Some Powerful Trends Could End Kickbacks in Pharma

Pharma and other health care manufacturing sectors have been furiously trying to forecast how Obamacare and other changes in the environment, such as the consolidation of medical practices, will affect their futures. As one example, previous postings here discussed how practice consolidation under hospital-dominated, Integrated Delivery Networks (IDNs), together with the universal adoption of Electronic Medical Records (EMR) by 2015, will lead to providers and payors selecting drugs through a process of "duelling databases."

The consequence of practice consolidation and EMR will be the final nail in the coffin for pharma's megacompany-blockbuster model. Companies that can prosper with a line of small, niche products will generate top value for their investors while the megacompanies capitalized at $160 billion after shortsighted mergers won't be able to grow their earnings per share by relying on small products.

Last week's public disclosure of a whistleblower lawsuit, filed in California during 2007, now calls into question the entire scope and process of pharmaceutical marketing. In that suit a former employee of Bristol-Myers Squibb (BMS) alleges the company engaged in a mammoth kickback scheme to induce California physicians to prescribe branded BMS products. These kickbacks obliged insurers and other payors to pay more for drugs than they otherwise would have.

So what exactly were these kickbacks? The suit alleges that in addition to cash payments, the company provided physicians with "gifts" such as tickets for luxury suites at Los Angeles Lakers basketball games, balls autographed by star players, invitations to Lakers fantasy camps, and similar perquisites. On numerous occasions, according to the suit, BMS "rented suites at Staples Center and held catered events for physicians at Lakers games."

BMS allegedly obtained this access to the Lakers through the intervention of a former player named Lucius Allen. Allen went on to work for BMS for six years and left the company in 2003. In 2010 Allen and his wife, who also worked for BMS, joined the whistleblower suit as co-plaintiffs. They provided attorneys with information on how BMS used various inducements to get physicians to write prescriptions for its drugs. Last week the California insurance commission also joined the suit. Commissioner Dave Jones charged that insurance companies in the state spent more than $3.5 billion to cover the costs of BMS drugs promoted by kickbacks.

BMS purportedly did not rely strictly on sports tickets, fancy meals, and expense-paid trips to induce physicians to prescribe their products. The suit also alleges the company disbursed hard cash, typically classified in the business as "honoraria." All told the whistleblower suit claims BMS paid 15,000 kickbacks to physicians between 1999 and 2005, even as Insurance Commissioner Jones also claims he has evidence showing that kickbacks still continue.

So in forecasting the impact of current trends on pharma, it seems likely that the efforts by public and private payors to control costs will play a larger role. In particular, the payors will try to drastically change the way pharma has operated for more than 60 years to influence physicians. The thrust of their efforts, both in court and through their reimbursement practices, point to forbidding any marketing influence that manufacturers seek to exert on physicians. This pressure and the consolidation of practices under IDNs will consign pharmaceutical marketing to a far smaller and more discreet role.

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