Guilty Plea Seen for Drug Maker
By GARDINER HARRIS
Published: July 16, 2004
The drug giant Schering-Plough has agreed to pay $350 million in fines
and plead guilty to criminal charges that it cheated the federal
Medicaid program, according to people involved in the case.
The settlement, expected to be announced next week with federal
prosecutors in Philadelphia, stems from a six-year investigation
prompted by three whistle-blowers who accused Schering-Plough of selling
its products to private health care providers for far less than it sold
them to Medicaid.
Federal law requires drug makers to offer their lowest prices to
Medicaid, the federal and state health program for the poor.
In the settlement, which is still subject to final approval from a
judge, Schering-Plough is expected to admit that it gave grants to the
private providers to conduct patient education and marketing programs as
part of a kickback scheme to induce them to buy Schering-Plough's drugs
at relatively high prices, according to a person involved in the
investigation and another informed of the negotiations. Schering-Plough
then billed Medicaid officials at these high prices - without giving the
Last year, Bayer paid $257 million and GlaxoSmithKline paid $86.7
million to settle similar allegations.
A Schering-Plough spokesman declined to comment, as did a spokesman for
Patrick L. Meehan, the United States attorney in Philadelphia, whose
office has been conducting the investigation. The Schering-Plough case
is part of a broad assault by federal prosecutors into the drug
industry's marketing practices.
Federal investigations in Philadelphia, Boston and Washington have
resulted in subpoenas to nearly every big drug maker, seeking
information about suspected aggressive and illegal sales techniques that
cost taxpayers billions of dollars.
Many of the cases were started by whistle-blowers under a Civil War-era
statute that allows citizens to file suits on behalf of the government
in cases of suspected defrauding of taxpayers. If government prosecutors
take up such a case, resulting in a conviction or settlement, the
whistle-blower is entitled to a portion of the award. Since 2001, drug
companies have agreed to pay more than $2 billion in fines to settle
suits brought by whistle-blowers.
Of those fines, tens of millions were paid directly to the
In one recent case, Pfizer agreed in May to pay $430 million to settle
allegations that a subsidiary marketed a pain drug improperly. Of that
settlement, $27 million went to a former executive who brought the
original claim against the company.
As a result of these cases, most drug companies say that they are
overhauling their marketing programs and strengthening their internal
policing of sales practices.
Inquiries like the one involving Schering-Plough focus in part on an
exception to the 1990 Medicaid "best price" law that has allowed drug
makers sometimes to sell their products for a "nominal" price - defined
as less than 10 percent of the manufacturer's average price, without
having that price counted as part of the calculation of what Medicaid is
charged. The exception was intended to encourage drug makers to sell
their products at steep discounts to charitable organizations and
clinics, like Planned Parenthood.
But some drug makers have used "nominal" prices in sales to hospitals
and managed care organizations, subverting the intent of the law,
When prosecutors bring these cases, drug companies rarely contest the
charges because the risks of a court battle are too great. The sanctions
prosecutors could seek include a ban on all sales to the government - an
unthinkable penalty for a drug maker, because government health programs
are among the drug industry's largest customers.
Schering-Plough, with sales last year of $8.33 billion, is one of the
world's largest drug makers. But the company, based in Kenilworth, N.J.,
has struggled since 2002 when it lost its patent on its best-selling
allergy pill, Claritin. And its legal problems have been extensive. In
2002, the company paid a $500 million fine to the Food and Drug
Administration to settle claims that it had failed for years to
manufacture its products safely. Among other issues, a citizens' group
contended that the deaths of 17 people might have resulted from their
use of faulty asthma inhalers manufactured by Schering-Plough.
Richard Kogan, the former chairman and chief executive, left
Schering-Plough last year under criticism for having met with selected
investors just before a steep decline in the company's share price and
before the company announced its results to the public. Last September,
the company and Mr. Kogan settled a resulting selective-disclosure
investigation by the Securities and Exchange Commission; the company
paid a fine of $1 million and Mr. Kogan paid $50,000.
Even with the various settlements so far, Schering-Plough's legal
troubles are not over. The company remains under investigation by
prosecutors in Boston and Washington over whether it paid physicians to
prescribe its drugs and whether it reported inflated wholesale prices to
the government's Medicare program, leading government health officials
to pay more for its drugs than necessary. Over the last two years, the
company has set aside $500 million to pay fines expected in those cases
and the Philadelphia inquiry.
The new chairman and chief executive, Fred Hassan, has promised to
change the company's manufacturing and marketing operations. The
company's most recent annual report is titled "Building the NEW
Schering-Plough," with the subtitle "To earn trust, every day."