Pfizer Inc. agreed in September to a whopping $2.3 billion settlement, the largest fine the Justice Department has ever issued for health care fraud. The settlement resolves a series of charges stemming from the misbranding of several drugs by the pharma giant and its subsidiary Pharmacia & Upjohn Inc.

The companies had illegally promoted several drugs for off-label use, including Bextra, an anti-inflammatory; Geodon, an anti-psychotic; Zyvox, an antibiotic; and Lyrica, an anti-epileptic drug.

In addition to its size, the settlement is notable for a number of reasons: The fines will return almost $1 billion to Medicare, Medicaid and other government insurance programs, underscoring interagency collaboration in fraud recovery efforts. More than $102 million of the civil recovery will go to whistleblowers, including an astonishing $51.5 million to a single former employee. But perhaps the most interesting aspect is the timing.

The Pfizer settlement was announced just a week before President Obama’s health care address to Congress. The proximity may be more politically fortuitous than politically motivated–the investigations date back six years–but the message is clear nonetheless. Health care fraud is in the crosshairs.

“The political climate right now regarding the health industry is one of trying to ferret out fraud, waste and abuse in an effort to show that reform is possible,” says Dan Plunkett, a member of McGlinchey Stafford. “I don’t think this was a purely political move, but it certainly is an area–just like defense was 20 years ago–that is ripe for clean-up. This is a big-ticket item for the government.”

Make it Hurt

What makes off-label marketing worthy of a record-setting penalty? The willfulness and duration of the violations certainly played a large role. Even as Pfizer negotiated with prosecutors to resolve one operation’s fraudulent actions, the same behavior persisted in other divisions within the company.

“The size and seriousness of this resolution, including the huge criminal fine of $1.3 billion, reflect the seriousness and scope of Pfizer’s crimes,” acting Massachusetts U.S. Attorney Michael Loucks said in the settlement announcement. “Pfizer violated the law over an extensive time period. [This] enormous fine demonstrates that such blatant and continued disregard of the law will not be tolerated.”

The size of the company and the revenues at stake in the industry are also significant considerations. Prosecutors aren’t out to put corporations out of business, but they do want to get their message across.

“The idea is that the fine has to be related to the ability to pay it,” says Bruce Barket, a partner at Quadrino Schwartz. “If you fine Pfizer $1 million, they’d write you a check and move on–it’s a 30-second ad for the Super Bowl or something. The bigger the corporation, the more they can expect to be fined; the government wants it to hurt.”

Then there’s the fact that the government itself was Pfizer’s biggest victim. The fraudulent marketing in question drove up costs for Medicare, Medicaid and other large payers, such as the Defense Department and Postal Service, leading to eager cooperation among government agencies to recover losses and deliver a meaningful, and as it turned out, record-setting penalty.

Whistleblower Windfall

The case also presented a Hollywood-worthy whistleblower storyline.

When John Kopchinski was a platoon leader in the Gulf War, he carried on a personal correspondence with Pfizer’s then-CEO, Edward Pratt. The relationship ultimately led to a $125,000 job for Kopchinski at the company after the war, selling the pain drug Bextra.

But the feel-good tale turned sour as Kopchinski grew appalled at Pfizer’s aggressive and illegal off-label marketing tactics. He filed a qui tam suit in 2003, sparking the government investigations.

Kopchinski was sacked, of course, and had to drain his retirement savings and support his family on a $40,000 job as the case progressed. But when the settlement was finalized, he walked away with a staggering reward.

“When you’re talking about a whistleblower who gets a $50,000 payment, most folks, in their own personal risk-benefit analysis say, ‘I’m not sure I’m willing to lose my job over this, be alienated, etc.,’” Plunkett says. “But John Kopchinski walked away with $51 million.”

It’s a stunning example of the potential of the False Claims Act to reveal corporate fraud. While the numbers are extreme, they come in the context of an industry that has been known to blacklist troublemakers. (Kopchinski, after being fired, went to work in the insurance industry.)

“The whistleblower law does what it was designed to do,” Barket says. “The potential awards are sometimes 20 times what the individual could hope to make from their employment in a lifetime.”

Compliance Split

As a part of the settlement agreement, Pfizer will enter into an extensive corporate integrity program with the Office of the Inspector General of the Department of Health and Human Services. The program is intended to root out future fraudulent marketing practices.

Such monitoring programs are common in large criminal settlements, but like the fines, the program’s scope in this case is unusually large. Among the terms is the stipulation that Pfizer’s general counsel can no longer oversee the company’s compliance function. A separate chief compliance officer will now report directly to the CEO.

The move is engineered to prevent conflicts of interest, predicated on the notion that legal and compliance advice are not always one in the same, a startling idea for in-house counsel.

“This type of agreement could happen in any area, but it’s interesting that it’s in health care,” Barket says. “I’ll bet you the government very much wants to set that precedent as a potential remedy in the health care industry, especially at a drug company.”

As stringent as the agreement terms may be, they beat the alternative of debarment, which would not only cripple the company, but would also deprive patients of Pfizer’s many drugs.

More than anything, the Pfizer settlement demonstrates just how many facets of risk health care violations can present these days.

“It’s a many-headed hydra,” says Cathy Yanni, an ADR specialist at JAMS. Yanni has worked on many disputes involving pharmaceuticals, including Pfizer’s Bextra. “It’s a more complicated matrix now that there are so many different agencies involved than, say, when these cases first came to the forefront in the 1990s. There’s also a heightened awareness from the variety of the governmental entities now than there would have been 15 years ago.”