Why Do Drug Companies Fear This Man? Maybe because he's declared all-out war on cheats in the drug industry.
By John Simons

(FORTUNE Magazine) – Imagine Yankees skipper Joe Torre delivering the keynote speech at a gathering of rabid Red Sox fans. That's the kind of unfriendly skepticism Michael Loucks faced earlier this month as he stepped to the podium at the Pharmaceutical Marketing Congress in Philadelphia. In the audience were about 350 drug industry executives, sales reps, and consultants--in other words, the people Loucks spends his days investigating.

The crowd clapped politely, but they did not like what they heard. In his early-morning speech, Loucks, chief of the Justice Department's Boston-based health-care fraud unit, revealed himself as a man on the warpath, rattling off a litany of recent legal actions against drug companies: Since 2000, he noted, AstraZeneca, Bayer, GlaxoSmithKline, Pfizer, and other drugmakers had coughed up more than $2.2 billion to settle such civil and criminal violations as kickbacks to doctors, overcharging, and marketing drugs for unapproved uses. Though none of that was news to the attendees, some of whom were obviously recovering from a night of convention revelry, Loucks hammered home his points with 37 PowerPoint slides. "No other sector of the health-care industry," he said, "has ever paid similar amounts in health-care fraud investigations in so short a time." The finger wagging did not stop there. "Frequently I hear the excuse that 'Everyone else is doing it.' I have two teenage daughters, and that's the first thing out of their mouths when they're doing something wrong. I don't accept that excuse from kids. And I'm not going to accept it from a defense lawyer."

Michael Loucks is one of the lawyers who have made the U.S. Attorney's office in Massachusetts the drug industry's least favorite address. Of the 94 U.S. Attorney's offices, Massachusetts has become the Department of Justice's primary nexus for investigating and prosecuting pharmaceutical sales and marketing misconduct. Since 2000, drug company cases have contributed more than $1.2 billion in fines and legal settlements to federal coffers. Recent settlements include a record $885 million civil and criminal action against TAP Pharmaceuticals in 2001, last spring's $257 million win against Bayer Corp., and another against GlaxoSmithKline for $87 million.

As a result of those cases, Loucks's boss, Michael J. Sullivan, the U.S. Attorney for Massachusetts, has become a feared man among drug company executives. A Boston-area native who worked his way through Boston College and Suffolk University Law School, Sullivan, 49, entered government in 1990, winning election as a Republican to the Massachusetts House of Representatives. He served three terms before being appointed District Attorney of Plymouth County, which covers Boston's southern suburbs. In 2000 he laid the groundwork to contest Ted Kennedy's U.S. Senate seat, but dropped out, citing distaste for fundraising, and was appointed to his current job the following year.

For a man with broader political ambitions, which Sullivan certainly has, combating medical-related fraud is a no-brainer. In 2002 the average American incurred $5,037 in medical expenses. By 2010 that number is expected to jump 66%, to $8,368. As much as 10% of that pricetag, experts believe, is fraud.

Critics who charge that the Bush administration is beholden to big business may find Sullivan's aggression odd. He doesn't. "There's no inconsistency," he says. "We need to ensure that consumers have a basis for trust in the products and services they're spending billions of dollars on." His main concern is that drug companies are corrupting medical judgment by paying off doctors, then passing on those costs to consumers. Strict oversight, he argues, is "pro-business."

Sullivan took the job just as Michael Loucks and his partner, assistant U.S. Attorney Susan Winkler, were pressing to resolve their three-year fraud case against TAP Pharmaceuticals. In a bare-knuckles sales war against AstraZeneca's prostate cancer treatment Zoladex, TAP sales representatives in 1995 began offering doctors free drug samples to persuade them to prescribe TAP's competing drug, Lupron. The pharma reps convinced doctors that they could administer the samples to patients and bill their insurers for the full price of the drug, turning the free doses into pure profit.

The first priority for Sullivan, appointed just three days after the terrorist attacks of Sept. 11, 2001, was to investigate terrorism in the Boston area and the events that led to the planes that hit the World Trade Center being hijacked from the city's Logan Airport. Even so, he made time in his first few weeks to talk about TAP. As Loucks, Winkler, and others outlined the case in a meeting room overlooking the Boston Harbor, they had no trouble getting permission to move forward with the settlement. "He was personally offended by what the doctors and reps had done," recalls former assistant U.S. Attorney Suzanne Durrell. "'You've got to be kidding me,'" Durrell quoted Sullivan as saying in his Boston accent. "'They actually did this?'"

Four months later Sullivan created the health-care fraud unit and increased the number of prosecutors working cases from four to 11. He also allowed Loucks and Winkler to work exclusively on medical cases. "You couldn't ignore this, even in light of 9/11," he says. The U.S. Attorney's office in Massachusetts is now one of five Justice Department health-care fraud units. As a result of its recent track record, Washington steers many cases to Boston, even when the alleged crimes occur in other states.

As crime fighters go, Winkler and Loucks make a dynamic duo. Winkler, who ended up in government after a brief stint with Boston white-shoe law firm Hale & Dorr in the early 1980s, says her main strength is taking a "divining rod" to mounds of corporate financial data. As for Loucks, she says he "has a better sense of the big picture." Winkler and Loucks disagree on politics--she's a liberal Democrat and he's a Republican. Still, they share a belief in their roles as public servants. Winkler says that when she joined the government, she immediately felt at home "serving the public good and doing what's right...rather than doing what's good for whichever client is paying you."

The pair also share a doggedness that is essential to their work. These are not rough-and-tumble investigations. Instead, medical-fraud cases tend to be paper-driven and tedious, taking an average of four years to conclude. In one current case, the staff has accumulated hundreds of boxes of corporate e-mails, voice messages, spreadsheets, internal memos, videoconferencing transcripts, and sales training manuals. The material is housed in its own 800-square-foot office in the Massachusetts federal building. "Eventually we'll get to everything in every box," says Winkler. "And if they did the crime, it'll come popping out." The only deadline is the five-year statute of limitations.

Several drug firms, including Bristol-Myers Squibb, Pfizer, and Schering-Plough, have disclosed to investors that they are under investigation by the Massachusetts U.S. Attorney's office. For others, the only solace may be that Sullivan's health-care team, which includes three civil prosecutors, eight criminal lawyers, and a handful of FBI agents, is overloaded with active cases. The unit also investigates clinical laboratories, outpatient-service providers, medical-device makers, hospitals, doctors, and pharmacists. There are little targets too. Loucks, in fact, made a name for himself early in his career chasing ambulance services that billed hospitals for emergency calls they never answered. He brags about the recent prosecution of a private nurse who overcharged patients for $3,000 worth of checkup visits she didn't make. "If we don't do little cases, people will cheat for little dollars," he says.

If Loucks, 48, sounds like Wyatt Earp with a calculator, well, he probably wouldn't mind the comparison. Far from physically intimidating, he is tall and slender with the angular yet affable facial contours of a Doonesbury character. But he sees his professional world as a landscape in black and white. Companies are either cheating or honest, abiding by the law or breaking it. Aren't the laws complicated and confusing to follow? Loucks doesn't want to hear it.

It's an approach that has earned Winkler and Loucks the respect of their adversaries. "Though I often disagree with their positions, they are hard-working, intelligent, and creative prosecutors," says Nicholas Theodorou, a defense lawyer with Boston's Foley Hoag, who has represented companies such as Blue Cross/Blue Shield in cases brought by the office.

That moral clarity may also be part of the reason people with a tale to tell feel comfortable calling: 85% of Boston's investigations are initiated by the public. Sometimes that public involvement takes the form of phone-in tips, but increasingly cases are initiated by informants and their "qui tam" lawyers. Qui tam is a provision of the False Claims Act signed into law by Abraham Lincoln in 1863. To thwart Civil War profiteers, lawmakers encouraged citizens who knew about attempts to defraud the government to file civil suit in the government's name. As a reward, informants got part of the settlement recovery. The law fell into obscurity and was rarely used until 1986, when Congress revised it to deal with military-procurement fraud. Since then, informants have received an average of about 16% of recovered funds. In five recent cases, Loucks told the Philadelphia conference, whistleblowers pocketed $330 million of settlement spoils. The number of annual qui tam cases filed with the Justice Department grew from 82 in 1990 to 320 in 2002.

One beneficiary was George Couto. In the winter of 2000, Couto and his lawyer, Neil Getnick, filed a qui tam lawsuit against Bayer in Massachusetts, knowing that the case would be assigned to Sullivan's crew. Couto, a former midlevel marketing executive with Bayer, alleged that the company had overcharged Medicaid $97 million for Cipro, an antibiotic, and Adalat, a hypertension drug, during the previous three years.

Understanding what Bayer did wrong requires a little knowledge of how Medicaid works. The federal government's health insurance plan for the poor, Medicaid covers among other things the cost of beneficiaries' prescription drugs. In 1990, Congress enacted a law to ensure that drug companies were billing the government the best price that they offered to customers like hospitals or HMOs. Under the law companies are obliged to issue a quarterly report stating the lowest commercial discount or "best price" for each drug. The government then uses the reports to calculate the difference between the price paid by a manufacturer's lowest-paying customers and the price Medicaid patients paid. The company refunds any difference to the government. Bayer's $97 million overcharge represented the amount Bayer would have paid the federal government in rebates if it had been providing Medicaid with the correct pricing data. But it wasn't. In California, for example, Bayer relabeled packages of Cipro and Adalat with new bar codes that made them appear to be "private label" medicines; that allowed it to give a 40% discount to Kaiser Permanente, an HMO. The shipments were recorded as sales but never reported to the government as such. And no, Medicaid didn't get the same deal.

Couto first sat down with Susan Winkler in the spring of 2000. He had recorded his conversations with Bayer co-workers, and saved e-mails and other documents pertaining to Bayer's private-labeling program. As a result, Winkler was able to zero in on other key pieces of data in her subpoenas. In April 2002, however, Winkler learned that Couto had been diagnosed with pancreatic cancer; doctors gave him six to 12 months to live. To preserve his testimony, the judge in the case agreed to a videotaped deposition with the understanding that Bayer defense lawyers could cross-examine. For three days that August, Winkler deposed Couto before a videocamera. Couto died in November 2002 at age 39; three months later Bayer settled the case. Under the settlement the drug giant pleaded guilty to criminal and civil misconduct and agreed to pay the government $257 million. Couto's three children received $34 million as their portion of the settlement.

Whistleblower awards are enticing, but they are far from the government's only weapon against health-care fraud. Sullivan and his health-care fraud unit can also seek to ban a company from federal programs if it's found guilty of defrauding Medicaid or Medicare--an effective death sentence. No drug company has had to face that prospect yet, but corporate lawyers who've gone up against Sullivan's team complain that the threat is so severe that it encourages companies to settle rather than contest charges. Sullivan sees the ban as a way to level the playing field against companies that can often outspend the government on legal resources.

With an endless stream of cases to keep them busy, the larger question for Sullivan is whether they are making a difference. Though $2.2 billion in fines and settlements over three years sounds like a lot of money, it really isn't for an industry with $200 billion in annual U.S. sales. Drug industry executives are loath to speak out about the increasing scrutiny for fear of influencing current or future investigations; none would speak to FORTUNE on the record. But privately many of them grouse that Sullivan's entire effort is misplaced, instilling fear without changing the way companies operate.

Those sentiments were echoed by some of Loucks's audience in Philadelphia. "It's so obvious he was trolling for whistleblowers," says Kathleen Kaa, an executive at the Lash Group, a Charlotte, N.C., health-care consulting company. Says another attendee, Mick Kolassa, managing partner of drug-pricing consultant Medical Marketing Economics: "Drug companies are the villain du jour. With TAP and Bayer you had some overzealous product teams doing stupid things. But the industry isn't evil. I'm always concerned when lawyers think they're going to be our salvation."

Sullivan certainly isn't deluded enough to see himself as a savior. Neither is he apologizing. He views the law's role in the pharmaceutical marketplace as critical--and positive. "I'm hoping the element of punishment will be a deterrent to companies. The ultimate objective," Sullivan says, "is that they'll reform themselves."