The OIG And Excluding Execs: Demske Explains
June 7th, 2011 // 12:31 pm @ jmpickett
Over the past year, the Office of Inspector General of the US Department of Health and Human Services has regularly issued warnings that more top executives will be held accountable for corporate misdeeds. Specifically, the OIG has warned that execs could be excluded from doing business with federal health care programs, such as Medicare and Medicaid. One example involved Marc Hermelin, the former chairman of KV Pharmaceuticals. And the OIG recently notified Forest Laboratories chairman Howard Solomon that he faces the same fate . But no one from any of the world’s largest drugmakers has, so far, been tagged. We spoke with Gregory Demske, the OIG’s assistant inspector general for legal affairs, about this effort and the implications for the pharmaceutical industry.
Was there any one episode or event that prompted this get-tough attitude?
Demske: Our office does around 3,000 exclusions a year and hundreds of individuals and entities that committed crimes… In the pharmaceutical world, we have had big companies enter into several of the largest settlements that the government has had in fraud, many of which included criminal convictions. If individuals were being convicted of those types of crimes, they almost certainly would have been excluded. We’re not required to do so, but we can.
Why haven’t we seen more exclusions for pharma execs?
Demske: Basically, we would look at excluding people who are convicted of a misdemeanor criminal offense related to health care fraud. But when we are considering whether to exclude an entity that provides health care, we have to weigh the interests of what in the best interest of various parties… There’s the cost of disruption of supplying needed drugs to patients and there’s harm to innocent employees and shareholders and others…We have not excluded corporations when they have been convicted of offenses. The cases get resolved with criminal and civil resolutions and they enter into a CIA, or corporate integrity agreement.
So what has changed that we’re seeing these warnings?
Demske: One of our concerns is that we’re not protecting federal health care programs prospectively by continuing to enter into these settlements where the only result is paying money, which is perceived as a cost of doing business. We’ve been reluctant to exclude pharmaceutical companies because of the negative effects. If all a company has to do is pay money and enter into a CIA – that’s the same as in a civil case. We’re concerned about criminal conduct and that our remedy in civil cases is not sufficient to protect programs going forward and provide a deterrent.
Several settlements involved subsidiaries, though, instead of corporate parents.
Demske: Depending on how cases are resolved…we can exclude the entity that has been convicted. It’s not as easy to exclude a corporate affiliate. Right now, the operating company is convicted and we’re faced with a decision to exclude the operating company or not. We generally don’t think it’s in the best interest to exclude that company but we have decided we should at least consider exclusion of executives at that company, who were in a position of responsibility at the time the crimes occurred.
We have had that authority on the books for well over a decade, but it was used for mostly smaller companies and not bigger, publicly trade companies. But over the last year or so, we evaluated when we would consider using it and talking to companies in negotiations with us about using this authority and came out with guidance last October (read the guidance here).
So far, there’s been just one individual and that was the former KV chairman.
Demske: He was the only person excluded under Rule b15 in the pharmaceutical world since we’ve taken this new authority…section 1128 b15 of the Social Security Act. We have excluded other pharmaceutical executives. There was the Purdue case, but those were individuals who were convicted (individually of a criminal act – read this)… What’s different about Hermelin and Forest is there were no individuals convicted in those cases…
We’ve been trying to figure out a way to address this. It’s really over the last year that we’ve come to the conclusion that it’s one of the things we want to do, but only with respect to companies that were on notice before they entered a plea or settlement. We would not go back in time to cases that were settled in the past year. We decided we would look prospectively.
Why KV?
Demske: We were looking at (KV) as soon as we were looked at the conviction. There was only a gap in time between when a conviction took place and when an exclusion would happen. KV came to our attention because an executive was identified in the information in the criminal conviction and there was evidence an individual had made certain determinations about what to report and what not to report to the FDA. And we worked with the US Attorney to identify that person was Hermelin (look here).
It was the first b15 case and the only one we can talk about. But it’s different from other cases we’ve seen in that the executive was identified as having engaged in criminal conduct and the criminal information to which the company pled guilty and we just haven’t had that in other cases.
What happens, by the way, if there’s a breach of a CIA?
Demske: The CIA remedies an exclusion for a breach. Generally, we use monetary penalties to incentivize future compliance. The issue is excluding the company. The remedy goes to the company. With CIAs over the last year or so, we’ve had, increasingly, a provision that require individual executives to certify compliance. So there is that element of individual responsibility. If an individual falsely certifies, that could bring a potential criminal liability.
For the record, would you explain why the OIG does not pursue the Park Doctrine?
Demske: The Park Doctrine applies to criminal enforcement. The DOJ makes a determination about whether to pursue a criminal case, but there are some parallels – (applying the Park Doctrine) does not require any evidence or intent of knowledge by a corporate official, just that activity took place under their control and they didn’t take the proper steps. Rule b15 has different elements and so there’s exclusion, while the Park Doctrine allows criminal prosecution. And as a practical matter, the FDA has its own investigation unit and they will give a recommendation to the DOJ about how (a company or individual) should be prosecuted.
So beyond KV and Forest, will there be others? Or is this is for now?
Demske: At least one. There is context. Look at Purdue. We excluded three individuals and that’s been a hard-fought battle. It’s still in litigation…but we’ve prevailed. Those individuals are excluded. They were convicted and excluded (read this). Hermelin is the next step. He was an individual at the time who was not convicted, but implicated in the criminal conviction documents, so we had evidence he was involved in what the company pled guilty to.
The next logical step would be to exclude someone based on the fact they had been in a position of responsibility at a corporation when a crime occurred, without that admission the individual was involved. That’s more of a Park analysis. And so we are considering cases. We’re looking at particular cases where that might be appropriate. Any case where we have been involved in the last year, we have been engaged in that analysis…The guidance discusses a person’s position in a company, their reaction to the (event) and how they dealt with it…Our process would be that we would send notice of intent to exclude… We’ve looked at all these cases that have been resolved over the last year and before us now, but I’m not saying that we’re necessarily going to have any number of potential exclusions going forward.
What’s the likelihood that we’ll see exclusions at the largest drugmakers? Several have paid some of the biggest settlements and were convicted of various offenses.
Demske: We haven’t been doing this for long and we made a decision that we’re not going to go back in time and claw back and look at cases in the past. And there’s a relatively limited universe of cases. The way our statute is written, we can only pursue a person who is in office of a convicted entity. If a drug company settles with a criminal conviction in 2011, they have a ceo and an entire executive suite that is new. But since the conduct occurred in 2005, say, the ceo and vice president of marketing and the chief operating office are all gone. We can exclude the current ceo, but we have no interest in doing that. And we can’t reach the former ceo, because of the way our statute is written, so that limits the universe of potential subjects of exclusion. And we’re looking at circumstances of cases… I would certainly not take away a message that we’re only looking at smaller companies. That is not the case. We will look at them.
Our goal is not to keep generating billion-dollar settlements. Our concern is the pattern over the last 10 years doesn’t indicate that forcing companies to pay money has really changed behavior. But if there are future criminal cases, then this issue comes into play…I have no reason to believe the year of the big pharmaceutical settlement is over. If so, that’s great from our perspective – we want better compliance.
