Module 7 Case Study_Pharmaceutical Fraud
Case in Point: Pharmaceutical Fraud
Diluting Crooked Pharmacist' Drug Treatment Tampering
Ross Eldred, MBA; Stephen C. Del Vecchio, DBA, CFE, CPA; and Roy Greenway,
CFE, CPA, CIA
May/June 2008
Pharmacists who commit fraud by diluting prescriptions pose a serious threat to patients.
Integrating new controls to stop these criminals in their tracks might save lives.
Nobody suspected that Robert Courtney was capable of committing fraud. After all, his
father was a preacher; he spent his early years enveloped in a world of Christian values in
Hays, Kan. His childhood was stable. His family was supportive. After high school,
Courtney earned a pharmacy degree and eventually went on to own and operate the
Research Medical Tower Pharmacy in Kansas City, Mo. By the time he was in his late
thirties, he owned a second pharmacy. Courtney had achieved his lifelong dream of
ecoming a successful pharmacist and he displayed a lavish lifestyle to prove it.
His first indulgence was a Mercedes, a purchase that launched his grandiose obsession
with owning "only the best." Next, he bought an enormous house in the upscale Tremont
Manor Enclave, located in northern Kansas City. If material possessions indicate
happiness, anyone would have believed that Courtney was in a state of perpetual bliss.
However, his personal life told a different story as the emotional effects of committing an
unthinkable fraud surfaced. Just prior to purchasing his second pharmacy in 1990,
Courtney, then 38, divorced his wife and retained custody of his two daughters. Shortly
thereafter, he used his ostentation to attract another woman and, after just four months of
dating, Courtney proposed with a four-carat diamond engagement ring. They eloped just
after Christmas in 1990, less than a year after his first divorce.
"As long as you are ma
ied to me, you'll drive a BMW," Courtney was said to have
promised his new wife. He forced her to buy $600 dresses and prohibited her from
gaining weight. He flaunted his money when he was around his church friends, while at
other times he was stingy. Courtney complained that his parents were "squeezing him for
money." At one point, he instructed his wife to find ways to pinch pennies. He soon
ecame as obsessed with saving money as he was with flaunting it. His wife later recalled
that when they would dine out, he wouldn't allow her to order her own food and insisted
that she eat a small amount from his order.
Courtney began to display extreme mood swings, a possible indication of deception. He
was ve
ally and physically abusive to his daughters. His frightened wife recognized the
ed flags and left.
Two years later, Courtney ma
ied for a third time and exhibited the same e
atic
ehavior he had in the past. According to testimony, he didn't allow his wife to
participate in the design of a spectacular new home in excess of 5,000 square feet. He
maintained financial control over all the household financial affairs and decisions and
forced his new wife to sign a prenuptial agreement. He became obsessed with "feeling
needed." In 1999, Courtney pledged to donate $1 million to the building fund of his
church. Throughout the 1990s, his outward appearance displayed a high income, but
ehind the scenes, he was under pressure.
Courtney's luxuries required a substantial level of income to support, much more than he
could have possibly generated by his two pharmacies. So how was he making ends meet?
Well, he had been diluting patients' potentially lifesaving cancer-treatment drugs for
about eight years. But eventually a pharmaceutical sales representative discovered the
fraud when he conducted a routine review of the pharmacy. Courtney confessed and was
sentenced to 30 years in prison.
Courtney's scheme prevented patients from receiving proper treatment for their diseases.
In some cases, he might have contributed to or caused their deaths, though it was never
proven. It was a typical fraud triangle, complete with all three angles: opportunity,
pressure, and rationalization. Courtney enjoyed a lifestyle that created a need, which
generated an internal pressure to meet his financial obligations. He had no supervision,
controls, or checks and balances, which allowed him the opportunity to commit this
crime. Finally, Courtney rationalized his actions by believing that his patients were going
to die anyway. Here, we examine the establishment of internal controls that might help
educe, eliminate, prevent, and/or detect future occu
ences of the dilution of
pharmaceutical medicines fraud.
GRAY MARKET AND BEYOND
The United States generates $236 billion of pharmaceutical industry's global revenue of
approximately $550 billion. By owning two pharmacies, the size of the industry
presented Courtney with an opportunity to capitalize on this market. His initial fraud
involved buying prescription medications from a retired pharmaceutical representative
through the "gray market" - pharmaceuticals for sale outside the authorized distribution
channels of the pharmaceutical company that produces the product. According to
attorneys Duncan Curley and Lisa M. Fe
i, gray market goods, also known as parallel
imports, are produced under intellectual property rights held by the owner (or its licensee)
for legitimate sale in one market and are then diverted and distributed in a second market
without the intellectual property rights owner's authorization.1 By purchasing legitimate
drugs through the gray market, Courtney was able to substantially increase the markup on
those drugs and reap a huge profit. He often paid cash under-the-table for additional
discounts. The pharmaceutical gray market is illegal and violators who participate in it
are subject to criminal prosecution. This was his first departure from ethics and legitimate
usiness practices. As with most schemes of this nature, Courtney's fraud grew. His next
fraudulent activity involved diluting the drugs in the prescriptions he received from
doctors regardless of whether he obtained the prescribed drugs from legitimate sources.
THE FRAUD SURFACES
The first indication of wrongdoing was in May of 2001. A pharmaceutical sales
epresentative visited a doctor's office and told the staff that Courtney's pharmacy had
only purchased approximately one-third of the amount of the cancer-treatment drug
Gemzar, which Courtney supposedly provided and billed to that doctor's office.2 The
doctor averaged about 100 patient treatments per month, and according to the office
ecords, the doctor was billed and paid Courtney's pharmacy approximately $100,000 per
month.3
Based on the sales representative's information, the doctor sent a sample of a prescription
ordered from Courtney's pharmacy for the drug Taxol, a cancer treatment drug, to an
independent lab for testing to determine if the actual amount of the drug agreed with the
prescription. The lab testing revealed that the prescription contained less than one-third of
the drug prescribed by the doctor. The doctor then took several samples from the
prescriptions received from Courtney's pharmacy and gave them to the U.S. Food and
Drug Administration's special agents, who forwarded them to the FDA's Forensic
Chemistry Center for testing. The test results confirmed that the samples contained
substantially less of the drug prescribed by the doctor than would be required to
constitute a full dose. The samples tested contained from 17 percent to 39 percent of the
drugs prescribed by the doctor. The doctor's office obtained a second sample of three
chemotherapy treatments from Courtney's pharmacy and the results from the independent
lab revealed that the amount of drugs prescribed in each of the samples were zero
percent, 24 percent, and 28 percent, respectively. To put the fraud into monetary terms,
the prescription containing only 24 percent of the required drug netted Courtney $779.37
of profit on just that prescription.4
On Aug. 10, 2001, the FBI and the FDA obtained a search wa
ant to investigate
Courtney's pharmacy. During an interview prior to the search, Courtney confirmed that
he was personally involved in and responsible for mixing, assembling, labeling, and
distributing at least some of the prescriptions that were tested by the U.S. Food and Drug
Administration's Forensic Chemistry Center, according to the district court criminal
complaint.5 Courtney couldn't explain why the chemotherapy treatments didn't contain
the amount of drugs that had been ordered and was identified on the labels on the
chemotherapy bags, the complaint read.6
On Aug. 15, Courtney, with his attorney, voluntarily appeared for an interview with an
FBI special agent. During the interview, Courtney admitted to diluting several
chemotherapy drugs. He stated that greed motivated him and that he limited the dilutions
to the patients of one doctor XXXXXXXXXXchemotherapy treatments for approximately 34 of the
doctor's patients. Courtney was explicit that he hadn't done anything improper with any
other drugs and/or anything with any medications/treatments for any other doctor's
patients.7 However, further investigations showed that Courtney had, in fact, diluted
other drugs and had improperly billed insurance companies for drugs not given to
patients. Also, his dilution of the prescriptions caused the doctor unwittingly to submit
fraudulent Medicare claims.
INTERNAL CONTROL REALITY
During the process of examining this fraud, two fundamental concepts of internal control
came into sharp focus for us. First, there's no guarantee that internal controls or any
system of controls can be completely preventative. Auditors, managers, and fraud
examiners are all familiar with the concept of reasonable assurance. The American
Institute of CPAs' SAS 104 has expanded the concept of reasonable assurance to "the
high, but not absolute assurance level of assurance."8 However, when faced with a fraud
committed by someone like Courtney, an individual who was aware of the consequences
of his actions, the concept of reasonable assurance appears to pose a dilemma because it
attempts to provide a level of protection while at the same time acknowledging that there
are limitations to any system of internal controls. As unsettling as this thought may be,
it's a fundamental