As drug prices have soared in recent years and insurers have increased copayments, a new type of charity has blossomed to fill a vital niche - helping patients pay the steep out-of-pocket costs for their medicines.
But the largest of these copayment assistance charities, the Chronic Disease Fund, is now in turmoil after questions have arisen about its relationship with a pharmaceutical company that is itself under investigation for its marketing practices.
The practice is casting a light on what has long been an open secret: The bulk of the contributions to these charities come from the pharmaceutical companies themselves. The foundations not only help hundreds of thousands of patients a year, they also raise drug company sales and profits.
After all, if a patient cannot afford out-of-pocket costs of $5,000 for a $100,000-a-year drug, the drug company gets nothing. But if the manufacturer or the charity pays the $5,000, the patient gets the drug and the company receives $95,000 from the patient’s insurance company or Medicare.
The contributions - which also provide tax deductions to drugmakers - are legal as long as a company does not require that the money it donates be used exclusively to pay for its own drugs.
But articles circulating in the investment world have suggested that the Chronic Disease Fund might be showing improper favoritism toward Questcor Pharmaceuticals, which sells an expensive drug for immune diseases. Moreover, the articles noted that the charity was purchasing millions of dollars a year in services from for-profit companies owned by the charity’s founder and president, Michael Banigan.
Questcor and the charity have said they are victims of a campaign by short-sellers - investors who benefit from the decline of a stock’s price.
Nonetheless, fearing defections from donors, the charity hired Venable, a law firm in Washington, to evaluate its practices and recommend changes to ensure that it was in compliance with legal requirements.
As a result, Banigan is leaving the charity, and the entire board has been replaced. The charity is also revamping policies in a way that could eliminate copay assistance for certain drugs, according to Jeffrey S. Tenenbaum, the head of the nonprofit organizations practice at Venable.
“When an organization comes under great scrutiny like CDF has come under, you have to make sure they are squeaky clean,” Tenenbaum said in an interview. He said he thought the fund and Banigan had good intentions but “just didn’t know some of the things they should be doing.”
Tenenbaum said the charity was cooperating with a request for information in a federal investigation of Questcor’s marketing practices. He also said that the fund itself was “absolutely not a target of that or any other investigation.” Nonetheless, he said, he had advised the fund that an investigation might be coming.
He said the controversy “definitely has gotten the drug companies’ attention.” While no company has ended its donations, some were still considering what to do, he said.
The Chronic Disease Fund, which is based in Plano, Texas, received $200 million in contributions in 2012, triple its 2007 total and ranking it among the 50 largest charities in the United States. It says it helped nearly 86,000 patients last year and more than 500,000 since its inception in 2003.
Critics say copay assistance helps keep drug prices high and circumvents efforts by insurers to control drug spending by making consumers bear part of the cost.
“These subsidies are unfortunately used to promote the overutilization of expensive brand-name drugs,” said Wells Wilkinson, a lawyer at Community Catalyst, a consumer advocacy organization.
The charities counter that any benefit to the drug companies is secondary to helping patients.
“Look at the alternative,” said Dana Kuhn, founder and president of Patient Services, one of the charities. “If they didn’t donate their dollars, people would die.”
Drug companies often directly subsidize the copayments for privately insured patients. But they cannot do so for patients covered by federal programs like Medicare’s Part D drug benefit, because that would be considered a kickback, an illegal inducement to use a drug.
So the drug companies donate to the copay assistance charities. A handful of charities specialize in providing such help. In addition, some patient advocacy groups like the Leukemia and Lymphoma Society have similar programs.
Some executives of these charities now worry about increased scrutiny.
“We could all get painted with the same brush,” said Patrick McKercher, president of the Patient Access Network Foundation. Its contributions more than doubled in 2012 to $179 million. It expects to help more than 100,000 patients this year, an increase from 59,000 in 2012.
The charities are supposed to solicit donations from the public, not just drug companies. Still, 81 percent of the contributions to the Chronic Disease Fund in 2011 came from two pharmaceutical companies, according to its financial report for the year. The companies were not identified.
Drug companies cannot contribute money specifically for their own drugs. Rather, they donate money to provide copayment assistance for people with a specific disease, regardless of which drug is used. The Chronic Disease Fund, according to its website, provides copay assistance for 78 drugs used to treat 46 diseases.
For 15 of those diseases there is only one drug available, however, meaning that the manufacturer of that drug can be certain its contribution will be spent on copays for its product.
The articles raising questions about the fund were published in October in Barron’s and on the investor website Seeking Alpha.
The latter was written by an anonymous short-seller of Questcor stock.
Questcor sells a drug called H.P. Acthar Gel, which was approved more than 60 years ago to treat a variety of immune-related conditions. The company, which acquired the drug in 2001, has raised its price since then from $40 to more than $28,000 a vial.
It has been gradually expanding the marketing of its drug to different diseases. And as it does so, it appears the Chronic Disease Fund has started copay assistance for those diseases.
For instance, although the fund already offered support for multiple sclerosis, it started a new program for “acute exacerbations of MS,” which applies only to Acthar.
The fund does not provide copay assistance for an approved drug for lupus, but it does for “exacerbations of lupus,” a use of Acthar.
Questcor’s contributions for copay assistance are increasing even faster than sales of Acthar. Its contribution of $9 million in the first nine months of this year was 74 percent higher than the same period a year earlier. Its total 2012 contribution of $8 million was quadruple the level in 2011. Don M. Bailey, Questcor’s chief executive, said at an investor conference last week that the company was “doing exactly the same thing everybody else is doing” in contributing to the charity.
Tenenbaum, the lawyer, said the fund would no longer provide copay assistance for diseases treatable by only a single drug, unless there was clearly a second drug in development. And he said the fund would sever all ties with companies owned by Banigan, its departing president.
Banigan declined to comment. But in an email the fund forwarded to donors last week, he wrote: “There are many things I still want to accomplish in my lifetime and with CDF well-positioned for the future, I believe this is the right time for me to step aside and let others carry the organization forward.”
Clorinda Walley, the executive director, will now run the organization. She issued a letter last week calling the earlier articles misleading but wrote that the charity was nonetheless making changes to its structure and practices aimed at “not just meeting, but exceeding best practices for nonprofit charities.”