Title: Table of Contents
Author: Carly N. Kelly
Last saved by: Chad and Sarah Ludington
Company: Harvard Law School

Government Regulation of Off-Label Drug Prescriptions:
Balancing Healthcare Innovation with Public Safety and Fiscal Responsibility

Carly N. Kelly 
J.D. Candidate, 2004
Harvard Law School
March 2004 

This paper is submitted in satisfaction of the three-credit course requirement.

Abstract
	This paper examines the government’s role in regulating off-label drug prescriptions, both as a patient safety advocate and as a health insurer. Part One describes why off-label drug prescriptions occur, including an analysis of the risks and benefits of this practice. Part Two examines how FDA drug marketing regulations, Medicare and Medicaid reimbursement rules, and healthcare fraud and abuse laws have shaped the current landscape of off-label prescription policies. Finally, Part Three proposes regulatory reforms that could help the government to better achieve its goal of encouraging drug treatment innovation, while still protecting the public from the medical and fiscal harms of inappropriate and excessive off-label drug prescriptions.     

Table of Contents

Introduction
Part I:  Benefits and Risks of Off-Label Drug Prescriptions
A.	The Drug Approval Process
B.	Benefits of Off-Label Prescribing
C.	Risks of Off-Label Prescribing
Part II:  Statutory and Regulatory Control of Off-Label Drug Prescriptions
A.	FDA Regulation of Off-Label Marketing by Pharmaceutical Companies
B.	Regulating Off-Label Use Through Reimbursement Policy
1.	Medicare Reimbursement Policy
2.	Medicaid Drug Coverage
3.	Fraud and Abuse Law
4. 	Private Health Insurance Reimbursement
Part III:  Rethinking the Optimal Regulation of Off-Label Prescriptions
Conclusion

Introduction
	Prescription drug spending in the United States nearly tripled between 1993 and 2000, rising from $50 billion to $150 billion annually. One reason for this astronomical growth was an increase in the number of drug prescriptions that were written for “off-label” purposes. Off-label use occurs whenever a physician writes a prescription in a manner that deviates from the instructions on the drug’s FDA-approved labeling. Drug manufacturers are not permitted to market drugs for treatment regimens that have not been approved by the FDA. However, once a drug is on the market, physicians are free to prescribe it for any treatment, dose, or patient demographic, regardless of whether the use has been tested and approved by the FDA. By some estimates, off-label use now accounts for at least a quarter of all drug prescriptions nationally, and up to 90 percent of all prescriptions for some of the more versatile drugs on the market.

Milt Freudenheim, Drug Middlemen Are Facing Pressure Over Rising Prices, N.Y. Times, Jan. 5, 2002, at C1.

Milton Liebman, Off Label, In Bounds, Med. Mktg. & Media, 28:12, Dec. 1, 2003, at 44.

This paper examines the government’s role as a regulator of off-label prescription drug use. Part One provides an overview of the Food and Drug Administration (“FDA”) drug approval process, including an assessment of the benefits and risks of allowing physicians to write off-label prescriptions. Part Two examines how the government impacts off-label prescription patterns through its separate- and sometimes contradictory- roles as a public safety advocate, and as a health insurer. This section includes a discussion of how the recent boom in healthcare fraud and abuse litigation against the pharmaceutical companies has been driving the integration of FDA and government reimbursement policies. Finally, Part Three evaluates the effectiveness of the government’s current regulatory framework, and proposes several legislative and regulatory changes that would better protect the public from the potential financial risks and patient safety threats created by excessive and inappropriate off-label drug prescriptions. 
Part I:  Benefits and Risks of Off-Label Drug Prescriptions
A.	The Drug Approval Process

	The Food, Drug, and Cosmetic Act (“FD&C Act”) provides for the federal regulation of all drugs that are manufactured and marketed in the United States.  All new drugs must be approved by the Food and Drug Administration (“FDA”) before they can be legally sold to the public.  Under the FD&C Act, a drug can be classified as “new” when it is an unknown compound, or when the drug is being used in a manner that deviates from the conditions described as safe and effective on the drug’s FDA-approved labeling.  

Federal Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 301-397 (1994).

21 U.S.C. § 355(a); 21 C.F.R. § 312.

21 U.S.C. § 321(P)(1) & (2).

In order to gain FDA approval for a new drug, a pharmaceutical company must first file an Investigational New Drug application (“IND”) with the FDA to being testing the drug in humans.  IND testing occurs in three phases, and can take several years to complete.  If the clinical trial data indicates that the new drug is safe and effective at treating its intended disease, the company will then file a New Drug Application (“NDA”) with the FDA. The NDA contains all of the clinical data needed to evaluate the toxicology, safety, and effectiveness of the drug, as well as information on the chemical composition of the drug, the company’s manufacturing methods, and the drug’s proposed labeling.  

21 U.S.C. § 355(b); 21 C.F.R. § 312.20.

21 C.F.R. § 312.21.

21 U.S.C. § 355(b).

21 C.F.R. § 314.50.

The FDA will only approve a new drug for the specific diseases and doses that were shown to be safe and effective during the company’s IND clinical trials.  Package inserts and labeling may not contain information to instruct physicians about other potential uses for the drug that were outside of the original clinical testing.  If a new use for the drug is later discovered, the manufacturer can submit a Supplemental New Drug Application (“SNDA”) to the FDA to petition to have this information added to the drug’s labeling.  This requires the submission of additional clinical data, and often takes as long as the original NDA to win FDA approval.  It is illegal for a manufacturer to include any use on the drug’s label that has not been formally approved by the FDA, even if clinical testing has shown the use to be safe and effective. Unapproved promotion of any off-label use is considered misbranding, and is prohibited by the FD&C Act.

See Steven R. Salbu, Off-Label Use, Prescription, and Marketing of FDA-Approved Drugs: An Assessment of Legislative and Regulatory Policy, 51 Fla. L. Rev. 181, 187 (1999).

See Veronica Henry, Off-Label Prescribing Legal Implications, 20 J. Legal Med. 365, 368 (1999).

21 C.F.R. § 99.201; 21 C.F.R. §§ 314.70-71.

Henry, supra note 11, at 368.

42 U.S.C. § 352.

Despite the FDA’s strict approval process over the sale of new drugs, the agency has historically exerted very little control over how drugs are ultimately administered to and used by patients in the marketplace. Once a new drug is approved by the FDA, physicians have full discretion to decide how they want to prescribe it, including in a manner that was not proven to be safe and efficacious during the manufacturer’s original clinical trials.  This “off-label” activity can occur when a physician prescribes a drug to treat a disease that is not indicated on the drug’s FDA-approved label, or when a physician deviates from the drug’s intended dosage amount or patient population. 

See William L. Christopher, Off-Label Drug Prescription: Filling the Regulatory Vacuum, 48 Food Drug L.J. 247, 248 (1993).

Id.

Off-label use is extensive within the medical community. Recent studies have suggested that 20 to 60 percent of all drug prescriptions are written in an off-label manner.  Despite this trend, the FDA has never taken an aggressive stance about limiting drug prescriptions to uses that were reviewed and approved for safety and efficacy by the FDA.  Theoretically, the FDA could use its powers to more extensively restrict off-label use- such as requiring drug labels to warn against off-label use, or to require manufacturers to conduct studies when an off-label use for a drug has become widespread.  However, the FDA has generally relied on medical malpractice and products liability tort law to fill the void left by the agency’s failure to regulate off-label use.

Salbu, supra note 10, at 193.

One of the most well-known examples of the FDA’s reluctance to regulate the prescription activities of the medical community is demonstrated by the facts in Heckler v. Chaney, where eight Texas death row inmates sued the FDA for failing to protect them from an injection solution that was being used off-label to perform executions. The FDA refused to intervene, claiming no jurisdiction over the “practice of medicine” by the Texas prison system. The Supreme Court ultimately rejected the FDA’s position, holding that the agency had jurisdiction under its authority to prevent drugs from being misbranded. Heckler v. Chaney, 470 U.S. 821, 823-824 (1985).

See Christopher, supra note 15, at 251.

Id. at 254.

B.	Benefits of Off-Label Prescribing   

There are many valid reasons for allowing the medical community to have such wide latitude to deviate from a drug’s approved and intended use.  First, pharmaceutical companies do not have the capacity to identify and conduct research on every possible off-label use for all of the drug products that they produce. There are a potentially infinite number of uses for any given drug, making it financially and practically impossible for a drug company to conduct the clinical trials necessary to establish the safety and efficacy of all of these applications.  Further, if pharmaceutical companies were forced to incur the tremendous cost associated with running a clinical trial for every off-label use, it is very likely that these added expenses would have to be passed onto consumers in the form of higher drug prices.

See Salbu, supra note 10, at 187.

Id. at 195.

Second, allowing physicians to experiment with different off-label treatments can help expedite the medical discovery process.  Pharmaceutical clinical trials are tightly controlled and regulated by the FDA and Institutional Review Boards, while physician prescriptions are relatively unsupervised. This often makes it easier for a physician to experiment with off-label drug applications than it is for a pharmaceutical company. In addition, a practicing physician will likely be exposed to a wide variety of patient diseases and drug products on a daily basis, so they are arguably in an ideal position to evaluate and compare the effects of different off-label drug applications over a broader demographic in a much shorter period of time.   Once physicians identify a new off-label use, they are free to disseminate this information via journals, conferences, or by word of mouth. Drug companies, in contrast, are subject to stricter FDA off-label marketing regulations.

Id. at 197.

Id. at 218.

A 1991 GAO study noted that physicians were frequently responsible for expediting the discovery of new and innovative cancer treatments through their experimentation with off-label drug prescriptions.  A similar trend has been observed within the field of AIDS, where it is estimated that between 90 to 100 percent of all revolutionary AIDS “cocktail” combination therapies have resulted from off-label drug discoveries by practicing physicians. If the FDA required a controlled clinical trial before allowing physicians to prescribe these types of off-label drug regimens, many dying patients would be denied access to potentially life-saving treatments. 

General Accounting Office, Report to the Chairman, Comm. on Labor and Human Resources, U.S. Senate, Off-Label Drugs: Reimbursement Policies Constrain Physicians in their Choice of Therapies, GAO/PEMD-91-14 (1991).

See Salbu, supra note 10, at 194.

Finally, off-label drug prescriptions are a necessity within certain patient populations. For example, off-label use is very common in the field of pediatrics.  Parents are understandably wary about allowing their children to participate in the clinical trial for a new and unknown drug. Consequently, only about one-fifth of all drugs on the market have been tested in children.  Pediatricians are frequently forced to adjust the recommended dose of an “adult” drug for their juvenile patients, often with little instruction or guidance from the drug’s FDA-approved label.  Similar prescription problems arise among pregnant women, where clinical trials are also justifiably infrequent. 

Sheryl Gay Stolberg, Children Test New Medicines Despite Doubts, N.Y. Times, Feb. 11, 2001, at 1.

Henry, supra note 11, at 378.

The Pediatric Research Equity Act of 2003 amends the FD&C Act to give the FDA authority to require drug companies to conduct additional studies and to submit labeling information for drugs that are commonly prescribed to children. Pediatric Research Equity Act of 2003, Pub.L.No. 108-155 (to be codified at 42 USC § 355).

Henry, supra note 10, at 382-383.

C.	Risks of Off-Label Prescribing

Despite the benefits of off-label prescribing, the lack of regulation in this area creates some definite risks. First and foremost, off-label prescriptions are not subject to the FDA’s stringent approval process, so there is no guarantee that the new use or dose has been thoroughly tested for patient safety and effectiveness.  The FDA does not routinely monitor, collect, or evaluate any information regarding off-label drug uses, so patients taking drugs in an off-label manner are relying solely on the judgment and advice of their physician. Patient safety advocates argue that this can expose patients to scientifically unsound treatments and quackery medicine. According to one estimate, nearly 8,000 people became seriously ill in 2002 after taking frequently prescribed drugs for off-label purposes.

Chris Adams & Alison Young, Drugmakers Push Risky Off-Label Uses on Physicians, Charleston Gazette, Nov. 3, 2003, at 1A.

Sheryl Gay Stolberg, Heartburn Drug Linked to Deaths to be Withdrawn, N.Y. Times, Mar. 24, 2000, at A15.

Liebman, supra note 2.

Second, by allowing physicians to write off-label prescriptions, the government creates a disincentive for manufacturers to conduct further research into a drug once it has been approved for sale. Ironically, physicians frequently justify their off-label prescribing powers by arguing that drug companies cannot be relied on to submit new drug uses for approval through the Supplemental New Drug Application process. However, this allegation can become a self-fulfilling prophesy. As long as physicians are given the freedom to experiment with off-label prescriptions, it will always be cheaper and easier for a drug company to rely on the physician community to discover and spread this information, instead of incurring the cost of an additional manufacturer-sponsored clinical trial.  This is especially true if there are not many years left on the drug’s patent, since sales competition from generic manufacturers would make it harder for the drug company to recoup the cost of additional clinical research. Furthermore, getting FDA approval to add a new use to a drug’s label would not necessarily result in additional sales, particularly if the off-label use was already well-known and commonly prescribed among the medical community.

Salbu, supra note 10, at 205.

Christopher, supra note 15, at 250.

Henry, supra note 11, at 369; see also Melody Petersen, Documents Show Effort to Promote Unproven Drug, N.Y. Times, Oct. 29, 2002, at C1.

Salbu, supra note 10, at 188.

	Third, the FDA’s hands-off approach to off-label prescribing creates an opportunity for pharmaceutical manufacturers to “game” the drug approval and sales process. An enterprising drug company could try to get a new drug approved for a cheap, narrow use that required less extensive clinical testing. Once the drug was approved, the company could then try to market the drug (subject to the FDA restrictions discussed below) for broader and more profitable off-label indications. This strategy is particularly attractive for drug companies who qualify for the market exclusivity, tax benefits, and federal research funding available under the Orphan Drug Act. Drugs that receive “orphan drug approval” for the treatment of a rare disease can still be prescribed off-label for more common “non-orphan” indications, often at very lucrative reimbursement levels due to the lack of generic competition from other drug products. 

Id. at 205-206.

Orphan Drug Act, Pub. L. No. 97-414 (codified at 21 U.S.C. §§ 360bb-360dd (1994)).

For a discussion of this paradigm, see Henry Chesbrough & Clarissa Ceruit, Genzyme: Engineering the Market for Orphan Drugs, Harvard Business School Case #9-602-147 (2002). The FDA has begun to address this practice by limiting orphan drug patent protection to the orphan indication. Generic drug makers are allowed to manufacture and market an equivalent protect, as long as the labeling is limited to the “off-label” non-orphan uses.  At least one court has supported this interpretation of the Orphan Drug Act. See Sigma-Tau Pharmaceuticals v. Schwetz, 288 F.3d 141 (4^th Cir. 2002) (holding that the FDA did not violate the Orphan Drug Act when it approved a generic version of Sigma-Tau’s orphan drug Carnitor to treat patients with unprotected indications).

	Finally, in an era of rising healthcare costs, it is worth questioning whether it is fiscally wise to allow physicians and patients to have such wide and uncontrolled access to prescription drugs, particularly for off-label uses that have not been rigorously reviewed by the FDA for safety and effectiveness.  According to the Centers for Medicare and Medicaid Services (“CMS”), prescription drug spending in the United States totaled $162.4 billion in 2002, an increase of 15.3 percent over 2001 spending. Given this statistic, it would not be surprising if cost-control pressures eventually pushed the health insurance industry to more strictly control enrollee access to off-label prescription drug treatments.  

See Earl P. Steinberg, Sean Tunis, & David Shapiro, Insurance Coverage for Experimental Technologies, Health Affairs, 14:4, 143, 147 (1995).

Press Release, CMS, Health Care Spending Reaches $1.6 Trillion in 2002 (Jan. 8, 2004), available at http://www.cms.hhs.gov/media/press; see also Liz Kowalczyk, Medical Spending Leaps in ‘02, Boston Globe, Jan. 9, 2004, at C3.

Part II:  Statutory and Regulatory Control of Off-Label Drug Prescriptions

To some extent, economic considerations are already the primary driving force behind our nation’s current off-label prescription drug policies. Most of the government regulations concerning off-label use have been focused on mitigating financial conflicts of interest and preventing reimbursement abuse, rather than on protecting patient safety. Within the past ten years, both the FDA and CMS have enacted regulations and launched investigations to address pharmaceutical company promotional practices that could lead physicians to write improper or excessive off-label prescriptions.  The addition of an expanded Medicare prescription drug benefit will likely only increase this type of agency activity, particularly since the elderly currently account for almost 40 percent of our nation’s prescription drug spending.  

Issues in Designing a Prescription Drug Benefit for Medicare, Congressional Budget Office, October 2002.

A.	FDA Regulation of Off-Label Marketing by Pharmaceutical Companies

	The FDA has focused primarily on the pharmaceutical industry, rather than the physician community, in its effort to control inappropriate off-label drug prescriptions. Prior to 1997, drug companies were prohibited from advertising or promoting a drug for any purpose, use, or dose that was outside the scope of the FDA-approved labeling. This restriction only applied to drug manufacturers; the FDA did nothing to prevent physicians from publishing and sharing information about off-label research. This essentially made the physician community solely responsible for disseminating all information about break-through off-label treatments.  
In many respects, the FDA’s approach made total sense. Theoretically, a physician’s prescription decision should be entirely motivated by a desire to provide the patient with the best possible medical treatment, and not by any potential financial gain. In contrast, the pharmaceutical industry has a tremendous conflict of interest when they market drugs for off-label purposes, since off-label prescriptions translate directly into a higher volume of drug sales and larger company profits.  This is particularly true when the company’s drug is still under patent protection.  

Andrew Pollack, Taking Up a Drug for This (and That), N.Y. Times, Apr. 27, 2003, at 1; for a contrary view, see Michael I. Krauss, Essay, Loosening the FDA’s Drug Certification Monopoly, 4 Geo. Mason L. Rev. 457, 474 (1996)

Drugs that are still patent-protected will usually sell well above the manufacturer’s production costs, which creates an incentive for manufacturers to spend money on marketing to generate additional sales.  See Joseph Newhouse, How Much Should Medicare Pay for Drugs?, Health Affairs, 23:1, 89, 93 (2004).

	Critics from the drug industry and the scientific community argued that the FDA’s strict marketing rules actually stymied the dissemination of information about cutting edge off-label drug discoveries, possibly at the cost of patient lives. The sheer number of drugs on the market makes it very difficult for busy physicians to keep up to date on emerging off-label research for all of the different products that they prescribe to their patients. In contrast, there is an expectation that a well-managed drug company will be able to efficiently track cutting-edge research involving its products, particularly since future sales projections are a fundamental part of how the company is valued on Wall Street.  Some free speech advocates also argued that the FDA regulations violated the First Amendment rights of the pharmaceutical manufacturers.     	

Daniel Troy, FDA Censorship Could Cost Lives, Wall St. J., Aug. 2, 1999, at A14.

Salbu, supra note 10, at 199-200; see also Chris Adams, Looser Lips for Food and Drug Companies? Wall St. J., Sept. 17, 2002, at A4.

The passage of the Food and Drug Administration Modernization Act (“FDAMA”) in 1997 changed this landscape.  The FDAMA allows drug manufacturers, for the first time, to disseminate literature about the off-label uses of their drugs, as long as this information is copied from a qualified drug reference manual (defined as one that was not prepared or significantly influenced by the manufacturer), or is reprinted from an unabridged peer-reviewed article published in a journal that is indexed in the National Library of Medicine. The marketing literature must disclose all sources of the research funding, and must prominently warn readers that the off-label drug use has not been approved by the FDA.  Manufacturers are required to submit all off-label marketing materials to the FDA for approval at least sixty days prior to dissemination, along with any additional clinical trial data supporting the off-label use.

Food and Drug Administration Modernization Act of 1997, Pub. L. No. 105-115 (amending 21 U.S.C. §§ 360aaa et seq. (1994)).

21 U.S.C. §§ 360aaa-1-2.  Some critics have questioned whether this limitation unnecessarily excludes articles from other reputable, but unindexed, journals.  See Salbu, supra note 10, at 214.

21 U.S.C. § 360aaa-3.

Id.

The pharmaceutical industry welcomed this new marketing freedom, but many contended that the legislation still failed to eliminate the biggest obstacle to off-label research- namely, the costs associated with filing a Supplemental New Drug Application (“SNDA”). Under the FDAMA, drug companies that want to promote an off-label use are still required to file an SNDA (along with the supporting clinical trial data) within five years of the initial dissemination of the off-label marketing material.  The FDAMA allows the FDA to exempt companies from this requirement if it would be “economically prohibitive” or “unethical” to conduct additional studies. However, it is unclear if cost considerations unrelated to the actual clinical trial- such as generic sales competition from an impending patent expiration- would be sufficient to meet this economic hardship standard.

Id. The FDA requires this application to be filed within 36 months, but the agency has the discretion to grant an additional extension of up to 24 months.

Id.

In contrast, patient safety advocates, and those concerned with controlling off-label costs, complained that the FDAMA was not restrictive enough.  Opponents argued that it was irresponsible for the government to allow drug companies to promote and profit from off-label drug uses for up to five years before requiring any safety and efficacy data to be submitted to the FDA. Furthermore, the FDAMA creates several loopholes that could allow drug companies to promote drugs for off-label uses, while still avoiding the entire SNDA process. For example, drug companies are still allowed to offer providers “research grants” to conduct off-label studies involving their drug.  Further, the FDAMA places no restriction on a drug company’s ability to provide funding for a continuing medical education seminar on the topic of the off-label use, as long as the conference is organized by an “independent” sponsor. Finally, it is unlikely that the FDA will be able to effectively police the new law, given the sheer number of existing drug manufacturers, products, and promotional materials in the marketplace. This means that the FDA will have to rely heavily on physicians to take the initiative to report drug company violations. 

Henry, supra note 11, at 376.

Id. at 377.

Thomas N. Bulleit & Joan H. Krause, Kickbacks, Courtesies or Cost-Effectiveness?: Application of the Medicare Antikickback Law to the Marketing and Promotional Practices of Drug and Medical Device Manufacturers, 54 Food & Drug Law 279, 298 (1999); see also Paul E. Kalb & I. Scott Bass, Government Investigation in the Pharmaceutical Industry: Off-Label Promotion, Fraud and Abuse, and False Claims, 53 Food & Drug L.J. 63 (1998).

Henry, supra note 11, at 375-376; Kalb and Bass, supra note 56, at 67; see also Scott Hensley, When Doctors Go to Class, Industry Often Foots the Bill, Wall St. J., Dec. 4, 2002, at A1.

Christopher, supra note 15, at 251.

B.	Regulating Off-Label Use Through Reimbursement Policy

Given the FDA’s fairly permissive attitude about off-label drug prescriptions, it is probably not surprising that public and private insurers often play an even bigger role than the FDA in controlling inappropriate off-label use. Although the FDA has generally refused to interfere with physician prescription decisions, the health insurance industry has not been quite so deferential. The FDA’s approval of a drug does not guarantee that every insurance company will pay for it, especially if a comparable and less-expensive drug is already available. Further, even when a new drug is placed on an insurance company formulary, coverage can still be limited to only certain diseases and uses. Thus, insurance company reimbursement policies (and the financial pressures that coverage denials ultimately place on patients) will regularly influence physician prescription choices.

Id. at 256-260.

The government, both at the federal and state level, has arguably exerted its biggest influence over off-label drug use in its role as an insurer, rather than in its role as a patient safety advocate. In 1998, state Medicaid programs spent $14.2 billion on prescription drugs. The Medicare program, in its current form, spends another $8 billion. However, Medicare prescription drug spending is expected to dramatically increase once the new Medicare prescription drug plan is fully implemented. It is estimated that the new legislation will cost the federal government between $400 billion to $534 billion over the next ten years.  

Kaiser Family Foundation, Medicaid and Prescription Drugs: Fact Sheet, Oct. 2002.

Newhouse, supra note 45, at 75.

Prescription Drug and Medicare Improvement Act of 2003 (H.R.1), Tit. 3, § 303, 108^th Cong., 1^st Sess. H.R.1 passed the House and Senate on Nov. 26, 2003, and was signed by President Bush on December 7, 2003. A complete review of the new drug bill is outside the scope of this paper. However, footnotes are included, where applicable, to notify readers when the content of the new law might impact future off-label policies.

Amy Goldstein & Juliet Eilperin, Medicare Drug Cost Estimate Increases, Wash. Post, Jan. 30, 2004, at A1.

The following sections of this paper explore the ways that current government health insurance reimbursement methodologies have directly or indirectly regulated off-label prescription drug use. It remains to be seen whether the new Medicare drug benefit will prompt the federal government to become even more aggressive about monitoring off-label drug use. Indeed, there are signs that this crackdown is already beginning. 

The federal government pays for prescription drugs for patients who are insured through Medicare, Medicaid, the Veteran’s Administration, the Department of Defense, and Federal Employee Health Benefit Plans.  This paper will only discuss Medicare and Medicaid, since these two programs constitute such a large (and often controversial) portion of federal healthcare expenditures.

In its 2004 work plan, the OIG indicated that it would continue to review the prices that Medicare and Medicaid pay for prescription drugs. See Leo Crowley, Office of Inspector General’s Work Plan for 2004, N.Y.L.J., Oct. 28, 2003, at 3.

Gardiner Harris, U.S. Weighs Not Paying All Uses for Some Drugs, N.Y. Times, Jan. 30, 2004, at C1.

1.	Medicare Reimbursement Policy

Historically, the Medicare program has divided most prescription drugs into two categories: those that can be self-administered (taken at home), and those that must be administered in an inpatient or outpatient setting. Self-administered prescription drugs have not traditionally been covered by Medicare. Instead, beneficiaries have been expected to pay for these prescriptions directly out-of-pocket, or through private supplemental (Medigap) insurance policies. Consequently, the Medicare program has had little incentive to study or monitor the cost issues surrounding beneficiary off-label prescriptions for self-administered drugs.
Medicare has been equally unconcerned about the cost of off-label prescriptions that are administered to patients within the inpatient hospital setting. The reimbursement structure of the Medicare Prospective Payment System (“PPS”) makes the hospital, rather than the Medicare program, responsible for the cost of any inappropriate off-label drug use. Under the PPS (also called “Medicare Part A”), Medicare assigns every inpatient procedure to a Diagnosis-Related Group (“DRG”).  Each DRG is linked to a unique reimbursement rate that is calculated to cover all of the hospital’s costs for caring for the patient during their hospital stay- including the cost of all drugs that are administered as part of the patient’s procedure.  The DRG payment to the hospital will be the same regardless of what drugs are used, so the hospital is ultimately responsible for covering any extra costs generated by excessive off-label drug prescriptions.
Drugs that are administered to Medicare beneficiaries in the outpatient setting have been an entirely different story. Over the past few years, Medicare has become increasingly concerned about excessive reimbursement for “Part B” drugs, which are usually those that cannot be self-administered by the patient, such as chemotherapy cancer drugs that need to be delivered intravenously in a physician’s office. In contrast to Part A, Medicare reimburses Part B drugs separately from the actual medical procedure.  Physicians typically buy their Part B drugs in bulk from a wholesaler, and will then transmit individual claims to Medicare as doses from the drug supply are used in conjunction with each patient’s treatment.  Under the current methodology, Medicare will reimburse physicians 95 percent of the average wholesale price (“AWP”) for each covered drug that they administer. In 2002, Medicare covered approximately 450 pharmaceutical products and biologics under Part B at a total cost of $8 billion, more than three percent of total program spending.

See Bill Brubaker, Firms in Talks on Overbilling for Medicare, Medicaid Drugs, Wash. Post, May 11, 2000, at E03; see also Spencer Rich, Battling the High Prices Medicare Pays for Drugs, Wash. Post, Jan. 2, 1997, at A15.

Under Medicare Part B, physicians submit a bill containing a CPT code for the “work” that was involved with administering the drug. For example, CPT codes 90780 and 90781 cover therapeutic and diagnostic drug infusions.  Each CPT code is linked to a uniform payment amount, reflected in the national Medicare Fee Schedule. This fee schedule payment amount is intended to cover the physician’s salary, office overhead, and malpractice insurance, but it does not cover the actual cost of the drug.

42 U.S.C. § 1395u(o).  This methodology will be revised once the new Medicare prescription drug bill is fully implemented.

Newhouse, supra note 45, at 95.

The Medicare statutes and regulations are noticeably silent about the proper reimbursement for the off-label uses of Part B drugs. The statute states that Medicare will cover Part B drugs if they are reasonable and necessary for the diagnosis or treatment of the patient’s illness, while the regulations only require the drug to be administered “incident to” a physician’s service. The Medicare Carriers Manual (“MCM”)- which essentially serves as a CMS interpretive rule- elaborates that a drug will always be considered “reasonable and necessary” if it is administered for the indications specified on the FDA-approved labeling.  However, the reimbursement approval for an off-label use is left entirely to the discretion of each Medicare Part B contractor: 

42 U.S.C. § 1395y(a)(1); 42 C.F.R. § 405.517; 42 C.F.R. §§ 410.26-27.

MCM § 2049.4.

“FDA approved drugs used for indications other than what is indicated on the official label may be covered under Medicare if the carrier determines the use to be medically accepted, taking into consideration the major drug compendia, authoritative medical literature and/or accepted standards of medical practice.”  

Id.

There are over fifteen different Medicare Part B carriers, each with the ability to issue its own set of coverage policies regarding off-label drug prescriptions. Not surprisingly, the result has been a confusing patchwork of coverage policies that can be very difficult for physicians to navigate.  

See Henry, supra note 11, at 378.

	Medicare coverage for off-label drug use has been particularly contentious in the area of cancer therapy.  Innovative cancer treatments are often discovered when oncologists prescribe FDA-approved anti-cancer agents in an off-label manner, such as in combination with other cancer agents, or to treat a different type of tumor.  However, Medicare reimbursement policy has not always supported these off-label benefits. A 1991 GAO study found that physicians were admitting patients to the hospital for cancer treatment when off-label drug use was involved, solely to ensure reimbursement that they feared would be denied in an outpatient setting.  In response, CMS now requires its carriers to pay for the unlabeled uses of FDA-approved cancer drugs if the use is listed in any of three major drug compendia.  Thus, reimbursement for the off-label use of cancer drugs has arguably become more consistent across Medicare carriers than it has for other types of medications and diseases. 

General Accounting Office, supra note 25.

Id.

These compendia include: 1) American Hospital Formulary Service Drug Information; 2) American Medical Association Drug Evaluations; 3) United States Pharmacopoeia Drug Information (USPDI).  See MCM § 2049.4(C).

2.	Medicaid Drug Coverage

Off-label drug prescriptions are an even bigger concern for the Medicaid program, since its outpatient drug benefit covers all prescription drugs, including those that are self-administered by the patient. Between 1997 and 2000, Medicaid prescription drug expenditures rose at an average annual rate of 18.1 percent.  Although the Medicaid program is administered and operated by individual state governments, its funding comes from a combination of federal and state revenues. Thus, state Medicaid programs are governed by laws and regulations at both the federal and state level. 

Although outpatient prescription drug coverage remains optional under federal Medicaid law, all states currently provide some form of a prescription drug benefit. Dawn M. Gencarelli, Medicaid Prescription Drug Coverage: State Efforts to Control Costs, National Health Policy Forum Issue Brief No. 790, May 10, 2003, at 3.

Id. at 2.

Arguably, the federal legislation that has had the largest impact on Medicaid off-label reimbursement policy has been the Medicaid Drug Rebate Program.  This law stipulates that a drug will only be “covered” by state Medicaid programs if the manufacturer has entered into a rebate agreement with the U.S. Department of Health and Human Services (“DHHS”). Rebate amounts are established by federal statute and are paid to the states on a quarterly basis.  Once a manufacturer has entered into a Medicaid rebate agreement, the federal government has historically covered all of the manufacturer’s FDA-approved drug products, unless exclusion is explicitly allowed by statute.  

42 U.S.C. § 1396r-8.

42 U.S.C. § 1396r-8(c).

Id.  For brand name drugs, this rebate amount is usually the greater of 15.1 percent of the average manufacturer’s price (“AMP”), or the difference between the AMP and the “best price” that the manufacturer offers the drug to any other wholesaler, provider, or insurance payer.  For generic drugs, the rebate is equal to 11 percent of each product’s AMP.  The AMP is the average price paid to manufacturers by wholesalers (after all discounts and rebates) for a particular dosage and strength of a prescription drug. See Gencarelli, at  3.

For example, 42 U.S.C. § 1396r-8(d)(2) lists certain classes of drugs that “may” be excluded from state Medicaid coverage, such as agents used for cosmetic purposes, weight loss, or smoking cessation.  For a complete list, see 42 U.S.C. § 1396r-8(d)(2).

Unfortunately, the Medicaid rebate statute is very ambiguous about whether Medicaid is required to pay for both the on and off-label uses of prescription drugs. This has led to a great deal of dispute and litigation. Although the Medicaid rebate statute outlines a Medicaid reimbursement system for “covered outpatient drugs”, it never actually defines this term. The law is equally ambiguous when it stipulates that states “may” refuse to pay for a covered outpatient drug if it is not being used for a “medically accepted indication”- defined in the statute as an FDA-approved use, or an off-label use that has been included in one of four major drug compendia.  States with drug formularies “may” also exclude a covered outpatient drug for the “treatment of a specific disease or condition” when the drug does not have a significant safety or efficacy advantage over an existing formulary product.

U.S. ex rel. Franklin v. Parke-Davis, 147 F.Supp.2d 39 (D. Mass. 2001); see also Chappell v. R.I. Dept. of Human Services, C.A. No. PC 02-4586, 2003 R.I. Super. LEXIS 73, at *20 (R.I. Super. May 28, 2003) (holding by Rhode Island Superior Court that the state Medicaid program was not required to reimburse a patient for Provigil, a narcolepsy drug, when it was prescribed off-label for chronic fatigue syndrome).

42 U.S.C. § 1396r-8.

42 U.S.C. § 1396r-8(d)(1)(B)(i); a list of the four approved drug compendia is found in 42 U.S.C. § 1396r-8(g)(1)(B)(i). Approximately 20 percent of uses listed in the United States Pharmacopoeia Drug Information compendium are not approved by the FDA. See Steinberg, Tunis, & Shapiro, supra note 41, at 147.

42 U.S.C. § 1396r-8(d)(4)(C).

Not surprisingly, the somewhat ambiguous language in the federal Medicaid statute has caused some confusion at the state level (and in the courts) about when Medicaid reimbursement for a drug’s off-label use is required, and conversely, when Medicaid reimbursement for a drug’s off-label use must always be denied.  The lack of a strong national policy has also subjected Medicaid off-label prescription drug coverage to the forces of fifty different state legislatures.  For example, some states (but not all) require health plans to cover off-label prescriptions for all FDA-approved drugs if the use is listed in a major drug compendia, or supported by medical research.  Other states require health insurance companies to cover all off-label prescriptions when used in conjunction with cancer treatment. As a result of these different policy standards, it is possible for a drug’s off-label use to be covered under one state’s Medicaid program, while being denied coverage in an adjoining state.

See U.S. ex rel. Franklin v. Parke-Davis, No. CIV.A.96-11651PBS, 2003 WL 22048255, at *3 (D. Mass. Aug. 22, 2003) (“The Court would appreciate an amicus brief from federal officials, providing the federal government’s understanding of the extent to which the Medicaid statute empowers states to provide coverage of off-label, non-compendium prescriptions”).

For examples, see Maryland Ins. Code § 15-804 and Oregon O.R.S § 743.700.

For a complete list of these states, see http://www.acor.org/clinical/offlabel.html (last visited Feb. 22, 2004).

3.	Fraud and Abuse Law

As healthcare costs continue to rise, the federal government has become much more aggressive about cracking down on “fraud and abuse” within the Medicare and Medicaid programs, including the improper use and reimbursement of prescription drugs.  State governments are also joining the movement, with over 40 state attorneys general banding together to form the Pharmaceutical Pricing Task Force to examine whether state Medicaid programs are appropriately paying for drugs. Recent investigations and lawsuits have focused specifically on whether drug companies are improperly influencing physician prescription decisions. In particular, there is growing concern that pharmaceutical company marketing and reimbursement programs may be causing physicians to write excessive or inappropriate prescriptions for the off-label uses of some covered drugs. 

Kalb and Bass, supra note 56, at 67-68; see also Hearing on Waste, Fraud, and Abuse in Federal Programs Before the House Comm. on Ways and Means, 108th Cong., 1st Sess. (July 17, 2003) (statement of William H. Jordan, Senior Counsel to the Assistant Attorney General for the Civil Division, Department of Justice).

See Terry Carter, Drug Wars: Coalition Tactics Make Price Fight Look Like Battle Over Tobacco, 88 A.B.A.J. 40 (2002); see also Reed Abelson and Jonathan D. Glater, New York Will Sue Two Big Drug Makers On Doctor Discount, N.Y.Times, Feb. 13, 2003, at A1.

See Government Could Model More Probes on Neurontin Case, Drug Indus. Daily, Sept. 9, 2003.

The legal attack on inappropriate off-label prescriptions has been largely premised on a combination of the federal Anti-Kickback Act (“AKA”), off-label prescription drug marketing rules (including the FDAMA), and the federal False Claims Act (“FCA”). So far, most of the attention has been focused on the interaction between the AKA and the FCA. The AKA applies to anyone who:

Increasingly, state attorneys generals are also examining whether drug marketing and reimbursement practices violate state-level fraud and abuse and consumer protection laws. However, a review of these theories is beyond the scope of this paper. For more background information, see Montana Accuses 18 Drug Makers of Price Manipulation, Am. Health Line, Feb. 26, 2002.

“Knowingly and willfully offers or pays any remuneration (including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person… to purchase, lease, order, or arrange for or recommend purchasing, leasing, or ordering any good, facility, service, or item for which payment may be made in whole or in part under a Federal health care program...”  

42 U.S.C. § 1320a-7(b)(b)(2).

The AKA also applies conversely to persons who knowingly and willfully solicit or receive remuneration in exchange for engaging in activities that can be reimbursed under a federal healthcare program. This puts pharmaceutical companies and healthcare providers at equal legal risk when a kickback scheme is discovered. 

42 U.S.C. § 1320a-7(b)(b)(1).

 In 1994, the DHHS Office of Inspector General (“OIG”) issued a “fraud alert” that described how a number of relatively common pharmaceutical company practices could constitute illegal kickbacks under the AKA. These activities included: any prize, gift, cash payment, or bonus offered to a physician in exchange for prescribing a product; grants offered to physicians for studies that are of “questionable scientific value”; and “switch fees” that are paid to providers when they change from one manufacturer’s product to another. Under the AKA, these types of illegal drug marketing programs could place both the pharmaceutical company and the prescribing physician at equal legal risk. 

Special Fraud Alert: Prescription Drug Marketing Schemes, 59 Fed. Reg. 65376 (Dec. 19, 1994).

Id.

A violation of the AKA is considered a felony and can bring a fine of up to $25,000, five years in prison, and exclusion from the Medicare and Medicaid programs.  Because of the potential severity of this punishment, DHHS promulgated regulations to delineate “safe harbor” business practices that would not be considered a violation of the law, including properly reported drug discount programs and grants for legitimate research studies that are paid at a fair market rate.  Business practices that do not qualify under a safe harbor can be considered a violation of the AKA if even “one purpose” of the scheme is to induce greater utilization of the covered good or service. The application of these safe harbor guidelines to pharmaceutical company marketing programs was further explained in OIG guidelines released in May 2003.

42 U.S.C. § 1320a-7(b).

42 C.F.R § 1001.952.

United States v. Greber, 760 F.2d 68, 72 (3d Cir.), cert. denied, 474 U.S. 988 (1985) (holding that the AKA was violated if diagnostic company payments were intended to induce a physician to use certain services, even if these same payments were also intended to be compensation for activities that were actually performed by the physician).

OIG Compliance Program Guidance for Pharmaceutical Manufacturers, 68 Fed. Reg. 23731 (May 5, 2003).

In contrast to the AKA, the federal False Claims Act is not specific to the healthcare industry. Any party, in any industry, can be liable under the FCA if they submit false claims to the government.  In order to collect damages under the FCA, the government must prove that: 1) the defendant submitted (or caused the submission of) false information to the government; 2) the defendant knew it to be false or fraudulent (scienter requirement); and 3) the government relied on the false or fraudulent information to its detriment. FCA violators are subject to penalties of $5,500 to $11,000 per claim, plus three times the government’s damages.  In addition, the FCA contains qui tam provisions that permit private “whistleblowers” to sue on the government’s behalf, with the possibility of retaining 10 to 30 percent of the recovery proceeds. This creates a powerful incentive for healthcare and pharmaceutical company employees to “police” the reimbursement practices of their employers. 

31 U.S.C. § 3729(a)-(c).

Id.; see also United States v. Neifert-White Co., 390 U.S. 228 (1968) (holding that an action may be brought under the FCA only if there is: (1) a false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter; (3) that was material; and (4) that caused the government to pay out money or to forfeit moneys due (i.e. that involved a ‘claim’)).

31 U.S.C. § 3729(a).

31 U.S.C. § 3730(b)-(d).

Joan H. Krause, Health Care Providers and the Public Fisc: Paradigms of Government Harm Under the Civil False Claims Act, 36 Ga. L. Rev. 121, 125 (2001).

One area of hotly contested legal dispute is whether a violation of the AKA will automatically constitute a simultaneous violation of the FCA. The ultimate resolution of this question could have an important impact on the outcome of off-label reimbursement litigation.  In U.S. ex rel. Thompson v. Columbia/HCA Healthcare Corp., the leading case on this question, the Fifth Circuit held that although an AKA violation does not constitute a per se violation of the FCA, it can constitute an actionable FCA claim if the government has conditioned its reimbursement on a claimant’s statement of compliance with all applicable Medicare and Medicaid laws, such as the required certification that all providers must submit with their annual Medicare cost reports.  However, this opinion has not been universally followed by other courts. For example, in U.S. ex rel. Barmak v. Sutter Corp., a New York district court held that the AKA could not serve as the basis for a qui tam FCA suit since the AKA was a felony crime statute with no private cause of action.   

U.S. ex rel. Thompson v. Columbia/HCA Healthcare Corp., 125 F.3d 899, 902 (5^th Cir. 1997); see also U.S. ex rel. Pogue v. Am. Healthcorp, Inc., 914 F.Supp. 1507 (M.D. Tenn. 1996) (holding that certification of adherence to the law can be inferred simply by virtue of a defendant’s participation in a federal health program), aff’d, U.S. ex rel. Pogue v. Diabetes Treatment Ctrs. of Am., 238 F.Supp.2d 258, 266 (D.D.C. 2002).

U.S. ex rel. Barmak v. Sutter Corp., No. 95-CIV.7637-KTD-RLE, 2002 WL 987109, at *5 (S.D.N.Y. May 14, 2002) (holding “I have no reason to believe, nor have the parties provided me any, that Congress intended to subvert the DOJ's exclusive jurisdiction over the anti-kickback statute by grafting the FCA's qui tam provisions onto it”).

Recent litigation involving two major pharmaceutical companies- Tap and Parke-Davis- sheds light on how healthcare fraud and abuse law can serve as a regulatory vehicle for restricting off-label drug prescriptions.  Both cases involved marketing campaigns for drugs that were heavily prescribed for off-label uses. In the Tap lawsuit, the government argued that the marketing campaign for Tap’s Lupron product involved illegal kickbacks in violation of the AKA, and thus every “tainted” Lupron prescription constituted a false claim under the FCA. The Parke-Davis case involved a similar allegedly illegal kickback scheme, but with the additional accusation that Parke-Davis was also distributing false information about the off-label uses of its drug in violation of the FDAMA. Thus, the Parke-Davis litigation raises the further question of whether an FCA case can be premised on an off-label marketing violation in the same way that an FCA case can be premised on an AKA infringement.
In examining these two cases, it is important to remember that the law is still very unsettled in this area. No off-label prescription drug case involving federal healthcare fraud and abuse law has ever been heard by the Supreme Court, so there has never been a definitive ruling on how Medicare and Medicaid law should treat off-label reimbursement, or whether an off-label prescription written in violation of the AKA (or the FDAMA) automatically constitutes an FCA violation. Unfortunately, the potentially exorbitant penalties available under the FCA make settlement an attractive option for many of the accused parties, so these legal questions have not been thoroughly litigated. 

Krause, supra note 107, at 146; see also Off-Label False Claims Lawsuits on the Rise, Drug Indus. Daily, Feb. 4, 2004.

The Tap case, which was settled in 2001, demonstrates how any prescription that is motivated, even in part, by a drug company remuneration program can lead to prosecution under the AKA and the FCA. The Tap investigation involved the marketing campaign for Lupron, a popular prostate cancer drug that is also widely used off-label to treat infertility problems.  Physician remuneration from the Lupron marketing program included free drug samples, trips to golf and skiing resorts, consulting and audit services, office Christmas parties, and electronic equipment, such as TVs and VCRs. Tap was also accused of constructing an illegal “return to practice” program that manipulated drug discounts to allow physicians to generate more profit from Medicare’s reimbursement rate for Lupron.  Tap ultimately pled guilty to violating the AKA and the FCA, and settled the case for $875 million. Four doctors also pled guilty to healthcare fraud charges and were sentenced to probation and fines. 

In 1999, Medicare spent more money on Lupron than any other drug. In that year, it accounted for 15.1 percent of total Medicare drug spending. Joseph Brown, The Price of Improper Conduct, Med Ad News, 20:12, Dec. 1, 2001, at 22.

Six Additional Tap Employees Charged with Conspiracy and Kickback Crimes, PR Newswire, July 16, 2002.

Todd A. Rodriguez, Physicians and the Pharmaceutical Industry: Knowing When to Look a Gift Horse in the Mouth, Health Law Handbook, Alice G. Gosfield, Ed. (2002) § 8.11.

Brown, supra note 111.

PR Newswire, supra note 112.

Most of Tap’s activities constituted fairly straightforward violations of the AKA, leaving only the legal dispute about whether these kickback violations were enough to establish valid claims under the FCA. Several attorneys within the healthcare legal community felt that Tap should have fought harder to defend against the FCA claims, particularly as they related to the company’s AWP-based marketing program. This issue, in particular, has implications for current off-label prescription policy, since the “profit spread” between a drug’s purchase price and its reimbursement rate can easily become a consideration (or an incentive) when physicians decide to experiment with a drug for an off-label use. 

Although the AKA contains a safe harbor provision for drug discount programs, the government argued that the Tap scheme would not qualify since the discount savings were retained by the physicians and were not passed back to the government and beneficiaries. 42 U.S.C. § 1320a-7b(b)(3)(a); 42 C.F.R. § 1001.952 (h).

In order to understand the Tap “return to practice” program, it is necessary to first examine how Lupron is usually reimbursed. Lupron, like most cancer drugs, needs to be administered intravenously in the physician’s office. Physicians usually purchase a supply of Lupron directly from Tap at a discounted rate. Each time a dose of Lupron is used for a patient’s treatment, the physician will transmit a claim form to Medicare for reimbursement. Medicare traditionally paid the physician 95 percent of Lupron’s AWP, as reported in the drug industry’s annual pricebook (called “The Red Book”).  Because AWPs are self-reported, drug companies are often able to craft and aggressively market the “spread” between the AWP rate and the drug’s actual sales price.  For example, Tap sold Lupron to physicians for an average of $510 a dose, while Medicare reimbursement, based on the published AWP, was set at $619.  Thus, physicians were able to pocket the $109 difference. 

42 U.S.C. § 1395u(o); supra note 62. The Medicare Prescription Drug Bill that was recently passed by Congress will make several substantive changes to the way that Medicare pays for Part B outpatient drugs.  For FY 2004, physicians will be reimbursed at the lower of 85 percent of the AWP, or at the widely available market price (“WAMP”), as determined by CMS.  Starting in FY 2005, physicians will be reimbursed at 4 percent above the average sales price (“ASP”), as calculated by CMS.  However, the legislation does not specify how CMS is to collect and calculate the WAMP and ASP data, so it is unclear how this law will ultimately be implemented.

See Robert Pear, Bayer to Pay $14 Million to Settle Charges of Causing Inflated Medicaid Claims, N.Y. Times, Jan. 24, 2001, at A16; see also Alice Dembner, A Cure for Fraud: Weston Doctor Saves Taxpayers Millions By Blowing Whistle, Boston Globe, Oct. 7, 2001 at B1.

Medicare beneficiaries are responsible for a 20 percent copayment under Medicare Part B rules.  Thus, Medicare would actually reimburse the doctor $495, and the patient would pay the doctor the remaining $124.

The government argued that because Tap marketed this reimbursement spread, it caused physicians to “present” drug claims to the government for payment at an overly inflated rate in violation of the FCA. However, some healthcare lawyers observed that the term “AWP” was never defined anywhere in the statutes or regulations, thus AWP calculations have been left open to varying interpretations over the years.  Moreover, Congress explicitly rejected a proposal to discontinue Medicare’s use of the AWP as recently as 1998, despite OIG and GAO reports that conclusively documented that the government was paying an excessive amount for outpatient drugs when payment was linked to drug company “sticker” prices.  If the AWP statutes and/or regulations are truly ambiguous, it might have been hard for the government to convince a jury that Tap met the FCA’s scienter burden by knowingly causing the submission of false claims. 

Diane Romza-Kutz et al., Average Wholesale Price: The Fading Standard for Prescription Drug Pricing and Reimbursement (2002), at 11, available at www.mayerbrownrowe.com.

James M. Spears and Jeff Pearlman, Using Litigation to Regulate Drug Prices: the Assault on AWP, Medical Marketing and Media, Vol. 37(6), June 1, 2002, at 70.

Furthermore, as noted earlier, even if many of Tap’s other Lupron marketing tactics constituted illegal kickbacks under the AKA, it does not necessarily follow that these violations are actionable under the FCA.  Unlike physicians and hospitals, drug companies do not actually “present” claims to the government for reimbursement. Rather, they sell their drugs to wholesalers, PBMs, physicians, and pharmacies. These entities are ultimately responsible for submitting patient drug claims to the appropriate insurer for reimbursement. A pharmaceutical company arguably has little control over whether or not a drug manufacturer’s discount program is correctly reported on the bill to the insurer, so it hardly seems fair to hold the drug company responsible for an FCA violation. 
In addition, it is unclear how Tap’s remuneration program constituted any “falseness” under the FCA. Thompson made this argument work within the hospital context by relying on provider cost reports to prove that there was a “certification” of compliance with the AKA law as a condition of government payment. However, pharmaceutical companies do not file provider cost reports. One might respond that a drug company’s participation in the Medicaid rebate program carries an implicit guarantee of compliance with all applicable healthcare laws, including the AKA; indeed, this “implied certification” theory has been accepted in the Second, Sixth, and D.C. Circuits. However, this legal argument has also been harshly criticized for its failure to adequately establish a direct link between the alleged kickback and the government’s actual payment of the claim, so it is unclear whether the theory will stand up on further appeal. Further, as noted earlier in Barmak, one could also argue that the AKA does not provide for a private cause of action, and thus cannot support a qui tam FCA lawsuit. 

Pogue, 238 F.Supp.2d 258 at 266 (D.D.C. 2002); Augustine v. Century Health Serv., Inc., 289 F.3d 409, 413-414 (6th Cir. 2002); Mikes v. Straus, 274 F.3d 687, 699-703 (2nd Cir. 2001);

Lisa Michelle Phelps, Note, Calling Off the Bounty Hunters: Discrediting the Use of Alleged Antikickback Violations to Support Civil False Claims Actions, 51 Vand. L. Rev. 1003, 1017 (1998).

Barmak, 2002 WL 987109 at *5.

It is probably not surprising that Tap’s $875 million damage agreement has now sparked a major legal debate over the application of the FCA to healthcare services. Tap’s potential liability under the FCA was one of the driving forces behind its record-breaking settlement price. Under the FCA, a pharmaceutical company and/or physician is liable for up to $11,000 for every prescription for every drug that was implicated in an illegal marketing campaign. These kinds of fines can severely impact the earnings of even a large pharmaceutical company, and they would surely wipe out the net worth of most practicing physicians. Furthermore, as long as the potentially exorbitant FCA fines are on the table, physicians and pharmaceutical companies may be less likely to prescribe drugs for new off-label uses. This halt in off-label experimentation could ultimately impede medical innovation.
The untested FCA defenses in the Tap case could finally get their day in court through the current qui tam litigation against Parke-Davis (a division of Pfizer) over the improper off-label promotion of its epilepsy drug Neurontin. In U.S. ex. rel. Franklin v. Parke-Davis, the government (via a whistleblower) alleges that Parke-Davis engaged in a fraudulent scheme to promote the sale of Neurontin for off-label uses, thereby causing the submission of false claims to state Medicaid programs.  Approximately 50 percent of Neurontin’s 1996 sales were attributable to off-label uses, including pain control, bipolar disease, and attention deficit disorder. According to information provided by the Relator (a former Parke-Davis employee), Parke-Davis instructed its sales force to misrepresent their scientific credentials while making exaggerated and false claims concerning the safety and efficacy of the drug for off-label uses, including promoting the drug at a dose of 4800 mg per day, when the FDA-approved dose was only 1800 mg. Parke-Davis sales force representatives were instructed to coach doctors on how to conceal the off-label nature of their prescriptions to ensure reimbursement from insurers who did not cover the drug for all uses.

Parke-Davis, 147 F.Supp.2d at 45.

Id.

Id.

Id. at 46

The Neurontin marketing scheme also involved an alleged kickback scheme, where doctors were paid additional compensation relative to their prescription volume. These payments were disguised as sham consulting or speaker fees, or as “grants” for non-existent drug studies.  Some doctors were also given extravagant travel gifts, such as tickets to the Olympics, in exchange for their prescriptions.  The plaintiff also submitted evidence that Parke-Davis took explicit measures to conceal these activities, including shredding documents and falsifying records so as not to leave a paper trail. 

Id.  For a discussion of how pharmaceutical research grants can violation the AKA, see Kalb & Bass, supra note 56, at 63.

Parke-Davis, 147 F.Supp.2d at 46; see also Liz Kowalczyk, Drug Company Push on Doctors Disclosed, Boston Globe, May 19, 2002, at A1.

Parke-Davis, 147 F.Supp.2d at 46.

The Relator in Parke-Davis alleged that the pharmaceutical company caused the submission of numerous off-label Neurontin prescriptions to the Medicaid program through both its fraudulent statements about the safety and efficacy of the drug, as well as through its system of unlawful kickback incentives to the prescribing doctors.  Parke-Davis responded by arguing that an AKA violation does not constitute a per se violation of the FCA, and that even if it did, a pharmaceutical manufacturer could not be prosecuted under the FCA for the off-label prescriptions of its drugs since the pharmaceutical companies do not submit individual patient drug claims to the government for reimbursement.

Id. at 51.

Id. at 51-54.

In a 2001 hearing, the judge rejected the argument that Parke-Davis’ AKA violations were sufficient to establish a case against the pharmaceutical company under the FCA. The court noted that there was no precedent for extending Thompson’s “certification” or “implied certification” theory to hold a pharmaceutical company responsible for government claims filed by a third party.  The court agreed that Parke-Davis’ kickback scheme may have been illegal, but stated that this alone was not enough to prove an FCA claim. “A claim under the FCA [premised on the AKA] will fail unless the Relator alleges that Parke-Davis caused or induced a doctor and/or pharmacist to file a false or fraudulent certification regarding compliance with the anti-kickback statute.” Thus, Parke-Davis seems to reject the very same legal argument used earlier in the year to justify Tap’s huge settlement amount. 

Id. at 55.

Id.

Id.

Surprisingly, the court still permitted the FCA allegations to continue to trial, even without the AKA framework. Instead, the court allowed the FCA claims to proceed based on Parke-Davis’ alleged violation of the FDA’s off-label marketing regulations. The court reasoned that if Parke-Davis had really trained its sales representatives to promote false data regarding the safety and effectiveness of Neurontin’s off-label uses, then any impact that these instructions had on a physician’s decision to write a Neurontin prescription for a non-reimbursable off-label use could be viewed as Parke-Davis “causing” the submission of a false claim to the Medicaid program. The fact that it is physicians and pharmacists, and not Parke-Davis, who actually submit the claims to Medicaid was not sufficient to break the legal chain of causation. Rather, the court argued that these prescriptions were a foreseeable and intended consequence of Parke-Davis’ marketing program and thus grounds for holding the pharmaceutical company liable.   

Id. at 52-53.

Id. This holding was reaffirmed in Parke-Davis’ 2003 summary judgment motion. Parke-Davis, 2003 WL 22048255 at *4-5.

It is curious that the Parke-Davis court would reject the use of the AKA as a basis for an FCA lawsuit against a pharmaceutical company, while still allowing the FCA allegations to proceed based on the FDAMA violations.  The Parke-Davis court held that the government could not build an FCA case on the AKA framework because there was no precedent for holding a pharmaceutical company liable for drug claims filed by a third party.  Thus, it seems inconsistent for the same decision to continue to hold that an FCA case against a pharmaceutical company for claims filed by a third party can still be premised on false marketing statements made in violation of the FDAMA, when there is no legal precedent for this theory either.
Another legal puzzle created by Parke-Davis is whether an FCA violation can be established when a drug company distributes truthful off-label promotional materials in violation of the FDAMA.  For example, suppose a pharmaceutical company distributed an article describing a university’s study of a new, but non-reimbursable, off-label use for one of the company’s cancer drugs. Under the FDAMA, it would be illegal for the drug company to distribute this article, regardless of its truthfulness, unless it was first approved by the FDA.  An oncologist might rely on this illegally-distributed article in his decision to prescribe the drug for an off-label use. However, it would not follow that the oncologist has relied on any “false” information from the drug company if he later decides to submit a claim for the drug to his Medicare Part B carrier. Thus, it is not clear that the distribution of marketing materials in violation of the FDAMA would subject the pharmaceutical company to FCA liability, absent the presence of fraudulent statements like those allegedly made in Parke-Davis.  

Kickbacks Tied to Off-Label Push Increase Risk of False Claims Suits, Pharm. Corporate Compliance Report, 1:13, Sept. 30, 2003; but see Off-Label Promotion Unlikely Prosecution Target, Wash. Drug Letter, Vol. 35:39, Oct. 6, 2003 (reporting that the Justice Department will probably not bring FCA suits based on the illegal dissemination of truthful off-label marketing statements).

Supra note 49.

But see Parke-Davis, 2003 WL 22048255 at *2 (holding, without further explanation, that the “cause” behind the physician’s submission of a false claim does not need to be independently unlawful to establish an FCA violation).

Another issue that came up in both the Tap and Parke-Davis cases was the surprising extent to which both Lupron and Neurontin were being prescribed for off-label purposes. Once the illegal kickback program was in place, physicians had a tremendous incentive to prescribe the drug for as many uses as possible- including off-label treatments. The Oklahoma Medicaid agency estimated that 94 percent of its Neurontin claims were for off-label uses in 2002, costing the agency triple what it paid for the drug in 1998.  Likewise, Lupron sales rose 3.5 percent in 2001, an increase that was directly attributed to the kickback program and the drug’s off-label uses.  

David Armstrong, How Drug Directory Helps Raise Tab for Medicaid and Insurers, Wall St. J., Oct. 23, 2003, at A1.

Brown, supra note 111.

Surprisingly, this off-label use continued in the face of serious questions about whether the drugs were effective at treating their target off-label diseases. Much of Lupron’s increased usage was attributable to physicians prescribing the drug off-label to treat infertility, even though this use was not approved by the FDA and there was growing evidence that Lupron could cause severe, and even life-threatening, side effects when used to treat gynecological conditions.   Likewise, there was a growing body of evidence that Neurontin was not really beneficial in treating many of its target off-label diseases. This raises serious questions about whether physicians can really be objective about evaluating a drug’s potential off-label use when a reimbursement incentive program is present.

See Dolores Kong, What Price Pregnancy? Boston Globe, Aug. 5, 1996, at A1.

See Armstrong, supra note 142.

A 1991 OIG survey found that the promotional practices of pharmaceutical companies can affect the prescribing patterns of physicians. Office of the Inspector General, Department of Health and Human Services, Promotion of Prescription Drugs Through Payments and Gifts, OEI-01-90-00480 (1991). Another study published in JAMA also concluded that pharmaceutical incentive programs can affect prescribing behavior. See Ashley Wazana, Physicians and the Pharmaceutical Industry: Is a Gift Ever Just a Gift?, 283 JAMA 373 (2000).

In light of these findings, some argue that liability for off-label prescriptions might rest more appropriately with the physician community, rather than with the pharmaceutical industry. After all, the FDA has given physicians the discretion to prescribe drugs off-label, based in part on a belief that physicians will responsibly evaluate whether the drug’s off-label use is in the best interest of the patient. This may be a valid argument for increasing physician liability under the FCA, but it is not a good reason to entirely shield drug manufacturers from healthcare fraud and abuse law. AKA and FDAMA liability creates an additional incentive for pharmaceutical manufacturers to follow the FDA’s drug marketing laws.  This, in turn, bolsters patient safety and cost containment by helping to deter inappropriate off-label prescriptions that are motivated, at least in part, by financial gain on the part of the pharmaceutical company and/or the physician.  

The usual maximum penalty for the promotion of a drug for an off-label use is only $100,000 for the individual and $200,000 for an organization. This is arguably just the cost of doing business for some drug companies. See Henry, supra note 11, at 373-374.

4. 	Private Health Insurance Reimbursement

Commercial health insurance companies have also had to grapple with enrollee prescriptions for off-label uses. Typically, an insurance company will contract with a Pharmaceutical Benefit Management Company (“PBM”) to manage and administer the health insurance company’s drug benefit. A thorough examination of the relationship between PBMs and commercial health insurance companies is beyond the scope of this paper. However, it is worth noting that any change to off-label reimbursement policy within the Medicare and Medicaid programs would likely have a large impact on how drug benefits are administered in the private sector for several reasons. 

PBMs manage nearly 70 percent of the 3.2 billion prescriptions dispensed each year. See Greg Radinsky, The Spotlight on PBMs: Federal Enforcement of the Anti-Kickback Statute on the Pharmaceutical Benefit Management Industry, 36 J. Health Law 213 (2003).

First, commercial health insurance companies frequently follow Medicare’s lead when establishing coverage policies for all types of medical services, treatments, and technologies.  Thus, any change in Medicare’s off-label drug reimbursement policy would likely have a direct influence on the drug coverage policies of the private insurance industry. For example, if the Medicare program enacts a national off-label drug coverage policy, as some have advocated, it would not be surprising if the private sector implemented the same standard.  

Christopher, supra note 15, at 256.

John B. Reiss, Commentary on Payment and Reimbursement Issues Affecting the Marketing of Drugs, Medical Devices, and Biologics, With Emphasis on the Anti-Kickback Statute and Stark II, 52 Food & Drug L.J. 99 (1997).

So far, CMS has shown no indication that it plans to implement more expansive restrictions on off-label uses, despite the fact that the agency currently has two national coverage decisions pending that would limit the off-label use of the cancer drugs Camptosar and Eloxatin. See CMS Denies Broad Plan to Curb Off-Label Coverage, Drug Indus. Daily, Feb. 2, 2004.

Second, the new Medicare prescription drug benefit (called “Medicare Part D”) will be administered through privately-owned risk-bearing drug plans (typically PBMs) starting in 2006.  The use of PBMs has already become the predominate model for administering the drug benefit in most state Medicaid programs.  It is probably fair to assume that the trend of outsourcing government drug benefit programs to private firms will likely mean that government fraud and abuse law will continue to have a growing impact on the way that PBMs and pharmaceutical companies operate. Government prosecutors have already launched investigations into the rebate arrangements between pharmaceutical companies and PBMs with Medicaid contracts to evaluate whether these relationships could constitute illegal kickbacks under the AKA or the FCA.    

Supra note 62.

Emile L. Loza, Access to Pharmaceuticals Under Medicaid Managed Care: Federal Law Compiled and State Contracts Compared, 55 Food & Drug L.J. 449, 453 (2000).

See Reiss, supra note 150, at 108.

Radinsky, supra note 148; Freudenheim, supra note 1.

Finally, the publicity surrounding the Tap investigation and the Parke-Davis lawsuit could lead the entire health insurance industry- both public and private- to more closely monitor the appropriateness of the off-label prescriptions used by their enrollees. Off-label prescriptions are now much easier to track, particularly since more hospitals and physicians are installing computerized order-entry systems as a way to reduce medication-related errors and potential malpractice liability. Once these order-entry systems become integrated with pharmacy, hospital, and physician billing systems, it will become much easier for insurance company claims adjusters to examine whether the patient’s diagnosis and prescription matches an appropriate and reimbursable use of the drug. 
Part III:  Rethinking the Optimal Government Regulation of Off-Label Prescriptions

	Off-label prescriptions clearly play an important role in ensuring patients access to the highest quality and most state-of-the-art medical treatments available. However, there are definite financial and public safety risks attached to this freedom. Given the overwhelming number of drug products on the market, it would be nearly impossible for the government- or the pharmaceutical industry- to adequately evaluate the safety, efficacy and cost-effectiveness of every possible off-label drug use. Thus, the challenge for legislative bodies and administrative agencies is to promulgate a framework of laws and regulations that will minimize prescription drug costs and patient injuries, while still allowing medical innovation to occur. 
A strong relationship between the FDA and CMS is vital to accomplishing this goal. For example, if the FDA decided to prohibit physicians from writing drug prescriptions for off-label treatments, it would radically influence the types of drugs used by Medicare and Medicaid beneficiaries. This would necessarily impact CMS drug reimbursement policies, and would probably also alter the scope of healthcare fraud and abuse law. Likewise, if Medicare and Medicaid reimbursement was ever limited to only FDA-approved uses, more drug companies would probably begin to file Supplemental New Drug Applications in order to have popular off-label uses added to drug labeling. This influx in applications would presumably place a significant strain on FDA resources. This balance underscores the importance of better coordinating the drug approval process with health insurance reimbursement policies.
It is not always clear that the FDA and CMS are working in tandem under the current system. For example, although the FDA gives physicians complete discretion to prescribe drugs off-label, CMS has proposed to limit Medicare reimbursement for the off-label uses of some cancer drugs.  This type of agency disconnect will inevitably cause confusion within the healthcare community- and possibly even fraudulent insurance billing- particularly if physicians and pharmacies do not have the resources to adequately track changes in drug reimbursement coverage. If FDA and CMS off-label policies were better coordinated, it would be easier for physicians to ensure that they were choosing drug treatment regimens that were not only effective, but were also covered by the patient’s insurance.

Supra note 151.

	Some reform advocates have urged the FDA and CMS to work together to develop national Medicare and Medicaid coverage standards for off-label drug use, rather than relying on individual Medicare carriers and state Medicaid program directors to make these complicated decisions.  For example, CMS could enact a default rule that would limit Medicare and Medicaid drug reimbursement to FDA-approved uses. If an off-label use was discovered, CMS could then issue a National Coverage Decision (“NCD”) that would allow a reimbursement exception for the new treatment. These new off-label NCDs could be based on data that was collected and reviewed by the FDA. Of course, as noted earlier, one problem with this proposal is the sheer number of drugs and potential off-label uses on the market. Thus, it is unclear that the FDA and CMS would have sufficient resources to expeditiously implement this type of an approval system.

Henry, supra note 11, at 378.

Another example of a regulatory reform that might better integrate FDA and CMS policies would be to reclassify off-label drug prescriptions as “experimental” and then subject them to a more stringent reimbursement review.  On one level, it makes sense to restrict payment for experimental or off-label drug treatments. The efficacy and safety of these treatment regimens has not been formally reviewed by the government, which leaves some doubt as to whether health insurance company reimbursement for these unproven uses would be well-spent.  However, as noted earlier, the FDA approval process is notoriously slow, even for Supplemental New Drug Applications. It might not be fair for CMS to classify an off-label treatment as “experimental” (and therefore non-reimbursable) when the only obstacle to FDA-approval was the slow pace of the FDA’s own bureaucracy.  This concern might be addressed by simultaneously enacting legislation to require the FDA to simplify and expedite its review of SNDAs. The combined effect of these legislative changes would put CMS in the position to be able to issue timely reimbursement policies that would accurately reflect the most current advances in drug treatment, as determined (and approved) by the FDA.

See Drusilla S. Raiford, Shelia R. Shulman & Louis Lasagna, Determining Appropriate Reimbursement for Prescription Drugs: Off-Label Uses and Investigational Therapies, 49 Food & Drug L.J. 37 (1994).

Alan M. Garber, Evidence-Based Coverage Policy, Health Affairs, 20:5, 62, 63-66 (2001).

Prescription Drugs: Implications of Drug Labeling and Off-Label Use, Testimony Before the House Subcommittee on Human Resources and Intergovernmental Relations (Sept. 12, 1996) (statement of Sarah F. Jagger) GAO/T-HEHS-96-212.

	Healthcare fraud and abuse law is another area where CMS and the FDA could do a better job of coordinating the goals of the two agencies. The FDAMA’s off-label marketing restrictions are clearly intended to thwart a drug manufacturer from tainting a physician’s prescription decision with false information and financial incentives, thereby helping to ensure that patients are being prescribed the most appropriate and effective drug treatment. This intent seems to dovetail with the AKA’s purpose in preventing the Medicare and Medicaid program from paying for drug prescriptions that are motivated by financial considerations outside of the desire to provide patients with the best possible healthcare.
Unfortunately, courts appear to be having a difficult time determining the appropriate nexus between FDA marketing restrictions, CMS reimbursement policies, and federal false claim doctrines. The OIG has attempted to explain how a pharmaceutical marketing program can qualify as an illegal kickback, but it is still unclear how a court should apply the different damage provisions available under the FDAMA and the AKA. In addition, as discussed earlier, there is obviously a great deal of uncertainty as to whether a violation of either the FDAMA or the AKA can be used to establish a claim under the FCA. The ambiguity about how these three laws will be interpreted by the DOJ and the courts makes it very difficult for providers and pharmaceutical companies to determine when their activities might be in violation of the law, and further, what the penalty would be. In light of this confusion, Congress should revise drug marketing and healthcare fraud and abuse laws to more clearly explain how these statutes and regulations are intended to interact with each other.
	As an additional consumer protection, Congress should also enact a law that would require healthcare providers to inform patients when they are being prescribed a drug for an off-label use. Physicians are not currently required to disclose when they are prescribing a drug in a manner that has not been approved by the FDA.  This means that physicians and pharmaceutical companies are often the only parties with knowledge of the risks associated with a drug’s off-label use. This imbalance of information is unacceptable in a patient-centered healthcare atmosphere. Patients should be empowered to weigh the benefits and risks of their own course of treatment, rather than being forced to rely on the paternalistic decision-making of their doctor.

James M. Beck & Elizabeth D. Azari, FDA, Off-Label Use, and Informed Consent: Debunking Myths and Misconceptions, 53 Food & Drug L.J. 71, 100-101 (1998).

Existing state medical malpractice law does not adequately protect patients from the risks of taking a drug off-label.  Physicians who write a prescription for an off-label use that causes harm to a patient could be sued for negligence under the tort law of most states. However, the patient would likely face a very heavy burden of proof to prevail at trial. Most states use a patient informed consent standard that is based on the prevailing medical practice in the community, rather than a standard that is based on what a reasonable patient would want to know before taking a drug off-label.  It would be hard for most patients to prove that a physician committed malpractice by not sharing information about a drug’s off-label status, if the “norm” in the state medical community was non-disclosure.

Beck & Azari, supra note 161, at 86-99.

 This blind deference to the customs of the medical community is no longer justified in today’s medical environment. The sheer number of drugs on the market makes it very unlikely that every physician will adequately investigate every risk of the off-label prescriptions that they write. This is particularly true in a world of managed care, where physicians are already under pressure to see more patients each day, and thus are forced to keep shorter appointments. In light of this reality, doctors should be required to disclose when they are prescribing a drug in a manner that deviates from the FDA-approved labeling, so that patients, in turn, can perform their own evaluation of whether the benefits of the off-label use outweigh the risks. 

See Salbu, supra note 10, at 201.

Conclusion
As healthcare costs continue to rise, off-label prescription drug use is likely to become a target of greater scrutiny. It is important for federal and state governments to maintain a legal and regulatory framework that will effectively balance the innovative benefits of off-label drug prescriptions against concerns about public safety and fiscal responsibility. This goal will only be accomplished when the FDA’s drug approval and marketing regulations are better coordinated with health insurance reimbursement policies and fraud and abuse law.