Pharmaceutical Company Payments to Co-Pay Foundations Merit Continued Scrutiny

Since 2018, more than a dozen pharmaceutical companies and four co-pay foundations have agreed to pay more than $1 billion to resolve False Claims Act allegations that the pharmaceutical companies used the foundations as conduits to pay kickbacks to induce Medicare patients to purchase the companies’ expensive drugs.

Whistleblowers initiated some of the cases, but, unusually, the Department of Justice initiated most of the cases itself. Because pharmaceutical companies continue to funnel hundreds of millions of dollars each year to Medicare patients through co-pay foundations, there is potential for more whistleblowing in this area.

The cases arise because Medicare Parts B and D can require significant co-pays when pharmaceutical companies set high prices for their drugs. Under Part B, patients without a Medicare Supplement plan must pay 20% of the cost of physician-administered drugs. Under Part D, after patients reach an annual “out-of-pocket” threshold (currently $6,550), they must pay 5% of the cost for outpatient drugs. While 5% may not sound like much, it can amount to thousands of dollars per year if, as happens increasingly often nowadays, a pharmaceutical company charges tens, or even hundreds of thousands of dollars per year for a drug. Even under the drug price legislation currently under consideration in Congress, annual Part D co-pays still may be as high as $2,000 per year.

Co-pays are one of the only economic checks on the price of drugs. As the Office of Inspector General of the Department of Health Human Services (HHS-OIG) explained in a 1994 Special Fraud Alert, requiring patients to consider the cost of therapies makes them “better health care consumers, and [causes them to] select items or services because they are medically needed, rather than simply because they are free.” [1] When a drug co-pay gets waived, the consumer no longer has any reason to consider the cost of therapy, and the maker of that drug can set prices without considering the impact of those prices on health care consumers.

Pharmaceutical companies, of course, would prefer that Medicare patients never have to face a co-pay. That way, patients would not care at all about the price of drugs, the pharmaceutical companies could charge ever-higher prices for their drugs, and only the taxpayers who fund the Medicare program would face the economic consequences. Meanwhile, the pharmaceutical companies would reap ever-greater profits.

It is illegal, however, for a pharmaceutical company to cover a Medicare patient’s co-pay. As HHS-OIG has explained, “[w]hen providers, practitioners or suppliers forgive financial obligations for reasons other than genuine financial hardship of the particular patient, they may be unlawfully inducing that patient to purchase items or services from them.”[2]

In a recent case, pharmaceutical giant Pfizer tried to argue that it should be allowed to cover Medicare co-pays for tafamidis. Pfizer charges approximately $225,000 per year for tafamidis. That means, for Medicare Part D patients, tafamidis has co-pays of over $10,000 per year. The court rejected Pfizer’s attempt to cover these co-pays, “since the [Anti-Kickback Statute] prohibits all remuneration that induces purchases of drugs like tafamidis.”[3]

To get around the prohibition on covering Medicare patients’ co-pays directly, many pharmaceutical companies have tried to use co-pay foundations to cover the co-pays indirectly. The Anti-Kickback Statute, however, makes it illegal to pay a kickback either “directly or indirectly.”[4] Furthermore, HHS-OIG has issued bulletins warning that pharmaceutical companies should not attempt to use a co-pay foundation as a “conduit” to cover Medicare patients’ drug co-pays.[5] Still, as the recent settlements demonstrate, many pharmaceutical companies tried to do exactly what OIG warned against.

Because pharmaceutical companies continue to set very high prices for some drugs, the temptation remains for the companies to use co-pay foundations as vehicles to cover Medicare co-pays, in violation of the Anti-Kickback Statute. Whistleblowers can play a role in stopping these kickbacks. Employees of pharmaceutical companies and co-pay foundations are particularly well-situated to observe and identify behavior that is not purely charitable, but is designed to ensure that pharmaceutical companies effectively subsidize the cost of their expensive drugs by covering the drugs’ Medicare co-pays.

Gregg Shapiro represents whistleblowers as a partner at Newman & Shapiro. For 16 years, he was an Assistant United States Attorney in Boston, and he led cases that resulted in over $1 billion in settlements involving pharmaceutical company payments to co-pay foundations.

[1] HHS-OIG, Special Fraud Alert, 59 Fed. Reg. 65372, 65375 (Dec. 19, 1994).

[2] Id.

[3] Pfizer Inc. v. United States, 2021 U.S. Dist. LEXIS 189381, at *45 (S.D.N.Y. Sept. 30, 2021).

[4] 42 U.S.C. § 1320a-7b(b).

[5] HHS-OIG, Special Advisory Bulletin on Patient Assistance Programs for Medicare Part D Enrollees, 70 Fed. Reg. 70623, 70627 (Nov. 22, 2005); HHS-OIG, Supplemental Special Advisory Bulletin: Independent Charity Patient Assistance Programs, 79 Fed. Reg. 31120, 31122 (May 30, 2014).