http://www.businessweek.com/news/2013-08-13/florida-pharmacists-win-597-million-blowing-whistle-on-scheme

Bloomberg News

Florida Pharmacists Win $597 Million Blowing Whistle on Scheme

August 13, 2013

Luis Cobo

Ven-A-Care partner Luis Cobo says he was determined to unravel the scheme. Photographer: Jeffery Salter/Bloomberg Markets

T. Mark Jones learned about the costs and benefits of health-care delivery when he treated AIDS patients in Key West, Florida, in the late 1980s. The pharmacy he co-founded -- unusual at the time -- provided a humane last step for gay men who didn’t want to spend their final weeks confined to a hospital.

Jones, a registered nurse, went into homes to dispense infusion-therapy drugs and teach patients to care for themselves.

“I was worn out,” he says. “But I loved it.”

His dream job began to unravel in 1991, when a national health-care chain came to Key West to open an AIDS clinic. It secured the support of local doctors by offering them padded insurance reimbursements, Jones says, Bloomberg Markets magazine will report in its September issue.

More from the September issue of Bloomberg Markets:

  • SPECIAL REPORT: Terrorism and Tungsten | Slideshow
  • FAMILY OFFICES: World's Richest | Graphic
  • QATAR: Money, Gas and Clout
  • PHILANTHROPY: One Woman's Mission
  • BILLIONAIRES: Charity, Russian Style | Slideshow
  • MALAYSIA: Najib's Grand Plan
  • EQUITIES: America's Best Stock Analysts

Referrals to Jones’s pharmacy, Ven-A-Care of the Florida Keys Inc., dried up. By the late 1990s, Jones had hit bottom. Broke and bereft, he borrowed money from friends and maxed out credit cards. In 1999, he moved his wife and two children into his parents’ home in Key West.

“I just got to the point where we couldn’t survive anymore,” he says.

Jones, now 57, turned his misfortune into a mission ignited by the company that nearly destroyed him. National Medical Care Inc., then a unit of W.R. Grace & Co. (GRA:US), planned to prescribe medications for patients based on how much profit they would generate, Jones says.

Overbilling Medicare

He and his two partners decided to investigate exactly how NMC was making money. They found it was overbilling Medicare, cheating U.S. taxpayers. This practice, they later discovered, was widespread.

Big Pharma was routinely reporting inflated drug prices, leading Medicare and Medicaid to overpay doctors and pharmacies by billions of dollars. Jones and his partners dedicated their lives to exposing that hard-to-detect scheme.

Ven-A-Care, operating from a quiet street in Key West, has filed whistle-blower lawsuits against dozens of pharmaceutical companies since 1995 -- many later joined by the U.S. and states -- that have recovered more than $3 billion for the U.S. government.

In those settlements, Ven-A-Care secured awards totaling $597.6 million for suing on behalf of taxpayers, making it the most successful whistle-blower in U.S. history.

Saved Billions

No industry has felt the sting of whistle-blowing more than health care. Since 1988, whistle-blowers have helped the U.S. government recover $24.2 billion, and 75 percent of that involved medical treatment, according to the Department of Justice. The pace is accelerating. Since 2009, 91 percent of the $10.6 billion recovered has come in health-care cases.

Ven-A-Care stopped a scheme that was costing taxpayers billions of dollars a year, says Suzanne Durrell, a former U.S. prosecutor who worked on the pharmacy’s first case.

“They figured out these pricing scams were going on that affected virtually every drug manufacturer in the United States,” Durrell says. “Because they were a pharmacy, they could easily get a lot of inside information on what the industry was doing and charging.”

As a result of Ven-A-Care’s actions, at least 24 pharmaceutical companies settled civil lawsuits and an NMC unit pleaded guilty to U.S. criminal charges. Largely in response to Ven-A-Care’s evidence, Congress passed the Medicare Modernization Act of 2003, says Charles Clapton, a former counsel to the House Committee on Energy and Commerce.

The Scheme

The Congressional Budget Office estimated that the law saves taxpayers $15.7 billion per decade.

The scheme Ven-A-Care revealed worked like this:

Drugmakers sold medicines to pharmacies, hospitals and doctors at one price and then falsely reported higher amounts to independent publishers of pricing data. Medicare and Medicaid relied on the figures pharmaceutical companies reported to those firms to set reimbursement rates.

For example,Abbott Laboratories (ABT:US) sold its antibiotic Vancomycin 1 GM FTV to customers for $4 a dose, according to a joint Justice Department and Ven-A-Care lawsuit. Abbott reported the cost to pricing publishers as $72.48 -- 18 times the actual amount, the lawsuit says.

Abbott, based in Abbott Park, Illinois, denied liability and settled that case, which involved dozens of drugs. It paid $126.5 million to the U.S. government in 2010.

Inflated Reimbursements

Though the scheme benefited the pharmacies and doctors that purchased the medicines, Ven-A-Care figured out that drugmakers made billions beyond that. In court papers, Ven-A-Care referred to the inflated reimbursements as kickbacks from pharmaceutical companies to its customers.

The drugmakers were encouraging physicians to prescribe more drugs and pharmacies to buy more, according to Ven-A-Care’s lawsuits. That allowed drug companies to increase sales and expand market share.

The difference between the price drug companies charged pharmacies and physicians and the price it reported to set Medicare and Medicaid reimbursements was called “the spread.” Drugmakers used the spread as a marketing pitch to pharmacies and doctors, Ven-A-Care showed.

Jones says it took him a long time to understand what was happening. The strategy became clearer when a drug representative pitched her company’s version of intravenous immune globulin, which cost more than a rival’s.

Internal E-Mails

“The rep said, ‘Well, my product may be more expensive on the purchase end, but you get a higher reimbursement,’” Jones says. Data publishers were using inflated prices reported by drugmakers to set what’s known as an average wholesale price, or AWP, which was the basis for Medicare reimbursements.

Internal pharmaceutical-company e-mails obtained by the Justice Department, working with Ven-A-Care, show the importance of the AWP. In one case, a Bayer AG (BAYN) executive wrote in an e-mail that the company should raise its reported price for a hemophilia drug to keep pace with Baxter Healthcare Corp., which was selling a similar medicine.

Baxter falsely reported prices for 13 drugs, including five by as much as 10 times the actual cost, according to a 1999 lawsuit filed by Ven-A-Care.

“If Baxter has increased their AWP, then we must do the same,” wrote the Bayer executive, who wasn’t identified. “It is a very simple process to increase our AWP and can be done overnight.”

Lawsuits Settled

Bayer and Baxter settled lawsuits filed by Ven-A-Care that accused the drugmakers of falsifying prices. Bayer denied wrongdoing in settling for $14 million in 2001. Bayer spokeswoman Lauren Trocano declined to comment. Baxter settled two civil cases, denying wrongdoing in 2006 and 2011, for a total of $38.2 million.

“We settled to avoid costly and protracted litigation,” spokeswoman Deborah Spak says. Abbott spokesman Scott Stoffel says his firm complies with all laws and settled to end the uncertainty of litigation.

Ven-A-Care didn’t sue pharmacies, hospitals or doctors over drug pricing because it didn’t have as much information as it did for Big Pharma, says Ven-A-Care’s lead attorney, Jim Breen.

Jones says he never expected his career as a nurse would extend much beyond caring for patients. Darkly tanned with close-cropped brown hair and a quick laugh, Jones says he’s proud to be a conch, as lifelong Key West residents are known.

Cherry Smash

Revelers begin to crowd bars to see bands in town for a songwriters’ convention in May, as Jones and his partners tell their story in their new offices on the first floor of a converted bus depot on Duval Street.

As a child, Jones says, he bought Cherry Smash sodas at Cobo Pharmacy on the island outpost known for its artists, fishermen, key lime pie and tolerant attitudes. After earning a nursing degree from the University of Florida in Gainesville, Jones co-founded Ven-A-Care with his friend Luis Cobo.

Cobo filled prescriptions, and Jones administered AIDS drugs intravenously at patients’ homes. Jones and Cobo, a pharmacist who ran his father’s store, teamed with Cobo’s brother-in-law, Zach Bentley, who managed Ven-A-Care. By 1991, they were taking in $1 million annually.

All of that changed when W.R. Grace’s NMC, which ran dialysis centers, came to the island. NMC managers offered Ven-A-Care a deal that they said would make Jones, Cobo and Bentley millionaires if they joined NMC in a new AIDS clinic, Jones says.

Profitable Prescriptions

NMC proposed that doctors prescribe and share profitable insurance reimbursements for drugs, the Ven-A-Care owners say. The partners say they declined because they believed it was wrong for physicians to choose drugs based on profit margins rather than medical reasons.

NMC proceeded without Ven-A-Care, and Key West doctors who had made referrals to Ven-A-Care took their business to NMC instead. Ven-A-Care lost almost all of its income, Cobo says.

“I was very upset,” Jones says. “I felt like everything I had worked for, someone was trying to snatch, and for the wrong reasons. It took away something that I loved.”

The Ven-A-Care partners decided to take a closer look at their competitor. They probed how NMC billed at its largest business -- running dialysis centers around the U.S. Jones and Bentley hired former Federal Bureau of Investigation agents to learn whether NMC was overbilling Medicare.

Jones called NMC centers, saying he was a nurse, and asked about their drug costs.

Defrauded Medicare

In 1994, Ven-A-Care sued NMC in federal court in Miami under the False Claims Act. Passed during the Civil War and amended in 1986, the law allows citizens to sue on behalf of the government and share in recoveries. The lawsuit against NMC said the company had defrauded Medicare through overbilling for a type of nutritional therapy for dialysis patients.

The case was under seal, and NMC didn’t publicly respond for six years while the Justice Department investigated.

As the case progressed behind closed doors, the Ven-A-Care partners widened their probe. They began looking at how some of the largest pharmaceutical companies were using excessive reimbursements as kickbacks to pharmacies and doctors to increase sales.

The scheme revolved around the spread between what drugmakers charged providers and how much they reported to the data companies. Drug salespeople distributed computer software with spread calculators, says John Lockwood, a doctor who joined Ven-A-Care as a partner in 1998.

Expanding Probe

Lockwood, 59, says he was offended that many doctors were making thousands of dollars per patient from inflated reimbursements.

Ven-A-Care investigated the pricing spread for HIV and cancer medicines and then expanded to other drugs, eventually looking at tens of thousands of pharmaceuticals. The pharmacy compiled prices from flyers, catalogs and faxes. Jones and Bentley called the Florida Medicaid office to ask about reimbursements for specific drugs.

“You’d tell them what pharmacy you are, and they’d tell you what the reimbursement was,” Jones says. “Every day, I’d sit down and do a list of drugs. They only allowed you five an hour. Then we’d hang up and call back.”

In late 1999, Ven-A-Care got a boost from the company that had nearly buried it. NMC, then owned by Fresenius Medical Care AG, agreed to settle Ven-A-Care’s lawsuit. The Justice Department joined Ven-A-Care’s complaint in January 2000.

Criminal Charges

At the same time, the U.S. criminally charged three NMC units with conspiracy, including one for violating Medicare’s anti-kickback regulations. One of those units was charged with overbilling Medicare for the fraud that Ven-A-Care identified.

The NMC units pleaded guilty to the conspiracy charges in 2000, and NMC paid $486 million to the U.S. In the civil case, NMC denied wrongdoing. Ven-A-Care got $40 million as its cut of the civil settlement.

“It miraculously settled, so I got back on my feet,” Jones says. “I got my life back, to a degree.”

The settlement gave Jones the strength and money to continue. Cobo closed the family pharmacy, and Lockwood quit practicing medicine to work full-time on litigation. The firm sued more drugmakers in federal courts and in state courts in Texas, California and Florida.

The Ven-A-Care settlements began piling up after 2007, when Bristol-Myers Squibb Co. (BMY:US) agreed to pay $515 million. Mylan Inc. and Par Pharmaceuticals Cos. also settled. All three denied wrongdoing. Bristol-Myers, Fresenius, Grace, Mylan and Par declined to comment.

Unusually Adept

Ven-A-Care was unusually adept at smoking out a hidden ploy by Big Pharma, says Durrell, the former prosecutor. There are likely still far more undetected Medicare frauds by companies, she says. The U.S. spends $2.8 trillion annually on health care, or 17.8 percent of the nation’s gross domestic product, according to the World Health Organization.

More than half of those medical expenses are paid by Medicare and Medicaid.

Ven-A-Care’s $597.6 million in settlement awards have stoked the debate about whether whistle-blower payouts should be capped. Michael Loucks, a former acting U.S. attorney in Boston, says awards should be limited to $2 million per case.

“The purpose of the statute is to incentivize people to blow the whistle, not to make whistle-blowers rich,” Loucks says.

Breen bristles at such arguments. He says he and Ven-A-Care repeatedly took risks and spent tens of millions of dollars on a national legal team to investigate and litigate cases for the government. While the Justice Department joined some cases, the company secured settlements for the U.S. on its own in others. Breen assembled dozens of lawyers and expert witnesses throughout the country, Jones says.

‘About Perfectly’

“It was really good, strategic prosecution,” Jones says. “Jim ran that just about perfectly.”

Bentley, a Key West resident for 35 years, retired in 2004 and oversees finances at a church. The remaining partners say they made modest lifestyle changes despite their wealth. Lockwood spends time with grandchildren and travels to ski or play golf. Cobo visits his three daughters and his grandchildren, and has invested with Jones in real estate.

Jones is the globe-trotter, planning trips to Greece, Italy and Spain. Although he says he regrets losing his nursing job when NMC took over the Key West market, he’s proud of the way Ven-A-Care protected taxpayers.

“I really believed in what we were doing,” he says.

Get your free issue of Bloomberg Markets! SUBSCRIBE TODAY

To contact the reporter on this story: David Voreacos in Newark, New Jersey, at dvoreacos@bloomberg.net.

To contact the editor responsible for this story: Jonathan Neumann at jneumann2@bloomberg.net.


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus