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Pharmaceutical Manufacturer Kaléo Agrees to Pay $12.7 Million to Resolve Allegations that It Paid Kickbacks to Physician Practices and Knowingly Reaped the Benefit of Fraudulent Prior Authorizations Submitted by Specialty Pharmacies

In a first-of-its-kind case, the U.S. Attorney’s Office in Boston announced today that kaléo, Inc., the manufacturer of Evzio, an expensive naloxone drug, has agreed to pay $12.7 million to resolve allegations that, among other things, kaléo encouraged doctors to send Evzio prescriptions to particular pharmacies that then submitted fraudulent prior authorization requests to payers in order to get reimbursement for Evzio. While the government previously has brought actions pharmaceutical companies, including Warner-Chilcott and Insys, that themselves submitted fraudulent prior authorization requests, this is the first time the government has brought an action against a pharmaceutical company that essentially farmed out the prior authorization fraud to third party pharmacies.

Evzio is an anti-overdose drug that, as 60 Minutes reported, cost over $4,000 for two injectors. It competed directly with Narcan, which cost only about $125. Because of Evzio’s cost and the availability of a much cheaper alternative, many payers, including many Medicare Part D plans, required prescribers to submit a so-called “prior authorization” request explaining why Evzio, rather than Narcan, was medically necessary. Prior authorization requirements are a common hurdle to increased drug sales and, as the earlier cases against Warner-Chilcott and Insys show, pharmaceutical companies have an incentive to overcome those requirements, sometimes by fraud.

Perhaps taking a lesson from the earlier cases, kaléo did not itself submit fraudulent prior authorization requests, but instead relied on a small group of specialty pharmacies to submit those requests even though, according to the settlement agreement, kaléo “knew of or deliberately ignored information about improper prior authorization practices” by those pharmacies. The pharmacies included Royal Care, Benzer, People’s Drug Store, and Ray’s Drugs. Several individuals associated with Royal Care were recently sentenced for engaging in other health care frauds. Benzer, which is now known as Ravkoo, was recently the subject of an unflattering story in Time Magazine, which noted, among other things, that “[o]ne top executive had previously been convicted for his role in running a national opioid pill mill; another was barred from doing business with federal health-care programs due to allegations ranging from conspiracy to paying illegal kickbacks.”

The government alleged that kaléo “sought out and cultivated business relationships with specialty pharmacies” like Royal Care and Benzer because they “were willing to assist with Evzio prior authorization requests.” The government further alleged that these pharmacies “submitted Evzio prior authorization requests to Medicare, TRICARE, and the FEHBP that were false because (a) the pharmacies misrepresented to insurers that it was the prescribing physicians who were submitting the prior authorization requests when the pharmacies themselves did so; and/or (b) the prior authorization forms contained false or misleading assertions about patients’ medical histories, such as false statements that patients had previously tried and failed less costly alternatives to Evzio.”

The settlement with kaléo also alleges “that kaléo knew, or disregarded information indicating, that specialty pharmacies at times dispensed Evzio without collecting or attempting to collect co-payment obligations from Medicare or other government health program beneficiaries.”

Finally, the settlement alleges that kaléo sales representatives engaged in more prosaic misconduct, including providing “doctor’s offices with deliveries of food and beverages, as well as occasional holiday gifts, even when there was no connection to any educational or other business event.”

Overall, the settlement with kaléo serves as an important warning that pharmaceutical manufacturers risk government enforcement action if they knowingly rely on third party pharmacies to prepare fraudulent prior authorization requests that result in federal reimbursement for the manufacturers’ drugs.