The pharmaceutical and medical device industries can expect increased scrutiny of, and actions against, company officers and other individuals, according to a senior official from the Department of Health and Human Services Office of Inspector General (OIG). Although industry has heard this message before, there are new “teeth” to the OIG’s approach this time, especially including:
- board of director, officer, and senior manager certification requirements in a number of recent Corporate Integrity Agreements, which, borrowing from Sarbanes-Oxley, will put corporate leaders on the hook for their companies’ compliance actions;
- a number of criminal actions against individuals deemed by the government responsible not only for orchestrating, but for failing to scrutinize and abate, compliance problems; and
- closely scrutinizing transfers of assets or operations from the entity that faces exclusion and refusing to be a party to what the OIG views as “sham” transactions.
This Update describes these trends in more detail.
Corporate Integrity Agreements
The use of more robust Corporate Integrity Agreement (CIA) requirements and the OIG’s exercise of its exclusion authority are trends the industry can expect to see more of, according to remarks given by OIG Senior Counsel Mary Riordan at the March 4, 2010, “Second Annual Summit on Disclosure, Transparency and Aggregate Spend for Drug, Device and Biotech Companies” in Washington, D.C. Although CIAs are only employed in cases where the government has alleged corporate wrongdoing, their evolving standards for corporate responsibility go beyond directors’ traditional fiduciary obligations to the company, as established through cases like Caremark, and suggest an increase in the OIG’s expectations for a comprehensive commitment to compliance at all levels of companies that do business with federal health care programs.
Ms. Riordan set the stage for her remarks by summarizing the requirements in recent CIAs aimed at increasing transparency with respect to industry’s financial relationships with health care providers, and increasing individual accountability. Recent CIAs, such as those entered into by Cephalon Inc. (2008), Eli Lilly (2009), Biovail (2009), Pfizer (2009), and Boston Scientific (2009), all include elements requiring, among other things:
- each company’s boards and senior managers to make annual certifications to OIG regarding the company’s compliance;
- the boards to resolve that they have made reasonable inquiry into the operation of the compliance program and, based on that inquiry, have concluded that the company has entered into an effective compliance program;
- individual board members to concur with such resolutions;
- senior managers to certify to their understanding of and compliance with the federal health care program requirements under the managers’ supervision; and
- the company’s public disclosure of payments to health care providers.
These elements are part of what Ms. Riordan said are the OIG’s efforts to “shine a light” on various industry financial relationships. Her statements corroborate what many in the industry have noted as an increase in the enforcement community’s attention to the specifics of these relationships. The general trend towards greater transparency and disclosure reflects the increased attention not only to contractual arrangements such as education and training, product design and development, and advisory board participation, but also to research projects, publication activities, and educational and research grant activities.
The other aspect of increased scrutiny is the government’s efforts to identify specific individuals to hold accountable for activity or relationships it believes were problematic. Ms. Riordan noted that some critics of the government’s law enforcement activities have argued that large monetary settlements are treated simply as a “cost of doing business” by the corporation, and that only holding individuals accountable will drive significant change in corporate culture and behavior. She then described the government’s recent efforts to hold individuals accountable, which has taken a number of forms.
For example, the Department of Justice (DOJ) required guilty pleas under the “responsible corporate officer” doctrine for Purdue Pharma executives, which was followed by their exclusion by the OIG from participation in federal health care programs. (Ms. Riordan did acknowledge that these executives are challenging the OIG exclusion action in federal court.) Other actions taken against industry executives and employees she cited include the conviction of InterMune Inc.’s CEO for wire fraud for the creation and dissemination of false and misleading information, and the 2009 conviction of a Pfizer district sales manager on obstruction of justice charges for directing a sales representative to alter documents and backdate the alterations on his computer to delete evidence of off-label promotion. In short, she said, “individuals should not think they are off the hook and that the government is only looking at the corporations.”
According to Ms. Riordan, the OIG is working with the DOJ to use their resources most effectively, with the DOJ focusing its efforts on cases against entities and the OIG using its administrative authority to pursue cases against corporate individuals, particularly those offering or accepting kickbacks.
In addition to considering how best to hold individuals accountable, Ms. Riordan said that if individuals the OIG deems responsible for illegal activity are still involved with a company that is pleading guilty, this calls into question whether it is appropriate to waive permissive exclusion as to the company. Outside of the drug and device industries, she observed, the OIG’s presumption is to exclude entities entering into a guilty plea. In recognition of the severe impact exclusion of an operating drug or device company might have on federal health care program beneficiaries, the OIG historically has waived its permissive exclusion authority. Now, when an operating company is taking a criminal plea, according to Ms. Riordan, the OIG actively is “considering the imposition of certain requirements that go beyond a CIA.” As a matter of process, if a company pleads, the OIG has been asking for information regarding key individuals who were involved in the conduct, directed the conduct, or could have prevented the conduct but did not. If any individuals falling into those categories are still with the company, she said, “it gives [the OIG] pause to continue doing business with that company on a going forward basis.” Indeed, Lewis Morris, Chief Counsel to the OIG, stated at the American Bar Association’s National Institute on White Collar Crime in February 2010 that even relocating a convicted executive to a position outside the United States, and in a capacity that has no connection to federal health care programs, would be insufficient in the OIG’s view. In other words, the OIG is suggesting the dismissal of such individuals will increasingly be a condition of the OIG waiving its exclusion authority.
Finally, the OIG intends to scrutinize carefully the exclusion implications for companies that take criminal pleas while transferring assets or operations from the entity that faces exclusion. In a clear break from historic practices, Ms. Riordan said that the OIG cannot be a party to a knowing transfer of assets or operations to avoid the impact of exclusion, and, moreover, that it will expect parent companies to take steps to preserve the intended impact of exclusion on a subsidiary that takes a plea where exclusion of the parent is waived. The OIG also will consider whether successor liability is appropriate where there has been a transfer of assets or operations to an affiliated corporate entity.
Ms. Riordan’s statements described a strong and growing effort by the OIG to increase transparency and accountability under CIAs and to ensure that the individuals involved in a company’s alleged illegal activities are held accountable for their actions. The pharmaceutical and medical device industries should be aware of this trend as they implement and monitor their compliance procedures.