American Journal of Law & Medicine

"Monitoring" corporate corruption: DOJ's use of deferred prosecution agreements in health care.

I. INTRODUCTION

It has become a truism to cite Enron as the new millennium's watershed impetus for government assertion of power to improve corporate governance. (1) While indictment of corrupt corporations and their executive leadership seems an obvious corrective to corporate norms that have gone astray, the unsuccessful prosecution (2) and demise of Arthur Andersen proved a stunning backfire of such a blunt weapon. The public accounting industry shrunk even further, to the detriment of clients, and thousands lost their jobs. (3) Arthur Andersen taught that an indictment itself may be sufficiently damaging to close the doors of a public corporation. (4)

In the health care context, even more is at stake. Federal prosecutors are acutely aware of the irremediable harm to a health care product manufacturer or institutional provider that can come from the conviction and resultant exclusion (5) from government contracts generally or Federal Health Programs specifically. (6) It is against this background that prosecutors intent on punishing and eliminating corporate corruption sought alternative techniques to clean up corporate America.

This article describes the Department of Justice's ("DOJ" or "Justice Department") increased use of pre-trial diversion agreements and corporate monitorship in the health care provider and supplier sectors. It begins with an overview of the DOJ's enforcement goal--corporate reform--as well as a description of the primary tool--federal monitors--being employed to accomplish these reform goals. Specifically, it describes the extraordinary breadth of authority afforded these monitors, and observes that the parameters on their power are, at least in some instances, few. The most important question this article poses is whether pre-trial diversion agreements, particularly when coupled with the use of federal monitors, work to reform corporate culture in those instances in which the government believes that a broken corporate culture has contributed to pervasive illegal behavior.

Part II attempts to identify and analyze the costs and benefits associated with this enforcement approach and, due largely to the dearth of available information, ends up arguing for increased transparency in all aspects of the pre-trial diversion process. In addition, we enumerate benchmarks that could aid in assessing whether the current combination of corporate compliance programs and monitors is accomplishing sustained corporate reform in the health sector. We posit that empirical research is necessary to determine the costs of monitorship, and whether success justifies these costs.

Part III makes specific recommendations to achieve transparency of the pre-trial diversion process, for the benefit of investors, the public, state oversight agencies and consumers. As important, however, is the benefit that transparency will bring to other participants in the health care provider or supplier sector who are engaged in similar behavior; they will have the opportunity to understand the government's perspective of the legality of the targeted practices, as well as the best practices achieved under a monitor.

Throughout this article, we refer to three situations in which pre-trial diversion agreements were used in the health care context. The first is the 2005 deferred prosecution agreement ("DPA") entered into by the DOJ and Bristol-Myers Squibb ("BMS") relating to "channel stuffing" activities. (7) The second is the 2005 DPA between the DOJ and The University of Medicine and Dentistry of New Jersey ("UMDNJ") for Medicaid billing fraud. (8) The third is the simultaneous settlement with five orthopedic device manufacturers relating to financial incentives paid to orthopedic surgeons through consulting contracts. (9)

A. PRE-TRIAL DIVERSION AGREEMENTS AND THE USE OF CORPORATE MONITORING

In a "bottom-up" revolution (10) over the last five years or so, Justice Department attorneys have adopted a multi-pronged pre-trial diversion approach to dealing with companies engaged in illegal conduct. This approach may include a negotiated agreement to defer or not pursue prosecution in exchange for the company's admission of illegal behavior and a commitment to enumerated actions to prevent future occurrences; (11) compulsory adoption or enhancement of the entity's corporate ethics and compliance program; corporate reorganization; and/or the appointment of a federal corporate monitor responsible for ensuring adherence to the agreement between the company and the DO J, and making regular reports to the U.S. Attorney. (12) Referred to by one author as "enforced self-regulation," (13) any particular pre trial agreement may contain one or all of these elements, and can last from twelve months to five years. (14)

The goals of these pre-trial diversion agreements can be extraordinary. The broadest aspire to wholesale structural reform of the subject institution, (15) or an entire industry. For instance, in 2007, the DOJ simultaneously executed one non-prosecution agreement ("NPA") and four deferred prosecution agreements ("DPA") with the five companies that comprise ninety-five percent of the hip and knee orthopedic device market. (16) The Justice Department's current stance builds upon the philosophical underpinnings of the Federal Sentencing Guidelines, which incentivize corporations to identify and pursue ethical norms rather than mere technical legal compliance. Effective compliance programs, according to the Sentencing Guidelines, "promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law." (17) The Justice Department's latest iteration of the Principles of Federal Prosecution of Business Organizations ("Principles") states that "[i]ndicting corporations for wrongdoing enables the government to be a force for positive change of corporate culture, and a force to prevent, discover, and punish serious crimes." (18) An internal Justice Department memorandum, referred to as the McNulty Memo, which served as the predecessor to the current Principles, (19) explained that the Justice Department seeks to "root[] out corruption in ... corporate board rooms across the country" and protect the "integrity of the marketplace." (20)

B. SCOPE OF CORPORATE MONITORS' AUTHORITY

When the DOJ chooses to implement a DPA or NPA which includes the appointment of a federal corporate monitor, the monitor assumes a vast amount of power. The Morford Memorandum, an internal Justice Department memo released in March 2008 to address the appointment of federal monitors, states that the "monitor's primary responsibility should be to assess and monitor a corporation's compliance with those terms of the agreement that are specifically designed to address and reduce the risk of recurrence of the corporation's misconduct," including evaluation of the entity's ethics and compliance programs as well as its monitoring processes. (21) This statement authorizes a huge amount of monitor power. (22) The statement itself describes only the monitor's primary responsibilities. In point of fact, at least a few of the negotiated agreements in the health care sector leave the monitor's duties open-ended. For instance, in the case of UMDNJ, (23) former Judge Stern had expansive authority over every aspect of the university's operations except for academic decisions. In both Bristol-Myers Squibb and UMDNJ, the monitor and the U.S. Attorney attended board meetings and were involved in the termination of several executives--including the president and general counsel--as well as the selection of their replacements. (24)

The breadth of powers afforded corporate monitors likely has several causes. First, pre-trial diversion agreements are often negotiated by Assistant U.S. Attorneys whose knowledge of the subject industry and specific entity may, at an early stage in the process, be too limited to enable them to draft a narrow charge. Furthermore, the drafting prosecutor wants to encompass within the agreement previously unknown problems that the monitor may discover during her tenure. Second, because the companies often waive their attorney-client privilege, (25) the government and monitor have virtually unfettered access to the companies' inner workings. Finally, a U.S. Attorney who believes that the subject entity is corrupt, and seeks to reverse norms that pervade senior management and/or the board, obviously wishes to give the monitor sufficient control over the entity's operations. It was just such breadth that empowered former Judge Lacey, the Bristol-Myers Squibb federal monitor, to recommend the dismissal of the CEO and general counsel for their handling of a generic competitor--a move which potentially violated antitrust laws, despite not being in violation of the DPA. (26)

Beyond the formal initial authority vested in monitors, however, is the natural phenomenon of "scope creep," which subject companies have witnessed but may or may not feel they have leverage to stave off. Scope creep can occur in a number of ways, such as when a monitor discovers previously unknown illegalities, the company engages in new questionable behavior during the term of the agreement, or the monitor suspects problematic behavior by a parent or sibling corporation that is not subject to the agreement. (27) The case of UMDNJ might exemplify scope creep compelled by new discoveries by former-Judge Stern during his tenure as monitor. (28)

For the preceding reasons, monitors wield tremendous, relatively unchallenged power over their subject companies' operations. (29) They can literally become the ultimate authority on a company's entire operations, ranging from entering into new transactions to pursuit of its strategic plan. Monitors have their own teams of experts, including legal counsel, whose interpretations of the law (30) in uncertain areas are frequently made with the knowledge and input of the U.S. Attorney. In the case of the five hip and knee companies, (31) for instance, the monitors and their legal counsel regularly confer to ensure that they are reaching consistent legal interpretations--at least among themselves, if not with the companies' lawyers. (32) Monitors also provide frequent updates to the U.S. Attorney. (33) Companies rarely challenge their monitors' legal interpretations or recommendations. In brief, sectors of the health care industry are influenced by government-sanctioned legal advice that is relatively unchallenged and yet inaccessible to the remainder of the industry.

Thus, the current use of negotiated pre-trial diversion agreements with the attendant appointment of monitors results in a significant incursion into corporate governance. Notably, monitors are not constrained by fiduciary duties. (34) There is little reason at this point to conclude that this is bad--it certainly beats indictment or jail for those monitored. (35) Nonetheless, federal prosecutors are engaged in a huge experiment to reform corporate culture and, as with any experiment, we must determine whether it is working--both in the short and long term.

C. DOJ's INCREASED RELIANCE ON DPAs, NPAs AND CORPORATE MONITORS

The increased frequency with which the DOJ is using DPAs, NPAs and monitors -particularly in the contexts of health care fraud and the Foreign Corrupt Practices Act -suggests that the DOJ perceives these methods to be successfully eliminating corporate corruption and reforming the ethos of corporate America. The following summary illustrates the DOJ's increased reliance on pre-trial diversion:

 
   January 2003 to December 2006 Settlements 
 
   From the 2003 date of the Justice Department's memorandum 
   on the Principles of Federal Prosecution of Business 
   Organizations (the "Thompson Memorandum") until that 
   document's re-issuance in 2006 (the "McNulty Memorandum"), (36) 
   19 different U.S. Attorneys entered into a total of 39 DPAs (25) 
   and NPAs (12); twenty-two of these required outside monitors. 
   Six of these agreements were with health or pharmaceutical 
   entities, and of these, five required monitors. 
 
   December 2006--January 2008 Settlements 
 
   Forty-four agreements, DPAs (24) and NPAs (20), have been 
   entered into since the McNulty Memorandum; of these, 17 
   required monitors and 28 required compliance programs. Of the 
   ten that involved health or pharmaceutical organizations, 8 
   required federal monitors. (37) 

There is no reason to expect these numbers to drop. Although a pre-trial diversion agreement with a monitor may he an unappealing option for the subject company, it is in the company's interest to settle the case. (38) A trial puts the company at enormous risk. It can result in incalculable reputational and actual costs to the entity as well as its officers and directors which, as was seen in the case of Arthur Anderson, may mean the end of the company. Further, an executive who faces the possibility of prison is likely to become a cooperative witness for the government, and the involvement of such a whistleblower providing substantial documentation to the government can greatly undermine the company's chances of prevailing. (39) Finally, the consequences of a conviction can be dire for health care companies. In certain circumstances, a conviction excludes a health care enterprise from conducting business with federal health care programs, (40) which contravenes patients' interests and can jeopardize the entity's survival. Acquisition by or merger with another company does not relieve a target company of the consequences of a conviction. (41)

At the same time, few U.S. Attorneys' offices have the resources to try complex corporate fraud cases that can involve the Food, Drug and Cosmetic Act, Medicare billing regulations, the Federal Anti-kickback Statute, Federal False Claims Act and/or the Foreign Corrupt Practices Act. This is especially true when pursuing cases against pharmaceutical and medical device companies and mega-nonprofit health care systems that have the capacity to mount significant defenses. Moreover, the DOJ may have a much clearer sense of an entity's potential liability than the company does because of its extraordinary ability to uncover information that the target company does not know it possesses. (42) This gives the prosecutor significant leverage in negotiating a settlement. For these reasons, DPAs, NPAs, and monitorship have become the Justice Department's sanctions of choice. The question the rest of this article explores is whether the reform techniques imposed by pretrial diversion agreements, particularly monitors, work, and whether their benefits are worth the extraordinary costs to the target companies.

II. ARE FEDERAL MONITORS A COST-EFFECTIVE SOLUTION?

This section discusses whether the government's use of pre-trial diversion agreements and corporate monitorship is successfully deterring corporate crime and transforming the ethos of governance in the firms it has targeted and throughout corporate America.

A. REASONS FOR ILLEGAL CORPORATE BEHAVIOR

Studies that discuss the causes of illegal corporate behavior suggest that the following factors can provide the "motive" for organizational crime: inefficiency of the regulatory system, expectations of high profitability, economically depressed industries, and profit problems. (43) While these factors might explain the illegal behavior of the pharmaceutical and medical device companies, a remedy for this behavior is not immediately obvious.

First, it is a gross understatement to describe many of the laws implicated by DPAs as inexplicable and inaccessible. This is particularly true of laws and regulations affecting health care-related corporations. Drug and device reimbursement regulations are some of the most complicated regulations that exist. Agencies' enforcement of the laws governing off-label promotion is inconsistent: the FDA engages in little enforcement; (44) Medicare and Medicaid often reimburse for physicians' prescription for off-label uses that reflect the standard of care; (45) and federal and state prosecutors are increasingly aggressive in targeting off-label promotional activities by companies. (46) The pharmaceutical industry protests that the paucity of case, statutory and regulatory guidance regarding the application of anti-fraud laws to them, and almost exclusive reliance on enforcement to convey the government's interpretation of and obtain compliance with these laws is unreasonable, inefficient and expensive. They virtually beg for a clear regulatory articulation of prohibited activity with which, they claim, they are happy to comply.

The government, on the other hand, claims that enforcement agencies are seeking to reform the underpinnings of industry's corrupt research, sales, and marketing practices. The two decades of anti-kickback enforcement has been a cat-and-mouse game between enforcers and the health industry. The government promulgates safe harbor regulations, guidelines, fraud alerts, opinion letters, and CIAs signaling behaviors it deems illegal and the principles underlying its legal interpretations. Industry then eliminates those practices but adopts alternative practices that have not been expressly prohibited. To enforcers, however, these substitute practices may be just as offensive. While the ultimate problem may be the ideological divide about how to organize and finance healthcare, the question still remains what efficiencies and reforms can be attained on an incremental basis.

No discussion of the research, marketing and sales practices employed by the pharmaceutical industry can ignore the economic realities that, unlike most hospitals, these for-profit publicly traded companies exist to make money, (47) and even while the pharmaceutical pipeline of new "blockbuster" products has dried up, (48) shareholders' expectations of high yields on their investments continue unabated. Consequently, it should come as no surprise that much of the behavior subject to government scrutiny relates to unethical tactics employed to establish the efficacy of and sell product. Studies also show that large companies commit a larger number of violations and have the resources to pay the considerable fines they consequently incur. (49) This phenomenon may explain some of the behavior in the pharmaceutical industry--continuing profits may justify the costs of illegal behavior, at least to date. Finally, many pharmaceutical and medical device companies are huge, complex, multinational organizations, characteristics which make control more difficult, especially if that control is decentralized--this factor is also known to be associated with more frequent illegal behavior. (50)

And so the question becomes whether enforcement tools effectively respond to the causes of illegality in the health sector, and whether the reforms achieved under pre-trial diversion agreements are sustainable.

B. ESTABLISHING THE ANALYTICAL FRAMEWORK

Empirical data about the success of corporate compliance programs in either transforming the ethics of an entity, or improving legal compliance, are mixed. The question is whether the addition of a monitor makes a positive difference in achieving corporate reform, and if so, whether the benefits justify the costs. …

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