Chiron's Plight a Good Lesson in Perils of Trying to Curb Drug Prices
Ghost of legislation from the Civil War haunts drugmakers
Tom Abate / SF Chronicle 13nov00

A fraud law enacted during the Civil War has ensnared Chiron Corp. in an investigation of possible pricing shenanigans for a cancer drug the company hasn't sold for four years.

This twisted and unfinished tale provides a peek into how difficult it has been -- and will be -- for federal and state governments to curb rising health care costs through any sort of legislative remedy.

Should legislators try to fix the system through government-imposed pricing rules, they would be wise to consider how previous, mild attempts at legislated pricing have come back to haunt drug developers like Chiron with a legal threat whose magnitude is, as yet, undetermined.

The first glimmer that Chiron had a problem came last week, when a sharp-eyed reporter for Bloomberg News noticed a cryptic disclosure in the company's quarterly report.

Chiron told shareholders it had been subpoenaed by the California state attorney general's office as part of an investigation into the pricing of a generic cancer drug that it used to sell to Medi-Cal and Medicaid through a subsidiary that it sold off in 1996.

Chiron could not talk because the matter is under investigation. A spokeswoman for Attorney General Bill Lockyer's office did not respond to a request for details.

But between the clues provided by Chiron's disclosure, and some insights from attorneys familiar with this arcane area of law, it's possible to put together a picture of Chiron's fix, and the lessons it might hold for the biotech industry.

Medi-Cal, Medicaid and Medicare are all government-funded programs that buy drugs and medical services. To hold down the prices government pays for these drugs, rulemakers enacted what should be a straightforward formula: Government buyers should get a small discount off the average wholesale price for a given pharmaceutical.

The rationale is to let private markets set prices, so government neither intervenes nor gets taken to the cleaners.

But what is the average wholesale price? And how does government police the system? That's where the ghost of Abraham Lincoln enters the drug price debate.

Sacramento attorney Dennis Warren, an expert in the field, said that during the Civil War, when unscrupulous vendors shipped barrels of sand to the front instead of gunpowder, Congress enacted a law that allowed the government to prosecute companies that filed false or fraudulent claims against the government.

This False Claims Act remained on the books, little-used, for more than 120 years, until the mid-1980s, when Congress, angry that the Pentagon was paying $200 for toilet seats and $500 for hammers, beefed up the statute in two important ways, Warren said.

First, it imposed triple damages and other penalties on firms that were caught filing false claims. Second, the law said private whistle- blowers who brought evidence of fraud to the government's attention could take 15 to 25 percent of whatever penalties were recouped.

Many states, including California, enacted whistle-blower statutes modeled on the beefed-up federal law, Warren said.

Over time, this law gave birth to a small legal industry, with one set of lawyers, like Warren, defending companies against suits, and another set of lawyers, including San Francisco attorney Stephen Meagher, specializing in helping whistle-blowers assemble evidence and bring cases to the government's attention.

One other trend occurred to bring this Civil War statute to Chiron's doorstep. The targets of the lawsuits changed. According to Warren, in 1987, of the 33 cases brought under the federal False Claims Act, only 12 percent involved health care companies.

By 1998, the last year for which data were available, of the 471 whistle-blower cases on record, 61 percent were against health care firms, mainly hospitals, Warren said.

This change partially reflected the growing prominence of health care as a part of the national budget. But health care firms also complain that the complexity of government billing rules and the whistle-blower incentives encourage plaintiff attorneys to go after technical violations that are not really fraud.

``The average Medicaid error rate is about 7 percent, and that's not fraud or abuse, just human error,'' Warren said.

But plaintiff attorney Meagher said the real hurdle in a whistle- blower case is proving that the errors were intentional or resulted from a reckless disregard for giving the government a fair shake. Meagher, whose firm has represented whistle-blowers in suits that have recovered millions of dollars for the government and the plaintiffs, doesn't shed any tears for the defendants. He said the courts typically allow defendants to shield themselves from liability by claiming they were unaware that erroneous practices may not have conformed to the letter of the law.

``In this area, the courts have made it much more difficult to apply the rule that ignorance of the law is no excuse,'' Meagher said.

All of this is background for the Chiron affair, which is shrouded in secrecy. In many cases, whistle- blowers want media attention. Not in false-claim suits, however. Any leak by the whistle-blower could cause them to lose their share of any potential recovery.

But here's what little is known.

Chiron used to hold a stake in a joint venture called Cetus-Ben Venue Therapeutics, which made and sold a variety of anti-cancer drugs. Chiron sold off its stake in the joint venture to its partner Ben Venue in 1996. Ohio's Ben Venue was acquired in 1997 by Boehringer Ingelheim Corp., a German drug firm.

Chiron said the California attorney general has subpoenaed information ``related to pricing'' of these anti-cancer drugs. Tom Russillo, president of Ben Venue, said his company is also cooperating with California authorities.

``It is our position we have done nothing wrong,'' Russillo said.

Meagher, the plaintiff's attorney, said investigators are probably trying to ascertain whether the average wholesale price charged for these anti-cancer drugs somehow concealed their true price. For instance, if the sellers gave rebates to private buyers, but failed to reflect the value of these rebates in the government price, that might be a false claim.

As many as a dozen other firms, whose names are not known, are part of the same investigation. Chiron said ``it is not known when nor on what basis this matter will be concluded.''

This is a case to follow in coming months, because the implications go far beyond Chiron or cancer.

If lawmakers tinker with drug pricing formulas, this whistle-blower law, with all its pros and cons, is likely to be how the government polices the system.