The Department of Health and Human Services ("HHS") recently announced that it will seek to exclude Howard Solomon, CEO of pharmaceutical company Forest Laboratories Inc., from participation in federal health programs (such as Medicare and Medicaid) based solely on the corporation’s criminal conviction.  Solomon will be effectively barred from working in the health and pharmaceutical field even though he has not been charged with any personal wrongdoing.  In doing so, HHS is relying on its authority to exclude managing employees of companies that are sanctioned for a health care-related offense.  By making this move, HHS is sending a clear signal to corporate officers that they will be held personally responsible if they fail to take adequate measures to prevent their subordinates from violating the law.

Solomon’s exclusion stems from a plea agreement that Forest Labs entered on charges that it had illegally marketed the anti-depressant drugs Celexa and Lexapro as a treatment for minors, and paid kickbacks to doctors to prescribe those drugs.  Mr. Solomon was never charged with any crime.  After the plea agreement was approved by a federal judge, the HHS Office of Inspector General ("OIG") issued a letter to Solomon informing him that it plans to exclude him from federal health programs.  Mr. Solomon has stated that he intends to challenge the exclusion in court and Forest Laboratories is supporting him.

The OIG’s action against Solomon was preceded by a guidance document that it issued last October, which stated that OIG would use its authority under Section 1128(b)(15) of the Social Security Act to exclude executives of corporations that are sanctioned for health care-related offenses.  The OIG advised that it would look to a number of factors, including (1) the circumstances of the misconduct and the 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) information about the entity such as the entity’s compliance history, size, and structure.  When it appears that the executive knew or should have known about the misconduct, OIG “will operate with a presumption in favor of exclusion.”

HHS/OIG first followed through on this warning in January 2011, when it excluded another executive, Marc Hermelin of K-V Pharmaceutical.  Hermelin had not been convicted of any wrongdoing at that time, but later pled guilty to a misdemeanor marketing violation.  Solomon, by contrast, faces no accusation of criminal conduct, but is being excluded nonetheless.  As one HHS representative put it, its intent is to “alter the cost-benefit analysis of corporate executives,” presumably by making it in their interest to root out misconduct rather than condone or ignore it. 

Executives who fail to prevent misconduct not only face exclusion under Section 1128(b)(15), but can also be exposed to criminal charges under the “responsible corporate officer doctrine” ("RCOD").  The RCOD provides that executives can be criminally liable for certain offenses if they have the authority to correct or prevent the corporation’s unlawful conduct and fail to do so, even if they were unaware of the misconduct.  Last year, three Purdue Frederick executives were excluded from federal health programs after pleading guilty to misdemeanor charges of misbranding pain medication under the RCOD.  HHS subsequently excluded them from federal health programs (under a different provision in Section 1128 allowing for the exclusion of those convicted of health care offenses), and that decision was upheld by a federal court in January. 

As a result of the new stance taken by HHS, executives in the health care industry must be proactive in taking measures to prevent misconduct, as they can face penalties for the actions of subordinates even when unaware that the misconduct is occurring.  Companies in the health care industry can mitigate this risk by maintaining effective compliance programs, which may include the following:

• compliance training of all personnel who have responsibilities in risk areas, such as medical billing or pharmaceutical marketing;

   

• confidential internal reporting mechanisms to ferret out misconduct, such as an anonymous whistleblower “hotline”;

   

• use of periodic external audits in which the auditors have direct communication with management;

   

• clarification of each officer or manager’s area of supervision and responsibility for ensuring compliance;

   

• prompt remedial measures whenever misconduct is suspected or detected;

   

• thorough documentation of all efforts to prevent misconduct.

   

These measures will prevent misconduct from occurring in the first place, and in the event the company is sanctioned for a health care-related offense, may create crucial evidence to persuade the government not to use its discretion to exclude executives under Section 1128(b)(15) or file charges under the RCOD.

© 2011 Perkins Coie LLP