The Federal Government’s Use of United States v. Park and the “Responsible Corporate Officer” Doctrine to Prosecute and Excluded Corporate Healthcare Executive

I. Introduction

Consider the following words of Chief Justice Warren Burger from the 1975 decision, United States v. Park, 421 U.S. 658:

The requirements of foresight and vigilance imposed on responsible corporate agents are beyond question demanding, and perhaps onerous, but they are no more stringent than the public has a right to expect of those who voluntarily assume positions of authority in business enterprises whose services and products affect the health and well-being of the public that supports them.

Nearly forty years later, this commentary resounds in the healthcare industry. Federal agencies tasked with policing fraud and abuse in the healthcare industry increasingly are relying upon the Park “responsible corporate officer” doctrine to investigate and impose severe criminal and civil penalties on healthcare industry executives. The U.S. Department of Health and Human Services Office of Inspector General (OIG) and the Food and Drug Administration (FDA) are wielding two swords in their efforts to address corporate fraud in healthcare: criminal prosecution and exclusion from federally funded healthcare programs.

II. An Environment Ripe with Criminal Prosecutions and Civil Sanctions

A. Criminal Prosecutions

On the criminal front, the federal government has articulated its intent to pursue more prosecutions against healthcare executives for charges (including misdemeanors) under the federal Food, Drug, and Cosmetic Act (FDCA). Significantly, these “Park Doctrine” prosecutions do not require proof that the corporate officers had any actual knowledge of, or participation in, specific offenses. To this point, the FDA recently added to its Regulatory Procedures Manual (RPM) a new provision directly targeted at healthcare industry executives.¹ RPM Section 6-5-3, “Special Procedures and Considerations for Park Doctrine Prosecutions,” provides:

The Park Doctrine, as established by Supreme Court case law, provides that a responsible corporate official can be held liable for a first time misdemeanor (and possible subsequent felony) under the Federal Food, Drug, and Cosmetic Act (“the Act”) without proof that the corporate official acted with intent or even negligence, and even if such corporate official did not have any actual knowledge of, or participation in, the specific offense. A Park Doctrine prosecution, for the purposes of this section, refers to a recommended prosecution of a responsible corporate official for a misdemeanor violation of the Act.²

Among the factors FDA considers are the individual’s position in the company, his relationship to the violation, and whether he had the authority to correct or prevent the violation. Other relevant factors include (1) whether the violation involves actual or potential harm to the public, (2) whether the violation is obvious, (3) whether the violation reflects a pattern of illegal behavior and/or failure to heed prior warnings, (4) whether the violation is widespread, (5) whether the violation is serious, (6) the quality of the legal and factual support for the proposed prosecution, and (7) whether the proposed prosecution is a prudent use of agency resources.

Section 6-5-3 further reiterates that “[k]nowledge of and actual participation in the violation are not a prerequisite to a misdemeanor prosecution but are factors that may be relevant when deciding whether to recommend charging a misdemeanor violation.” Thus, under the Park Doctrine and FDA policy, a corporate healthcare executive may be charged with a misdemeanor offense for healthcare fraud — even without proof of participation in the specific offense, intent, actual knowledge, or even negligence.

B. Exclusion from Federal Healthcare Programs

A “Park Doctrine” conviction can lead not only to criminal penalties but also to additional sanctions in the form of an “exclusion.” RPM Section 6-5-3 clearly states that “[i]n some cases, a misdemeanor conviction of an individual may serve as the basis for debarment by FDA.” A “debarment” or “exclusion” prevents an individual or entity from participating in federally-funded healthcare programs.³ The period of time for the exclusion varies based on the specific offense.⁴

The effects of an exclusion are far-reaching, especially given the significant revenue stream that federal health programs provide to the healthcare industry. Exclusion⁵ can mean:

• No payment will be made by any federal healthcare program for any items or services furnished, ordered, or prescribed by an excluded individual or entity (there is a limited exception for certain emergency items or services).
• No program payment will be made for anything that an excluded person furnishes, orders, or prescribes; this prohibition applies to the excluded person, anyone who employs or contracts with the excluded person, any hospital or other provider where the excluded person provides services, and anyone else.

Exclusions fall under the purview of the OIG, an independent nonpartisan agency within the United States Department of Health & Human Services (HHS).⁶ But make no mistake, OIG is a law enforcement agency. Among other responsibilities, OIG investigates suspected fraud, refers cases to the United States Department of Justice (DOJ) for criminal and civil actions, and imposes monetary penalties or exclusions from participation in federal healthcare programs. In its healthcare fraud enforcement role, OIG works closely with DOJ, law enforcement partners, the Centers for Medicare and Medicaid Services, and FDA.

OIG’s investigations in the healthcare industry address a wide range of fraudulent healthcare schemes (e.g., phony clinics, fraudulent billing) on a number of levels — from small operators to major organized crime rings. Of note here, however, are the OIG’s recent public pronouncements of its intention to target major corporations, such as pharmaceutical and medical device manufacturers, whom the OIG contends “have also committed fraud, sometimes on a grand scale.”⁷ In recent Congressional testimony, OIG asserted that “[s]ome hospital systems, pharmaceutical manufacturers, and other providers play such a critical role in the care delivery system that they may believe that they are ‘too big to fire’ and thus OIG would never exclude them […].”⁸ Stating its concern that major corporations “may consider civil penalties and criminal fines a cost of doing business,” OIG seeks to “alter the cost-benefit calculus of the corporate executives who run these companies” by “excluding” individuals who are responsible for the fraud, either directly or because of their positions in the company that engaged in fraud.⁹

The authority to exclude individuals and entities from participation in federal healthcare programs is found in Section 1128 of the Social Security Act.¹⁰ This provision authorizes the Secretary of HHS to exclude individuals or entities — on either a mandatory or permissive basis — under the following categories of conduct¹¹:

Section 1128: Mandatory and Permissive Exclusions

Mandatory Exclusions (Section 1128(a))

(1) Conviction of program related crimes (2) Conviction relating to patient abuse (3) Felony conviction relating to healthcare fraud (4) Felony conviction relating to controlled substance

Permissive Exclusions (Section 1128(b))

(1) Conviction relating to fraud (2) Conviction relating to obstruction of an investigation or audit (3) Misdemeanor conviction relating to controlled substance (4) License revocation or suspension (5) Exclusion or suspension under federal or state healthcare program (6) Claims for excessive charges or unnecessary services and failure of certain organizations to furnish medically necessary services (7) Fraud, kickbacks, and other prohibited activities (8) Entities controlled by a sanctioned individual (9) Failure to disclose required information (10) Failure to supply requested information on subcontractors and suppliers (11) Failure to supply payment information (12) Failure to grant immediate access (13) Failure to take corrective action (14) Default on health education loan or scholarship obligations (15) Individuals controlling a sanctioned entity (16) Making false statements or misrepresentation of material facts

Consistent with OIG’s intention to target major corporations and executives for healthcare fraud-related crimes, new emphasis has been placed on Section 1128(b)(15) — Individuals Controlling a Sanctioned Entity. In October 2010, OIG released its “Guidance for Implementing Permissive Exclusion Authority Under Section 1128(b)(15) of the Social Security Act.”¹²

Section 1128(b)(15)(A) provides for permissive exclusion of two categories of individuals: those with an ownership/control interest in a sanctioned entity¹³ and corporate officers or managing employees¹⁴ “based solely on their position within the entity.”¹⁵ For corporate officers/managing employees, OIG will consider the basis for the criminal conviction and/or exclusion of the entity (i.e., the company) as well as any other conduct that formed the basis for criminal, civil, or administrative investigations, cases, charges, or resolutions.¹⁶ OIG will also consider matters that involve entities that are or were related to the convicted or excluded entity.¹⁷ Moreover, the Guidance spells out relevant factors related to “misconduct.”¹⁸ Given the importance of these factors, they are provided, in full, below:

Circumstances of the Misconduct and Seriousness of the Offense

1. What were the nature and scope of the misconduct for which the entity was sanctioned? What were the nature and scope of any other relevant misconduct? At what level of the entity did the misconduct occur (e.g., violation by one field employee of company policy versus headquarters’ involvement and/or direction)?
2. What was the criminal sanction imposed against the entity (or related entities) or any individuals? What was the amount of any criminal fine, forfeiture, or penalty imposed? What was the amount of any civil or administrative payment regarding related or similar issues? What was the length of any period of exclusion imposed?
3. Was there evidence that the misconduct resulted in (1) actual or potential harm to beneficiaries or other individuals or (2) financial harm to any Federal healthcare program or any other entity? If financial loss to the programs or other persons occurred, what was the extent?
4. Was the misconduct an isolated incident or part of a pattern of wrongdoing over a significant period of time? Has the entity previously had similar problems with OIG, the Centers for Medicare & Medicaid Services or its contractors, or any other Federal or State regulatory agency? What was the nature of these problems?

Individual’s Role in Sanctioned Entity

1. What is the individual’s current position? What positions has the individual held with the entity throughout his or her tenure, particularly at the time of the underlying misconduct? What degree of managerial control or authority is involved in the individual’s position?
2. What was the relation of the individual’s position to the underlying misconduct? Did the misconduct occur within the individual’s chain of command?

Individual’s Actions in Response to the Misconduct

1. Did the individual take steps to stop the underlying misconduct or mitigate the ill effects of the misconduct (e.g., appropriate disciplinary action against the individuals responsible for the activity that constitutes cause for the sanction or other corrective action)? Did these actions take place before or after the individual had reason to know of an investigation? If the individual can demonstrate either that preventing the misconduct was impossible or that the individual exercised extraordinary care but still could not prevent the conduct, OIG may consider this as a factor weighing against exclusion.
2. Did the individual disclose the misconduct to the appropriate Federal or State authorities? Did the individual cooperate with investigators and prosecutors and respond in a timely manner to lawful requests for documents and evidence regarding the involvement of other individuals in a particular scheme?

Information About the Entity

1. Has the sanctioned entity or a related entity previously been convicted of a crime or found liable, civilly or administratively, or resolved a civil or administrative case with the Federal or State Government or a government entity? If so, what was the prior conduct that formed the basis for these actions?
2. What is the size of the entity? (e.g., how many employees does the entity have, what are the revenues, how many product lines/divisions are there within the entity)? What is the corporate structure of the entity? (e.g., how many subsidiaries — operating and nonoperating — are there, what are the sizes of the subsidiaries, and what are the reporting relationships between the subsidiaries)?

III. Case in Point

A. Friedman v. Sebelius: Use of “Agreed Statement of Facts” in Criminal Plea Agreement Subjects Former Executives to Exclusion

A recent and highly publicized case from the United States District Court, District of Columbia, illustrates the close connection between criminal liability and exclusion under the FDCA and Section 1128. In Friedman v. Sebelius, 755 F.Supp.2d 98 (D. D.C. 2010), three corporate executives with Purdue Frederick Company — Michael Friedman (former President/CEO), Paul Goldenheim (former Executive VP of Medical and Scientific Affairs/Worldwide Research and Development), and Howard Udell (former Executive VP/Chief Legal Officer) — were investigated, charged, and convicted of misdemeanor offenses and ultimately excluded from participation in all federal healthcare programs for twelve years.¹⁹

In 2001, the United States Attorney’s Office for the Southern District of Virginia began to investigate the marketing and sale of OxyContin, a prescription pain medication manufactured and distributed by Purdue.²⁰ The investigation revealed that Purdue supervisors and employees marketed and promoted OxyContin as “less addictive, less subject to abuse and diversion, and less likely to cause tolerance and withdrawal than other pain medications.”²¹ In 2007, federal criminal charges were filed against Purdue for allegedly misbranding a drug with intent to defraud or mislead, a felony under the FDA.²² The three senior corporate executives were charged as “responsible corporate officers,” a misdemeanor.²³

Purdue and the three executives entered guilty pleas.²⁴ Purdue agreed to pay $600 million in monetary penalties.²⁵ The three corporate executives agreed to disgorge $34.5 million and were sentenced to three years’ probation, 400 hours of community service, and a $5,000 fine.²⁶ Importantly, as part of their plea agreements, the three executives agreed that the Court could accept an “Agreed Statement of Facts” that was prepared by the parties.²⁷

The facts contained in the Agreed Statement proved to be the lynchpin for the subsequent exclusions of the three executives. After the criminal proceeding was concluded, the Inspector General notified the three executives that, as a result of their criminal convictions, the agency was considering their exclusion pursuant to Section 1128.²⁸ Four months later, the Secretary of HHS officially excluded the executives. After several administrative hearings and appeals, the executives faced a twelve-year exclusion from participation in all federally funded healthcare programs.²⁹

The three executives filed a request for judicial review to challenge the exclusion.³⁰ The district court first rejected the argument that Section 1128’s permissive exclusion provision does not authorize the Secretary of HHS to exclude individuals convicted of misdemeanor misbranding under the Park Doctrine (responsible corporate officer) because such convictions do not require any evidence of personal wrongdoing.³¹ The court applied a broad meaning to the phrase “misdemeanor relating to” fraud and found that the offenses that triggered exclusion were “related to” fraud or financial misconduct.³² The court further reasoned that the Secretary’s decision should be affirmed as reasonable, particularly in light of the fact that the Agreed Statement of Facts (from the criminal plea agreement) specifically acknowledged that the executives were corporate officers with responsibility and authority to prevent or correct the misconduct related to the misbranding of OxyContin.³³

Friedman is illustrative on a number of levels. First, it showcases how a criminal misdemeanor that carried a comparatively light individual punishment can serve as the basis for exclusion from all federal healthcare programs. Second, it highlights the intensity with which the OIG and FDA will work together (and with other law enforcement) to target high-level executives in the healthcare industry. In recent Congressional testimony, Inspector General Levinson noted that, in addition to excluding the Purdue Frederick executives, the OIG recently excluded the former owner/former executive of Ethex Corporation for twenty years for failing to inform the FDA about manufacturing problems that led to the production of oversized prescription drug tablets.³⁴

If these stories were not enough, a recent front-page Wall Street Journal article undoubtedly sent additional shockwaves through the healthcare industry.³⁵ The article reports that HHS has notified the CEO of Forest Laboratories, Howard Solomon, that it intends to exclude him under Section 1128. The Forest Laboratories situation differs from the Friedman/Purdue Frederick case in an important aspect. In Friedman, both the corporation and the executives were convicted of federal crimes, and exclusions followed. In the Forest Laboratories case, only the corporation was charged with a federal crime, for which it entered into a plea agreement in March 2011. Three weeks later, Solomon was notified of HHS’s intent to seek exclusion, notwithstanding the fact that he was not charged with any federal criminal act.

IV. What’s Next

A. HHS/DOJ Annual Report: Introducing the Pharmaceutical Fraud Pilot Program (PFPP)

In its FY 2010 Annual Report, the HHS and DOJ Health Care Fraud and Abuse Control Program identified that in FY 2010, the OIG excluded 3,340 individuals and entities.³⁶ Nearly 40% of these exclusions involved crimes related to Medicare, Medicaid, or other federal healthcare programs.³⁷ Given the OIG’s public announcements and written policies related to enhanced use of exclusions as a “valuable enforcement tool,” as well as the FDA’s efforts to prosecute corporate executives pursuant to the Park Doctrine, these numbers should be expected to increase.

The Annual Report also discussed a $1.7 million allocation in FY 2010 to FDA by HHS for the FDA Pharmaceutical Fraud Pilot Program (PFPP). According to the report, this program has enhanced the healthcare fraud-related activities of FDA’s Office of Criminal Investigations which, together with the Office of the General Counsel Food and Drug Division, investigates criminal violations of the FDA and other federal statutes.³⁸ More specifically, PFPP “is designed to detect, prosecute, and prevent pharmaceutical, biologic, and medical device fraud. The PFPP focuses on fraudulent marketing schemes, application fraud, clinical trial fraud, and flagrant manufacturing-related violations.”³⁹ Likely as a nod to the Friedman/Purdue Frederick case, PFPP anticipates investigation of “marketing schemes that knowingly overstate the effectiveness or minimize the risk of a medical product.”⁴⁰ Moreover, the PFPP comes amidst record healthcare fraud recoveries from pharmaceutical companies in FY 2010, including a single settlement by Pfizer for $2.3 billion.

Review of the Annual Report reveals that the PFPP is in ramp-up mode. FDA received its approval for the program in FY 2010 and was in the hiring process for personnel. Notwithstanding its new status, FDA noted that through the PFPP it had opened — in a relatively short time — the following criminal investigations: two off-label promotion matters involving different manufacturers of brand name prescription drugs; claims against a third pharmaceutical manufacturer for various promotional issues including overstatement of efficacy, omission of material facts, and promotion of unapproved uses; two matters involving Good Manufacturing Practice issues, one of which also involves potential application and promotional fraud; a clinical trial fraud matter where study documents are alleged to have been falsified by a study coordinator; falsification by a Contract Research Organization company of study documents related to research studies conducted for pharmaceutical manufacturers; and falsification by a Contract Testing Laboratory company of data used to support multiple drug applications.⁴¹

V. Suggestions

Given this environment for healthcare executives, there is no more important time to evaluate compliance policies and procedures that address industry best practices and minimize the risk of misconduct and the potential for criminal and/or civil liability. As set forth in Corporate Responsibility and Corporate Compliance: A Resource for Health Care Boards of Directors,⁴² companies should consider compliance questions such as:

• Code of Conduct: How has the Code of Conduct or its equivalent been incorporated into corporate policies across the organization? How do we know that the Code is understood and accepted across the organization? Has management taken affirmative steps to publicize the importance of the Code to all of its employees?
• Policies and Procedures: Has the organization implemented policies and procedures that address compliance risk areas and established internal controls to counter those vulnerabilities?
• Compliance Infrastructure: Does the Compliance Officer have sufficient authority to implement the compliance program? Has management provided the Compliance Officer with the autonomy and sufficient resources necessary to perform assessments and respond appropriately to misconduct? Have compliance-related responsibilities been assigned across the appropriate levels of the organization? Are employees held accountable for meeting these compliance-related objectives during performance reviews?
• Measures to Prevent Violations: What is the scope of compliance-related education and training across the organization? Has the effectiveness of such training been assessed? What policies/measures have been developed to enforce training requirements and to provide remedial training as warranted? What processes are in place to ensure that appropriate remedial measures are taken in response to identified weaknesses?
• Measures to Respond to Violations: What is the process by which the organization evaluates and responds to suspected compliance violations? How are reporting systems, such as the compliance hotline, monitored to verify appropriate resolution of reported matters? Does the organization have policies that address the appropriate protection of “whistleblowers” and those accused of misconduct? What is the process by which the organization evaluates and responds to suspected compliance violations? What policies address the protection of employees and the preservation of relevant documents and information? What policies govern the reporting to government authorities of probable violations of law?

To address these and other program-specific⁴³ compliance issues, internal auditing and monitoring, and independent assessments of corporate compliance policies are critically important. These tools can identify errors and potential misconduct and minimize the application of the discretionary factors that would weigh in factor of criminal prosecution and related exclusion. Finally, should criminal prosecution arise, great care must be given to the agreed-upon facts contained in any corporate or individual plea agreement, as Friedman/Purdue Frederick instructs.

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[1] FDA Regulatory Procedures Manual (RPM) Section 6-5-3, amended Jan. 26, 2011, available at <http://www.fda.gov/ICECI/ComplianceManuals/RegulatoryProceduresManual/ucm2005380.htm>.

[2] Emphasis added.

[3] Office of Inspector General: U.S. Department of Health & Human Services, Exclusions Program Information, available at <http://oig.hhs.gov/fraud/exclusions.asp>.

[4] OIG provides the following link to review the length of exclusions by subsection under Section 1128(b): <http://oig.hhs.gov/fraud/exclusions/authorities.asp>.

[5] See 42 C.F.R. § 1001.1901. Even beyond the prohibitions against any federal health program payments, the practical effect of an exclusion on an individual is to disable the excluded individual from his or her profession — often characterized as a “career death sentence.”

[6] Lewis Morris, Chief Counsel to the Inspector General, U.S. Department of Health & Human Services, testimony before the Subcommittee on Oversight of the United States House Ways and Means Committee on Improving Efforts to Combat Healthcare Fraud (Mar. 2, 2011), available at <http://oig.hhs.gov/testimony.asp>.

[7] Morris Testimony at 3.

[8] Id. at 6.

[9] Id.

[10] Codified at 42 U.S.C. § 1320a-7.

[11] See 42 U.S.C. § 1320a-7 for the full statutory language for these categories.

[12] U.S. Department of Health & Human Services, Office of the Inspector General, Guidance for Implementing Permissive Exclusion Authority Under Section 1128(b)(15) of the Social Security Act, available at <http://oig.hhs.gov/fraud/exclusions.asp>, (last accessed May 24, 2011).

[13] Section 1128(b)(15)(A)(i).

[14] Section 1128(b)(15)(A)(ii). Sec. 1126(b) states that “[f]or the purposes of this section, the term ‘managing employee’ means, with respect to an entity, an individual, including a general manager, business manager, administrator, and director, who exercises operational or managerial control over the entity, or who directly or indirectly conducts the day-to-day operations of the entity.” [Codified at 42 U.S.C. § 1320a–5].

[15] Guidance at 1.

[16] Id. at 3.

[17] Id. “[F]or example, OIG will consider the conduct alleged by the Government in a civil False Claims Act settlement with a corporate parent of the convicted or excluded entity. As used in the following factors, the term “misconduct” includes the factual basis for the criminal conviction or exclusion that underlies the potential 1128(b)(15) exclusion as well as any other conduct OIG considers relevant, including allegations in criminal, civil, and administrative matters involving the convicted or excluded entity or any related entity.”

[18] Id.

[19] Friedman, 755 F.Supp.2d at 100-01.

[20] Id.

[21] Id.

[22] Id. at 101.

[23] Id. at 102.

[24] Id. Citing United States v. Purdue Frederick Co., 495 F.Supp.2d 569 (W.D. Va. 2007).

[25] Id.

[26] Id.

[27] Id.

[28] See id. at 102-03.

[29] Id. at 104.

[30] Id. at 105.

[31] Id. at 106-07.

[32] Id. at 107-08.

[33] Id. at 110-13.

[34] Daniel Levinson, Inspector General, U.S. Department of Health & Human Services, Testimony before the United States Senate Committee on Finance (Mar. 2, 2011), available at <http://oig.hhs.gov/testimony.asp>, (last accessed May 24, 2011).

[35] Alicia Mundy, U.S. Effort to Remove Drug CEO Jolts Firms, Wall Street Journal, Apr. 26, 2011, at A1.

[36] 2010 U.S. Dept. of Health & Human Services & U.S. Dept. of Justice Ann. Rep. at 1, available at <http://www.oig.hhs.gov/publications/docs/hcfac/hcfacreport2010.pdf>, (last accessed May 24, 2011).

[37] Annual Report at 1.

[38] Id. at 69.

[39] Id.

[40] Id.

[41] Id. at 70.

[42] Office of Inspector General & the American Health Lawyers Association, Corporate Responsibility and Corporate Compliance: A Resource for Health Care Boards of Directors (Apr. 2003), available at <http://oig.hhs.gov/fraud/docs/complianceguidance/040203CorpRespRsceGuide.pdf>, (last accessed May 24, 2011).

[43] See also U.S. Department of Health & Human Services, Office of Inspector General, Compliance Program Guidance for Pharmaceutical Manufacturers, 68 Fed. Reg. 23731 (May 5, 2003).

Finis