Life Science Compliance Update

February 18, 2015

AstraZeneca Pays $7.9 Million To Resolve Kickback Allegations Related to PBM Formulary Placement


AstraZeneca last week settled with the Department of Justice over allegedly offering kickbacks to Medco Health Solutions, a pharmacy benefits manager, in exchange for Medco maintaining AstraZeneca’s drug Nexium in favorable status on its formulary. AstraZeneca settled the allegations for $7.9 million. 

A drug’s listing as “brand-preferred” on a pharmacy benefit manager’s formulary is crucial to a brand. Pharmaceutical companies want to be on a formulary so that when a physician writes a prescription for Nexium, for example, the patient can get it covered under their insurance when they walk into a pharmacy. 

Price negotiations between pharmaceutical companies and pharmacy benefits managers (PBMs) have been criticized for being too secretive. While this settlement may indicate a trend towards greater scrutiny into the manufacturer-PBM relationship, it does little to draw a definite line between a seemingly permissible rebate (that theoretically is passed on to the customer) and illegal kickbacks.

According to a Department of Justice's press release issued on February 11, AstraZeneca gave Medco “concessions” on other drugs, such as Prilosec, Toprol XL and Plendil, as long as the PBM made Nexium the “sole and exclusive” drug of its kind on certain formularies and other marketing activities. 

The United States contended that this arrangement between AstraZeneca and Medco (bought by Express Scripts in 2012) violated the Federal Anti-Kickback statute, and thereby caused the submission of false or fraudulent claims for Nexium to the Retiree Drug Subsidy Program.

Drug Tiers

The allegations were initially made in a whistleblower lawsuit filed in 2010 by two high ranking former AstraZeneca employees – Paul DiMattia, a former executive director of commercial operations, and F. Folger Tuggle, who had been a managed markets account director in charge of the Medco account. The two relators will split $1,422,000 from the settlement. 

Interestingly, many of the relators' chief allegations in the original complaint are left out of the DOJ press release. The original 2010 whistleblower lawsuit focused on the fact that AstraZeneca did not offer similar discounts to government healthcare programs as required by the Medicaid “best price” rebate system, which requires drugmakers to enter an agreement with the Centers for Medicare & Medicaid Services and state Medicaid agencies to offer the state either 23.1 percent of the Average Manufacturer Price (AMP), the average price wholesalers pay to manufacturers for drugs sold to retail pharmacies, or the best price obtained on the private market, whichever is the greater rebate.

The complaint stated:

"Ignoring its [ ] legal obligations, AZ never reported the substantial sums paid in illegal inducements to Medco to secure a favorable formulary position for Nexium…which would have significantly undercut Nexium's profitability."

"The illegal inducements/discounts and rebates AZ provided Medco were subject to “best price” reporting requirements.”

"AZ's intentional circumvention and misreporting of its Nexium best price was intended by AZ to deprive, and fraudulently did deprive the federal government and states of discounts and/or reimbursement in the hundreds of millions of dollars or more over the relevant period." 

Writing what was probably on a lot of people’s minds, Ed Silverman of the Wall Street Journal noted that this $7.9 million settlement “is rather small compared with the $3.6 billion in revenue that Nexium generated last year and the sometimes sizeable payouts made by drug makers to resolve allegations over kickbacks to physicians or illegal marketing.” Indeed, the original complaint alleged that AstraZeneca’s “intentional circumvention and misreporting of its Nexium best price was intended…to deprive, and fraudulently did deprive the federal government and states of discounts and/or reimbursement in the hundreds of millions of dollars or more over the relevant period.”

The small settlement figure compared to the underlying allegations perhaps corroborates AstraZeneca’s statement denying fault: "It is in the best interests of the company to resolve these matters and to move forward with our business of discovering and developing important, life-changing medicines - while avoiding the delay, uncertainty, and expense of protracted litigation,” the company stated. 

Silverman concludes that "[s]till, the case is interesting if only because it pulls back the curtain a wee bit on interactions with pharmacy benefit managers."


We will continue to follow enforcement action in the PBM space, especially as it relates to pharmaceutical pricing and transparency. The Assistant Attorney General Joyce R. Branda of the Justice Department’s Civil Division stated that her office "will continue to pursue pharmaceutical companies that pay kickbacks to pharmacy benefit managers...Hidden financial agreements between drug manufacturers and pharmacy benefit managers can improperly influence which drugs are available to patients and the price paid for drugs.”


September 09, 2014

DEA Places Heavy Restrictions on Vicodin and Other Hydrocodone Combination Drugs; Gives Stakeholders 45 Days to Adjust

DEA Image


On Friday, August 22, the U. S. Drug Enforcement Administration (DEA) published their Final Rule moving hydrocodone combination products (HCPs) from Schedule III to the more restrictive Schedule II. The change will take effect 45-days from the Final Rule, so likely on Monday, October 6.

The Controlled Substances Act (CSA) places substances with accepted medical uses into one of four schedules, with substances with the highest potential for harm and abuse being placed in Schedule II, and substances with progressively less potential for harm and abuse being placed in Schedules III through V.  Schedule I is reserved for drugs with no currently accepted medical use and a high potential for abuse. 

The DEA may transfer drugs between schedules if they feel that more restrictions are needed for a particular product. They look at the drug’s potential for abuse, the potential to cause psychological or physical dependence, and whether it has a widely-accepted, current medical use.

Interestingly, pure hydrocodone is already on Schedule II. Before the new Final Rule, lower amounts of hydrocodone per pill (15 milligrams or less) or lower-potency pills combined with another pain-killing drug, such as Vicodin (a mixture of hydrocodone and acetaminophen), were placed in the less-restrictive Schedule III. Now the DEA has moved anything with hydrocodone up the schedule.

Many prescription drugs are not listed on the schedule because they are not considered to have a potential for abuse, such as blood pressure drugs and cholesterol lowering medication like Lipitor.

Schedule II v. Schedule III

The DEA's decision to move HCPs from Schedule III to Schedule II will impact practitioners who can prescribe drugs, but ultimately it will affect all industries involved in the manufacture, supply, and distribution of HCPs.

When the rule takes effect in early October:

  • Prescribers will no longer be able to authorize refills for HCPs and will be limited to prescribing a 30-day supply, although the DEA notes that prescribers can issue multiple prescriptions for up to a 90-day supply. Before this rule, doctors could prescribe a 180-day supply.
  • Patients will have to be seen by a doctor for a new prescription. Before this change, refills for HCPs such as Vicodin could be called in to a pharmacy.
  • Rescheduling will also change the process required to order and transfer HCPs from a distributor to a pharmacy. For Schedule III drugs, DEA registrants could transfer HCPs through simple invoices. Now all orders must be submitted on the official DEA Form 222, and separately from the pharmacy's usual bulk order of CIII-V drugs. When distributing, prescriptions must be defaced when filled and (depending on the pharmacy) require double counts of the pills filled and presentation of valid customer identification. 
  • Further, the new classification will place added burdens on manufacturers and distributors who will have to store HCPs in secure vaults (1301.72) rather than locked cages and will have to label all HCPs with a “C-II” designation. The DEA noted, however, that the packaging and labeling requirements applicable to manufacturers and distributors do not apply to dispensers such as pharmacies. The DEA specified that dispensers with HCPs in commercial containers labeled as Schedule III may continue to dispense these medications after the effective date of the final rule. Further, only manufacturers and distributors, and not retail pharmacies, are required to place Schedule II drugs in a locked vault. Retail pharmacies may disperse HCPs throughout their stock of non-controlled substances in a manner so as to obstruct the theft or diversion of the HCPs.

Reaction to the Schedule Change

The DEA’s stated purpose of the change was to minimize the misuse of the drugs for recreational purposes while still ensuring that patients with severe pain have reasonable access to the amount of drug needed to control their pain and suffering. 

“Almost seven million Americans abuse controlled-substance prescription medications, including opioid painkillers, resulting in more deaths from prescription drug overdoses than auto accidents,” said DEA Administrator Michele Leonhart, “[This] action recognizes that these products are some of the most addictive and potentially dangerous prescription medications available.”

The DEA received 573 comments on the proposed rule to reschedule HCPs. Fifty-two percent (298 comments) supported, or supported with qualification, controlling HCPs in schedule II. Forty-one percent (235 comments) opposed rescheduling HCPs into schedule II. Seven percent (40 comments) did not take a definitive position.

Many commenters indicated support for controlling HCPs in schedule II based on the scientific evidence demonstrating the high abuse potential of HCPs and evidence that HCPs may lead to severe psychological or physical dependence.

The State Attorney General and a U.S. Senator from West Virginia, the state with last year's highest per capita rate of prescription drug overdose in the nation, wrote in strong support of rescheduling HCPs: "rescheduling hydrocodone combination drugs would be a tremendous step forward in the fight to curb the prescription drug abuse epidemic that has ravaged our country. It will help prevent these highly addictive drugs from getting into the wrong hands and devastating families and communities. I urge the DEA to move quickly in finalizing its regulations so that we are able to save hundreds of thousands of lives."

Other commenters noted that rescheduling HCPs “would directly address the problem of 'leftover' pills in parents [sic] medicine cabinets, and would keep kids safe. Furthermore, lowering the quantity a doctor can prescribe will decrease the number of drugs that are sold on the street, which will in turn decrease crime and decrease HCP abuse overtime.”

The Schedule II requirements would also go a long way in reducing telephone fraud, where knowing a prescriber’s DEA number can be used to obtain a Schedule III drug from certain pharmacists.

Comments addressing the time limit and burden of the Schedule change:

Most commenters supported the policy behind the DEA's schedule change. However, certain groups in particular pointed out potentially negative consequences that could result. Of all comments submitted, in support and in opposition, 60% of pharmacists were opposed; 22% of the general public were opposed; and 91% of ultimate users were opposed.

  • Impact on patients in need

The comments in opposition touched on a wide variety of concerns, including a negative effect on access to important medications for patient access to medicine. The Institute of Medicine (IOM) estimates that as many as 100 million Americans suffer from some chronic pain. They believe that reclassifying HCPs might make it harder for those people with legitimate needs to get relief.

Furthermore, because accessing these drugs now requires more trips to the doctor’s office, this change could cost the health system millions of dollars each year. “Heading to a doctor may also be hard on elderly patients who are less mobile such as those being cared for by their children or those who live in long-term care facilities, meaning the new rules will keep the drug away from those who need it most,” notes Capital New York.

  • Effective Date and Short 45-Day Window to Comply

Several of the comments submitted by members of industry (manufacturers, wholesale distributors, veterinary distributors, retail pharmacies) and trade groups focused on the timeframe for implementation of various handling requirements. A national trade association comprised of manufacturers and distributors of generic pharmaceutical products requested that the DEA "allow sufficient time for all parts of the supply chain to integrate the new requirements into their business operations."

The DEA noted that similar requests were posed by an individual manufacturer of HCPs, a wholesale distributor, and a retail pharmacy/mail pharmacy service provider, each of whom proposed a blanket six month delay before the final rule would go into effect.

The DEA responded that generally DEA scheduling actions are effective 30 days from the date of publication of the final rule in the Federal Register. In order to ensure the continued availability of HCPs for legitimate medical use, while also ensuring they are not subject to misuse, abuse, and diversion, the DEA noted that a 45-day period is a “reasonable amount of time for registrants to comply with the handling requirements for a schedule II controlled substance and was established upon a full consideration of the totality of circumstances specific to HCPs.”

While the DEA acknowledges that the supply chain will need to plan and coordinate efforts, and may even need to temporarily modify existing ordering and inventory management practices, the DEA stated that they are required to consider the risk of diversion and risk to public health and safety of U.S. residents.

DEA took this time to explain that ”HCPs are being abused with adverse effects both individually and to the public health and safety, accordingly, it should be placed into schedule II as soon as practicable.”

“In order to prevent continued misuse, abuse and diversion, it is necessary to set an effective date for this scheduling action, including security and labeling requirements, with all reasonable haste," the Rule states. "After careful consideration of the risk to the U.S. public health and safety related to the diversion and abuse of HCPs, the DEA believes the 45-day effective date is reasonable.”

The DEA believes that a “45-day period will provide handlers of HCPs a reasonable amount of time to implement any one-time modifications to comply with the DEA regulations. Registrants are familiar with the applicable security regulations, and already have systems in place with respect to other schedule II controlled substances. Accordingly, it is reasonable to revise operating procedures, amend monitoring systems, and train staff with respect to HCPs as schedule II controlled substances within the 45-day compliance timeframe.”

  • Cost of Physical Security

Manufacturers and distributors must secure schedule II substances in a safe, steel cabinet or vault while schedule III substances may be stored in a less secure controlled substance cage or other enclosure.  Several commenters suggested that it would cost millions of dollars for distributors and retail pharmacies to obtain new vaults or increase the size of their vaults to accommodate for the influx of HCPs. Another commenter suggested that only a limited number of firms can build vaults that meet the requirements of the DEA and because of this, constructing a vault would be time consuming and costly.

The DEA’s response in a lot of categories was that “[s]cheduling determinations are based on scientific determinations regarding the drug or other substance's potential for abuse, its potential for psychological and physical dependence, and whether the drug or other substance has a currently accepted medical use in treatment in the United States. 21 U.S.C. 812(b). The DEA may not reschedule, or refuse to reschedule, a drug or other substance based on economic impacts.”

Furthermore, the DEA noted that retail pharmacies are not required by the CSA or DEA regulations to place schedule II controlled substances in a vault or safe. In accordance with 21 CFR 1301.75(b), pharmacies may disperse schedule II controlled substances throughout their stock of noncontrolled substances in such a manner as to obstruct the theft or diversion of the controlled substances.

  • Increased Record-Keeping

A pharmacy group was concerned that increased records and security requirements would increase workloads and require redesigning of pharmacy space in some cases. 

The DEA stated that they “do not find evidence to support the claim that the ordering process for schedule II controlled substances will result in limited availability of HCPs.” A DEA Form 222, or its electronic equivalent—the Controlled Substance Ordering System (CSOS)--is required for almost all distributions of schedule I or II controlled substances. This extra documentation enables the DEA to monitor the flow of these controlled substances from their point of manufacture through commercial distribution.

In terms of time commitment, DEA stated that “[i]t takes approximately an hour to complete each order using the paper DEA Form 222. It takes approximately three minutes to complete an order using CSOS… While CSOS transactions are faster, the paper DEA Form 222 orders are also able to be processed quickly through the system.” The DEA notes that in 2013, “109,632 registrants ordered schedule I or II controlled substances. About 4.8 million orders were processed on Form 222s and 924,257 were processed electronically via CSOS (approximately 16% of all orders). The paper orders represented roughly 27.7 million transactions (or about 6 per order); the electronic orders represented roughly 21.2 million transactions or slightly more than 23 per order.”


Given the widespread abuse of certain HCP products in the United States, the DEA's change in scheduling is appropriate and necessary. While we believe that patients and certain stakeholders along the supply and distribution chain would have benefited from more than 45-days to adjust to the Final Rule, we hope these strict regulations will better control the use and distribution of these drugs. 


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