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Grassley Eyes Mix of Measures to Squeeze Drug Savings from Medicaid

JUNE 29, 2005 -- Senate Finance Committee Chairman Charles E. Grassley made clear Wednesday at the second day of a two-day hearing on Medicaid fraud that he regards the drug industry as a big part of the problem. And he told drugmakers to make sure they do not try to weaken his prized tool for going after fraud, the False Claims Act.

Grassley, R-Iowa, also explored witnesses' reactions to a variety of other tactics for reining in Medicaid drug spending, including basing payment on the "ASP" (average sales price) method now in use for some Medicare drugs, and sharing pricing data with the states that is now kept confidential.

After the first day of the hearing (CQ HealthBeat, June 28, 2005), Grassley estimated that $4 billion could be saved through greater use of generic drugs in Medicaid and changes in the current "AWP" (average wholesale price) system of Medicaid drug reimbursement.

Federal and state anti-fraud prosecutors underscored Wednesday that they view the drug industry as a big target. Department of Justice (DOJ) attorney Timothy J. Coleman said that in pure dollar terms, "pharmaceutical pricing schemes perpetrated against state Medicaid programs" have been the most significant area in Medicaid fraud seen by DOJ enforcement officials.

Patrick J. O'Connell, who heads the Medicaid Fraud Section of the Texas Attorney General's office, said his unit has pursued claims against doctors, hospitals, and other providers, but "the overwhelming majority of our time and efforts have been concentrated on drug manufacturers," he said. "Did we target or place special emphasis on drug manufacturers on purpose? No. The fact is that whistleblowers brought us cases which showed significant fraud in amounts which dwarfed the cases against other providers."

Grassley said that between 2001 and 2004, the Justice Department and state attorneys general recovered nearly $2.5 billion from various pharmaceutical companies because of Medicaid and Medicare fraud.

He sought assurances from Marjorie Powell of the Pharmaceutical Research and Manufacturers of America (PhRMA) that the powerful lobby is not funding a campaign to change the False Claims Act, used by federal officials to recover billions of dollars in fraud cases against a variety of industries.

Powell replied that she was not aware of such an effort. But she suggested that the act's penalty provisions providing for exclusion of a drug company from the Medicaid program may be inappropriate in light of the enormous burden she said it would place on patients needing the company's drugs.

Grassley said to Powell that defense contractors had worked with the hospital industry to try to gut the False Claims Act and advised PhRMA to make sure it does not follow a similar course. Grassley also is prodding drugmakers to educate their employees about the whistleblower-protection provisions of the act, which allow those who report fraudulent activities leading to settlements to get part of the money recovered.

Beatrice Manning, a whistleblower in a case brought against the drugmaker Schering-Plough, testified that educating drug company employees about the act could reduce fraud. "It has the potential of having a noticeable chilling effect" on the activities of managers if they know employees know how to report them, she said.

Federal officials involved in curbing fraud said it is time to change the current AWP system. The "takeaway" message from the hearing, Coleman said, is that pricing mechanisms used in Medicaid to reimburse for pharmaceuticals are "problematic and subject to manipulation."

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