Implementing US-style anti-fraud laws in the Australian pharmaceutical and health care industries

Government expenditure on medicines and health care in Australia runs to billions of dollars annually. Federal expenditure on the Pharmaceuticals Benefits Scheme (PBS) increased from A$3.2 billion in the 1998–99 financial year to A$8.3 billion in 2009–10.1 In 2008, the federal government spent A$45 billion on health care and state governments spent A$26 billion.2 Federal expenditure on health care in general is expected to be over A$70 billion in 2011 and will increase partly as a result of projected changes to federal–state administrative arrangements.3 Per capita yearly government expenditure on health (calculated using the average exchange rate) is about US$4000 in Australia and US$7000 in the United States.4

In the US, the health sector is a major target for fraudulent corporate activities, such as reporting false claims or costs, billing for services or procedures not performed or medically unnecessary, hiding improper financial arrangements with health care goods and service providers, as well as promoting off-label uses to physicians, lying about the true wholesale price and submitting false performance records5 (Box 1).

In Australia, a recent representative proceeding (class action) in the Federal Court found that Merck Sharpe and Dohme trained its representatives to minimise physician concerns about adverse cardiovascular effects of Vioxx (rofecoxib). The company even created a publication called the Australasian Journal of Bone and Joint Medicine, which was neither peer-reviewed nor independent, to advertise a product subsequently found under the Trade Practices Act 1974 (Cwlth) to be defective (s 75AD) and not reasonably fit for purpose (s 74B) or of merchantable quality (s 74D).6 This heightens concerns that the Australian pharmaceutical market is unlikely to be immune from US-style false claims and fraud, if only because most of the major drug companies proven to have engaged in such conduct against the US government also dominate the Australian market (Box 2). A report by the University of Melbourne and KPMG estimated that the total amount of money lost to corporate fraud in Australia, including in the health care sector, was about A$350 million in 2010 and growing at an annual rate of 7%, with only a third being detected.7

Under the Medicare Australia Act 1973 (Cwlth), Medicare is empowered to monitor payments on claims paid for both Medicare and the PBS for fraud. It does this through a program of audits as well as sophisticated methods of data analysis. Under the Health Insurance Act 1973 (Cwlth), civil penalties can be imposed on providers of pathology or diagnostic services for asking for or accepting prohibited benefits (s 23DZZIK), offering or providing prohibited benefits (s 23DZZIL) and making threats to induce the above conduct (s 23DZZIM) (Box 3). Within 6 years of a wrongdoer contravening a civil penalty provision, the Chief Executive Officer of Medicare Australia may apply on behalf of the Commonwealth to the Federal Court for an order that the wrongdoer pay the Commonwealth a pecuniary penalty (s 125A(1)). In the 2006–07 financial year, Medicare pursued 499 individuals for A$3.4 million in “incorrect payments” and 550 investigations into fraudulent claiming were begun, with 79 referred to the Commonwealth Director of Public Prosecutions, who successfully prosecuted 56 individuals to recover A$312 927.8 Yet in Australia (unlike the US) large-scale anti-fraud and anti-competitive prosecutions in the pharmaceutical sector have been rare. One example was the 2001 Australian Competition and Consumer Commission prosecution in the Federal Court of Roche Vitamins Australia (A$15 million penalty), BASF Australia (A$7.5 million) and Aventis Animal Nutrition (A$3.5 million), in connection with a global price-fixing cartel supplying vitamins A and E in animal feeds, which inflated general food prices.9

The False Claims Act (31 US Code ss 3729-3733) (FCA) began during the US Civil War and was substantially amended in 1986 by the Reagan administration, and in 2009 by the Obama administration. It now imposes liability upon anyone who knowingly or with “deliberate ignorance” or “reckless disregard” of the truth submits, or conspires with another to submit, a false claim or related false record:

• for payment from the US Government or from an entity administering government funds; or

• to avoid or decrease an obligation to pay the US Government.

Qui tam provisions are a component of these false claims laws that have proved extremely effective in encouraging whistleblowers to provide (in a private–public enforcement partnership) crucial “insider” evidence about corporate fraud in a wide range of settings (Box 1). The words qui tam are an abbreviation of a Latin legal maxim broadly meaning “he who sues on behalf of himself also sues on behalf of the state”. Qui tam laws allow private citizens (relators) the right to provide documents establishing fraud or false claims (the terms are generally interchangeable in this context) upon the government to a no win–no fee lawyer who, if convinced of the merits, will fund and file with a Department of Justice office a lawsuit under seal (not initially disclosed to the defendant) (s 3730(b)). Whistleblowers are rewarded with between 15% and 30% of whatever proceeds the government recovers from the civil suit (ss 3729(a), 3730(d)(1), 3730(d)(2)).10 The prospects of success are greater if federal or state justice department officials can be convinced to join the case.11 In such instances, the qui tam relator and his or her counsel act as force multipliers for the often cash-strapped public prosecutors, contributing valuable human and financial resources to the action.

Qui tam whistleblower suits constitute about 80% of all false claims actions and have been very successful in achieving substantial recoveries from corporations in the health service, pharmaceutical, education, defence, and oil and gas sectors.12 In 2010, recoveries from pharmaceutical and medical device companies accounted for 65% of the US$2.5 billion recovered from health care fraud claims.13 Qui tam actions against pharmaceutical companies are now the most successful type of anti-false claims litigation14 (Box 4). In recent years, nearly half of all US states have enacted their own anti-false claims statutes.

A comparison with the situation in the US strongly suggests that one reason for the lack of large-scale anti-fraud and anti-false claims actions in the pharmaceutical and health care sectors in Australia may relate to the lack of insider information from private corporations provided to law enforcement officials. Whistleblowing is an infrequent phenomenon from within the Australian health care sector; it is not encouraged, rewarded or adequately protected.22 In 1989, a federal committee recommended that qui tam laws were incompatible with accepted practice in the Australian legal system.23 By 2011, however, significant progress has been made in Australia towards a uniform legislative regime for protecting whistleblowers from unjust reprisals.24 The potential application of US qui tam laws to facilitate whistleblowing about fraud and false claims from within the Australian private corporate health care and pharmaceutical sectors again has been suggested to the Australian Government (T A F, invited oral testimony to the Australian House of Representatives Standing Committee on Legal and Constitutional Affairs,18 Sep 2008). Given the scale of public investment in the Australian health care service, pharmaceutical, medical device and other health-related industries, we believe that an anti-fraud regime based on that of the US should be introduced in Australia. Such laws comport with developing Australian legal principles and are likely to prove as effective here as they have been in the US.

Over the past 20 years, anti-competitive behaviour has increasingly been regarded as a serious crime by Australian regulators. No win–no fee advertising is now common, and litigation funding companies are permitted to back public interest class actions.25 The Australian High Court has now supported the right of any person to seek injunctive relief for a breach of specified provisions of the Trade Practices Act against a corporation.26 It has also upheld the capacity of a plaintiff to bring an action, not to vindicate a private right, but to prevent the violation of a public right or to enforce the performance of a public duty.27,28

Litigation-funding companies in Australia already accept the risk of paying the other side’s costs if a case fails, in return for a set share of the proceeds if it succeeds. These arrangements have withstood challenges in Australian courts, in part because they fulfil public policy imperatives such as access to justice, particularly in public health-related class actions.25While some Australian courts may consider the treble damages provided for under the FCA to be an extraordinary remedy, appropriate only in cases of truly outrageous conduct,29 others are likely to agree with US courts that treble damages in qui tam actions are primarily remedial in nature10 or even justifiably punitive.30 Moreover, treble damages have been considered previously as a deterrent for insider trading, and Australian regulators have generally been in favour of them.31 Considerable financial benefits would arise from applying such damages even to existing penalties under, for example, the Health Insurance Act (Box 3). The recently announced Tobacco Plain Packaging Bill 2011 could include provisions establishing an anti-fraud system related to industry claims required to be made under government regulation of the manufacture and marketing of tobacco (including mandatory disclosure of tobacco industry research about the harmfulness or addictiveness of its products).

The key strengths of the US qui tam anti-fraud regime, particularly in a period of financial stringency, lie in its recovery of large amounts of public monies, its encouragement of good corporate practice, the incentives it provides and the protection it affords whistleblowers from within the private sector, and its various checks and balances to ensure that only presumptively meritorious claims are processed. If designed carefully, Australian qui tam anti-fraud laws may provide a mechanism for sustained and diligent oversight of claims by health care services, the financial sector, and the pharmaceutical, medical device, defence and fossil fuel industries on the public purse without significantly impeding their growth. Australian qui tam legislation could also play a significant role in reducing fraud and false claims in relation to other large investments or redistributions of public monies in public health-related fields such as carbon emissions compensation and the costs of treating tobacco-related illness.