BOSTON -- In the largest-ever settlement involving Medicaid fraud, drug giants Bayer AG and GlaxoSmithKline agreed Wednesday to pay nearly $345 million to settle claims they used a labeling scheme to overcharge the government insurance program for the poor.
Bayer said it will pay more than $250 million and Glaxo will pay almost $88 million, U.S. Attorney Michael J. Sullivan said. The money will be shared by the government, the District of Columbia and every state except Arizona.
Bayer will also plead guilty to violating the Federal Prescription Drug Marketing Act, pay a criminal fine of $5.6 million for alleged overcharges involving its antibiotic Cipro and its high blood pressure drug Adalat, and pay nearly $252 million in civil penalties.
"Throughout the investigation, Bayer cooperated fully with the government and we are now pleased to put this matter behind us," the company said in a statement.
Glaxo agreed to pay a civil fine for overcharges involving its anti-depressant Paxil and the nasal allergy spray Flonase. Unlike Bayer, the company was not accused of any criminal wrongdoing. Sullivan would not elaborate on why Bayer was charged criminally while Glaxo was not, but said the conduct of the two companies was not identical.
Companies that participate in Medicaid must offer the government the lowest price available to other customers. If a company charges anyone less than the government, it must pay Medicaid a rebate.
'Lick and stick scheme'
According to Sullivan, Bayer and Glaxo used a "lick and stick scheme" when it offered drugs at discount prices to Kaiser Permanente, the nation's largest health maintenance organization.
The discounts were not reported and difficult to track because Kaiser was allowed to put different labels on the drugs it was giving to its customers, Sullivan said.
He said the scheme allowed the two drug companies to avoid paying millions of dollars in Medicaid rebates.
At a time of state budget woes and skyrocketing prices for prescription drugs, shortchanging Medicaid can have a devastating impact on efforts to provide drug coverage for the poor, Sullivan said.
"Such conduct by pharmaceutical companies is intolerable," he said.
Glaxo said the sole issue in the case was how it interpreted an "ambiguous aspect" of Medicaid law. The company said it agreed to the civil settlement to avoid the delay and expense of trial.
"GSK believes its interpretation of the statute was reasonable and was in good faith," company spokeswoman Mary Anne Rhyne said.
Dr. Peter Lurie, deputy director of Public Citizen's Health Research Group in Washington, said settlements with major drug companies could help in the government's effort to control prescription drug costs.
"In other countries -- through a variety of different mechanisms -- they negotiate prices, they establish profit margins and there's a transparency to the process that tends to mitigate the possibility of this kind of fraud," Lurie said.
The settlement comes amid numerous investigations into drug companies by state and federal prosecutors across the country.
TAP Pharmaceutical Products Inc., Pfizer Corp. and Bristol-Myers Squibb have reached separate agreements to settle multimillion-dollar complaints. Attorneys general from 47 states are currently investigating whether Pfizer illegally marketed the epilepsy drug Neurontin.
The Bayer investigation was prompted by George Couto, a Bayer marketing executive who became a whistleblower.
In 1999, Couto first reported his concerns to his boss, according to his attorney, Neil Getnick. After the company took no action on his complaint, Couto took his claims to the Justice Department, Getnick said.
Couto died of cancer in November. Under the federal whistleblower statute, his estate will be awarded $34 million out of Bayer's civil settlement.