Inventory maintenance, a routine undertaking in most businesses, is among the most crucial tasks performed by pharmacists and may have profound repercussions if not handled accurately. In particular, inventory shortages are common discrepancies noted by pharmacy benefit manager (PBM) audits, and those reviews often prompt referrals and regulatory scrutiny beyond the claims audited. That is all the more so in today’s evolving risk landscape, where states are leveraging various enforcement mechanisms to set-off costs associated with fraud, waste and abuse, and the federal government’s intense focus on the abuse of controlled substances has not waivered. This practice note provides on overview of the regulatory framework, to be followed by an in-depth webinar involving defense strategies and decision-tree analysis for responding to inventory maintenance allegations.
As a threshold matter, it is important to distinguish inventory shortages involving controlled substances from other drugs. Specific rules apply to inventory requirements for controlled substances, including, but not limited to, obligations conditioned on the drug schedule at issue, and whether the product is in finished form, awaiting disposal, or maintained for compounding. See, e.g., 21 C.F.R. § 1304.11(e). In addition, affirmative reporting requirements may obtain upon the discovery of a theft or significant loss of controlled substances. See 21 C.F.R. § 1301.76(b). In contrast, inventory requirements for non-controlled medications typically are a function of state laws regarding prescription “audit trails” or PBM contractual obligations. In either case, common sources of inventory shortages include vendor fraud, administrative errors, theft, loss or other shrinkage.
Similarly, although DEA cyclical inspections may result in inventory findings relating to controlled substances, such concerns are more frequently identified through PBM invoice or purchase history audits. The ramifications of these PBM audits are often severe, and include network termination and financial penalties, including recoupment. Nonetheless, inventory discrepancies, however identified, are increasingly the subject of collateral proceedings, including administrative, civil and criminal actions. We have written previously, here, regarding the expanding number of Board of Pharmacy investigations arising from PBM audit findings, and the consequences associated with these disciplinary actions. Separately, federal and state investigations, under the federal False Claims Act and state analogs, present additional and perhaps more severe risk. These investigations, often led by Medicaid Fraud Control Units (MFCUs), overseen by HHS-OIG, frequently involve partnerships with local U.S. Attorneys’ Offices. Moreover, unlike PBM audits in which payor-specific claims are audited and/or reversed, these civil proceedings often result in much broader scrutiny of a registrant’s entire inventory, and involve more severe financial penalties, the potential for outside monitors, and debarment/exclusion.
Inventory discrepancies involving controlled substances involve distinct, additional risks. In addition to the foregoing remedies, the federal government has mandated that regulators consider use of civil injunctive remedies under the Controlled Substances Act (CSA) to obtain immediate suspension orders or injunctions to stop ongoing violations of the Act. See, e.g., 21 U.S.C. § 843(f). While historic inventory shortages, standing alone, should not constitute a valid basis for an immediate suspension order, when combined with other factors suggestive of an ongoing violation, such orders may be appropriate. Furthermore, in certain cases, inventory shortages may form the basis for criminal prosecution. Section 843 of the United States Code, Title 21, makes it unlawful for a registrant to (1) distribute a Schedule I or II controlled substance except pursuant to an order or order form; or (2) furnish false material information, or omit material information, from records or documents required to be maintained under the CSA. See id. §§ 843(a)(1), (4). Similarly, Section 842 of the United States Code, Title 21, makes it a federal crime to knowingly fail to make or keep records or information required under the CSA. See id. §§ 842(a)(5), (c)(2). Finally, depending on the underlying facts, inventory shortages for both controlled and non-controlled drugs may form the basis for criminal prosecution under healthcare fraud or other fraud (wire, mail) statutes.
How Frier Levitt Can Help
In short, the manner in which the foregoing considerations will influence defense strategy is highly nuanced, particularly given the range of factual scenarios that may cause an inventory discrepancy. The legal framework outlined above, however, will apply to most cases save those involving illegal distribution of controlled substances (which implicates 21 U.S.C. § 841 and other criminal statutes). Please join me for a webinar on September 14, 2021, for a deeper-dive analysis of how best to defend this category of cases, or contact Frier Levitt to speak with me regarding any questions in the interim.
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* Anthony J. Mahajan formerly served as Chief Counsel to McKesson Corp., where he was responsible for providing legal advice to the business regarding compliance with suspicious order reporting requirements and McKesson’s 2017 settlement with the Department of Justice and DEA regarding controlled substances. He previously was employed as an Assistant U.S. Attorney for the U.S. Department of Justice, where he investigated and prosecuted controlled substance offenses against manufacturers, distributors, pharmacies and health care professionals. Mr. Mahajan currently serves as Chair of Frier Levitt’s White Collar Defense & Government Investigations practice.
