Department of Justice Seal Department of Justice
FRIDAY, JULY 30, 2004
(202) 514-2007
TDD (202) 514-1888


WASHINGTON, D.C.- Deputy Attorney General James B. Comey and United States Attorney for the Eastern District of Pennsylvania, Patrick L. Meehan, announced today that Schering Sales Corp., the sales and marketing subsidiary of drug manufacturer Schering-Plough Corporation, will plead guilty to criminal charges and pay a fine of $52.5 million, while Schering-Plough Corporation will pay more than $290 million to resolve civil liabilities stemming from its fraudulent pricing of Claritin, its blockbuster allergy medication.

“This case is significant because it demonstrates the Department of Justice’s commitment to health care fraud enforcement, and combating fraud by pharmaceutical manufacturers in particular,” said Comey. “This case sends the message that secret payments fraudulently made to disguise the price of drugs will be subjected to criminal and civil enforcement.”

The global resolution includes the following components: (1) Schering Sales Corp. has agreed to plead guilty and pay a $52.5 million fine for violating the Anti-Kickback Statute for paying a kickback to a customer in exchange for the preferred treatment of Claritin on its formulary; (2) Schering Plough Corporation has agreed to settle its False Claims Act liability and to pay the United States, 50 state Medicaid programs, and certain Public Health Service entities $292,969,482 as a result of Schering’s failure to report its true best price for Claritin; and (3) Schering Plough Corporation will enter into a Corporate Integrity Agreement with the Department of Health and Human Services to correct its government pricing and Medicaid rebate reporting failures.

The Criminal Charges

The Information filed today charges that Schering Sales Corp. offered and paid a health maintenance organization (“HMO”) a kickback of $1.8 million to induce the HMO to keep Claritin on its formulary (a list of drugs that the HMO covers for its beneficiaries).

In the late 1990s, Claritin was Schering Sales’ best-selling drug. It was substantially more expensive, however, than its biggest competitor, Allegra. When one of Schering Sales’ best customers demanded a price reduction in Claritin-- because it cost the HMO millions of additional dollars a year to purchase Claritin instead of Allegra-- Schering Sales refused, in part, because it knew that by doing so it would have to lower the Claritin price for the Medicaid programs. Following the HMO’s decision to remove Claritin from its formulary (in essence, the death knell for Claritin sales to that customer), Schering Sales offered to make up the difference between the price of Claritin and Allegra by offering the HMO a $10 million package of added value, in lieu of an actual price reduction on Claritin.

As part of this “value added” package to induce the HMO to keep Claritin on its formulary, Schering Sales offered to pay an annual fee of 2% of the annual gross sales of Schering drugs to the HMO, approximately $2.4 million. Schering Sales disguised the true nature of the fee by calling it a “data fee” in order to give the appearance that the fee was a fair market value transaction rather than a hidden inducement to the HMO to keep Claritin on its formulary.

“Schering used terms like ‘data fee’ and ‘value added’ as camouflage for what was nothing more than an old-fashioned kickback,” said Meehan. “ This wasn’t a mistake. It was a marketing strategy. The result was that programs created to provide healthcare to the poorest among us were actually paying more for drugs than those who have private health insurance. There is a point at which pursuit of market share crosses the line that separates competition and illegal conduct. This case serves as an example that the consequences of stepping over that line can be costly.”

The Civil Claims

Under the Medicaid Drug Rebate Statute, drug manufacturers are required to report their “best prices” to the federal government and to pay quarterly rebates to Medicaid to ensure that the nation’s insurance program for the poor received the benefit of favorable drug prices offered to other large purchasers of drugs. As a participant in the Medicaid Rebate Program, Schering Plough was required to report its “best price” for and to pay rebates on Claritin. Similarly under the provisions of the Public Health Service drug pricing program, Schering was required to charge the PHS entities such as AIDS drug programs and community health centers a discounted price, based in part on the Medicaid price.

In the late 1990's, Schering Plough's powerhouse allergy drug, Claritin, faced growing competition. Two of Schering Plough's largest managed care customers, Cigna Healthcare (Cigna) and Pacificare Health Systems (Pacificare), threatened to remove Claritin from their respective drug formularies in favor of the less expensive, Allegra, as a way to decrease their drug costs. In order to match Allegra's price and keep Claritin on those formularies, while simultaneously attempting to avoid additional rebate obligations under the Medicaid Drug Rebate Program, Schering Plough funded significant price concessions to Cigna and Pacificare through an assortment of payments and services.

To Cigna, Schering provided a data fee which is the subject of the criminal charge described above, $3 million worth of deeply discounted Claritin reditabs, health management services at far below fair market value, and an interest free loan in the form of prepaid rebates. To PacifiCare, Schering provided a risk share arrangement in which Schering covered a portion of the managed care customer’s respiratory drug costs, deep discounts on other Schering products; payment and services for Internet development, and an interest free loan in the form of prepaid rebates.

By failing to account for these discounts in its reported best price for Claritin, the Medicaid program and PHS entities paid far more for Claritin from 1998-2002 than these two managed care customers. Schering Plough has agreed to pay a total of $292,969,482 arising from the allegations of fraud on the Medicaid program and PHS entities.

In addition, Schering Plough has agreed to enter into a corporate integrity agreement with the Department of Health and Human Services that addresses Schering’s sales, marketing and pricing of its drugs to government programs. This integrity agreement includes five years of independent audits to ensure Schering’s compliance with all federally funded health care programs. As a result of its criminal plea, Schering Sales Corporation will be excluded from participation in all federal health care programs for at least five years.

“Drug companies should take notice that they need to be vigilant in verifying the prices they report for drugs,” said Mark B. McClellan, M.D., Ph.D, Administrator for the Centers for Medicare and Medicaid Services. “We will be watching closely to assure the accuracy of the information reported on drug prices and to assure that all business practices are in compliance with federal rules and regulations."

"The Medicaid drug rebate program is a key control on expenditures for Medicaid-reimbursed drugs. As this settlement demonstrates, the government continues to scrutinize pharmaceutical manufacturers' compliance with program requirements," said Dara Corrigan, Acting Principal Deputy Inspector General. "We are also examining the relationships and transactions between pharmaceutical manufacturers and managed care organizations. Through the CIA, the OIG will monitor both of these aspects of Schering's operations on a going-forward basis."

This investigation began when Charles Alcorn, Beatrice Manning, and Raymond Pironti, Jr., (“the relators”) three former employees of ITG, Inc. a subsidiary of Schering Plough, filed a suit on behalf of the United States government under the private whistleblower provision of the False Claims Act. As part of the civil resolution, the relators will receive $31,662,173.

Assistant United States Attorneys Marilyn May and Michael L. Levy handled the criminal case. Trisha Doyle of the U.S. Attorney’s Office, Special Agent Patrick Coar, Department of Health and Human Services, and Postal Inspector Gregory Wauck, Postal Inspection Service, performed the investigation.

Assistant United States Attorneys Marilyn May and Margaret L. Hutchinson handled the civil case with the assistance of Andy Mao of the U.S. Department of Justice. Alison Barnes of the U. S Attorney’s Office and Nicole Freda, Department of Health and Human Services performed the audit work.

The National Association of Medicaid Fraud Control Units represented the states. The Association’s committee members include John Guthrie of the Ohio Attorney General’s Office, Chris Abruzzo of the Pennsylvania Attorney General’s Office, Ellyn Sternfield of the Oregon Attorney General’s Office, and Pat Keenan of the Illinois Attorney General’s Office. Senior Counsel Mary Riordan in the office of Counsel to the Inspector General for the Department of Health and Human Services negotiated the corporate integrity agreement.