Pharmaceutical & Life Sciences News

Recent Developments in OIG Exclusion:
Health Care Corporate Executives in the Crosshairs

June 7, 2013, 8:48 PM

One of the most powerful tools in the Government’s health fraud enforcement arsenal is the power to exclude entities and individuals from participation in federal health care programs. In recent years, the Office of the Inspector General of the Department of Health and Human Services (“OIG”) has stepped up its efforts to exclude health care company executives from participating in federal health care programs. Gregory Demske, Chief Counsel for OIG, has warned that corporate executives remain firmly in the OIG’s exclusion crosshairs when their companies are the focus of a criminal investigation: “[W]e have decided we should at least consider exclusion of executives at that company, who were in a position of responsibility at the time the crimes occurred.” 1Interview of Gregory Demske, Pharmalot, June 6, 2011, at http://www.pharmalot.com/2011/06/the-oig-and-excluding-execs-demske-explains/.

Since 2007, there have been several high profile exclusions of corporate executives capturing headlines in the health care press. That year, the OIG exercised its permissive exclusion authority, pursuant to 42 U.S.C. §1320a-7(b), to exclude corporate executives of the Purdue Pharma company for conduct related to the drug Oxycontin and misdemeanor violations of the Federal Food, Drug & Cosmetic Act (“FDCA”). The exclusion of the Purdue Pharma corporate executives proved to be a harbinger of things to come. In the past two years, the OIG has used its permissive and mandatory exclusion authority to hold high-level, health care corporate executives (particularly in the pharmaceutical and medical device industries) accountable for conduct the OIG deems a threat to federal health care programs.

The OIG’s concerted effort to target health care corporate executives for exclusion has significant practical implications for health care entities seeking to resolve federal health care investigations. It not only raises the stakes for settlement, but can create conflicts of interest between the interests of the entity under investigation and the corporate managers, executives, and owners who could wind up the target of OIG exclusion.

This article discusses (i) the threat of permissive and mandatory OIG exclusion for corporate owners and officers (including those officers who do not have actual or constructive knowledge of their company’s transgressions), (ii) the story of former InterMune CEO W. Scott Harkonen, who is challenging the OIG’s mandatory exclusion action asserted against him, (iii) several other recent examples of how the OIG’s permissive exclusion power has been wielded against corporate executives and owners, and (iv) the practical implications of the OIG’s increased focus on corporate office exclusion.

I. The Corporate Health Care Officer–A Target For Exclusion

The trend toward exclusion of individuals is closely related to the recent aggressive deployment by the Food and Drug Administration of the Responsible Corporate Officer or Park Doctrine.

Under most federal health care laws, an individual can be convicted of a criminal offense only if the Government can demonstrate that the individual acted with intent to violate the law—that the individual had the appropriate scienter or mens rea. The Park Doctrine is an exception to that general rule—subjecting corporate officers to potential criminal liability under the FDCA based on their position within the organization rather than any criminal intent or active participation in illicit conduct.

The U.S. Supreme Court has interpreted the FDCA’s responsible corporate officer doctrine expansively; holding that those with managerial positions can be criminally liable for violations of the FDCA, even though the manager did not participate in the wrongdoing. In United States v. Park, the Court explained the reach of potential liability:

[T]he liability of the managerial officers did not depend on their knowledge of, or personal participation in, the act made criminal by the statute. Rather, where the statute under which they were prosecuted dispensed with ‘consciousness of wrongdoing,’ an omission or failure to act was deemed a sufficient basis for a responsible corporate agent’s liability. It was enough in such cases that, by virtue of the relationship he bore to the corporation, the agent had the power to prevent the act complained of. 2United States v. Park, 421 U.S. 658, 671, 95 S. Ct. 1903, 1911, 44 L. Ed. 2d 489 (1975) (citations omitted).

The OIG has relied on similar reasoning to support its position that it may exclude executives from participation in federal health care programs even if they were not active wrongdoers. On April 19, 2010, in an address to the Health Care Compliance Association, Inspector General Daniel Levinson explained the agency’s view that corporate officers must be held accountable when their companies violate public welfare statutes. 3Highlights of Keynote Address of Daniel Levinson to HCCA (Apr. 19, 2010), available at https://oig.hhs.gov/testimony/docs/2010/HCCAIGKeynoteSummary.pdf. Citing Park, Levinson stated:

  • “Liability as a responsible corporate officer does not turn upon a corporate officer’s approval of wrongdoing, but rather on whether the officer had, by reason of his or her position in the corporation, responsibility and authority to either prevent, or promptly correct, the violation at issue, and the officer failed to do so.” 4Id.

The OIG has multiple paths under 42 U.S.C. §1320a-7(b) to exclude responsible corporate officers who were not necessarily actively engaged in misconduct involving federal health programs. With §1320a-7(b)(1) permissive exclusions, the OIG may exclude persons who are convicted or plead guilty to a “misdemeanor relating to fraud … in connection with the delivery of a health care item or service.” 542 U.S.C. §1320a-7(b)(1)(A)(i). The OIG exercised the statute’s broad reach when it excluded Purdue executives who pleaded guilty to strict-liability misdemeanor offenses for misbranding Oxycontin—but who never pleaded guilty to intentional fraud or intentional violations of the FDCA. The Purdue exclusions highlight that strict-liability, FDCA misdemeanor offenses can ultimately lead to the exclusion of corporate officers. 6Friedman v. Sebelius, 686 F.3d 813, 828 (D.C. Cir. 2012).

Similarly, 42 U.S.C. §1320a-7(b)(15) permissive exclusion relies solely on the individuals “direct or indirect ownership or control” of the sanctioned entity and the assumption that responsible corporate officers should reasonable know about the actions of the entity the individual controls. The OIG released guidance setting forth the factors it will review when determining whether to exclude a passively-acting officer or managing employee of a sanctioned company under §1320a-7(b)(15). 7OIG Guidance for Implementing Permissive Exclusion Authority Under Secion 1128(b)(15) of the Social Security Act (2010), available at https://oig.hhs.gov/fraud/exclusions/files/permissive_excl_under_1128b15_10192010.pdf.

Specifically, the OIG outlined four categories of criteria relevant for its consideration of (b)(15) permissive exclusions: (1) circumstances of the misconduct and seriousness of the offense; (2) the individual’s role in the sanctioned entity; (3) the individual’s actions in response to the misconduct; and (4) a catchall that includes any additional information about the entity. This exclusion authority has not been widely used—the OIG has only excluded 36 individuals using its (b)(15) authority and there has only been one high-level executive of a major health care company excluded under (b)(15) (Marc Hermelin of KV Pharmaceuticals). However, the discretion afforded the OIG by this provision and the OIG’s recent pronouncement that there will be a presumption in favor of individual exclusions in any case where an entity is sanctioned provides the Government with significant leverage in settlement negotiations concerning government investigations.

Ultimately though, the vast majority of exclusions, well over 13,000, fall under the OIG’s mandatory exclusion authority. The OIG can exclude responsible corporate officers under 42 U.S.C. §1320a-7(a), which requires the exclusion from participation in the Federal health care program for individuals “convicted of a criminal offense related to the delivery of an item or service” under a Federal or State health care program. 842 U.S.C. §1320a-7(a). Criminal offenses warranting mandatory exclusion typically have included patient neglect or abuse, felony health care fraud, the felony manufacturing, distribution, prescription of or dispensing of a controlled substance, or any felony-level, program-related crimes.

The ongoing litigation between InterMune CEO W. Scott Harkonen and the OIG, however, highlights the degree of discretion and aggressive stance the OIG can wield in exclusion proceedings.

II. The OIG and Corporate Executives And Owners – Varying Outcomes In Exclusion Proceedings

A. Former InterMune CEO W. Scott Harkonen: Indictment, Partial Acquittal, OIG Exclusion, and Litigation

The case of InterMune CEO W. Scott Harkonen provides a new twist to the OIG’s efforts to exclude corporate executives. The OIG excluded Harkonen after he was convicted of criminal wire fraud, but found not guilty of violating the FDCA after a federal jury trial. Harkonen is challenging his mandatory OIG exclusion in federal court arguing that the HHS Department Appeals Board (“DAB”) did not (1) correctly apply the relevant standard for exclusion when it used a common sense connection or nexus test to support its interpretation that Harkonen’s actions were linked to the delivery of health care services, or (2) give the appropriate weight to the jury’s acquittal of Harkonen’s FDCA misbranding charge. 9Complaint at 2, Harkonen v. Sebelius, No. 13-0071 (N.D. Cal. Jan. 7, 2013) (11 PLIR 40, 1/11/13).

Harkonen’s ban stems from a 2002 InterMune press release that highlighed the most encouraging result from the initial stages of a study for a new indication of the drug Actimmune. 10Press Release, InterMune, Inc., InterMune Announces Phase III Date Demonstrating Survival Benefit of Actimmune in IPF (Aug. 28, 2002) (available at http://www.sec.gov/Archives/edgar/data/1087432/000091205702033878/a2088367zex-99_1.htm). Despite the inclusion of disclaimers about the preliminary nature of the study and the need for physicians to evaluate the final testing data, InterMune’s CEO Harkonen was quoted in the press release predicting sales between “$400-$500 million per year, enabling [InterMune] profitability in 2004 as planned.” 11Id. In 2004, the Department of Justice (“DOJ”) began investigating allegations of InterMune off-label promotion of Actimmune, ultimately culminating in Harkonen’s indictment on March 18, 2008.

On September 29, 2009, a jury found Harkonen guilty of wire fraud, but not guilty of felony misbranding under the FDCA. The government sought to have Harkonen’s sentencing enhanced, but the court did not find any connection between Harkonen’s statements and some actual or intended loss and on April 13, 2011, Judge Marilyn Patel sentenced Harkonen to three years of probation and a fine of $20,000. Nevertheless, the OIG informed Harkonen on August 31, 2011 that he would be excluded from all federal health programs for a period of five years under the agency’s mandatory exclusion authority, pursuant to 42 U.S.C. §1320a-7(a)(3). Currently Harkonen is challenging his exclusion in the U.S. District Court for the Northern District of California, seeking both injunctive and declaratory relief in the form of vacating the exclusion decisions.

In his complaint, Harkonen contends that the DAB’s decision should be set aside because (i) the DAB misconstrued the Social Security Act’s exclusion provision by concluding that Harkonen’s offenses were related to the “delivery” of health care goods or services, and (ii) the DAB’s decision was arbitrary and capricious given the dearth of evidentiary support that Harkonen violated federal health care laws. Harkonen argues exclusion should be allowed only when there is some actual connection between the felony delivery of health care; potential impact to delivery of health care is not enough. Further, he questions how the DAB can uphold his exclusion based on the same factual allegations regarding misbranding that were insufficient to support a criminal conviction in federal court. Harkonen believes the factual basis for the exclusion was ultimately lacking, which resulted in a decision by the DAB that was arbitrary, capricious, and should be overturned. The OIG has filed its answer, but the case is only in its early stage. The outcome could go a long way towards clarifying the limits of OIG’s mandatory exclusion power.

B. Howard Solomon Dodges Ban

Since the OIG leans in favor of individual exclusions in any case where an entity is sanctioned, corporate officers of those entities must rebut the OIG’s presumption of exclusion. That is what recently occurred with Howard Solomon, CEO of Forest Laboratories.

After a U.S. District Court sentenced his company, Forest Laboratories, to pay a criminal fine of $150 million for pleading guilty to a felony count of obstruction of justice and a misdemeanor count of distributing a misbranded drug in interstate commerce, the OIG turned its focus to Solomon. In April of 2011, the OIG notified Solomon that it was considering his exclusion in connection with matters related to Forest’s settlement. The OIG had presumed, pursuant to (b)(15), that Solomon should be excluded as the responsible corporate officer of a guilty corporate entity.

Initially, it appeared that Solomon’s fate would be the same as that of Marc Hermelin, the former CEO of KV Pharmaceuticals and first drug company executive to be excluded without the OIG first bringing criminal charges. Hermelin’s case involved a subsidiary of KV Pharmaceuticals pleading guilty to felony misbranding, and the OIG using (b)(15) permissive exclusion to ban Hermelin from the health care industry. 12It should be noted that eventually Hermelin pled guilty to two misdemeanor violations of the FDCA. Hermelin was never convicted of a health care-related crime (like the Purdue Pharma executives), but the OIG believed there was sufficient evidence that Hermelin had participated in decisions concerning what was reported to the FDA, which justified his exclusion. 13See Demske Interview, supra n. 1.

Solomon, however, was able to effectively rebut the OIG’s presumption of exclusion, as the OIG changed its position in an August 2011 letter to Solomon. In the letter, the OIG indicated that “[b]ased on a review of the information in [the OIG’s] file and consideration of the information that [Solomon’s] attorneys provided…[the OIG] decided to close the case.” 14Letter from Peter Clark Exclusions Director Office of Investigations to Howard Solomon (August 5, 2011). Instead of pressing on with its investigation into the exclusion of Solomon, a passive officer of a sanctioned entity, the OIG concluded that the evidence provided by the corporate officer was enough to rebut the initial presumption and led to the termination of any investigation into Solomon’s involvement and any possible exclusion from health care activities.

C. Arizona Hospice Owners Agree to Voluntary Permissive Exclusion

The 2012 exclusions of Hospice Family Care’s co-owners provide a stark contrast to the outcome Solomon obtained. Hospice Family Care and its co-owners were under government investigation for the submission of false claims to Medicare for hospice ineligible patients. Based on publicly available information, it seems likely that the OIG’s presumption of exclusion factored into settlement negotiations that led to Hospice Family Care agreeing to pay $3.7 million to the government and the co-owners voluntarily agreeing to seven-year exclusions from federal health care programs. The co-owners’ exclusion came under 42 USC §1320a-7(b)(7), which is permissive exclusion based upon allegations of fraud, kickback, or other prohibited activities. It seems likely the owners agreed to their own exclusions, so the company could be saved from exclusion and sold to new owners.

III. Practical Implications of the OIG’s Expanded Use of Exclusion

One obvious takeaway is that the OIG’s exclusion authority is very broad, and the OIG has sent strong signals to the health care industry that it intends to use exclusion to hold owners and executives accountable for the conduct of their companies, whether the executives played an active role in the fraud or misconduct or not.

Another takeaway is that the OIG’s enhanced use of exclusion can strain the relationship between the company and the executive/owner, who could be targeted for exclusion. The Arizona Hospice Care settlement is one example of how the OIG’s use of exclusion can introduce new variables into negotiations between health care entities and the government. Prior to the OIG’s expanded use of corporate officer exclusion, the interests of high-ranking individuals within a health care corporation’s management were generally aligned with the interests of the corporation, since there was little real threat that the individual executives faced the threat of exclusion. Now, since there is a greater likelihood the executive may be targeted by the OIG, it raises the question of whose interests will prevail—the executive’s or the health care company’s?

With the uptick in OIG exclusion, both mandatory and permissive, there is a distinct possibility that corporate officers may weigh the corporation’s interests against their own. At the very least, corporate management and their representatives in settlement negotiations must consider a wider array of outcomes with OIG exclusion such a prevalent possibility.

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