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Latest Department of Justice Settlement with Specialty Pharmacies Reflects Ongoing Crackdown on Prior Authorization Fraud and Waiver of Medicare Co-Pays

In its recent settlement with pharmaceutical company kaléo, Inc., the Department of Justice foreshadowed that it also would be pursuing cases against specialty pharmacies that sold and dispensed Evzio, a kaléo drug. Evzio, a naloxone anti-overdose auto-injector, cost over $4000, while Narcan, which was approved for the same purpose, cost only about $150. Thus, insurers, including Medicare, would not cover Evzio unless a physician signed a prior authorization request explaining exactly why Evzio, rather than Narcan, was necessary for the patient. Moreover, because of its cost, an Evzio prescription would result in a large co-pay for many patients, and those patients often would have preferred Narcan, or no drug at all, if they were faced with the prospect of actually paying a co-pay for Evzio. According to the kaléo settlement agreement, kaléo encouraged doctors to direct Evzio prescriptions to certain specialty pharmacies that solved these barriers to Evzio sales: the pharmacies allegedly submitted fraudulent prior authorizations to get insurers to reimburse for Evzio, and the pharmacies then waived the patient co-pays for the drug.

Yesterday, the Department of Justice announced a $1 million settlement with two of those specialty pharmacies, People’s Drug Store and Ray’s Drugs, and their owner, Riad “Ray” Zahr. The settlement agreement with Zahr and his pharmacies describes an elaborate scheme to get federal healthcare programs to pay for Evzio and then to get the drug to federal healthcare program beneficiaries without the beneficiaries ever having to consider the extraordinary cost of the drug.

According to the agreement, Zahr’s pharmacies often did not receive actual physician prescriptions for Evzio. Instead “kaléo sales representatives provided Defendants with lists of patients that pain management or addiction treatment doctors had seen on a given day, with only rudimentary patient demographic identifiers such as name, date of birth, and phone number.” Then, Zahr’s pharmacies would create the prescriptions on their own.

In the next step of the scheme, kaléo sales representatives allegedly provided Zahr and his pharmacies with physician log-in information for CoverMyMeds, an online prior authorization system run by McKesson. With the misappropriated physician log-in information, personnel from Zahr’s pharmacies allegedly logged into CoverMyMeds and created prior authorization requests in the names of the physicians. In addition to fraudulently holding themselves out as the prescribing physicians, Zahr’s pharmacy personnel also allegedly fabricated information on the prior authorization forms about patient diagnoses and medical conditions and, according to the settlement agreement, made false and misleading assertions “about the effectiveness of Evzio compared to competing forms of naloxone.”

In the final step of the scheme, Zahr’s pharmacies allegedly shipped Evzio to Medicare beneficiaries without making any attempt to collect the associated Medicare co-pays or to determine whether the beneficiaries had financial hardships that might have made them eligible for waiver of Medicare co-pays. According to the settlement agreement, Defendants waived Evzio co-pays as high as $3,000.

The result of this scheme was that many patients received Evzio that they didn’t need and that that their doctors didn’t prescribe. In all likelihood, the drug often just went into the back of patients’ sock drawers. Meanwhile, kaléo and its specialty pharmacy partners received a substantial, and unjust, financial benefit, all at the expense of American taxpayers who ended up footing the bill for the unnecessary dispensing of Evzio. Indeed, given Evzio’s cost and the availability of a much cheaper, and equally effective, alternative, it seems unlikely that Evzio would have generated more than minimal sales but for the fraudulent behavior of pharmacies like People’s Drug Store and Ray’s Drugs. Ongoing government enforcement efforts should discourage other pharmaceutical companies from emulating kaléo’s tactic of relying on third party specialty pharmacies to commit fraud on its behalf.