By ROBERT PEAR
Washington, April 27 – The Bush administration told drug companies today that many of the techniques they use to sell their drugs run a high risk of violating federal fraud and abuse laws.

The warning came as the government issued a compliance guide for the drug industry, telling manufacturers that they must not offer any financial incentives to doctors, hospitals, insurers or pharmacists to encourage or reward the prescribing of particular drugs.
Such payments have “a high potential for fraud and abuse,” said the guide, issued by Janet Rehnquist, inspector general of the Department of Health and Human Services.

Federal law prohibits payments intended to generate business under Medicare or Medicaid, the federal health programs for 80 million older, disabled or poor people.

The law, known as the antikickback statute, forbids some practices that are common in other industries, Ms. Rehnquist said.

She said she was particularly concerned about marketing practices that drive up federal costs, interfere with clinical decision-making and lead to overuse or inappropriate use of drugs.

Medicaid and Medicare spend more than $30 billion a year on prescription drugs. The amount would soar if President Bush and Congress agreed on a plan to provide comprehensive outpatient drug benefits to older people.

Drug companies objected to many provisions of the compliance guide when the government invited public comment on its ideas in October. The final version of the document clarifies the government’s interpretation of the law and explains why federal officials oppose some drug company practices, including offering doctors gifts, payments and entertainment.

“Any time a pharmaceutical manufacturer provides anything of value to a physician who might prescribe the manufacturer’s product, the manufacturer should examine whether it is providing a valuable tangible benefit to the physician with the intent to induce or reward referrals,” the compliance guide says.

“A lawful purpose will not legitimize a payment that also has an unlawful purpose,” it adds.

It also says drug companies risk prosecution when they encourage the use of their products by making payments to health plans and to the companies that manage drug benefits for millions of Americans. Such companies, known as pharmacy benefit managers, often receive money from the manufacturer of a drug if sales of that drug reach a certain level – say 40 percent of the prescriptions for drugs that lower cholesterol.

The inspector general said such payments could violate the law.

To help control costs and improve the quality of care, many health plans and benefit managers establish lists of recommended drugs, known as formularies.

If a drug is on such lists, its sales can rise rapidly. Given the importance of formularies, Ms. Rehnquist said, “some unscrupulous manufacturers and sales representatives” offer payments to the people who develop them. The payments “are suspect,” she said.

Ms. Rehnquist said consumers could benefit from legitimate discounts, defined as a reduction in the price of a prescription drug “properly disclosed and accurately reported.”

Drug companies and benefit managers can protect themselves, she said, by disclosing their financial arrangements to the people who pay for prescription drugs, including employer-sponsored health plans.

Those arrangements have long been shrouded in secrecy. But in advertisements last week, one benefit manager, Express Scripts, promised to “provide our clients with a detailed disclosure of our sources of revenue and financial relationships with drug manufacturers.”

Ms. Rehnquist also warned drug companies that their research and education grants must be divorced from their marketing, or they risk violating the law.

If a drug company has any influence over the content of a professional education program or the choice of speakers, “there is a risk that the program may be used for inappropriate marketing purposes,” the compliance guide says.

It also says that when drug companies pay doctors to conduct research, they must make sure the research is legitimate, “not simply a pretext to generate prescriptions of a drug.”

Research and education grants are suspect if they are “based in any way, expressly or implicitly,” on a doctor’s ability to generate business for a drug maker, the guide says.

Ms. Rehnquist said drug makers might violate the law when they pay doctors for the opportunity to observe the treatment of patients. Drug companies defend these programs as a way to educate their sales agents. But Ms. Rehnquist said the payments could also be a subtle way to encourage or reward the use of particular medicines.

Ms. Rehnquist also condemned a new arrangement under which drug companies pay doctors for the time they spend listening to sales pitches. The pitches are typically made by a sales representative who visits doctors in their offices.

These payments “are highly suspect under the antikickback statute, are highly susceptible to fraud and abuse and should be strongly discouraged,” the guide says.

Medicare and Medicaid often pay for prescription drugs based on price and sales data reported to the government by drug makers. Ms. Rehnquist said drug companies had often tried to maximize their income by reporting inaccurate data in violation of the False Claims Act.

Under federal law, state Medicaid programs are often entitled to the “best price” a drug company offers to other buyers. But, Ms. Rehnquist said, companies sometimes conceal the discounts they give other buyers.

“Manufacturers have a strong financial incentive to hide de facto pricing concessions to other purchasers, to avoid passing on the same discount to the states,” the compliance guide says. Drug companies are responsible for the integrity of the data they report to the government, and the data must take account of any discounts, rebates, price concessions or other benefits offered to private purchasers, it says.

Ms. Rehnquist said a drug company’s commitment to fighting fraud and abuse could be measured by the way it trains and pays its sales agents. Excessive compensation can be evidence of “improper intent,” the compliance guide says.

“For example,” it says, “if a manufacturer provides sales employees with extraordinary incentive bonuses and expense accounts, there may well be an inference to be drawn that the manufacturer intentionally motivated the sales force to induce sales through lavish entertainment or other remuneration.”