Government contracting

Looking for Fraud in All the Wrong Places

Elon Musk and his DOGE marauders claim that fraud is rampant in federal agencies ranging from USAID to the Social Security Administration, yet they can never seem to prove it. The Wall of Receipts website, which purports to document savings DOGE has achieved, is now a laughingstock because of its repeated errors and falsifications.

DOGE would have us believe it is the first effort to address federal fraud. In fact, a variety of groups inside and outside the government have been combatting the phenomenon for decades. For example, in the 1980s, when Musk was still a teenager in South Africa and his DOGE staffers where not yet born, the Pentagon was found to be a hotbed of procurement fraud.

Unlike now, when federal staffers are being falsely accused of misconduct, the main culprits back then were recognized to be the big military contractors cheating Uncle Sam out of millions.

When the DOGE effort first took off, many observers assumed that major contractors would be targeted. Booz Allen and Leidos, which rake in billions each year from federal contracts for management consulting and technology services, saw their stock price plunge.

Leidos seemed to be in the DOGE crosshairs when the Wall of Receipts posted an item claiming a savings of $231 million from a $1 billion contract with the Social Security Administration. But that turned out to be one of DOGE’s blunders: the cancellation involved only a $560,000 sliver of the contract.

Now there is a growing sense that the contractors have little to worry about. A recent article in the New York Times headlined (in the print edition) “Budget Ax May Benefit Contractors” reported that the Veterans Administration, which had been planning to cancel 850 contracts with companies such as Leidos, has dropped that idea. In fact, in the wake of moves to eliminate 80,000 VA staff positions, experts interviewed by the Times said it was likely the agency would have to make greater use of contractors to maintain essential services.

In other words, DOGE’s purported promotion of government efficiency may very well result in an acceleration of outsourcing, which tends to raise rather than lower costs. Increased reliance on contractors will also make agencies more, not less, vulnerable to fraud.

Those 1980s abuses are not just a thing of the past. Since 2010, the Department of Justice and other federal agencies have collected $35 billion in fines and settlements from contractors using the False Claims Act and related laws. Booz Allen, for example, has been hit with $393 million in penalties, including a $377 million case in 2023 and $15 million one earlier this year.

Apart from the consulting companies, healthcare corporations account for a large share of the penalty total. The cases involve false billing by hospital chains and other providers to federal programs such as Medicare as well as drug company payment of illegal kickbacks to doctors to get them to prescribe expensive medications.

Pentagon contractors also continue their old tricks. Last year, aerospace companies Sikorsky and Derco, subsidiaries of Lockheed Martin, paid $70 million to resolve allegations they overcharged the Navy for spare parts and materials needed to repair and maintain the primary aircraft used to train naval aviators.

If DOGE were serious about fighting fraud, it would be looking at contractors such as these rather than hunting down supposed DEI abuses and eliminating federal employees whose job it is to prevent corruption.

The DOGE Charade

Donald Trump and Elon Musk keep claiming that their scorched-earth approach to remaking the federal government is made necessary by the prevalence of fraud and waste. Musk’s DOGE attack-squad tabulates its progress on a Wall of Receipts that currently purports to have saved Uncle Sam $65 billion.

That number appears to have been plucked out of thin air. The savings for the 2,300 individual contracts listed on the site add up to only $9.6 billion, and even that amount is shaky. For example, the single biggest savings, $1.9 billion, is attached to a Treasury Department contract that is reported to have ended during the Biden Administration.

DOGE gives no details of any fraud it may have found in the contracts. That is not surprising, since it is impossible to have done a careful examination of that many contracts in such a short amount of time.

Large numbers of the contracts are linked to agencies the Trump Administration is in the process of dismantling. USAID accounts for 246 contracts with total purported savings of $4.2 billion. The Consumer Financial Protection Bureau has 404 listings with savings of $109 million. The Education Department, reported to be headed for the chopping block, has 119 contracts with supposed savings of $659 million.

It seems clear DOGE targeted those contracts because of the agency involved, not any evidence of misconduct. Among the remaining 769 contracts, there are many that seem to be targeted for ideological reasons. They include numerous awards whose descriptions refer to now-taboo areas such as DEI or environmental justice.

There are more than 100 listings for subscriptions, especially for expensive services such as Politico, Bloomberg Law, and Lexis Nexis. Those may not always be worth the cost, but there is nothing corrupt about the need for an agency to have good access to information.

Then there are listings for contracts that have not gone into effect. The second biggest saving amount, $318 million, is attached to an Office of Personnel Management pre-award. How can there be fraud when there is no contractor yet?

DOGE’s list also contains numerous entries with obvious errors. These include instances in which there are two links pointing to different contract awards, making it unclear which one is meant to be included. For example, there is a $149 million savings connected both to a contractor called Advanced Automation Technologies Inc. (for three assistants) and to Airgas USA for refrigerated liquid gases.

By pointing to DOGE’s sloppy work, I do not mean to deny the existence of contract fraud. The problem is that Musk’s people, whether through ignorance or design, are looking in the wrong places. They seem to be ignoring the types of large contractors that have repeatedly been found to have cheated federal agencies.

The classic examples are the big weapons producers. As of now, DOGE lists only $8 million in savings from Defense Department contracts—and those are mainly from DEI awards and subscriptions. The same is true for the Department of Health and Human Services, even though healthcare is a major source of contractor fraud.

What gets forgotten in the claims about fraud coming from Trump and Musk is that the federal government already had a robust system for fighting contractor misconduct. Audits were done by agency inspectors general—who have now been fired by Trump—and prosecutions were launched by the Justice Department using the False Claims Act. Over the past decade, the DOJ has collected about $30 billion in fines and settlements.

That is serious fraud fighting. What we see in DOGE is instead the illusion of an attack on corruption that serves as a smokescreen for the Trump Administration’s scheme to dismantle large portions of the federal government. It remains to be seen how long they can keep up the charade.

The 2024 Corporate Rap Sheet

My colleagues and I collected more than 22,000 new entries for the U.S. version of Violation Tracker this year. We also launched Violation Tracker Global, which contains cases brought against large corporations in 52 countries. Here are some of the most notable cases of the year from both databases.

McKinsey and Opioids. McKinsey, the leading management consulting firm, had to pay $650 million in criminal and civil penalties to resolve a U.S. Justice Department (DOJ) case concerning its work for the disgraced pharmaceutical company Purdue Pharma. McKinsey was charged with conspiring with Purdue to “turbocharge” sales of OxyContin while misleading users about the addiction risks of the opioid.

TD Bank and Money Laundering. TD Bank N.A., a U.S. subsidiary of Canada’s Toronto-Dominion, pleaded guilty and agreed to pay $1.9 billion in fines and forfeiture to resolve DOJ charges that it violated the Bank Secrecy Act by failing to file reports on suspicious transactions and thereby facilitated money laundering by criminal networks.

BHP, Vale and a Mining Disaster. Mining giants BHP and Vale, co-owners of the Samarco joint venture, agreed to a US$31 billion settlement to resolve litigation brought by Brazilian communities destroyed by the 2015 Mariana mine-waste dam collapse that killed 19 people and polluted 400 miles of rivers.

Raytheon and Fraud and Bribery. Raytheon Company, a subsidiary of military contractor RTX (formerly known as Raytheon Technologies), agreed to pay over $950 million to resolve a DOJ criminal investigation into a major fraud scheme involving defective pricing on certain government contracts and violations of the Foreign Corrupt Practices Act and the Arms Export Control Act.

3M and PFAS. A federal judge in South Carolina gave final approval to a class action settlement in which 3M agreed to pay an estimated $12.5 billion to more than 10,000 public water systems to resolve allegations that PFAS chemicals produced by the company for use in firefighting foam ended up contaminating water sources.

Apple and Improper Tax Breaks. The European Commission ordered Apple to repay 13 billion euros to Ireland after determining that the special tax breaks the company had been receiving for 16 years amounted to a form of illegitimate state aid.

Meta Platforms and Biometric Data. Facebook parent Meta Platforms agreed to pay $1.4 billion to the Texas Attorney General’s office to settle a lawsuit alleging it improperly captured biometric data from millions of users for its facial recognition system without the authorization required by state law.

Teva Pharmaceuticals and Copaxone. The European Commission fined Teva 462 million euros for abusing its dominant position to delay competition to Copaxone, its medication for the treatment of multiple sclerosis. The Commission found that Teva artificially extended the patent protection of Copaxone and systematically spread misleading information about a competing product to hinder its market entry and uptake.

Uber Technologies and Wage Theft. Uber paid $148 million to settle a case brought by the Massachusetts Attorney General alleging that it violated state wage and hour law in the way it paid its drivers. The agreement also required the company to begin paying a minimum wage of $32.50 an hour and providing benefits such as paid sick leave. The case also targeted Lyft, which paid $27 million.

Glencore and Bribery. The Office of the Attorney General of Switzerland ordered commodities trading company Glencore to pay a penalty equal to about $152 million for failing to take steps to prevent the bribery of government officials in the Democratic Republic of Congo by a business partner.

Walgreens and False Claims. Walgreens Boots Alliance Inc. and Walgreen Co. agreed to pay $106 million to the DOJ to resolve alleged violations of the False Claims Act and state statutes for billing government health care programs for prescriptions never dispensed.

Veolia and a Workplace Death. A British subsidiary of France’s Veolia Group pleaded guilty to breaching the Health and Safety at Work Act after a worker died and another was seriously injured while decommissioning a North Sea gas rig. The Health and Safety Executive fined the company £3 million and ordered it to pay £60,000 in costs.

Goldman Sachs and Apple Card Users. The U.S. Consumer Financial Protection Bureau ordered Goldman Sachs to pay $64 million in fines and redress for mishandling customer service breakdowns affecting thousands of Apple Card holders. These failures meant that consumers faced long waits to get money back for disputed charges and some had incorrect negative information added to their credit reports.

You can find many more examples of the year’s corporate scandals in Violation Tracker and Violation Tracker Global. There is every reason to believe there will be many more cases for the Trackers to document in the coming year.

The DOGE Blind Spot

Donald Trump and Elon Musk, both masters at making grandiose statements that usually have little substance, are at it again in the creation of the Department of Government Efficiency. The two, along with provocateur Vivek Ramaswamy, are dressing up the prosaic act of creating an advisory committee into something that will supposedly transform the federal government.

In a manifesto published in the Wall Street Journal, Musk and Ramaswamy vowed that DOGE will “cut the federal government down to size.” Saying the entity will work closely with the Trump Administration’s Office of Management and Budget, they plan to “pursue three major kinds of reform: regulatory rescissions, administrative reductions and cost savings.”

At this point it is difficult to assess whether Musk and Ramaswamy, who seem to be largely ignorant of federal regulatory and budgetary processes, can make any of this happen. Yet what strikes me as most significant is the issue missing from their stated agenda: federal procurement.

The DOGE principals have been taking repeated potshots at federal agencies and civil servants but have been largely silent about the other major player when it comes to public spending: the companies that are paid some $759 billion each year to provide goods and services.

Musk and Ramaswamy make passing reference to procurement in their manifesto, suggesting the issue is poor agency management of the process. Yet the real problem is contractor fraud.

A Government Accountability Office report published in April estimated total direct financial losses to the federal government from fraud at $233 billion to $521 billion per year. While some of this comes from corrupt activities of individuals or criminal enterprises, a substantial portion can be attributed to mainstream corporations, including many household names.

When such companies are found to be cheating, they are usually charged under the False Claims Act, an 1863 law that had its origins in the prosecution of unscrupulous suppliers to the Union Army during the Civil War. Today, the FCA is used to get misbehaving firms to pay a monetary penalty without facing the risk of criminal prosecution.

In Violation Tracker we document nearly 4,000 federal and related state FCA cases over the past 25 years, with total penalties of $58 billion. Healthcare companies such as Tenet, HCA, and Centene have penalty totals in excess of $1 billion. Pentagon contractors Boeing, Northrop Grumman, General Dynamics, and Lockheed Martin have each paid out hundreds of millions. Also high on the list are pharmaceutical producers such as Pfizer and Merck as well as information technology firms such as Oracle and Hewlett Packard Enterprise.

These penalties do not arise from isolated examples. Many of the big firms are penalized over and over for contracting offenses. Lockheed Martin, for example, has paid FCA penalties in 16 different cases. Large companies are almost never debarred from continuing as federal contractors.

Pentagon contractors seem to have little to worry about from DOGE or the Trump Administration. The president-elect reportedly plans to nominate Stephen Feinberg to the job of deputy defense secretary. Feinberg is the co-chief executive of Cerberus Capital Management, a private equity firm with a history of investing in weapons producers.

It is not surprising that DOGE is choosing to target federal employees rather than contractors. After all, Musk is the head of companies that do a great deal of business with Uncle Sam. SolarCity Corporation, acquired by Musk and now part of Tesla Energy, had previously paid $29 million in an FCA case.

Contractors in general are poised to thrive under Trump 2.0. In fact, one might view DOGE not as an effort to shrink government but rather as a way of generating more work for contractors. If the headcount of some agencies is reduced, those functions may not disappear but instead could be outsourced to the private sector.

That would be a boon to service contractors such as Booz Allen Hamilton, which last year paid $377 million to settle an FCA case involving improper billing, and Conduent, which in 2022 paid $7.9 million to settle an FCA case involving the submission of false claims to the Department of Education.

By paving the way for more federal contracting and thus more contractor fraud, DOGE may end up increasing rather than reducing government waste and abuse.

Military Contractors Return to Their Old Ways

In the 1980s and 1990s the big military contractors developed a reputation as some of the most corrupt major corporations in the United States. They were at the center of numerous scandals involving brazen overcharging in their dealings with the Pentagon, and they were often accused of providing defective equipment. Because the Defense Department was so dependent on them, these companies continued to be awarded lucrative contracts.

By the 2000s, the weapons makers were no longer in the spotlight as other industries such as the giant banks, Big Pharma, and the oil majors came to be viewed as the main corporate villains. After the arms companies got involved in arming the Ukrainian government to resist the 2022 Russian invasion, some ESG investors began to argue that the likes of Raytheon and Northrop Grumman should no longer be excluded from ethical portfolios.

A recent announcement by the Justice Department suggests that the military contractors have not changed their old ways. DOJ reported that Raytheon Company, now a subsidiary of a parent company known as RTX, is paying $950 million to resolve allegations in several categories.

First, it was accused of cheating the federal government by providing “false and fraudulent information to the DOD during contract negotiations concerning two contracts with the United States for the benefit of a foreign partner — one to purchase PATRIOT missile systems and the other to operate and maintain a radar system.” The deception caused the government to pay Raytheon $111 million more than it should have received. To settle this case, which is one of very few contract matters handled as a criminal offense, Raytheon paid a penalty of $147 million.

The second allegation involved additional instances in which the company provided “untruthful certified cost or pricing data when negotiating prices with the DOD for numerous government contracts and double billed on a weapons maintenance contract.” Raytheon paid a whopping $428 million to settle this civil action.

The third allegation involved bribes paid to a high-level official of the Qatari Air Force to obtain contracts. To resolve charges under the Foreign Corrupt Practices Act, paid a criminal fine of $230 million and other penalties. This and the other criminal charge were resolved through two deferred prosecution agreements, meaning that the company did not have to enter a guilty plea.

DOJ’s actions came less than two months after RTX paid $200 million to the State Department’s Directorate of Defense Trade Controls to resolve allegations of violating the International Traffic in Arms Regulations (ITAR) in connection with unauthorized defense exports.

Raytheon is not the only military contractor that has been slipping back into corrupt practices. Earlier this year, Sikorsky Services, a subsidiary of Lockheed Martin, agreed to pay $70 million to resolve allegations it was involved in a scheme to overcharge the Navy for spare parts and materials needed to repair and maintain the primary aircraft used to train naval aviators. Also this year, Boeing was fined $51 million for violating export control laws in its dealings with countries such as China. Last year, a subsidiary of L3Harris Technologies agreed to pay $21.8 million to resolve allegations that it violated the False Claims Act by knowingly submitting contract proposals in which the cost of certain parts was included twice.

Perhaps it is time to return the weapons companies to a prominent place in the corporate hall of shame.

Will Big Pharma Continue to Fleece Taxpayers?

Tensions are mounting between the Biden Administration, which wants to implement legislation passed in 2022 allowing Medicare to negotiate drug prices, and the pharmaceutical industry, which would like to nullify the law and maintain the highly profitable status quo.

Big Pharma has little support from the American public, which pays much more for its meds than residents of other countries. The industry is ultimately counting on being rescued by the business-friendly majority on the Supreme Court.

Being able to dictate prices to Medicare is not the only way drugmakers fleece government agencies and the public. In Violation Tracker we document more than 150 major cases of drug price cheating by large producers.

Some of these cases are old-fashioned price-fixing, in which supposedly competing producers conspire to set prices. Last year, for example, criminal charges were brought against Teva Pharmaceuticals and Glenmark Pharmaceuticals for scheming to fix prices of several generic drugs. Teva paid a $225 million criminal penalty and Glenmark paid $30 million. The companies were also ordered to divest their operations relating to the cholesterol drug pravastatin.

Generic producers are supposed to help reduce drug prices, but they often do the opposite. Along with price-fixing, they often engage in schemes called pay for delay. These are illegal deals in which they receive payments from producers of brand-name drugs whose patent protection is ending to look the other way as those producers use tricks to extend their exclusivity. Pay for delay arrangements are frequently challenged via class action lawsuits, and both brand-name and generic drugmakers have paid billions in settlements.

Earlier this year, for instance, Gilead Sciences agreed to pay over $246 million to settle litigation alleging it entered into an improper deal to delay the introduction of a generic version of its HIV medications. Pay for delay is apparently so profitable that nine-figure settlements have not put a dent in it.

Another form of cheating involves manipulation of the wholesale price levels drug companies are required to report to state Medicaid agencies and which are used in determining how much they receive for their products. This reporting is supposed to ensure that the prices being paid by Medicaid are not out of line with those charged to other parties.

Drugmakers have repeatedly been accused of reporting inflated prices to Medicaid, and have paid out large amounts in settlements. In 2016 Pfizer and its subsidiary Wyeth paid $784 million to resolve allegations that Wyeth knowingly reported to the government false and fraudulent prices on two of its proton pump inhibitor drugs.

Then there is the issue of rebates. Pharmaceutical companies often offer them to private-sector customers to promote their products, but they frequently fail to provide the same benefit to government health programs. Violation Tracker contains numerous cases in which drugmakers were accused shortchanging government agencies on rebates. In 2021 Bristol-Myers Squibb paid $75 million to settle one such case.

The Pharma giants have also driven up costs indirectly through practices such as paying kickbacks to healthcare providers to prescribe expensive medications and engaging in improper marketing to encourage off-label use of those over-priced meds.

There seems to be no end to the ways pharmaceutical companies pick the pockets of taxpayers and consumers. The Inflation Reduction Act could begin to tip the scales in the other direction—unless the courts decide to keep us at the mercy of the industry.

Blowing the Whistle on Procurement Fraud

A federal judge recently ordered Gen Digital Inc. to pay $53 million in damages for cheating the federal government. The case against the company—formerly known as NortonLifeLock, a spinoff of Symantec Corp.—originated in a lawsuit filed by whistleblower Lori Morsell, who stands to receive a share of the payout. While working at Symantec more than a decade ago, Morsell discovered that the company was failing to provide federal agencies the discounts it made available to other customers.

Gen Digital is the latest in a long line of federal contractors whose misconduct has been punished through what are known as qui tam lawsuits. (Qui tam is derived from a Latin phrase meaning “who sues on behalf of the king as well as for himself.”) These are cases enabled by the False Claims Act in which someone with information about fraud against a public entity can file a suit on behalf of the government. The practice in the U.S. dates back to the Civil War era.

In many situations, the Justice Department will choose to intervene in the matter, in effect taking over the prosecution, but the whistleblower is typically awarded a portion of the damages or settlement. A large portion of the more than 2,500 False Claims Act cases documented in Violation Tracker, which account for $60 billion in penalties, began as qui tam actions.

Federal prosecutors do not intervene in every whistleblower case. Given that the plaintiff may not have the resources to pursue the matter independently, most of these cases end up being dropped. Yet substantial settlements are sometimes achieved without government involvement, though the feds share in the proceeds. Here are some examples.

In 2022 State Farm Fire & Casualty Co. agreed to pay $100 million to settle allegations it violated the False Claims Act in connection with claims improperly submitted to the National Flood Insurance Program after Hurricane Katrina.

In 2011 Medline Industries agreed to pay $85 million to settle allegations that it violated the False Claims Act by paying illegal kickbacks to healthcare providers who purchased its medical supplies using federal funds.

In 2016 Novartis agreed to pay $35 million to settle allegations it violated the False Claims Act by marketing the eczema cream Elidel for use on infants, even though it was only approved for older patients.

Also in 2016, Ocwen Loan Servicing agreed to pay $30 million to settle allegations that two of its subsidiaries violated the False Claims Act by submitting incorrect information to the Treasury Department’s Home Affordable Modification Program.

Successful qui tam cases have become so common that it is easy to take them for granted and assume that this practice is widespread in other countries. That is not the case, even in the United Kingdom, where the practice originated centuries ago but later fell into disuse.

This could change. Recently, Nick Ephgrave, the director of the UK’s Serious Fraud Office gave a speech in which he endorsed the idea of compensating whistleblowers. Such a move would give a major boost to the prosecution of procurement fraud in the UK, which lags far behind the United States in dealing with this perennial problem.

Back here, the legal status of whistleblowers has been strengthened even as the power of regulatory agencies has been challenged. This applies both to False Claims Act cases and those brought under other laws with whistleblower provisions, such as the Sarbanes-Oxley Act. Recently, the U.S. Supreme Court ruled unanimously that whistleblowers seeking compensation after being fired for exposing misconduct do not need to prove an employer acted with retaliatory intent.

The U.S. has a long and impressive history of using qui tam whistleblower cases to fight corporate fraud against the public. The UK would do well to revive its own use of this effective tool.

Negotiating with Crooks

The pharmaceutical industry is indignant that the Biden Administration is actually moving ahead with plans to implement the provision of the Inflation Reduction Act that allows Medicare to negotiate drug prices. Responding to an announcement of the first ten medications that will be targeted, the trade association PhRMA complained about a “rushed process,” even though the law was passed a year ago and the negotiated prices will not become effective until 2026.

The industry is not just complaining—it is fighting the law in court and doing everything possible to retain its longstanding power to set prices at astronomical levels. The price-gouging is just part of the problem. Drugmakers also have an abysmal compliance record in their dealings with government healthcare programs.

Take the eleven companies which produce the medications included in the first round of negotiations: AbbVie, Amgen, AstraZeneca, Boehringer Ingelheim, Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson, Merck, Novartis, Novo Nordisk and Pfizer.

Over the past two decades, these companies and their subsidiaries have been penalized in more than 100 cases brought under the False Claims Act (FCA) or related laws relating to government contracting. As shown in Violation Tracker, they have paid a total of more than $5 billion in fines and settlements for overcharging federal agencies and others forms of fraud.

Six of the companies—AbbVie, AstraZeneca, Johnson & Johnson, Merck, Novartis and Pfizer–have each been involved in ten or more FCA cases, paying out enormous sums in penalties.

Pfizer, for example, has paid $1.15 billion in fines and settlements linked to 16 different FCA cases. The biggest of these was a $784 million payment by Pfizer and its subsidiary Wyeth to resolve allegations that Wyeth knowingly reported to the government false and fraudulent prices on two of its proton pump inhibitor drugs.

Novartis has paid $926 million to resolve a dozen different FCA cases. Among these is a $642 million settlement of allegations that included the payment of illegal kickbacks to doctors to get them to prescribe its products.

Merck has also been involved in a dozen FCA cases, paying total penalties of $796 million. The bulk of the total came from a $650 million settlement of allegations that included both illegal kickbacks and failure to offer Medicaid the same rebates it was offering hospital systems.

Johnson & Johnson’s $556 million FCA penalty total comes from four kickback cases as well as several involving the submission of inflated wholesale prices used in setting the rates for Medicaid reimbursements.

Among AstraZeneca’s FCA cases is a $354 million settlement of civil and criminal charges that the company provided large quantities of free samples of a prostate cancer drug to urologists, knowing that many of them were giving the medication to patients as free samples and then billing Medicare and Medicaid.

Seventeen of the 21 FCA cases involving AbbVie and its subsidiaries concerned allegations of falsified drug price reporting to federal and state agencies.

What all this shows is that when federal negotiators sit down at the bargaining table, they will be facing a group of companies that for years have not only been charging high prices but have allegedly also used a variety of illegal means to extract even more revenue from taxpayer-financed healthcare programs.

Rather than expressing indignation, Big Pharma should be displaying penitence for its fleecing of the public for so long.

Pharma Fights to Preserve the Gravy Train

Big Pharma has been fleecing its U.S. customers for so long, the industry came to regard it as a right. That arrangement started to come to an end last year, at least as far as one large customer, the federal government, is concerned. The Inflation Reduction Act included a provision empowering Medicare to begin negotiating some drug prices in 2026.

One pharmaceutical giant has decided to fight to preserve the gravy train. Merck just filed a lawsuit challenging the law, claiming that the obligation to negotiate is an infringement of its constitutional rights. The company argues that its Fifth Amendment protection against government seizure of private property would be violated. It also says that having to sign an agreement reached after negotiation would trample its First Amendment free speech rights.

The Fifth Amendment takings argument is a favorite position of conservatives in opposing all manner of government regulation, but the obligation to negotiate prices is not regulation. It is actually a free market correction to the absurd restrictions that have long existed on the ability of Medicare to bring drug prices back down to earth. The First Amendment argument is laughable.

It is not surprising that Merck would try its chances in court once its lobbying efforts against the law failed. The company has a lot at stake. It rakes in several billion dollars of revenue each year from the sale of diabetes and cancer medications through Medicare plans. Even if its lawsuit initially fails, Merck presumably hopes it will receive a more sympathetic hearing if the case reaches the corporate-friendly Supreme Court.

Freedom from having to negotiate with Medicare is not the only way in which Big Pharma has managed to evade competition. As I described in a report on antitrust cases published in April, drug companies have repeatedly been caught engaging in illegal schemes to block the introduction of lower-cost generic alternatives to their brand-name medications. Since 2000 the industry has paid a total of $10 billion in fines and settlements in these pay-to-delay cases.

Merck is one of those firms implicated in this practice. For example, in 2017 it agreed to pay $60 million to settle class action litigation alleging that its subsidiary Schering-Plough had taken improper actions to block the introduction of a generic version of K- Dur, which is used to treat potassium deficiencies.

Along with anti-competitive behavior, the pharmaceutical industry has a record of questionable practices in its dealings with the federal government. Merck alone has paid nearly $800 million in fines and settlements relating to alleged violations of the False Claims Act. For example, in 2008 it agreed to pay $650 million to resolve allegations that it failed to pay proper rebates to Medicaid and other government health care programs and paid illegal remuneration to health care providers to induce them to prescribe the company’s products.

These forms of misconduct, along with the immunity from having to negotiate prices with Medicare, have for too long given the drug companies the upper hand in their dealings with the federal government. The Inflation Reduction Act takes an important first step toward correcting that situation. It would be a shame if the courts turn back the clock.

Note: Corporate Crime Reporter reports that the Justice Department has quietly introduced a search engine covering its actions against business entities and individuals. As of this writing, the Corporate Crime Case Database contains only 11 entries but more is promised.

Targeting the Infant Formula Giants

The Agriculture Department’s Women, Infants and Children (WIC) program is one of the many forms of social assistance that could be seriously affected by Republican efforts to cut supposedly wasteful federal spending as a condition of approving an increase in the debt ceiling.

If there is waste in WIC, it’s not being caused by the low-income women receiving nutritional aid. A more likely culprit are the corporations providing the infant formula distributed through the program.

The Federal Trade Commission has revealed that it is investigating whether suppliers have been colluding in their bids for contracts awarded by the state agencies that administer WIC. Any such collusion would be made easier by the fact that the infant formula market in general and the WIC portion of it are dominated by three large companies.

Two of the three—Abbott Laboratories, which produces the Similac brand, and Nestlé, which sells the Gerber brand—have acknowledged that they are involved in the investigation, while Reckitt Benckiser has declined to comment.

This is not the first time these companies have come under regulatory scrutiny. Back in 2003 Abbott and a subsidiary paid a total of $600 million in civil and criminal penalties to resolve charges that the company made illegal payments to institutional purchasers of its tube-feeding products and then encouraged the customers to overbill government health programs.

Over the past two decades, Abbott and various subsidiaries have paid another $98 million in various False Claims Act cases brought by federal and state prosecutors. This does not include hundreds of millions more paid in false claims and antitrust penalties by the portions of Abbott that were spun off as AbbVie in 2013.

Nestlé’s infant formula business has a history of controversy for another reason. During the mid-1970s Nestlé was made the target of a campaign protesting the marketing of infant formula in poor countries. Activists from organizations such as INFACT and progressive religious groups charged that the aggressive marketing of formula by companies like Nestlé was causing health problems, in that poor mothers often had to combine the powder with unclean water and frequently diluted the expensive formula so much that babies remained malnourished.

Nestlé initially responded to the boycott of its products with a counter-campaign, seeking to discredit its critics. The company later changed its posture, agreeing to comply with a marketing code issued by the World Health Organization. In the years that followed, Nestlé was frequently criticized for failing to comply with the code and for engaging in various questionable practices.

In 2019 Reckitt Benckiser, based in the United Kingdom, paid over $1.3 billion in penalties in connection with the improper marketing of the opioid Suboxone. It paid another $50 million to the FTC to resolve allegations of engaging in a deceptive scheme to thwart the introduction of a low-cost generic alternative to that drug.

Reckitt entered the infant formula business through the 2017 acquisition of Mead Johnson, producer of Enfamil. In 2012 Mead Johnson had paid $12 million to settle allegations by the SEC that the company violated the Foreign Corrupt Practices Act through improper payments to healthcare professionals at government-run hospitals in China.

Given these rap sheets, along with controversies over recalls and shortages, it will not come as a surprise if the FTC finds that these companies engaged in bid-rigging. The remedy should involve an effort to attract more suppliers to the WIC infant formula market, especially honest ones.