Merck- Villain or Victim?

Merck recently settled a “Medicaid fraud claim” by agreeing to pay the government $650 million dollars to cover “overcharges” to the government-run program. This is the 18th such case to be “settled” against drugmakers since 2001. According to a report in the NJ Star-Ledger, “The Justice Department has said it is looking at about 150 other cases, now under court seal, of alleged drug company misconduct involving billions of dollars in overcharges.”

So are the companies that produce the medicines that millions of people rely on for their healthcare a bunch of sleazy fraudsters? Or are they victims of heavy-handed governmental coercion?

To unravel these questions, it is first important to understand the difference between private action and government action. Private action, by its very nature, is non-coercive. The use of force is legally prohibited, leaving private individuals and organizations (corporations, labor unions, etc.) free to deal with one another by voluntary means only. Government, on the other hand, is the domain of legalized force.

With this crucial distinction in mind, consider the position of the drug companies vis-à-vis the government. The drug companies pit their economic power (which derives solely from production of goods valuable to their customers) against the government’s political power (which derives solely from the barrel of a gun. As Ronald Reagan correctly observes, “government’s only weapons are force and coercion.”).

To begin with, the drug companies do not deal with their customers directly as companies in most other fields do. A huge portion of their customer base has been coercively taken over by government, in the form of medicare and medicaid. These programs for the elderly and the low-income folks forces the drug companies to “negotiate” with the government for the sale of their products (i.e., for their livelihoods). How do these “negotiations” determine the price of their drugs? Well, “Drugmakers are required by law to offer to Medicaid, the federal and state health-care program for the poor, the same discounts they offer to big managed-care plans and hospital chains (emphasis added).” They are coerced, in other words.

Thus, the price that the government pays for drugs is a constantly floating number that is determined by the latest private contract. Every discount extended by the drugmakers in their private dealings automatically extends to their medicaid “customers”, by law (i.e., by force). Put another way, the government’s “weapons [of] force and coercion” extend into every private contract between drugmakers and private insurance companies, HMOs, etc. This means that the state’s nose must necessarily snoop into every private pharmaceutical company contract in order to determine if it is getting its lawful (i.e., coerced) price. How does it do this? With “whistleblowers”… those civic-minded folks like Mr. Steinke who “exposed” Merck’s “kickbacks that were disguised as fees paid to physicians for training, consultation or market research.”

“Under the [government’s very own] False Claims Act, whistleblowers are given a percentage of any award, as an incentive to disclose wrongdoing and help the government prosecute the case (emphasis added).” Merck’s “kickbacks” “to induce physicians to use its products” is “fraud”. The government’s “incentives” to “whistleblowers” is just fine and dandy. Our civic-minded and “very grateful” Mr. Steinke will receive a cool $68 million bucks for his efforts. “Very grateful”, indeed!

More fundamentally, is it wrong for a drugmaker to structure its private contracts (to “game”, even, the government’s price rule technicalities) in a way to maximize the profits on its own products, in light of the government’s coercive intrusion of legally requiring the company to automatically extend its best discounts to medicaid? Is it not acting rationally and morally, in light of the state’s price-fixing violation of its right to sell its products at mutually agreed-upon prices and terms of sale? In short, is the drugmaker a villain or a victim?

It is instructive to note that of the 18 “false claims” cases, including Merck’s, cited by Taxpayers Against Fraud in a sidebar to the article, every case was settled out of court. Is this an indication of mass “guilt” on the part of the pharmaceutical industry, or is there something else at work here? Merck spokesman Ron Rogers “said the settlement does not constitute an admission of any liability or wrongdoing… Merck believes its pricing, sales and marketing practices were consistent with all regulations…[and that] the company had a fundamental disagreement with the government over the interpretation of the rules.”

If so, then why not fight it out in court? Merck and most drugmakers are certainly profitable enough to afford such a fight. Or why not simply refuse to sell their drugs to the government’s medicare and medicaid, thus avoiding the need to structure contracts with one eye on the government’s coercive and immoral price-fixing controls? The answer by now should be clear. It must be remembered that the companies are legally disarmed private organizations going up against an entity that’s “only weapons are force and coercion.”…and which has a legal monopoly on the use of such weapons.

Picture a liquor storeowner during prohibition confronted by an Al Capone surrounded by hulking trench-coated “associates”. Well, the government’s “associates” include the arbitrary power of the Justice Department’s Antitrust division, the taxing and auditing power of the IRS, the “oversite” authority of congressional committees with subpoena power, and the FDA through whose bureaucracy the drugmakers must get approval before marketing of its products can begin, among other regulatory agencies.

The organized crime analogy may be a bit unfair here. But the private drugmakers are up against an adversary that has life and death control over them. Fight back vigorously or refuse to sell its valuable products to the state-run programs, and a drugmaker may find itself under an “unrelated” Justice Department Anti-trust criminal investigation, an IRS audit, or have its executives hauled before a congressional committee for a public lashing. And just try to get your next drug through the FDA. Is it any wonder that they meekly “settle” these “fraud” cases? Talk about a conflict of interest!

So to repeat, are the companies that produce the medicines that millions of people rely on for their healthcare a bunch of sleazy fraudsters? Or are they victims of heavy-handed governmental coercion?

The pharmaceutical industry may not be squeaky clean, ethically. Big Pharma is a product of our mixed economy, playing the special-interest, pressure-group warfare game in Washington and in state capitals. Late last year, for example, Merck tried to use its political muscle to impose mandatory (i.e., government imposed) use of its cervical cancer drug. So perhaps there is an element of “play with fire, get burned” here. But the millions in donations to politicians they make is as much a self-preservation tactic as it is an attempt to gain legislative advantage (as is the case with most special interest groups).

Never the less, perhaps the self-righteous hysteria of the press headlines and of posturing politicians shouldn’t be taken at face value. And let’s remember who has coercive power over whom, and who it is that actually produces the drugs that are the object of these “fraud” cases.

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