers so they can offer beneficiaries the lowest prices possible. It also speeds up the entryof generic drugs to the marketplace.

The drug makers who received a letter from Grassley and Baucus were Pfizer, Inc.,GlaxoSmithKline, Johnson & Johnson, Merck & Co., Inc., AstraZeneca Pharmaceuticals LP,Bristol-Myers Squibb Company, Novartis Pharmaceuticals Corporation, Amgen, Inc., WyethPharmaceuticals, Eli Lilly & Company, Aventis Pharmaceuticals Inc., Abbott Laboratories,Hoffmann-La Roche Inc., TAP Pharmaceutical Products Inc., Schering-Plough Corporation,Boehringer Ingelheim Pharmaceuticals, Inc., Forest Pharmaceuticals, Inc., Sanofi-Synthelabo andEisai, Inc.

Variations of the following text comprised the Grassley-Baucus letter to the 19 drugmakers.

April 29, 2004

Dear __________ :

The U.S. Senate Committee on Finance (Committee) has jurisdiction over the Medicare and Medicaid programs, and accordingly, a responsibility to oversee the proper administration of those programs which provide health care coverage to more than 80 million Americans. During this legislative session, the Committee intends to study issues relating to these programs’ coverage of prescription drug benefits, including pricing practices that could have an impact onthe cost to taxpayers of purchasing prescription drugs. As Chairman and Ranking Member of the Committee, we ask that ____________ cooperate with the Committee and provide it with information regarding these matters as requested.

In recent years, the cost to Medicaid of purchasing prescription drugs is growing faster than anyother single area of the program. As a result of this and tight fiscal constraints, states have beenreducing prescription drug benefits; between 2001 and 2004, 45 states reduced drug benefitsunder Medicaid. Considering that prescription drugs are now an integral part of quality healthcare, such reductions in benefits may be detrimental to the health of Medicaid beneficiaries.Congress has revisited payment for prescription drugs under Medicaid several times to ensurethat federal and state taxpayers are not generally paying more for drugs than hospital buyinggroups, health maintenance organizations, pharmaceutical benefit managers, or other purchasers.

In 1990, Congress created the Medicaid drug rebate program, which requires any drugmanufacturers seeking reimbursement for prescription drugs from state Medicaid programs toenter into a rebate agreement (Medicaid Rebate Agreement) with the Secretary of Health andHuman Services (HHS) under which the manufacturer promises to pay a rebate for each coveredoutpatient drug paid for by Medicaid. The rebate formula is established in section 1927 of theSocial Security Act (the Act) and, for single source drugs and innovator multiple source drugs,generally is either the difference between the average manufacturer’s price (AMP) for that drugand the best price at which the drug was sold to a purchaser (Best Price), or a minimumpercentage of AMP, whichever is greater. In determining and reporting the statutory Best Price,drug manufacturers must take into account all cash discounts, free goods contingent on apurchase requirement, volume discounts, and rebates provided to covered purchasers.

When the rebate requirement was enacted, Congress created an exception to determining the BestPrice for drug sales involving prices that were merely nominal in amount (Nominal PriceException/NPE). Congress was trying to address a particular concern in establishing the NominalPrice Exception; namely, to ensure that manufacturers did not have an incentive to terminatesteep discounting practices designed with charitable intent to promote access to medication forlow-income or other populations for which access might be limited. The Centers for Medicareand Medicaid Services (CMS) has defined the Nominal Price Exception to include prices that are10 percent or less of AMP for the drug in the same quarter for which AMP was computed, as isincluded in your company’s Medicaid Rebate Agreement. However, notwithstanding thisCongressional intent, we understand that some drug manufacturers may be using the NominalPrice Exception as part of their commercial pricing practices. These practices could underminethe purposes of the Medicaid Best Price policy and may be costing taxpayers hundreds ofmillions of dollars through reduced Medicaid rebates.1

The Committee wants to assess how frequently the Nominal Price Exception to Best Pricereporting is used, in what contexts, and for what purposes. This will assist us in determiningwhether and to what extent the exception has been used to promote access to prescription drugsas intended by Congress and whether refinements should be made to the existing statutorylanguage to ensure that the Nominal Price Exception is not used for purposes other than thoseintended. In order to ensure that the Committee has sufficient information on which to base itsdeterminations, we are inquiring about drugs in the eight most popular classes to thosemanufacturers that ranked among the top twenty according to sales in 2003. Therefore, asChairman and Ranking Member of the Committee, we request that your company provide thefollowing information and data to the Committee:

1. Provide an executed copy of your company’s most recent Medicaid RebateAgreement with the Secretary of Health and Human Services.

2. Provide a copy of the assumptions used by your company in determining BestPrice, in accordance with the terms of manufacturer’s responsibilities under section IIof your Medicaid Rebate Agreement.

3. Identify the person(s) and/or agent(s) (including, name, title and contactinformation) within or affiliated with your company who is/are currently responsiblefor calculating, determining, generating, reporting and maintaining the quarterlyMedicaid rebate program data for your company, including but not limited to AMPand Best Price.

4. Identify the person(s) and/or agent(s) (including, name, title and contactinformation) within or affiliated with your company who is/are currently responsiblefor ensuring compliance of reported quarterly data for the Medicaid rebate programwith appropriate laws and program directives.

5. Identify the person(s) and/or agent(s) (including, name, title and contactinformation) within or affiliated with your company who is/are currently responsiblefor authorizing, developing, implementing, and/or monitoring any marketing or salesprograms in which sales of covered outpatient pharmaceuticals are made at pricesconsidered to be "merely nominal" under section 1927 of the Act.

6. State whether your company has a formal, written policy with respect to sales ofcovered outpatient drugs at prices considered to qualify for the Nominal PriceException, or if your company relies on an unwritten policy. To the extent a writtenpolicy exists, attach copies, including all versions and revisions of the policy since itsinception. To the extent an unwritten policy exists, describe it in detail, including butnot limited to describing any criteria used in authorizing, developing, implementingand/or monitoring any marketing or sales programs in which sales of coveredoutpatient drugs are made at prices considered to qualify for NPE.

7. In accordance with your company’s response to #6 above, describe the factors andcircumstances your company takes into account when determining whether sales ofcovered outpatient drugs should be made at prices that are considered to fall withinNPE. For example, what factors does your company take into account whendetermining who may purchase covered outpatient drugs at a "merely nominal" price?What type(s) of entities purchase drugs at prices that are "merely nominal?" Are notfor-profit entities the exclusive recipients of a "merely nominal" price? Under whatcircumstances may for-profit entities purchase covered outpatient drugs for a "merelynominal" price?

8. What types of contractual arrangements govern your company’s drug sales that fallunder NPE? For example, what contractual terms or conditions does your companytypically and/or commonly include in transactions for drugs sold under NPE? Must apurchaser meet a certain market share percentage requirement for a drug or class ofdrug as a condition to obtaining a "merely nominal" price? Does your company evermake drug prices under NPE transactions available for only one quarter or do theytypically have longer duration? Does your company ever condition the sale of anydrug at a "merely nominal" price on an agreement to purchase more of that drug orother drugs? If so, explain the details and circumstances.

9. For each of the drugs listed below, provide the number of units sold at prices withinNPE. For each single source and innovator multiple source drug, provide therequested information broken down by quarter, and by applicable 11-digit NationalDrug Code (NDC), for the 12 most recently completed quarters as of the date of thisrequest. In addition, provide the percentage of each drug that was sold under NPE foreach of the same 12 quarters. For those drugs that are no longer single source as of thedate of this request, also provide the requested information (both the number of unitsand the percentage) broken down by quarter, and by applicable NDC, for at least eightquarters prior to the drug status change from single source.

10. For each drug listed in #9 above, and for the same quarters, provide the totalnumber of units sold at prices that were included in the determination of Best Price,i.e., at prices that were above "merely nominal" prices. In addition, provide thepercentage of the drugs that were sold at prices that were included in thedetermination of Best Price for each of the quarters.

11. For each drug listed in #9 above, and for the same quarters, calculate the averageunit price for all sales that were considered within NPE. Then calculate and report thepercentage below Best Price that average unit price is.

12. For each drug listed in #9 above, and for the same quarters, identify each nonexcludedpurchaser that bought a drug at a price within NPE in one of the quartersand paid above NPE price for the same drug in another quarter(s) during the timeperiod for which your company provided responses for that drug.

13. Identify any drug not previously identified in this request, that your company soldat a price within NPE, i.e., at a price that was "merely nominal," during the 12 mostrecently completed quarters as of the date of this request.

Please provide the information and documents requested in questions 1 through 8 by May 17,2004. For questions 9 through 12, provide the requested information for the most recent fourquarters by May 17th, and the remaining quarters by June 7, 2004, unless it is availablesooner. In complying with this request, respond by repeating the enumerated request,followed by the accompanying response; attach and identify all relevant documents or data bytitle and the number(s) of the enumerated request(s) to which they are responsive. Finally, incomplying with this request, _____________ means its corporation, or one or more of itsdivisions, subsidiaries or affiliates, or related entities, including any other companies orcorporations with which _____________ entered into a partnership, joint venture or any otherbusiness agreement or arrangement.

1. The HHS Office of Inspector General has warned that drug pricing practices in the privatesector may nonetheless have significant effects on federal programs:

Discounting arrangements are prevalent in the pharmaceutical industry and deservecareful scrutiny particularly because of their potential to implicate the Best Pricerequirements of the Medicaid Rebate Program. Because the Medicaid Rebate Programin many instances requires that states receive rebates based on the Best Price offeredby a pharmaceutical manufacturer to other purchasers, manufacturers have a strongfinancial incentive to hide de facto pricing concessions to other purchasers to avoidpassing on the same discounts to the states. Because of the potential direct andsubstantial effect of such practices on federal health care program expenditures andthe interest of some manufacturers in avoiding price concessions that would triggerrebates to the states, any remuneration from a manufacturer to a purchaser, howevercharacterized, should be carefully scrutinized.

OIG Compliance Program Guidance for Pharmaceutical Manufacturers, 68 Fed. Reg. 23,731,23,735 (2003).

Sincerely,

Charles E. Grassley
Chairman

Max Baucus
Ranking Member