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Merck to Pay $650 Million In Medicaid Settlement

By Carrie Johnson
Washington Post Staff Writer
Friday, February 8, 2008

Merck agreed yesterday to pay more than $650 million to settle charges that it routinely overbilled the government for its most popular medicines, the arthritis drug Vioxx and the cholesterol drug Zocor, cheating Medicaid out of millions of dollars in discounts over eight years.

Prosecutors say the drugmaker gave pills to hospitals at virtually no cost to hook poor patients on expensive medicine. When the patients left the hospital, they often continued taking the drugs, but with the government footing the higher bill.

The Merck settlement culminates an investigation that began in 2000 and is one of the first in a series of cases centering on whether drugmakers used unfair pricing practices to bilk the government. The Justice Department is looking into 630 health-care whistleblower claims.

H. Dean Steinke, a district sales manager for Merck, set off the investigation after he noticed his company was using questionable sales tactics. Steinke complained to his supervisors, who brushed him off, so he turned to federal authorities.

Steinke, a 51-year-old Michigan native, will receive about $68 million from the settlement as a whistleblower reward. He said he was prompted to go to authorities after his direct supervisor told him: "I don't care how you do it, but get the damn business," when he questioned the sales practices. "There comes a time when you just dig in your heels and say, 'You know what? They're not going to get away with it,' " Steinke said.

The agreement yesterday, one of the largest health-care fraud recoveries, also closes a related case about Merck overcharging for the antacid Pepcid. William St. John LaCorte, a doctor in New Orleans who questioned the Pepcid charges, will receive a yet-to-be-determined share of the settlement proceeds.

Merck did not admit wrongdoing. The country's third-largest drugmaker stood by its pricing strategies but wanted to resolve the disputes, executives said in a statement. Merck agreed to heightened oversight by regulators for five years as part of the deal. The company remains the focus of a separate grand jury investigation related to Vioxx marketing and is striving to execute another multibillion-dollar settlement of thousands of lawsuits filed by people who had heart attacks after taking the painkiller.

The whistleblowing case centered on Merck's giving hospitals across the country 92 percent discounts on Vioxx, an arthritis drug pulled from the market three years ago for safety concerns; Zocor, a popular cholesterol-lowering medicine that drew intense competition from rivals; and Pepcid, an antacid tablet now sold over-the-counter. Merck offered the pills at the discount under a legal loophole, known as nominal pricing, that Congress created a generation ago to give poor patients access to medicine.

Merck and industry experts had argued that the pricing strategy fell within the law and helped reduce costs for many government-funded hospitals. But prosecutors said the Whitehouse Station, N.J., drugmaker used the discounts to outflank its competition, offering massive markdowns to hospitals that agreed to put its medicines on a list of preferred drugs or to prescribe them for as many as three-quarters of eligible patients. In some cases, hospitals favored Merck's drugs over cheaper generics. This practice conflicted with the law because Merck did not offer Medicaid the same discounts, authorities said. The law requires the government be charged no more than other customers.

"The company perceived a loophole and tried to drive through that loophole," said L. Timothy Terry, who leads Nevada's Medicaid Fraud Control Unit and who played a central role in the case. "I think they were exploiting these programs."

The pricing allegations cover bills paid by federal Medicaid plans and plans for states from California to New York. Patrick Burns, a spokesman for Taxpayers Against Fraud, a nonprofit group that supports the pursuit of such cases, said the settlement calls attention to an improper business strategy that has been used by as many as a dozen other drug companies.

"It's heroin-dealer economics," he said. "Your first shot is for free, and after that it becomes more expensive . . . not to the hospital but to Medicaid, which is paying the bill."

Congress tightened the nominal pricing loophole at issue in the Merck case, but prescription drug costs continue to rise steadily, a major issue for presidential candidates jockeying to present health-care reform plans. Meanwhile, on Capitol Hill, such key lawmakers as Sen. Charles E. Grassley (R-Iowa) and Rep. Henry A. Waxman (D-Calif.) are pressing government administrators for better oversight of drug spending.

But, as the Merck investigation underscores, the road to financial recovery for the government and for the whistleblower is not always clear, or direct.

The Merck case had been quietly proceeding under court seal since December 2000, after Steinke came forward in Michigan. He initially worried that Merck's sales campaigns ran afoul of laws that prohibit kickbacks to doctors and hospitals. Over time, the case expanded into a deeper examination of whether Merck had complied with rules requiring manufacturers to offer federal and state agencies their "best price" on drugs.

Steinke took his case to Steven H. Cohen, of Chicago, and Mark Allen Kleiman of Santa Monica, Calif., lawyers who regularly handle whistleblower cases. Together, they filed a lawsuit and waited to see whether federal prosecutors in Philadelphia would intervene, which would have strengthened their case and potentially offered a big financial reward under the False Claims Act. More than three years passed with no clear word from government officials in Philadelphia or Washington about the Justice Department's interest in the case. Then Cohen and Kleiman learned that personnel changes in the U.S. attorney's office meant they needed to introduce new officials to the complex issues and the 10,000 pages of documents Steinke had compiled.

Sitting down with a new, skeptical lead prosecutor in 2004 marked a low point, the lawyers recalled. The allegations were too complicated, the prosecutor said, and the case was too difficult to prove. The lawyers reluctantly agreed with her.

"It was gut-wrenching," said Kleiman, a former health-care executive who attended law school after his own negative experience with corporate corruption.

"This will be called the worst day in our life," added Cohen, a former congressional staff member and the son-in-law of retired D.C. federal appeals court judge Abner Mikva.

Their mood lifted weeks later, when they bumped into a Nevada health-care official at a conference and he invited them to discuss their case. Steinke and the lawyers traveled to Carson City, Nev., where Deputy Attorney General Tim Terry told them he was interested. "Tim was a real advocate for us, immediately," Steinke said. By then he had left Merck and joined another pharmaceutical company. Eventually, he got out of the business.

Steinke's thick brown hair turned gray as he spent weeks of vacation time sitting in conference rooms in Philadelphia and Carson City, poring over 440 boxes of documents to help prosecutors make sense of the scheme. To decompress, he built a wooden deck in his backyard. The construction project consumed seven years.

Steinke, who has an undergraduate degree in fisheries and wildlife biology, said he has not drafted a blueprint for his future. He has a notion, though, to start a rehabilitation center for wounded animals with some of his settlement proceeds. For him, he said, the issue was not one of money but of principle.

"Sometimes you just get so frustrated about things that are wrong," he said. "These are the things that drive you, and you're not going to stop until things are resolved."

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