Feds to Expand Use of Debarment in Health Care Sector

Debarment means the individual is excluded from working for any health care company that has federal contracts, such as Medicare, which effectively ends the executive's career in the industry. The penalty removes “those who pose the greatest risk to programs and beneficiaries,” Morris explained.

As an example, Morris cited his agency's 20-year debarment last year of Marc Hermelin, a major shareholder and former chairman of the board of KV Pharmaceutical Co. in St. Louis. Hermelin's exclusion came after a former KV subsidiary, Ethex Corp., pleaded guilty in March 2010 to felony criminal charges. Ethex was charged with failing to inform the Food and Drug Administration about manufacturing problems that led to the production of oversized tablets of two prescription drugs.

Testifying before the U.S. House Ways and Means Committee's Subcommittee on Oversight hearing on Improving Efforts to Combat Health Care Fraud, Morris called debarment “one of the most powerful tools in our arsenal.” He said the government could use exclusion “once we determine that an individual or entity is engaged in fraud, waste, abuse or the provision of substandard care.”

The chief counsel also cited the case of Purdue Frederick, in which three executives, including general counsel Howard Udell, were debarred in 2008 after pleading guilty to a criminal misdemeanor as the “responsible corporate officers” who failed to prevent the misbranding of Oxycontin. The three are fighting their debarment, and their case is now pending in the Circuit Court of Appeals in Washington, DC.

Too Big to Fire?

Morris explained that innovative penalties like debarment are needed because “providers that engage in health care fraud may consider civil penalties and criminal fines a cost of doing business … as long as the profit from fraud outweighs the costs.” And he said some major hospital systems, drug companies and other providers “may believe that they are 'too big to fire.'”

Morris testified that some drug companies that have been convicted of crimes and paid hundreds of millions of dollars in settlements aren't excluded “in part because of the potential patient harm that could result.” For example, Pfizer Inc. paid a record $2.3 billion in 2009 to settle the
government's case against it for the off-label marketing of four drugs. Only a Pfizer subsidiary was debarred, and the subsidiary did no business with the federal government anyway. But to debar Pfizer itself would mean patients would lose the company's powerful life-saving drugs, like cholesterol-lowering Lipitor.

“One way to address this problem,” Morris told the House panel, “is to alter the cost-benefit calculus of the corporate executives who run these companies. By excluding the individuals who are responsible for the fraud, either directly or because of their positions of responsibility in the company that engaged in fraud, we can influence corporate behavior” without putting patients at risk. Morris said the inspector general has the discretionary authority to exclude certain owners, officers and managing employees of a sanctioned entity even if the executive has not been convicted of a crime. “But until recently, we had typically applied this exclusion authority to individuals who controlled smaller companies,” he added, “and not to executives of large complex organizations like a drug or device manufacturer.”

The government's former methods are changing, Morris warned, saying it intends to use exclusion in more cases. While it won't debar every executive of a bad company, he said, “when there is evidence that an executive knew or should have known of the underlying criminal misconduct of the organization, [we] will operate with a presumption in favor of exclusion of that executive.”

Sue Reisinger is a reporter for Corporate Counsel magazine, an ALM sister publication of this newsletter, in which this article also appeared.

CEOs of health care companies, be forewarned: The government is planning to expand its use of debarring “untrustworthy individuals” as a way to hold individuals accountable for a company's fraud, a top federal lawyer said in March.

“We intend to use this essential fraud-fighting tool in a broader range of circumstances,” Lewis Morris, chief counsel to the inspector general of the Department of Health & Human Services, testified before a congressional panel.

What Debarment Accomplishes

Debarment means the individual is excluded from working for any health care company that has federal contracts, such as Medicare, which effectively ends the executive's career in the industry. The penalty removes “those who pose the greatest risk to programs and beneficiaries,” Morris explained.

As an example, Morris cited his agency's 20-year debarment last year of Marc Hermelin, a major shareholder and former chairman of the board of KV Pharmaceutical Co. in St. Louis. Hermelin's exclusion came after a former KV subsidiary, Ethex Corp., pleaded guilty in March 2010 to felony criminal charges. Ethex was charged with failing to inform the Food and Drug Administration about manufacturing problems that led to the production of oversized tablets of two prescription drugs.

Testifying before the U.S. House Ways and Means Committee's Subcommittee on Oversight hearing on Improving Efforts to Combat Health Care Fraud, Morris called debarment “one of the most powerful tools in our arsenal.” He said the government could use exclusion “once we determine that an individual or entity is engaged in fraud, waste, abuse or the provision of substandard care.”

The chief counsel also cited the case of Purdue Frederick, in which three executives, including general counsel Howard Udell, were debarred in 2008 after pleading guilty to a criminal misdemeanor as the “responsible corporate officers” who failed to prevent the misbranding of Oxycontin. The three are fighting their debarment, and their case is now pending in the Circuit Court of Appeals in Washington, DC.

Too Big to Fire?

Morris explained that innovative penalties like debarment are needed because “providers that engage in health care fraud may consider civil penalties and criminal fines a cost of doing business … as long as the profit from fraud outweighs the costs.” And he said some major hospital systems, drug companies and other providers “may believe that they are 'too big to fire.'”

Morris testified that some drug companies that have been convicted of crimes and paid hundreds of millions of dollars in settlements aren't excluded “in part because of the potential patient harm that could result.” For example, Pfizer Inc. paid a record $2.3 billion in 2009 to settle the
government's case against it for the off-label marketing of four drugs. Only a Pfizer subsidiary was debarred, and the subsidiary did no business with the federal government anyway. But to debar Pfizer itself would mean patients would lose the company's powerful life-saving drugs, like cholesterol-lowering Lipitor.

“One way to address this problem,” Morris told the House panel, “is to alter the cost-benefit calculus of the corporate executives who run these companies. By excluding the individuals who are responsible for the fraud, either directly or because of their positions of responsibility in the company that engaged in fraud, we can influence corporate behavior” without putting patients at risk. Morris said the inspector general has the discretionary authority to exclude certain owners, officers and managing employees of a sanctioned entity even if the executive has not been convicted of a crime. “But until recently, we had typically applied this exclusion authority to individuals who controlled smaller companies,” he added, “and not to executives of large complex organizations like a drug or device manufacturer.”

The government's former methods are changing, Morris warned, saying it intends to use exclusion in more cases. While it won't debar every executive of a bad company, he said, “when there is evidence that an executive knew or should have known of the underlying criminal misconduct of the organization, [we] will operate with a presumption in favor of exclusion of that executive.”

Sue Reisinger is a reporter for Corporate Counsel magazine, an ALM sister publication of this newsletter, in which this article also appeared.