Introduction
CVS Pharmacy, Inc. was fined $77 million by the United States Attorney’s Office for the Central District of California on October 14, 2010. The fine included a $75 million civil penalty and the forfeiture of $2.5 million profit. CVS Pharmacy’s violation occurred from September 2007 to November 2008 when they illegally sold pseudoephedrine to criminals, thereby breaching laws that govern the quantity of the drug sold per customer.
The Attorney’s Office reported that sales led to a rise in methamphetamine production in California. CVS Pharmacy, Inc (also known as “CVS”) is a subsidiary of CVS Caremark Corporation. Along with retail pharmacy operations, CVS also runs pharmacy services, retail clinics, and mail-order pharmacy businesses. In fiscal year 2010, the company earned net revenues surpassing $96 billion and achieved a net profit exceeding $3 billion.
According to its 2010 annual report, CVS is the 18th largest company on the Fortune 500 and one of the largest retail pharmacy chains in the United States. As of December 31, 2010, CVS has over 7,100 retail pharmacy stores in the country. The current CVS can be found at http://www.cvs.com/ and is listed on the New York Stock Exchange under “CVS”. This success is a result of mergers, acquisitions, and expansion into new markets in recent years.
CVS has undergone major mergers and acquisitions over the past six years, which include Eckerd ($2.15 billion), Albertson’s ($4.0 billion), Caremark ($26.9 billion), and Longs Drugs ($2.6 billion). Furthermore, CVS has expanded its market presence from operating in 36 states in 2004 to 44 states in 2010.
Similar to other companies in the industry, CVS faces various risks, such as completion and economic downturns, that it must successfully manage in order to ensure strong growth and returns for shareholders.
Legal Background
The Combat Methamphetamine Epidemic Act of 2005 (CMEA) imposes limitations on the sale of pseudoephedrine, a substance commonly utilized in the production of methamphetamine. The U.S. Department of Justice Drug Enforcement Administration (2007) asserts that this legislation aims to decrease the unlawful creation of methamphetamine, which has harmful impacts on individuals’ mental and physical well-being, devastates lives, and presents dangers to communities and the environment.
The CMEA imposes limitations on the sale of pseudoephedrine in retail drugstores. Customers are restricted to buying 3.6 grams per day, regardless of how many times they make a purchase. Moreover, customers can only buy up to 9 grams within a span of 30 days. The CMEA also requires regulated retail drugstores to implement measures for managing and overseeing sales of pseudoephedrine.
Methods of product placement include: keeping the product out of reach or in a secure cabinet for customers; delivering the product directly to the buyer; keeping a record of sales with details like quantity, purchaser information, and sale time; checking valid forms of identification; asking buyers to sign the logbook with their name, address, and purchase details; and informing buyers that providing false information may lead to legal consequences.
According to the CMEA, regulated retail drugstores must provide appropriate training to their storefront employees who handle customer purchases. It is crucial for drugstores to guarantee that these employees are well-informed about legal obligations and follow correct protocols. Additionally, drugstores need to certify themselves with relevant authorities in their jurisdictions as proof of all store-front employees’ successful completion of the mandatory training.
The U.S. Department of Justice Drug Enforcement Administration (DES) has established rules for drugstores’ logbooks in accordance with the CMEA. Paper logbooks need to be bound, while electronic logbooks should have records that can easily be retrieved by the store or law enforcement agencies. Additionally, drugstores may use an electronic signature system to capture customers’ signatures.
The DEA requires that the following notice be included in all logbooks and shown to customers:
“WARNING: According to Section 1001 of Title 18, United States Code, it is illegal to knowingly and intentionally falsify, hide, or conceal any important information within this logbook using tricks, schemes, or devices. It is also prohibited to make any false, made-up, or deceptive statements or representations regarding this logbook. Additionally, creating or using any false writing or document that contains knowingly false information is strictly forbidden. Those who violate these rules may be subject to fines up to $250,000 for individuals and $500,000 for organizations as well as imprisonment for a maximum of five years.”
If it is not possible to include the notice in the logbooks, it can be displayed in a visible area for customers to see when getting purchase information. For mail-order pharmacies, individual purchases are restricted to 3.6 grams per day and 7.5 grams over a 30-day period. Certain regulations that apply to retail drugstores do not apply to mail-order pharmacies.
According to the U.S. Department of Justice Drug Enforcement Administration (DEA), various measures are implemented to control the distribution of pseudoephedrine. These measures include physical controls such as “behind-the-counter” access, customer logbooks, and monthly reports filed with DEA for mail order sellers. Furthermore, verification of customer identities is required before shipping. It should be noted that state laws may also impose restrictions on pseudoephedrine sales, which can vary significantly from one state to another.
27 states have single transaction limits and 19 states have monthly or weekly limits. The DEA emphasizes that the CMEA does not override stricter requirements imposed by state laws or regulations. All individuals subject to the CMEA must comply with both the CMEA and the laws of the state(s) in which they sell [pseudoephedrine].
Pseudoephedrine “Smurfing”
According to the U.S. Department of Justice National Drug Intelligence Center (NDIC) in 2009, there has been a notable rise in California’s large-scale methamphetamine production since mid-2007. This increase is linked to “smurfing,” a widespread practice where individuals legally buy pseudoephedrine within limits and combine them for methamphetamine production. The NDIC also discovered that pseudoephedrine acquired through smurfing was being sent in bulk to Mexican methamphetamine producers.
According to the U.S. Attorney’s Office (United States Attorneys’ Office Central District of California, 2010), the increase in smurfing in California may be partly due to CVS/pharmacy’s failure to control the sales of pseudoephedrine as required by the CMEA. During a period of over one year starting from mid-2007, smurfers were able to repeatedly purchase pseudoephedrine from CVS/pharmacy stores in quantities that exceeded federal limits set by the CMEA. At times, smurfers were even able to completely empty store shelves.
CVS/pharmacy’s Compliance Practices
As stated in the investigation conducted by DEA and other law enforcement agencies (United States Attorneys’ Office, 2010), CVA/pharmacy has taken certain actions to adhere to the CMEA. These actions encompassed the implementation of physical control over pseudoephedrine, a logbook in paper form, and subsequently substituting it with an electronic logbook.
As a result of the CMEA, CVS/pharmacy relocated pseudoephedrine to cash register counters in their retail stores. Additionally, they supplied employees with written materials to educate them about the new federal regulations and the issue of diverting pseudoephedrine for methamphetamine production.
CVS/pharmacy introduced paper logbooks as an initial solution for tracking and preventing excessive sales of pseudoephedrine. These logbooks were considered CMEA compliant. The logbooks recorded customer names and their past purchases, organized alphabetically. However, CVS/pharmacy acknowledged that the paper logbooks had certain limitations.
In 2007, CVS/pharmacy made the decision to replace pager logbooks with a computer system called “MethCheck.” This system allows CVS/pharmacy stores to track sales of pseudoephedrine and provide information to law enforcement agencies as necessary. The implementation of this system was intended for all CVS/pharmacy stores nationwide. A key aspect of the MethCheck system is the “Lookback” feature, which enables the tracking and review of customer purchases of pseudoephedrine to prevent sales that would surpass federal and state limits. Without the Lookback feature, the system would not be able to fulfill its intended functions.
CVS/pharmacy implemented MethCheck by disabling the Lookback features in states that did not set monthly limits on pseudoephedrine purchases by individuals, such as California and Nevada. The feature must still be turned on for all states, regardless of their limits.
By not being able to stop an individual from making aggregated purchases exceeding the daily limit of 3.6 grams imposed by the CMEA, the company allowed sales of pseudoephedrine at CVS/pharmacy stores to greatly increase between late 2007 and late 2008. This was especially prominent in California and Nevada. Throughout that period, certain CVS/pharmacy employees expressed concerns regarding the excessive drug purchases made by individuals.
Instead of promptly responding and investigating the suspicious increased sales, the management instructed employees to rely on the MethCheck system to decide whether or not to block a customer’s purchase. After the government started investigating the company’s compliance, CVS/pharmacy modified the configuration of the MethCheck system. They enabled the Lookback feature in stores in California and Nevada in late 2008 and in other states in February 2009.
CVS/pharmacy accepted responsibility for the unlawful sales of pseudoephedrine during the government’s investigation (United States Attorneys’ Office, 2010). The company specifically acknowledged unlawful conduct in California and Nevada.
- employees at certain CVS/pharmacy stores knowingly sold the drug over legal limits;
- the stores that oversold the drug had reasonable knowledge that the drug would be used to make methamphetamine;
- the company’s distribution center was in a position to monitor and report the excessive sales of pseudoephedrine but failed to do so.
In response to the government’s investigation, CVS/pharmacy implemented various internal control measures to ensure compliance. These measures included monitoring the sales of pseudoephedrine products and reducing the threshold amount that can be ordered by each store. Additionally, CVS/pharmacy reduced the inventory level that can be held at each store and required the return of excessive inventory. The company also established an advisory committee to ensure compliance with the CMEA and relevant state laws. Furthermore, CVS/pharmacy updated its store operation manual and training materials to include additional information about pseudoephedrine and related policies and procedures. Lastly, pseudoephedrine drugs were moved from the retail counter to the pharmacy counter.
As per the non-prosecution agreement with the government, CVS/pharmacy must create and maintain a Compliance and Ethics Program. This program necessitates exercising caution to prevent criminal activities, endorsing and inspiring ethical behavior, and implementing procedures for an anonymous reporting system. Additionally, employees who violate compliance policies will be subjected to disciplinary action.
Reflections on CMEA Compliance In a statement (CVS Caremark Corporation, 2010), Thomas M. Ryan, then CEO of CVS Caremark, acknowledged that the lapse… was an unacceptable breach of the company’s policies and was totally inconsistent with the company’s values. CVS/pharmacy is unwavering in its support of the measures taken by the federal government and the states to prevent drug abuse. To prevent the non-compliance from happening again in the future, Ryan argued, the company has strengthened its internal controls and compliance measures and made substantial investments to improve the company’s handling and monitoring of PSE by implementing enhanced technology and making other improvements in stores and distribution centers.
CVS/pharmacy has faced various legal disputes and government inquiries. On April 15, 2011, the company reached a $17.5 million settlement with the United States and 10 states over False Claims allegations. The accusations involved Medicaid programs in these states, claiming that CVS/pharmacy had inflated prescription claims to overcharge, leading to excessive fees beyond what was owed (U.S. Department of Justice, 2011).
CVS/pharmacy and the U.S. Department of Health & Human Services (HHS) reached a settlement on January 16, 2009 regarding potential breaches of the HIPAA Privacy Rule (U.S. Department of Health & Human Services, 2009). HHS’s investigation discovered that CVS/pharmacy had participated in the following actions:
- failed to implement adequate policies and procedures to reasonably safeguard health information during its disposal process;
- did not adequately train employees;
- did not implement corporate policy to enforce employee compliance with its disposal procedures. CVS/pharmacy agreed to pay $2. 25 to settle the allegations.
CVS Caremark Corporation agreed to pay $36.7 million to settle Medicaid fraud claims on March 18, 2008 (U.S. Department of Justice, 2008). During the period from April 2000 to December 2006, CVS allegedly changed Medicaid patients from the cheaper tablet form of a medicine (Ranitidine) to the pricier capsule version solely for the purpose of increasing its reimbursement rate. Despite the settlement, the company did not confess any wrongdoing.
