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Since its Jan. 1 start date, Medicare’s prescription-drug benefit has caused headaches for senior citizens and disabled beneficiaries who can’t figure out how to get coverage and for state governments faced with bailing those people out. But the real pain is still to come, say lawyers who specialize in health care litigation. Thanks to its huge size, indecipherable structure, and an eligibility gap called the “donut hole,” the drug benefit is being seen as an invitation for major fraud for years to come. “You have a brand-new statutory scheme,” says Eric Havian, a partner at Phillips & Cohen in San Francisco who represents government whistle-blowers. “People in good faith are going to be confused about what to do.” And then there will be others, Havian says, who will engage in outright fraud. That’s a pattern often observed by lawyers like Havian, who represents whistle-blowing “relators” in qui tam cases — suits in which someone reports fraud allegations to the U.S. Department of Justice and stands to make a percentage of the government’s recovery if a suit is successful. With health care already the top source of qui tam recoveries by the government, Havian and other attorneys who specialize in such cases say that creating a monstrous and complicated new stream of government payouts (hundreds of billions of dollars expected over the next decade) makes widespread fraud inevitable. “I certainly expect there to be a lot of new qui tams based on the Medicare drug benefit,” says Sara Winslow, the deputy chief of San Francisco’s civil division of the U.S. attorney’s office. She is the local contact point for relators, whose claims are often investigated as both civil and criminal cases. “When you have a new program with a new pot of money, I think there’s ample potential for people to abuse it,” Winslow adds. As Stephen Meagher, a San Francisco solo and top relator attorney, puts it, drug prices are an ongoing problem, and “the government solution so far has been to throw money at the problem.” That approach creates all sorts of new avenues for fraud. “Medicare’s going to be paying for a lot more of the drugs people are taking,” Meagher adds. “In the end, I think you’ll see partly new frauds, by finding out how the program works, but you’ll also see an increase in the number of existing frauds.” Take the donut hole, which Winslow and several defense and plaintiffs lawyers point to as a problematic temptation for fraud. That hole is a gap in the bill, which annually covers up to $2,250 worth of drugs and 95 percent of anything above $5,100. The nearly $3,000 in between is not covered at all. With a steady stream of government cash lurking above the $5,100 mark, the hole gives an incentive for pharmacies “to report greater costs than what they actually incurred to qualify on the other side of the donut hole,” says Russell Hayman, a partner at McDermott, Will & Emery whose practice is devoted to defending companies accused of health care fraud. “I have never understood, from a legislative perspective and from a policy perspective, what was gained by creating the donut hole,” Hayman says. He and other defense lawyers say that many qui tam claims are rooted more in confusion about new laws than intentional fraud. Oftentimes, they say, a relator will mistake legal actions for fraud due to a lack of understanding about a complex funding scheme. But such confusion also produces valid claims, they say. “The bottom line is this: The government has created a new program. If you look at the old programs, you see the government doesn’t do a great job of setting these things up,” says Thomas Carlucci, a partner at Foley & Lardner in San Francisco who specializes in health care fraud defense. Intentional or not, health care frauds have generated a tremendous amount of money in qui tam recoveries for the government in recent years. Havian’s firm, Phillips & Cohen — where Meagher was also a partner until last year — has been involved in a series of huge cases, including the biggest-ever health care qui tam award, paid by TAP Pharmaceutical Products Inc. in 2001. That case resulted in an $875 million recovery for the government. Meagher says the TAP case involved one of a handful of typical health care fraud schemes: kickbacks paid to doctors for prescribing a drug. Other big medical qui tams — including separate $731 million and $631 million settlements paid by HCA Inc. in 2003 and 2000 and $704 million paid out by drug maker Serono SA last year — involved other fraud schemes. Common violations, the plaintiffs lawyers say, include sales efforts to persuade doctors to prescribe drugs for uses not approved by the Food and Drug Administration, artificially reporting wholesale prices, and illegally reselling surplus drugs returned to companies by hospitals. While they expect to see repeats of such scams, Robert Van Nest, a partner at Keker & Van Nest who has defended companies in qui tams, is skeptical. Plaintiffs and defense lawyers agree that it will take a year or two for whistle-blower complaints to start popping up from the Medicare bill, and Van Nest says it’s too early to predict what will happen. “At this point,” he says, “it’s really speculation.”
Justin Scheck is a reporter for The Recorder , the San Francisco-based ALM publication where this article first appeared.

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