The Free Samples That Cost $875 Million

Picture a urologist's office in the 1990s, and a representative from a drug company leaving behind a box of free samples. The drug is a peptide analogue for advanced prostate cancer; the samples are free in the sense that nobody charged the doctor for them. The case that ended in October 2001 alleged that some doctors were then billing Medicare for those same free samples, with the company's encouragement. It was brought by a prosecutor in Boston, it began with two whistleblowers, and it ended with a company agreeing to pay $875 million 1. This is a reconstruction of how, and of why a molecule discovered in a pituitary-hormone laboratory became the subject of a fraud case.

It is told as a history of money and regulation. The compound, leuprolide, appears here only as a prescription medicine at the centre of a legal case, and nothing in this article is about how it is used. The allegations are described as the Justice Department described them in 2001; the settlement resolved them without a trial.

From a releasing hormone to a drug that works by overdoing it

The molecule begins in a hypothalamic laboratory. In 1971 the group working under Andrew Schally in New Orleans reported the structure of the hormone that tells the pituitary to release luteinizing hormone and follicle-stimulating hormone, a ten-residue peptide now called GnRH 3. Schally and Roger Guillemin shared the 1977 Nobel Prize in Physiology or Medicine for work on the brain's peptide hormones 5. The structure raised an obvious question for drug chemists: what happens if you make a version that lasts longer than the natural one?

The answer was counterintuitive. The natural hormone is released in pulses, and the pituitary responds to pulses. If a longer-lasting analogue keeps the receptor continuously stimulated, the pituitary stops responding, and the downstream production of sex hormones falls. Leuprolide, developed at the Japanese company Takeda, is such an analogue. It is built from nine residues in which a single substitution makes it resistant to breakdown and a modified end makes it bind more tightly 4. In prostate cancer, where tumour growth depends on testosterone, lowering testosterone is the point. A drug that works by overstimulating a system until it switches off was a new kind of pharmacology.

A joint venture called TAP

The commercial vehicle was TAP Pharmaceuticals, a joint venture between Takeda and the American company Abbott Laboratories, formed in the late 1970s and named for the first letters of its parents. Leuprolide reached the American market in the mid-1980s as Lupron, and later formulations that lasted a month or more between injections made it a mainstay of the field. By the 1990s it was one of the most important products the venture sold.

It also had a competitor. AstraZeneca's goserelin, sold as Zoladex, was a similar analogue in the same market. When two products are close to identical in what they do, companies compete on other terms, and in the 1990s one of those terms was the profit a prescribing physician could make on the drug itself.

The spread: how a wholesale price becomes a profit for the prescriber

To understand the case, one has to understand how Medicare paid for drugs injected in a doctor's office. The programme reimbursed 80 per cent of the lower of the physician's charge or the drug's average wholesale price, with the patient responsible for the remaining 20 per cent 1. Average wholesale price, or AWP, was a figure reported by the manufacturer and published in industry compendia. It was a list price, not a transaction price. What the physician actually paid could be lower, and the difference was the spread.

A hypothetical with round numbers shows how it works. If a drug has a reported wholesale price of 100 and a physician can buy it for 70, Medicare's 80 per cent reimbursement plus the patient's 20 per cent adds up to 100, and the physician keeps 30. The larger the gap between the reported price and the real one, the larger the margin, and the more attractive the drug looked to a doctor deciding which of two near-identical products to buy. The Justice Department alleged that TAP set its reported prices well above what wholesalers actually charged, concealed its real discounted prices and advised physicians to bill at the higher figure, marketing the gap as a reason to prescribe 1.

Free samples with invoices attached

The second strand of the case was simpler and, to prosecutors, more brazen. Federal law forbids the sale of drug samples, which are meant to be given away. The indictment alleged that TAP representatives gave physicians free samples of Lupron, and that physicians were then caused to bill Medicare, and in some cases the patients' 20 per cent share, for those same samples. According to the Justice Department, the scheme caused hundreds of elderly Medicare beneficiaries, and Medicare itself, to be billed for thousands of free samples, in violation of the Prescription Drug Marketing Act 1.

The samples and the spread worked together. A free sample cost the doctor nothing, and if the sample could be billed as if it had been bought, the entire reimbursement was profit. Seen from the prescriber's side, there was no cost of goods at all. Seen from the programme's side, public money was paying for a product the company had already given away.

Two whistleblowers and a Massachusetts prosecutor

The case came to the surface through two people who had seen it from different sides. Douglas Durand was a vice president of sales at TAP who resigned after about a year, according to the Justice Department, because of concerns about illegal marketing; he filed a civil suit under the False Claims Act in 1996. Dr. Joseph Gerstein was a urologist employed by Tufts Associated Health Maintenance Organization in Waltham, Massachusetts, who reported that he had been offered an educational grant if he would reverse the plan's decision to cover only the cheaper rival drug, Zoladex. The health plan itself also took part as a whistleblower 1.

The investigation was run out of the office of Michael J. Sullivan, the US Attorney for the District of Massachusetts, in Boston. The False Claims Act allows private persons to sue on the government's behalf and to share in whatever is recovered, which is why a former executive and an HMO physician could be the origin of a federal prosecution. Together, the Justice Department said, they shared 17 per cent of the civil recovery, about $95 million 1.

October 2001: $875 million

On October 3, 2001, the department announced that TAP and seven individuals had been charged with health care crimes and that the company had agreed to pay $875 million to resolve the criminal and civil liability 1. The components are set out below.

What changed in how peptide medicines are sold

The settlement landed in the middle of a larger reckoning. Within two years, federal regulators published compliance guidance for drug manufacturers, setting out what the government regarded as risky marketing practice, and the trade association adopted a voluntary code on interactions with physicians. A 2004 commentary in the New England Journal of Medicine described the profession's efforts at self-regulation as taking place in the shadow of federal prosecution, a phrase that explains the motive better than any rule 2.

The reimbursement mechanism that made the spread possible was itself reformed. The Medicare Modernization Act of 2003 moved payment for most physician-administered drugs away from average wholesale price and towards a formula based on average sales price, which reflects what manufacturers actually charge. That change did not end disputes about the margin on drugs given in offices, but it removed the most obvious route by which a reported price could drift away from a real one.

Where the pharmacology and policy articles take over

Leuprolide's story has two halves that rarely appear together. One is a discovery narrative about the brain's chemical messengers, which this site tells in the piece about the hunt for the hormones that command the pituitary. The other is a story of how a successful peptide medicine was sold, and how a pricing convention that nobody had designed turned into a source of fraud. The first is about molecules, the second about incentives, and both are ways in which peptide history differs from the history of small molecules.

For the receptor pharmacology of GnRH analogues, and for the broader policy question of who pays for peptide medicines and at what price, the sister publications in this network and the pieces on drug pricing carry the argument forward. The facts here are only the ones the public record supports: a list price, a free sample, a box and an invoice.