Drug Diversion Investigations by the U.S. Drug Enforcement Administration

SPEAKERS       CONTENTS       INSERTS

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62–151

2000
DRUG DIVERSION INVESTIGATIONS BY THE U.S. DRUG ENFORCEMENT ADMINISTRATION

HEARING

BEFORE THE

SUBCOMMITTEE ON CRIME

OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

SECOND SESSION

AUGUST 6, 1998

Serial No. 150

Printed for the use of the Committee on the Judiciary

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For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

COMMITTEE ON THE JUDICIARY
HENRY J. HYDE, Illinois, Chairman
F. JAMES SENSENBRENNER, Jr., Wisconsin
BILL McCOLLUM, Florida
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
CHARLES T. CANADY, Florida
BOB INGLIS, South Carolina
BOB GOODLATTE, Virginia
STEPHEN E. BUYER, Indiana
ED BRYANT, Tennessee
STEVE CHABOT, Ohio
BOB BARR, Georgia
WILLIAM L. JENKINS, Tennessee
ASA HUTCHINSON, Arkansas
EDWARD A. PEASE, Indiana
CHRIS CANNON, Utah
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina
MARY BONO, California

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JOHN CONYERS, Jr., Michigan
BARNEY FRANK, Massachusetts
CHARLES E. SCHUMER, New York
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey

THOMAS E. MOONEY, Chief of Staff-General Counsel
JULIAN EPSTEIN, Minority Staff Director

Subcommittee on Crime
BILL McCOLLUM, Florida, Chairman
STEPHEN E. BUYER, Indiana
STEVE CHABOT, Ohio
BOB BARR, Georgia

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ASA HUTCHINSON, Arkansas
GEORGE W. GEKAS, Pennsylvania
HOWARD COBLE, North Carolina
JAMES E. ROGAN, California
LINDSEY O. GRAHAM, South Carolina

CHARLES E. SCHUMER, New York
SHEILA JACKSON LEE, Texas
MARTIN T. MEEHAN, Massachusetts
ROBERT WEXLER, Florida
STEVEN R. ROTHMAN, New Jersey

PAUL J. MCNULTY, Chief Counsel
GLENN R. SCHMITT, Counsel
DANIEL J. BRYANT, Counsel
NICOLE R. NASON, Counsel
MELANIE SLOAN, Minority Counsel

C O N T E N T S

HEARING DATE
August 6, 1998
OPENING STATEMENT

McCollon, Bill, a Representative in Congress from the State of Flordia, chairman Subcommittee on Crime

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WITNESSES
    Beard, Rick, Owner, Harvest Drug & Gift, Burkburnett, TX

    Burgess, Philip P., R.Ph., M.B.A., National Director of Pharmacy Operations, Walgreen Corp, Deerfield, IL

    Phelps, James R., Attorney at Law, Hyman, Phelps & McNamara, P.C., Washington, DC

    Warren, Mary Lee, Deputy Assistant Attorney General, Criminal Division, U.S. Department of Justice

    Williams, Gregory K., Chief of Operations, Drug Enforcement Administration, U.S. Department of Justice

    Work, David R., Executive Director, North Carolina Board of Pharmacy, Carrboro, NC

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    Burgess, Philip P., R.Ph., M.B.A., National Director of Pharmacy Operations, Walgreen Corp, Deerfield, IL: Prepared statement

    Jackson Lee, Sheila, a Representative in Congress from the State of Texas: Prepared statement

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    Phelps, James R., Attorney at Law, Hyman, Phelps & McNamara, P.C., Washington, D.C.: Prepared statement

    Thornberry, Hon. Mac, Representative in Congress from the State of Texas: Prepared statement

    Warren, Mary Lee, Deputy Assistant Attorney General, Criminal Division, U.S. Department of Justice: Prepared statement

    Williams, Gregory K., Chief of Operations, Drug Enforcement Administration, U.S. Department of Justice: Prepared statement

    Work, David R., Executive Director, North Carolina Board of Pharmacy, Carrboro, NC: Prepared statement

APPENDIX
    Material submitted for the record

DRUG DIVERSION INVESTIGATIONS BY THE U.S. DRUG ENFORCEMENT ADMINISTRATION

THURSDAY, AUGUST 6, 1998

House of Representatives,
Subcommittee on Crime

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Committee on the Judiciary,
Washington, DC.

    The subcommittee met, pursuant to call, at 9:30 a.m., in Room 2237, Rayburn House Office Building, Hon. Bill McCollum [chairman of the subcommittee] presiding.

    Present: Representatives Bill McCollum, Steve Chabot, George W. Gekas, Howard Coble and Sheila Jackson Lee.

    Also Present: Representative Mac Thornberry.

    Staff Present: Paul J. McNulty, Chief Counsel; Daniel J. Bryant, Counsel; Melanie Sloan, Minority Counsel; and Veronica Eligan, Staff Assistant.

OPENING STATEMENT OF CHAIRMAN McCOLLUM

    Mr. MCCOLLUM. The Subcommittee on Crime will come to order.

    The illegal diversion of drugs from the legal stream of commerce into criminal hands has long been a serious problem in the United States. In 1996, legally manufactured controlled substances accounted for one-fourth of drug deaths reported by medical examiners and one-fourth of drug-related emergency room admissions. In 1995, more than 6 million Americans abused prescription psychotherapeutic drugs, including stimulants, sedatives and antidepressants.

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    Prior to Congress enacting the Controlled Substances Act in 1970, an estimated 65 percent of all drug deaths in the United States arose from legally produced drugs, and almost 50 percent of the amphetamines and barbiturates produced legitimately in the United States were diverted into illicit channels.

    Of even greater and more immediate concern is the role of diversion in fueling the methamphetamine crisis ravaging our country. Clandestine lab operators who dump the poison of methamphetamine into our society rely on the diversion of precursor chemicals from rogue chemical firms and careless or unwitting legitimate establishments. So there is every reason to take drug diversion seriously and to do all we can to prevent it; and where it has already happened, we must investigate and punish those responsible.

    It is with this important goal in view that the diversion prevention program has been established and developed over the last 3 decades. It is not an overstatement for me to say that preventing and investigating the diversion of licitly produced drugs into illicit channels is one of the primary missions of the DEA. Indeed, the DEA has dedicated nearly 500 investigators to its diversion program.

    In the Controlled Substances Act, Congress established a system of controls designed to prevent diversion generally and pharmaceutical drug diversions specifically. At the heart of this system is the unglamorous, but extremely effective, requirement that all entities and persons who make, buy or sell and/or dispense controlled substances register with the DEA. This includes legal drug manufacturers, distributors, dispensers—including hospitals—pharmacies and physicians. All of which are required to keep careful, precise records of the whereabouts and movement of all the controlled substances. These records ensure a paper trail to account for each transaction, thereby deterring diversion in the first place. And the law also provides for substantial civil fines for failure to keep proper records.

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    And it is the question of whether these requirements have been properly enforced by the DEA and the Justice Department that brings us to the hearing today.

    On the one hand, the number of Federal actions taken against pharmacies appears quite limited: There are more than 63,000 pharmacies registered with the DEA, yet only 130 actions of some sort were taken against them last year, and only 35 civil fines were assessed in those cases.

    On the other hand, the alleged abuses by law enforcement in some of these cases have raised serious questions about whether the law needs to be revisited and whether the diversion problem is being properly enforced. For example, should the strict liability standard for recordkeeping be changed to a knowing standard and should the maximum civil fine amount be reduced?

    These are among the changes to the law that have been proposed, and I look forward to hearing from our witnesses on these and other proposals.

    I hope today's hearing will help the subcommittee meet the challenge before us. We must ensure an effective drug diversion prevention program which brings us closer to an America free of the grasp of illegal drugs. At the same time, we must ensure that laws on the books are equitable and that they are being faithfully and fairly enforced.

    While we don't have many of our panel yet here, I have chosen to start this hearing because it is going to be a very busy day. I think we have a conference and caucus in both the Republican and the Democrat parties meeting this morning.

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    But we do have Congressman Mac Thornberry, who is with us this morning. We want to welcome you. Do you have any opening comments to make? I will allow that even though you are not a member of the committee.

    Mr. THORNBERRY. Thank you, Mr. Chairman. And, actually, I do have a statement that I would ask to be made a part of the record.

    Mr. MCCOLLUM. Without objection, it is so ordered.

    Mr. THORNBERRY. Thank you.

    And let me just express my appreciation to you for having this hearing today. This issue, as you well know and have mentioned, has been of interest and concern to Congress over the past couple of years, as evidenced by language that has been in the Commerce, State, Justice report from the Senate and is in the Senate bill this year.

    My interest and concern really developed from what has happened in my district, and I appreciate the chance for one of the folks who was involved to tell their story. Because, as you said, all of us want the DEA to be as effective as possible. What we don't want is for minor paperwork violations to be prosecuted as serious, criminal sorts of acts, and so I think we are viewing what has happened as appropriate.

    At the same time, I wanted to say that I very much appreciate the attitude of the DEA, once we got into this and started raising concerns about it, because it is not all that common for a Federal agency to say, we didn't handle this right and back down. And that is ultimately what happened in my case, in the case of my constituents. So I appreciate that.

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    I do think it is appropriate, though, to look at the basic law, as you mentioned, and see whether some changes, as have been proposed, might be appropriate to prevent this sort of thing from happening in the future.

    Again, thanks for letting me be here and thanks for having this hearing.

    Mr. MCCOLLUM. You are quite welcome. We thank you for those remarks.

    [The prepared statement of Mr. Thornberry follows:]

PREPARED STATEMENT OF HON. MAC. THORNBERRY, A REPRESENTSTIVE IN CONGRESS FROM THE STATE OF TEXAS

    First, I would like to thank Chairman McCollum for allowing me to sit with the Crime Subcommittee today and participate in this important hearing regarding the Drug Enforcement Administration and the Department of Justice's treatment of paperwork infractions within the pharmaceutical industry.

    I would also like to take this opportunity to both thank and welcome my constituents, Rick and Janet Beard, co-workers of Harvest Drug and Gift in Wichita County, Texas. They have agreed to take time away from their business to come here today to sit on the panel and discuss their experience with the Drug Enforcement Administration—which, I am sorry to report, was less than pleasant.

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    As I am sure most of you are aware, the 1998 Commerce, Justice, State Appropriations bill contained report language as part of the DEA FY 1998 appropriation. The language specifically tells the DEA to 'exercise appropriate discretion in monitoring compliance with . . . recordkeeping requirements as they relate to legitimate commercial businesses . . . Also, . . . the DEA should not. . . impose significant monetary penalities for unintentional human error or omissions when the business has, in good faith, attempted to comply with regulatory requirement

    I am here today because I am concerned that 1998 Commerce, Justice, State Appropriations report language did not go far enough in preventing the DEA from imposing unreasonable penalties on legitimate commercial businesses. Twenty-five pharmacies in Wichita County, Texas have been subject to overzealous enforcement efforts by the recently. On December 18, 1997, the week before Christmas, the U.S. Attorney's office sent out twenty-five letters to Wichita County area pharmacists alerting them that they were subject to significant penalties ranging from $100,000 to $400,000 for minor paperwork infractions. They were told to pay by January 9, 1998 or be subject to an exhaustive investigation with each paperwork infraction costing $25,000. No diversion had taken place. No damage resulted from their errors. Ultimately, all cases were closed without a single fine being assessed.

    While no fines were assessed, I do not want to give the impression that no harm was done. Some of the pharmacists had to go to the expense of hiring and retaining a lawyer for six months. They had to endure the humiliation of the public awareness that the DEA was investigating their business and they had to prepare themselves for the possibility that they would have to file bankruptcy and go into financial ruin because they could not pay the fines and keep their businesses going.

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    I am greatly concerned about the Department of Justice's actions for a number of reasons. First, I am concerned with the approach the DEA and U.S. Attorney's office of sending such threatening letters to the pharmacists for minor paperwork infractions. Second, I am concerned with the level of responsiveness that came out of the U.S. Attorney's office when the pharmacists called to set up appointments or were looking for answers to their questions. Third, I am concerned that the ignored the clear request in FY 98 Commerce, Justice, State, Appropriations language.

    We all favor strong regulation of controlled substances. However, I must question the way the law is written today when it allows the DEA and the US Attorney's office to go into upstanding businesses like the pharmacies in my district and threaten them with fines so outrageous that they would lose everything they have worked hard for because i's were not dotted and were not crossed.

    In response to these concerns, there are a number of good ideas currently under consideration, including legislation Congressman and I are considering introducing. I hope that this hearing will serve to shed some light on appropriate action to take at this point to prevent this kind of legal extortion from happening in the future.

    Mr. MCCOLLUM. I would like to call our first panel this morning and get started. We have two witnesses on that panel.

    I would like to welcome Mary Lee Warren, our first witness. Ms. Warren is currently the Deputy Assistant Attorney General for the Criminal Division of the U.S. Department of Justice. She has previously served as the Chief of the Narcotics and Dangerous Drug Section within the Criminal Division.

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    Ms. Warren served as an Assistant United States Attorney in the Southern District of New York. During her time in New York, she served as the Chief of the Narcotics Unit.

    If we can have the name tags and have Ms. Warren go ahead and be seated up here, we would appreciate it.

    Our second witness, who may also join Ms. Warren up at the panel, is Mr. Gregory Williams, who is the Chief of Operations for the Drug Enforcement Administration. He began his career in law enforcement as a special agent with the DEA in Los Angeles. He has served as the Resident Agent in Charge at the Spokane, Washington, office; Staff Director of the Heroin Desk here in Washington, D.C.; and as the Senior Inspector in the Office of Professional Responsibility.

    Mr. Williams returned to the field to be Special Agent in Charge in Denver, Colorado, and then returned once again to Washington, D.C., to serve in his current capacity as Chief of Operations.

    We want to welcome both of you this morning, and I will call on you in the order in which we just introduced you. I would suggest, without objection, that your written testimony in both cases will be admitted into the record, and it is so ordered.

    You may proceed, Ms. Warren, to summarize your testimony, keeping it around 5 minutes or so. If you go over that, it is all right, as we will give you whatever time you really need. We aren't pressed this morning yet. We appreciate your being here. Please proceed.

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STATEMENT OF MARY LEE WARREN, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE

    Ms. WARREN. Thank you, Mr. Chairman. I am pleased to appear before you and pleased that Congressman Thornberry has joined the committee today.

    This is a critical, if unheralded, part of our national drug control problem: the prevention of the diversion of legally manufactured controlled substances—preventing them from being diverted to illegal channels.

    The DEA program to prevent and detect drug diversion is based in part on the civil penalty authority provided in the Controlled Substances Act, the CSA. It is the Department's strong conviction that all the sanctions under the CSA are pieces of a whole. In order to have a truly comprehensive system of drug control, the full gamut of regulatory and enforcement provisions must be supported by criminal, administrative and the current civil penalties.

    I understand that today's hearing is prompted in part by the case in Wichita Falls about which Congressman Thornberry spoke. In that case, some strongly worded demand letters were sent to a number of pharmacies. The Wichita Falls case was unfortunate, and it was an aberration. DEA and the U.S. Attorney for the District have apologized for the way the case was handled, and the Department of Justice reiterates that apology today.

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    However, the mishandling of that case should not prompt any evisceration of this important law that is generally not abused and which serves the salutary purpose of bolstering compliance with the system, the system by which DEA controls against the diversion of some of the most dangerous drugs available in this country.

    Current law provides for strict liability penalties of up to $25,000 for certain violations of the CSA regulatory provisions. We oppose the suggested amendments now contained in Sections 118 and 119 of the Senate version of the Justice Department's appropriation bill. They would impose an inappropriate ''knowingly'' standard and proof of actual diversion in this necessarily strict liability area that would, in the end, unacceptably weaken the graduated system of enforcement aimed at illegal diversions.

    The CSA's two main goals—the first goal, to prevent illicit drug traffic, is familiar to most Americans. The second goal, to prevent the diversion or redirection of legitimately produced drugs, is not so familiar, but it is inextricably tied with that first goal. DEA's regulation of the five schedules of controlled substances is achieved through a close system which creates the paper trail that the chairman spoke of for every transaction, whereby all participants in the chain of production and distribution are registered and held accountable for each transaction. Lapses in adherence to the recordkeeping and reporting provisions, even when they are merely careless and unintentional, undermine the close system of distribution and create the opportunity for drug diversion.

    When the opportunity for diversion exists, it will often be exploited. These are vastly profitable products in the drug traffickers trade, and one easily can imagine the incentives for diversion. One also easily can imagine the harm caused when these hundreds of thousands of pills eventually appear in high schools, on college campuses, street corners and elsewhere.

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    Abuse and diversion of legally manufactured drugs are major parts of the U.S. drug problem. The chairman noted the important pre-1970, statistics pre-1970 and in fiscal 1997 numbers of cases. The statistics show the importance of maintaining a strict control system to bolster the integrity of legitimate drug distribution in the health care system.

    The CSA also has a regulatory system for the chemicals commonly used in the production of drugs, those precursor and essential chemicals including the methamphetamine and amphetamine precursors. Noncompliance with these requirements compromises our chemical regulatory system and can have dire consequences. It is, therefore, puzzling to see the proposed amendments to weaken the civil penalties provisions of the CSA when less than 2 years ago Congress passed the Comprehensive Methamphetamine Control Act of 1996. This act amended the same code section to authorize a special penalty of up to $250,000 per violation for a business that sells chemicals with reckless disregard for its use if someone later uses or attempts to use those chemicals in the clandestine manufacture of methamphetamine.

    It was thought that the heightened meth threat, coupled with the higher reckless disregard standard, demanded the 10-fold increase in the maximum civil penalty. Now an even higher ''knowingly'' standard is proposed to be paired with the much lower penalty in the drug diversion area. In our opinion, Congress moved in the right direction in October 1996 and would move in the wrong direction if it proposes—if it passes the proposed measures.

    Sections 118 and 119 of the Senate version of the Justice Department's bill, in particular, would—let me begin where we stand at the moment. Section 842 of title 21 authorizes courts to impose a penalty of up to $25,000 for violations of certain regulatory provisions of the CSA and applicable DEA regulations. A civil penalty is but one option. The laws also provide for administrative sanctions, such as revocation or suspension of a DEA registration.

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    Most frequently, however, an investigation results in no adverse action, leaving instead the investigator's providing advice or counseling on compliance on the spot or, at most, a letter of admonition. This is because the DEA Diversion Program emphasizes cooperation and voluntary compliance by the regulated industry. DEA policy is clear that civil actions are not encouraged as a primary compliance tool, except in instances of actual, willful diversion or where a registrant's irresponsibility or unwillingness to comply has created a high probability of diversion. The DEA has communicated this policy to its field offices through a memorandum that has been shared with this subcommittee. DOJ has brought this DEA policy to the attention of the 94 U.S. Attorneys Offices.

    We are also circulating and suggesting the use of a form ''contact letter'' to initiate discussions in potential civil penalty cases. This letter is softer in tone than some forms of ''demand letters'' that have been used for this purpose in the past. At training seminars of Department attorneys who work on affirmative civil enforcement matters, we recommend the use of similar letters in all types of civil penalty cases.

    In general, the civil penalty provision of the CSA has been enforced appropriately and has not been overused.

    The chairman again noted the few instances in FY '97 that it was applied. As a general rule, civil assistant United States attorneys have not sought civil penalties on trifling grounds, but in cases of egregious, extensive or repeated violations.

    The civil penalty provision of the CSA carries a strict liability standard and appropriately so. The provision does not consider the violator's state of mind. Our review of other Federal statutes suggests that such strict liability standards are typical of civil penalty provisions affecting highly regulated industries. This is true, for example, of regulatory statutes relating to noncontrolled drugs, devices and foods regulated by the FDA. It also is true of most of our environmental statutes.

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    In fact, unlike many other agencies, the DEA does not have administrative authority to impose civil fines. The DEA and the DOJ attorneys must bring their claims in court. The clear import of these strict liability provisions is that compliance is a foregone imperative in these pervasively regulated industries and that participants must learn the rules and abide by them. In these areas, an unwitting or negligent violation jeopardizes public health and safety just as surely as a knowing one.

    With the ''knowing'' requirement, the Senate bill imposes the obligation to meet a criminal standard in a civil context, a context where the government is not able to use the investigative tools available to criminal prosecutors to help prove knowledge or intent.

    The proposed amendment would have an anomalous effect on the two-tiered civil and criminal approach that Congress established for violations of the CSA. Current law provides that the same violations subject to civil penalties, if committed ''knowingly,'' are subject to criminal misdemeanor penalties.

    By engrafting a criminal ''knowledge'' standard onto civil cases, the proposed amendment would blur the important distinction, based on the violator's state of mind, between civil and criminal cases. The effect would render obsolete the CSA's graduated penalty scheme.

    The proposed $500 cap on civil penalties, a reduction to 1/50 of the current maximum, would create an environment that, under business ''risk analysis,'' might invite less conscientious manufacturers, distributors, pharmacies and others to cut corners and costs, use inadequate systems for recordkeeping and reporting and safeguarding and to simply pay the fines if detected.

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    We do not question the good faith of most registrants, but it is inevitable that if the consequences of violation are greatly reduced, at least some controlled substance registrants and chemical handlers would be less diligent. This would ease the way for those who wish to divert controlled substances into the drug trade, the illicit drug trade.

    Pharmacies with lax standards of compliance would gain an unfair business advantage over their main-stream, conscientious competitors. We have a profound concern that the suggested changes in the law would fuel the methamphetamine crisis. Clandestine lab operators rely on the diversion of precursor chemicals.

    Requiring proof of actual drug diversion in order to exceed the $500 cap would be virtually impossible in the vast majority of CSA penalty cases. In fact, it would be especially difficult in the very worst cases the statute was designed to address, where the records are so shoddy that it is impossible to conduct an inventory, much less to determine what happened to those drugs that are missing. By weakening the enforcement mechanism, these amendments would virtually gut the graduated system of controls now in place.

    And there is one further point. A weakening of the CSA's civil penalty provisions would also have a negative impact on the integrity of our international counterdrug strategy and efforts. The United States has been a leader in the multilateral effort urging all countries to maintain a comprehensive and appropriate system of criminal, civil and administrative sanctions to support their drug and chemical control regimes. If the civil penalty provisions of the CSA are weakened as proposed, the United States would have no credibility in urging that other countries maintain rigorous programs that provide for tough sanctions. This will be particularly true in our bilateral initiatives with Mexico, our neighbor to the south.

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    In short, we need to set the example for what we ask others to do, and that means retaining a full complement of meaningful sanctions for noncompliance with the CSA.

    There is no reason to weaken the civil penalty provision of the Controlled Substances Act, which in all but the most aberrant cases is selectively and appropriately utilized by the DEA and civil assistant United States attorneys. The strict liability standard is appropriate to ensure compliance by persons and businesses registered with the DEA to handle these controlled and dangerous substances, as well as those who deal in regulated chemicals. A loosening of our enforcement standards would send the wrong message to the regulated community, the public and other countries which we seek as partners in our counterdrug efforts.

    Thank you.

    Mr. MCCOLLUM. Thank you, Ms. Warren.

PREPARED STATEMENT OF MARY LEE WARREN, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE

    I am pleased to have this opportunity to appear before you today to speak about a critical, if unheralded, part of our national drug control program, namely the prevention of the diversion (i.e., redirection) of legally manufactured controlled substances to illegal channels. The DEA diversion control program is backed in part by the civil penalty authority provided in the Controlled Substances Act (CSA). Mr. Chairman and distinguished members of the Subcommittee, it is the Department of Justice's strong conviction that the sanctions under the CSA are pieces of a whole: in order to have a truly comprehensive system of drug control, the full gamut of regulatory and enforcement provisions must be supported by criminal, civil and administrative penalties.

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Current law provides for a strict liability penalty of up to $25,000 for certain violations of CSA regulatory provisions. We oppose the suggested amendments now contained in Sections 118 and 119 of the Senate version of the Justice Department's appropriations bill for the following reasons:

1. Section 118 unwisely imposes a requirement that to obtain a civil penalty, a court must find that the violator acted ''knowingly.'' Proof of ''knowledge'' or other mental state is an unusual and inappropriate requirement in the context of civil penalties designed to ensure compliance in a highly regulated industry such as controlled substances. The willfulness of violations is already one of the factors considered by courts in determining the amount of a civil penalty in cases arising under the CSA. The courts also consider the degree of harm to the public; they do not, as would the proposed amendment in Section 119, limit significant penalties to cases where actual diversion can be proven.

2. The $500 penalty cap per violation '' one-fiftieth of the current $25,000 maximum '' proposed in Section 119 is simply too low to punish adequately some serious violations (e.g., the failure to report a large theft of morphine or the failure to report a proposed suspicious sale of a ton of precursor chemicals used to make methamphetamine). There is no evidence that the civil penalties imposed by courts or (more often) agreed to by violators are excessive, or that the current statutory authority is being overused or widely abused.

3. Taken together, the proposed amendments would weaken the enforcement options to such an extent that they would impair the underlying regulatory system. Inevitably, firms would relax their regulatory compliance, and just as inevitably, the rate of drug and chemical diversion to illicit channels would increase.

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4. Drug and chemical diversions have important international dimensions, and require multilateral cooperation. A watering down of our civil penalty statute would undermine U.S. leadership in drug control worldwide and reduce our credibility in asking other countries to enact and enforce comprehensive drug and chemical regulatory schemes.

THE CONTROLLED SUBSTANCES ACT: DIVERSION CONTROL ASPECTS

As you know, the core drug enforcement authority for DEA activities and federal prosecutions is the Controlled Substances Act (CSA), as it is commonly known, codified at Title 21 of the U.S. Code, in Sections 801 et seq. Broadly speaking, the CSA has two main goals. The first goal—to prevent illicit drug traffic—is familiar to most Americans. It involves investigation and prosecution of all levels and all aspects of drug trafficking organizations. The second goal—to prevent the diversion or redirection of legitimately produced drugs into illicit channels—is less familiar but is inextricably tied to the first goal.

Diversion control involves the huge and painstaking task of regulating several sectors of the pharmaceutical and health care industry, of which the overwhelming majority of participants are and wish to remain law-abiding and responsible. The DEA registers almost 1 million manufacturers, importers, exporters, distributors, physicians and pharmacies to handle controlled substances in some way. In its role as overseer of this system of regulation, DEA essentially serves as protector of the consuming public by ensuring that people who need the strong medicines it regulates are able to obtain them from legitimate and reliable sources. At the same time, in its oversight role, DEA ensures that the system is not susceptible to diversion.

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Under the CSA, the Attorney General—in a function delegated to the DEA—regulates five ''schedules'' of controlled substances. These are the most highly abused and addictive drugs: some 200 drugs that are a small subset of all prescription drugs. Regulation of these substances is achieved through a ''closed system'' which creates a ''paper trail'' for every transaction, and whereby all participants in the chain of production and distribution are registered and held accountable for each transaction. Therefore, the CSA requires all DEA registrants—including physicians and pharmacists—to maintain complete, accurate, readily retrievable records of all distributions of controlled substances. Businesses that keep stocks of controlled substances must have adequate security systems, take regular inventories and promptly report thefts or losses to the DEA. The DEA has the right to conduct administrative inspections and investigations of premises where controlled substances are kept and to conduct controlled substance audits.

THE DANGERS OF DRUG DIVERSION

Failure to adhere to the security, record-keeping and reporting provisions of the CSA creates a real opportunity for drugs to be diverted for illicit purposes. As this Subcommittee is well aware, our nation's drug problem is not confined to illicitly manufactured drugs such as cocaine, heroin, methamphetamine and marijuana. Abuse and diversion of legally manufactured drugs are a major part of the problem. Reliable data on the extent of this problem are not readily available, but the following are a few salient statistics:

in 1996, licitly manufactured controlled substances accounted for one-quarter of drug deaths reported by medical examiners and one-quarter of drug-related emergency room admissions.

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in 1995, more than 6.6 million Americans abused at least one prescription psychotherapeutic drug (stimulant, sedative, antidepressant or analgesic).

    As disturbing as these numbers may be, the current situation represents an improvement over the past decades in the sense that, relative to drug abuse nationwide, the proportion of abuse and diversion of licitly produced pharmaceutical drugs is decreasing.

prior to enacting the 1970 law, Congress was advised that some 60–70% of U.S. drug deaths arise from licitly produced drugs.

at the time the CSA was passed, almost 50% of the amphetamines and barbiturates produced legitimately in the U.S. were diverted into illicit channels.

    From these few benchmark statistics, it is clear that the system in place bolsters the integrity of the legitimate drug distribution and health care system.

    Lapses in adherence to the record-keeping and reporting provisions, even when they are merely careless and unintentional, undermine the closed system of distribution and create the opportunity for drug diversion. Where the opportunity for diversion exists, it will often be exploited. The reason is simple black market economics of supply and demand. The following are representative ''street prices'' of single tablets of legally produced controlled substance tablets:

Dilaudid 4 mg—$40-65

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Ritalin 10 mg.—$2-10

Morphine 100 mg.—$70-80

Valium 5 mg.—$1-5

    One can easily imagine the incentives for diversion, and the damage done when, for example, a pharmacy employee diverts thousands, and in some cases hundreds of thousands, of pills to the illicit market, and eventually to high schools and college campuses, ''rave'' parties, street corners and elsewhere.

CHEMICAL REGULATION AND DIVERSION

    The CSA also has a regulatory system—though not quite a ''closed'' one—for the chemicals commonly used in the production of drugs, known as precursor and essential chemicals. (''Precursors'' end up as part of the final drug product; ''essential chemicals are used as solvents, agents, reagents or catalysts in the manufacturing process.) The most important regulated chemicals today are the methamphetamine and amphetamine precursors ephedrine, pseudoephedrine and PPA (phenylpropanolamine). Regulatory requirements pertaining to these chemicals include registration of manufacturers and distributors, advance notice to DEA of imports and exports, reporting of suspicious transactions and events, record-keeping and the duty to ''know your customer.''

    Noncompliance with these requirements compromises our chemical regulatory system and has dire consequences. In the hands of a clandestine laboratory cook, every pound of ephedrine or pseudoephedrine diverted equates to almost a pound of methamphetamine. Before the chemical control amendments to the CSA were enacted in 1988, U.S. firms were supplying most of the potassium permanganate used in the processing of cocaine in Colombia. Acetic anhydride is diverted and used to manufacture heroin. The harm this country has suffered from trafficking and abuse of illicit drugs is a tragic consequence of chemical producing countries' having failed properly to monitor and police their supply and delivery. The chemical control provisions of the CSA and analogous laws in other countries are designed to prevent this phenomenon with minimal possible intrusion or burden on legitimate commerce in chemicals.

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    It is quite puzzling to see proposed amendments to weaken the civil penalty provisions of the CSA when less than two years ago, Congress passed the ''Comprehensive Methamphetamine Control Act of 1996,'' which amended the same code section to authorize a special penalty of up to $250,000 per violation for a business that sells chemicals with ''reckless disregard'' for their use, if someone later uses or attempts to use those chemicals in the clandestine manufacture of methamphetamine or amphetamine. The heightened ''reckless disregard'' standard, it was thought, demanded the ten-fold increase in the maximum civil penalty. Now an even higher ''knowingly'' standard is proposed to support a much lower penalty. In our opinion, Congress moved in the right direction in October 1996, and would move in the wrong direction if it passed the proposed measures.

CIVIL PENALTIES UNDER THE CONTROLLED SUBSTANCES ACT

    Turning to the particular provision of law that is the subject of this hearing, we reiterate our strong opposition to the suggested amendments in Sections 118 and 119 of the Senate version of the Justice Department's appropriations bill.

    The civil penalty provision of the CSA, codified at 21 U.S.C. §842, authorizes courts to impose a penalty of up to $25,000 for violations of certain regulatory provisions of the CSA and applicable DEA regulations. A civil penalty is but one option available; the law also provides for administrative sanctions, such as revocation or suspension of a DEA registration. Most frequently, however, an investigation results in no adverse action or, at most, a letter of admonition. This is because the DEA Diversion Program emphasizes cooperation with and voluntary compliance by the regulated industry. DEA policy is clear that civil actions are not encouraged as a primary compliance tool, except in instances of actual, willful diversion, or where a registrant's irresponsibility or unwillingness to comply has created a high probability of diversion. The DEA has communicated this policy to its field offices through a memorandum shared with this Subcommittee.

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    DOJ is bringing this DEA policy to the attention of the 94 U.S. Attorneys' Offices. We are also circulating and suggesting the use of a form ''contact letter'' to initiate discussions in potential civil penalty cases. This letter is softer in tone than some forms of ''demand letters'' that have been used for this purpose in the past. At training seminars of Department attorneys who work on affirmative civil enforcement matters, we recommend the use of similar letters in all types of civil penalty cases. Nevertheless, reviewing each case on its merits, we expect that the U.S. Attorneys will continue to pursue appropriate cases for civil penalties against DEA registrants who flout regulatory requirements and thereby create an open opportunity, if not invitation, for drug diversion.

    In general, the civil penalty provision of the CSA has been enforced appropriately, and has not been overused. DEA has furnished persuasive data on this point.

Of 955,000 DEA registrants in fiscal year 1997, only 116 (0.012%) paid a civil penalty.

Of 63,065 pharmacies registered with the DEA in fiscal year 1997, only 35 (0.055%) paid a civil penalty.

    As a rule, civil prosecutors have not sought civil penalties on trifling grounds, but in cases of egregious, extensive or repeated violations. I know that the case involving many pharmacies in Wichita Falls, Texas is of interest to this Subcommittee, but that case was an aberration. Both DEA and the Justice Department today reiterate our regret over the handling of that case. It is not representative of the way these cases are typically handled, and as I have stated, we are taking steps to prevent this from occurring in the future.

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    The civil penalty provision of the CSA carries a ''strict liability'' standard—and appropriately so. The provision does not consider the violator's state of mind; our review of other federal statutes suggests that such strict liability standards are typical of civil penalty provisions affecting highly-regulated industries. This is true, for example, of the regulatory statutes relating to non-controlled drugs, devices and food, regulated by the FDA. It is also true of most of our environmental statutes—including the Clean Water Act and the Federal Water Pollution Control Act—and other laws, such as the Trading with the Enemy Act and the Mine Safety and Health Act. In fact, unlike many other agencies, the DEA does not have administrative authority to impose civil fines; rather, DEA and its DOJ attorneys must bring their claims in court. The clear import of these strict liability provisions is that compliance is a foregone imperative in these pervasively regulated industries and that participants must learn the rules and abide by them. In these areas, an unwitting or negligent violation jeopardizes public health and safety just as surely as a ''knowing'' one.

    We oppose the amendments proposed in Sections 118 and 119 of the Senate appropriations bill, which would (1) require the government to prove that violations were engaged in ''knowingly,'' and (2) even in cases of ''knowing'' violations, lower the maximum penalty from $25,000 to $500, absent a showing of actual diversion of a drug. By weakening the enforcement mechanism, these amendments would virtually gut the system of controls now in place.

    With respect to the ''knowing'' requirement, it imposes the obligation to meet a criminal standard in a civil context, where we are not able to use the investigative tools available to criminal prosecutors to help prove knowledge or intent. In determining the amount of the penalty to impose, courts typically account for the violator's state of knowledge. In reported court decisions, judges consider four factor in setting a penalty: (1) the willfulness of the violations; (2) the extent the defendant profited from the illegal activity; (3) harm to the public; and (4) the defendant's ability to pay.

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    The proposed amendment would have an anomalous effect on the two-tiered approach that Congress established for violations of the CSA. Current law provides that the same violations subject to civil penalties, if committed ''knowingly,'' are subject to criminal misdemeanor penalties. By engrafting a criminal ''knowledge'' standard onto civil cases, the proposed amendment would blur the important distinction, based on the violator's state of mind, between civil and criminal cases. The effect would render obsolete the CSA's graduated penalty scheme.

    Requiring proof of actual drug diversion would be virtually impossible in the vast majority of CSA penalty cases. In fact, it would be especially difficult in the very worst cases that the statute was designed to address (e.g., where the records are so shoddy that it is impossible to conduct an accurate inventory, much less to determine what happened to any missing drugs).

    The proposed $500 cap on civil penalties—a reduction to one-fiftieth (1/50) of the current maximum—would create an environment that, under business ''risk analysis,'' might invite manufacturers, distributors, pharmacies and physicians to cut corners and costs, use inadequate systems for record-keeping and reporting and pay the fines if detected. We do not question the good faith of most registrants, but it is inevitable that if the consequences of violation are greatly reduced, at least some controlled substance registrants and chemical handlers would be less diligent. This would ease the way for those who wish to divert controlled substances into the black market—the exact situation in the U.S. prior to the enactment of the CSA. Pharmacies with lax standards of compliance would gain an unfair business advantage over their more conscientious competitors. Moreover, we have a profound concern that the suggested changes in the law would fuel the methamphetamine crisis. Clandestine lab operators rely on the diversion of precursor chemicals, such as ephedrine and pseudoephedrine, from ''rogue'' chemical firms and careless or unwitting legitimate establishments.

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    It is critical to note that the $25,000 figure is a maximum and should continue to be available, even if rarely imposed. In certain cases, a sum approaching that amount should be imposed. Consider, for example, the failure to report a major theft or loss of controlled substances to the DEA, or the sale of multi-ton quantities of pseudoephedrine to a firm in Mexico without filing the appropriate notice with the DEA. In other cases—indeed, most cases—such large penalties are clearly not appropriate.

IMPACT ON U.S. INTERNATIONAL COMMITMENTS

    A weakening of the CSA's civil penalty provisions would also have a negative impact on the integrity of our international counterdrug strategy and efforts. The United States has been a leader in the multilateral effort urging all countries to maintain a comprehensive and appropriate system of criminal, civil and administrative sanctions to support their drug and chemical control regimes. If the civil penalty provisions of the CSA are weakened as proposed, the United States would have no credibility in urging that other countries maintain rigorous programs that provide for tough sanctions.

    In particular, in our bilateral initiatives with Mexico, we are pressing our neighbor to the south to take stronger measures to regulate its pharmaceutical industry. Many of the licitly manufactured controlled substances that are later diverted in this country—including Rohypnol (also known as the ''date-rape'' drug), Valium and related preparations, and anabolic steroids—are obtained from Mexico. We suspect that pharmacies in the border areas of Mexico profit from practices that violate Mexican pharmacy laws, but the violations too often go unpunished due to scarce resources, among other reasons. DEA officials have recently initiated contacts that could make a difference in Mexico's cooperation in this area. In fact, a second DEA diversion investigator, soon to be posted in Mexico, should be able to focus on this issue. However, if our own law is weakened, we could not easily press Mexico to take the measures we think will make them better partners in curbing the cross-border diversion of drugs.

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    In short, we need to set the example for what we ask others to do, and that means retaining a full complement of meaningful sanctions for noncompliance with the CSA.

CONCLUSION

    There is no reason to weaken the civil penalty provision of the Controlled Substances Act, which, in all but the most aberrant cases, is selectively and appropriately utilized by the DEA and civil Assistant U.S. Attorneys and Department trial attorneys. The strict liability standard is appropriate to ensure compliance by persons and businesses registered with the DEA to handle controlled substances, as well as those who deal in regulated chemicals. A loosening of our enforcement standards would send the wrong message to the regulated community, the public and other countries which we seek as partners in our counter-drug efforts.

    Mr. MCCOLLUM. Mr. Williams?

STATEMENT OF GREGORY K. WILLIAMS, CHIEF OF OPERATIONS, DRUG ENFORCEMENT ADMINISTRATION, U.S. DEPARTMENT OF JUSTICE

    Mr. WILLIAMS. Thank you, Mr. Chairman.

    Mr. Chairman, members of the subcommittee and Congressman Thornberry, thank you for inviting me today to speak before you about DEA's Diversion Program, our investigative protocols and the initiatives we have in place to work more closely with the medical and pharmaceutical industry to prevent the diversion of pharmaceutical controlled drugs into entering the illicit market.

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    In 1970, the United States Congress passed the Controlled Substances Act which addresses many aspects of the drug problem and provides DEA with its authority. One of the critical outcomes of this legislation was the creation of a closed system of distribution that ensures the availability of pharmaceutical drugs to millions of Americans who need them in order to alleviate their medical conditions and ease their suffering. At the same time the Congress recognized this important need, they also recognized that the prevention of diversion of legitimate pharmaceuticals to the illicit market was a critical challenge.

    Those physicians, pharmacists and corporations who are registered to distribute, prescribe and dispense controlled Schedule II through Schedule V controlled substances play an integral role in safeguarding their stocks of controlled substances from theft and diversion. They are our partners in the national effort to keep licit drugs out of the illicit market. Their cooperation and trust is vital to the success of this effort.

    They also play a key role in the checks and balances system established by Congress which provides integrity to the flow of licit drugs from manufacturers to pharmacist. A breakdown anywhere in this closed system renders the whole program ineffective.

    At the outset, let me state for the record that the vast majority of almost one million individuals registered with DEA to handle controlled substances are honest, decent professionals who are as committed to the prevention of diversion as the Drug Enforcement Administration. Occasionally, there are unscrupulous individuals who use their position of trust to engage in illegal and unethical behavior. While that number is not large, DEA works hard to identify and rectify situations which can lead to the diversion of drugs, either through negligence or malfeasance.

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    Before I go into detail on these subjects, I would first like to review the facts surrounding an investigation of pharmacies in Wichita Falls, Texas, earlier this year. For the record, I want to State that the DEA and the U.S. Attorney's Office have publicly admitted and apologized for the events I am about to describe.

    In 1997, DEA received information from a local police officer in Wichita Falls, Texas, that large quantities of controlled substance prescriptions were being written by unregistered resident physicians in Wichita Falls and filled at local pharmacies. By reviewing the records of the pharmacies in Wichita Falls, our investigation revealed a highly unusual practice, whereby a large number of unregistered physician trainees at a local clinic were writing controlled substance prescriptions using the DEA registration number of their physician employer.

    These investigations were referred to the United States Attorney's Office for review for potential civil prosecution. On December 18th, 1997, letters were sent from the United States Attorney's Office to 27 pharmacies, at which time the prescriptions were filled, seeking substantial monetary penalties for the violations.

    Upon learning of the contents of the letters from several sources, including the offices of Congressman Thornberry, the Administrator moved quickly to correct what was an inappropriate and unacceptable action on the part of DEA and the U.S. Attorney's Office.

    First, the Special Agent in Charge of the Dallas Division publicly and directly apologized for the letters, which were unnecessarily harsh and intimidating. The United States Attorney and the Special Agent in Charge then sent letters to each of the pharmacies indicating that no punitive action would be sought provided they came into compliance with the law.

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    The Dallas DEA office provided each of the pharmacies with a list of local physicians and their DEA registration numbers. Furthermore, no punitive action is being taken against the registered physician and the unregistered interns as a result of this investigation. The action taken by the Diversion Investigators in our Dallas Division in this instance was clearly outside of the existing protocol and is not acceptable under established guidelines.

    Policies in effect since 1991 have clearly set out that civil action is not a primary enforcement tool in the absence of egregious conditions. DEA will not pursue civil action for relatively minor technical violations resulting from a registrant's mistake or misunderstanding of the regulations.

    We fully understand that our public apology in this matter does not rectify the impact those letters had on the pharmacists in Wichita Falls, many of whom were in fear of losing their livelihood. However, we have moved to insure that there will be no reoccurrence of this incident.

    Since January of this year, as a result of the Wichita Falls incident, a number of actions have been taken by DEA. Presently, DEA has republished the internal guidelines under which DEA field offices are directed to refer to the United States Attorneys a matter for civil prosecution. These guidelines State that pharmacy cases should only be referred for civil prosecution if diversion of controlled substances can be substantiated or if there were drug shortages, lack of required records, evidence of forgeries or falsified records which may have led to the diversion.

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    DEA also has instituted a more structured and higher level of review process before a case is referred to the U.S. Attorney's Office for prosecution. We have worked closely with the Department to provide notice to the Attorney's Office about the circumstances under which DEA would support civil prosecutions and to provide a less threatening sample contact letter to the United States Attorney's Office.

    In March 1998, program managers were given direct instructions by the Office of Diversion Control on new review procedures to be used in all cases. On May 1st of 1998, the Deputy Administrator and the Deputy Assistant Administrator for the Office of Diversion Control stressed the obligations of DEA under the Small Business Regulatory Enforcement and Fairness Act.

    We are currently preparing additional guidance that will be directed to our field offices as a result of recent meetings with the industry associations and congressional staff members. The guidance they will receive is that the Diversion Program managers must document their approval of the case referral to the United States Attorney's Office in writing, which will be made part of the investigative file. The referral document must identify the most serious violations which form the basis for seeking civil or criminal prosecution and provide the reasons why lessor sanctions are not being proposed.

    The Deputy Assistant Administrator for Diversion Control has expressed to the National Association of Chain Drug Stores that he wants to hear from them on any case, past or present, which they feel has been inappropriately referred for prosecution. In response to that offer, the National Association of Chain Drug Stores has requested the DEA to look into one case presently in settlement discussions in Detroit, Michigan.

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    A final decision has yet been made regarding the ultimate resolution of that investigation. I would like to reiterate Deputy Administrator King's request here today. DEA invites the National Association of Chain Drug Stores to bring to our attention any case that they feel was inappropriately handled by the Drug Enforcement Administration. We will, at the headquarters level, review each referral to ensure that the appropriate action has been taken by the Drug Enforcement Administration.

    Mr. Chairman, I want to assure this committee and the regulated community that civil prosecution of registrants is not now, nor has it ever been, a principal tool for ensuring regulatory compliance.

    Although the number of pharmacy investigations conducted each year is a relatively small percentage of the total investigations conducted by Diversion Investigators, this number does not in any way represent the number of pharmacies which are visited, most often in pursuit of evidence in other investigations.

    Before an investigation of a pharmacy or a physician is initiated, DEA evaluates a substantial volume of their information from a variety of sources, including State and local law enforcement and regulatory officers, individuals arrested for forging prescriptions, and excessive purchase reports from registered drug distributors and internal DEA databases. This information will be evaluated and confirmed before a decision is made to initiate an investigation. Therefore, once an investigation is opened, the likelihood that a targeted investigation of a pharmacy or a physician will result in some kind of action is relatively strong.

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    It is DEA's policy that technical violations are discussed with the registrant on-site and upon expressing their intent to correct them are not pursued further. We understand that human mistakes will inevitably be made in the course of generating and maintaining a large volume of records and even a cursory review of documents by trained investigators will uncover a few errors, which would, under a strict interpretation of the CSA, constitute violations of the Controlled Substances Act.

    Upon completion of an investigation, it has been, and continues to be, DEA's policy that only those cases that reveal criminal activities, substantial shortages of controlled substances or egregious disregard for their regulatory obligations will be referred for civil or criminal proportion.

    DEA has a full range of options to deal with a variety of mistakes and violations we encounter.

    I would like to bring your attention to a chart that has just been put on the easel. The vast majority of recordkeeping errors are discussed with the registrant at the time. This chart depicts the graduated steps that we use before seeking any type of civil or criminal action. Corrective action is then taken, with no further action, if deemed not to be warranted.

    For more serious incidents where the investigation shows a pattern of errors and omissions, DEA issues a letter of admonition which details the violations discovered and requests the registrant write back explaining what actions will be taken to correct them.

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    The next step is an administrative hearing, which is a more formal opportunity for the registrant to come before a midlevel DEA Diversion Manager and explain their plans to correct the cited violations. This approach is taken in the cases where the violations have a greater chance of resulting in diversion and often when a previous letter of admonition has been unsuccessful in bringing about a correction of the practices which violate the CSA.

    Lastly, criminal and civil fines, of course, are determined by the court or upon a settlement agreement between the company and the U.S. Attorney's Office. A voluntary surrender of the registration is almost always the results of a criminal conviction of the pharmacy owner for drug diversion or where the State has revoked the license, most often as a result of criminal diversion activities.

    In some instances, if there are mitigating circumstances or where a State has taken action for the same violation, DEA may forego actions at all. One such situation developed just last year.

    Prior to a Nationwide buy-out of a well-known pharmacy chain by one of the largest pharmacy chains in the United States, a number of substantial recordkeeping and security violations were investigated. Although legally liable for more violations of the company being acquired, including filling forged and altered prescriptions, failure to provide adequate controls against the loss or theft of controlled substances and incomplete or missing records, a decision was made by the DEA not to proceed civilly against the purchasing company.

    A draft complaint alleging 510 violations of the Controlled Substances Act, which amounts to a potential civil exposure of $12,750,000, was prepared and discussed with the attorneys for the company. However, in light of the fact that the new owners had expressed their strong intentions to resolve the problems and in view of the $1.5 million judgment accessed against the company by the State of Virginia for many of the same violations, it was decided by the DEA and the U.S. Attorney's Office not to seek monetary settlement in this case.

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    I would like to provide the subcommittee with a few relevant statistics to illustrate this point. As you can see by the chart that is being displayed now, in 1997, a total registrant population of 950,000 manufacturers, distributors, exporters, importers, narcotic treatment programs and pharmacies and physicians were actually identified as registrants. DEA initiated 2,211 diversion investigations during 1997. This number includes scheduled periodic investigations of manufacturers, distributors, narcotic treatment programs, as well as 151 complaint investigations against pharmacies.

    These 2,211 investigations resulted in a total of only 116 civil fines being levied. In other words, 1/100 of 1 percent of the industry received civil fines in 1997. Of the 116 civil fines, 35 were levied against pharmacies. The corresponding figures are similar for 1996.

    This next chart depicts actions against pharmacies in 1996. Of the 2,211 investigations conducted by DEA in 1997, 151 were on pharmacies. It is almost—excuse me, it is important to keep in mind that of the thousands of pharmacies DEA visited to review records in 1997, only 151 investigations were initiated. Those 151 investigations disclosed that 130 pharmacies were deemed to have violations that were actionable. 35 received civil fines, but, most importantly and indicative of our commitment to only pursue civil fines in the most egregious cases, 52—or 40 percent—of the actionable cases received letters of admonition.

    Of the pharmacy investigations collected in 1996, on 103 were deemed actionable. Of the 103 actionable cases in 1996, 40—or 38.8 percent—received letters of admonition. There were no administrative hearings held on pharmacies in 1996 and only two in 1997.

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    With respect to civil fines, which the chain pharmacies association is opposed to, I would like to show another chart. Of the 934,000 or so individuals and institutions registered with DEA in 1996, 124 paid civil fines. Of the 950,000 or so registrants in 1997, 116 paid civil fines. For pharmacies in 1996, of the 60,000 registered, 36 were assessed civil fines. And in 1997, out of 63,000 pharmacies, 35 paid a civil fine.

    In preparation for this hearing, Mr. Chairman, the Office of Diversion Control determined that a total of 121 contact letters had been sent to pharmacies in the last 2 and a half years notifying them of the potential for civil fines.

    What these figures show is that DEA does not have a program to routinely target pharmacies or to seek civil penalties whenever violations are discovered. Both the absolute numbers and corresponding percentages clearly reflect the judicious use of what is a powerful, but sometimes necessary, means of penalizing those who have shown gross disregard or worse toward their statutory obligations.

    The investigations of the 71 pharmacies which were assessed a civil penalty in 1996 and 1997 revealed that, in 46 of these pharmacies, 1,278,561 dosage units of controlled substances could not be accounted for by the registrant. In nine other cases, the lack of required records did not permit the investigators to conduct an audit to determine if there were shortages.

    Of the 71 cases in which letters were sent notifying the registrant of potential civil fines during 2 years of review, there was documented diversion in 47 other cases. The total of 30 people were ultimately arrested for acts of diversion directly related to the failures of these registrants to safeguard or account for their controlled substances.

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    In five of these cases, the registrant had been previously cited for the same or similar violations. Two had received letters of admonition, one had been the subject of an administrative hearing, and one was referred for revocation actions and later an administrative hearing, and one was previously fined $50,000 in a civil settlement.

    The single largest fine and most serious case during this 2-year period was a case against a mail order pharmacy which had filled numerous prescriptions without physician authorization or verification. This company filled prescriptions for an undercover Special Agent utilizing the name of the physician as the name of the patient. Controlled substances were also mailed to the Special Agent in his undercover role. This mail order pharmacy had previously received a letter of admonition for failure to maintain complete and accurate records in 1994.

    The pharmacy was cited for 132 recordkeeping violations, including dispensing unauthorized refills, dispensing on expired registrations and dispensing on altered or incomplete prescription information. The pharmacy paid a fine of $2,100,000 in 1997.

    The case with the smallest fine was initiated as a follow-up from a previous State inspection. The subject pharmacy had a prior history of recordkeeping violations dating back to 1988. As a result of this investigation, the pharmacy was cited for: failure to keep biennial inventory; a computer program resulting in the prescription refill log not being readily retrievable; and for merging purchasing invoices for Schedule III-V controlled substances with other business documents. While the potential liability for these three counts was $75,000, the pharmacy was ultimately fined $1,000.

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    In another case, it was determined that 130,000 dosage units of controlled substances had been diverted by a pharmacy employee which were not reported to DEA. In this case, the pharmacy paid a civil fine of $150,000. The fact that the diversion had taken place was discovered by DEA more than 1 year later from a source other than the pharmacy. Upon learning of the diversion, DEA investigated and criminally prosecuted the diverter, who had only been terminated for his actions by the pharmacy.

    By not notifying DEA of the criminal actions of their employee, he could have quietly relocated and commenced employment in another pharmacy, again with access to controlled substances.

    I would like to discuss the impact of the proposed statutory changes currently under consideration by Congress. In that context, it is important to review why there are strict liability requirements for recordkeeping and reporting in the Controlled Substances Act.

    In order to assure both their availability for medicinal use and to prevent their diversion into the illicit market, Congress established this closed system of registration and accountability for the pharmaceutical and health care industries. In turn, those individuals and institutions so registered commit to safeguarding their stocks of controlled substances from their threat or diversion and to keep and maintain records of their receipt and disposition.

    The unquestioned need for such controls to prevent diversion and abuse are as evident today as they were at the time of the passage of the Controlled Substances Act. When one looks at the frequency of emergency room admissions, the price that these drugs command in the illicit market, and the number of thefts and robberies reported by our Nation's pharmacies every year, there is incontrovertible evidence of the continued misuse of these licitly manufactured substances.

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    The proposal under consideration before this Congress would have the net effect of denying civil prosecution for any registrant. The amendment to the Senate Commerce, Justice, State appropriations bill would reduce the penalty for such willful acts from $25,000 for violation to $500.

    Mr. Chairman, the effect of these changes, if enacted, would be to virtually eliminate legislated incentives for legitimate, as well as disreputable, pharmaceutical and chemical registrants from maintaining records or filing required reports with DEA.

    The principal source of the evidence in most criminal diversion cases are the records and reports that are required to be kept. We do not foresee the lack of a significant deterrent through required recordkeeping as changing the manner in which the vast majority of the registrants maintain their records. However, the lax registrants and intentional diverters will fully exploit the opportunity to cover their tracks by not keeping records, thwarting DEA investigative efforts and significantly impacting our ability to document diversion through evidence. They will simply consider the $500 fine a cost of doing business.

    Mr. Chairman, DEA believes strongly that the strict liability standard imposed by Congress to promote adherence to the regulations controlling the activities of the pharmaceutical industry is vital to insuring that these dangerous and abusable drugs are not diverted to the illicit market where they can be due irreparable harm to our Nation. In light of the extremely rare occurrences encountered in the past 27 years, I am confident that the additional actions taken by the DEA to prevent honest and scrupulous registrants from even the possibility of unfair treatment will be more than sufficient to prevent a recurrence in the future.

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    Mr. Chairman, this concludes my remarks. I would welcome any questions you have.

    Mr. MCCOLLUM. Thank you, Mr. Williams.

    [The prepared statement of Mr. Williams follows:]

PREPARED STATEMENT OF GREGORY K. WILLIAMS, CHIEF OF OPERATIONS, DRUG ENFORCEMENT ADMINISTRATION, U.S. DEPARTMENT OF JUSTICE

    Mr. Chairman and members of the Subcommittee, thank you for inviting me to speak to you today about DEA's Diversion program, our investigative protocols and the initiatives we have in place to work more closely with the medical and pharmaceutical industry to prevent the diversion of pharmaceutical controlled drugs into the illicit market.

    In 1970, the United States Congress passed the Controlled Substances Act which addresses many aspects of the drug problem and provides DEA with its authority. One of the critical outcomes of this legislation was the creation of a closed system of distribution that insures the availability of pharmaceutical drugs to millions of Americans who need them in order to alleviate their medical conditions and ease their suffering. At the same time that Congress recognized this important need, they also recognized that the prevention of diversion of legitimate pharmaceuticals to the illicit market was a critical challenge. DEA was given the authority to establish a system of registration to ensure that manufacturers, distributors, wholesalers, pharmacists, doctors and nurse practitioners were responsible for keeping sound records and preventing the diversion of drugs.

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    Those physicians, pharmacies, and corporations who are registered to distribute, prescribe, and dispense Schedule II through V controlled substances play an integral role in safeguarding their stocks of controlled substances from theft and diversion. They are our partners in a national effort to keep licit drugs out of the illicit market. Their cooperation and trust is vital to the success of this effort. They also play a key role in the checks and balances system established by Congress which provides integrity to the flow of licit drugs from manufacturer to pharmacist. A breakdown anywhere in this closed system renders the whole program ineffective.

    At the outset, let me state for the record, that the vast majority of the almost one million individuals registered with DEA to handle controlled substances are honest, decent, professionals who are as committed to the prevention of diversion as the DEA. Occasionally, there are unscrupulous individuals who use their position of trust to engage in illegal and unethical behavior. While that number is not large, DEA works hard to identify and rectify situations which can lead to the diversion of drugs either through negligence or malfeasance.

    During my testimony before the Subcommittee today, I will provide you with information on several important topics: first, how DEA works across the nation cooperatively with registrants to prevent diversion; second, how DEA investigates potential diversion cases through civil and criminal investigations, and provide you with the numbers of investigations conducted against pharmacies in the past two years; third, how DEA views civil fines as an essential element of a successful enforcement philosophy and program; and fourth, how DEA is working to improve our program to ensure that there are collaborative and constructive partnerships in place to deal with the full range of issues of concern to DEA and the private sector.

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    Before I go into detail on these subjects, I would like to first review the facts surrounding an investigation of pharmacies in Wichita Falls, Texas earlier this year. For the record, I want to state that DEA and the U.S. Attorney's office have publicly admitted—and apologized for—the events I am about to describe.

    In late 1997, DEA received information from a local police officer in Wichita Falls, Texas that large quantities of controlled substance prescriptions were being written by unregistered resident physicians in Wichita Falls, and filled at local pharmacies. By reviewing the records of pharmacies in Wichita Falls, our investigation revealed a highly unusual practice, whereby a large number of unregistered physician trainees at a local clinic were writing controlled substance prescriptions using the DEA registration number of their physician employer. These investigations were referred to the United States Attorney's Office for review for possible civil prosecution. On December 18, 1997, letters were sent from the United States Attorney's Office to the 27 pharmacies, at which the prescriptions were filled, seeking substantial monetary penalties for the violations. The tenor and force of the letters was not appropriate to this type of proceeding.

    Upon learning of the content of the letters from several sources, including the offices of Congressman Thornberry, the Administrator moved quickly to correct what was an inappropriate and unacceptable action on the part of DEA and the U.S. Attorney's Office. First, the Special Agent in Charge of the Dallas Division publicly and directly apologized for the letters, which were unnecessarily harsh and intimidating. The United States Attorney and the Special Agent in Charge then sent letters to each of the pharmacies indicating that no punitive action would be sought provided they came into compliance with the law. The Dallas DEA Office provided each of the pharmacies with a list of local physicians and their DEA registration numbers. Furthermore, no punitive action is being taken against the registered physician and the unregistered interns as a result of this investigation. The action taken by the Diversion Investigators in our Dallas Division in this instance was clearly outside existing protocol and is not acceptable under established guidelines. Policies in effect since 1991 have clearly set out that civil action is not a primary enforcement tool in the absence of egregious conditions. DEA will not pursue civil action for relatively minor technical violations resulting from a registrant's mistake or misunderstanding of the regulations.

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    We fully understand that our public apology in this matter does not rectify the impact these letters had on the pharmacists in Wichita Falls, many of whom were in fear of losing their type of livelihood. However, we have moved to insure that there will be no reoccurrence of this incident.

    Since January of this year, as a result of the Wichita Falls incident, a number of actions have been taken by DEA to ensure that a situation of this nature never happens again. DEA has republished the internal guidelines under which DEA field offices are directed to refer a matter for civil prosecution. These guidelines contained in the Diversion Investigators Manual state that pharmacy cases should only be referred for civil prosecution if diversion of controlled substances can be substantiated or if there were drug shortages, lack of required records, evidence of forgeries, or falsified records which may have led to diversion.

    Since that time DEA has also instituted a more structured and higher level review procedure before a case is referred to the U.S. Attorney's Office for prosecution. Additionally, DEA has worked closely with the Department to provide notice to Assistant United States Attorneys about the circumstances under which DEA would support civil prosecution and to provide a sample, less threatening, contact letter to United States Attorneys Offices. This new contact letter has since been distributed to the U.S. Attorneys Offices. At a meeting of the Diversion Program Managers which was convened in Denver, Colorado in March, 1998, Program Managers were given direct instructions by the Office of Diversion Control on new review procedures to be used in all cases. On May 1, 1998, separate memoranda written by the Deputy Administrator and the Deputy Assistant Administrator for the Office of Diversion Control stressed the obligations of DEA under the Small Business Regulatory Enforcement and Fairness Act to forego civil fines for first offenses and where the registrant commits to make a good faith effort to correct the deficiencies. These memoranda also strongly reiterated DEA's policy with respect to the appropriate circumstances under which civil prosecution should be sought.

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    On May 15, 1998, the Deputy Assistant Administrator for Diversion Control met with several senior staff of the National Association of Chain Drug Stores to discuss their concerns with respect to DEA's civil enforcement efforts relating to its members. We assured them that officials at both DEA Headquarters and senior field management level are committed to continuing to monitor the referral process to insure compliance with existing policies and new procedures.

    The situation in Wichita Falls, I believe, would not have occurred if established policies had been adhered to and these new review procedures by Program Managers had been in place at the time. We are currently preparing additional guidance that will be directed to our field offices as a result of recent meetings with the industry associations and Congressional staff members. The guidance they will receive is that the Diversion Program Manager must document their approval of a case referral to the U.S. Attorney's Office in writing which will be made part of the investigative file; the referral document must identify the most serious violations which form the basis for seeking civil or criminal prosecution and provide the reasons why lessor sanctions are not being proposed, in conformity with the Small Business Regulatory Enforcement and Fairness Act; DEA will work with legitimate businesses which make a good faith effort to assist them in their efforts to come into compliance with their regulatory obligations.

    The Deputy Assistant Administrator for Diversion Control has expressed to the National Association of Chain Drug Stores that he wants to hear from them on any case, past or present, which they feel has been inappropriately referred for prosecution. In response to that offer the National Association of Chain Drug Stores has requested that DEA look into one case presently in settlement discussions in Detroit, Michigan. A final decision has not yet been made regarding the ultimate resolution of that investigation. I would like to reiterate Deputy Assistant Administrator King's request here today—we invite the NACDS and the independent pharmacists association to bring to our attention any case that they feel was inappropriately handled by the Drug Enforcement Administration. We will, at the Headquarters level, review each referral to ensure the appropriate action has been taken by DEA.

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    The principal argument voiced by proponents for the passage of this legislation is that DEA has embarked on an overly aggressive program of investigation and prosecution of registrants, principally pharmacies. Proponents have claimed that DEA Diversion Investigators regularly refer pharmacies for civil prosecution often for insignificant, technical violations of the Controlled Substances Act or even when the registrants act responsibly to fulfill their reporting obligations and no diversion of controlled substances has been proven. Mr. Chairman, I want to assure this committee and the regulated community that civil prosecution of registrants is not now, nor has it ever been, a principal tool for ensuring regulatory compliance.

    Although the number of pharmacy investigations conducted each year is a relatively small percentage of the total investigations conducted by Diversion Investigators, this number does not in any way represent the number of pharmacies which are visited, most often in pursuit of evidence in other investigations. Before an investigation of a pharmacy or a physician is initiated, DEA will have received and evaluated a substantial volume of information from a variety of sources, including state and local law enforcement and regulatory officials, individuals arrested for forging prescriptions or doctor shopping, and excessive purchase reports from registered drug distributors and internal DEA data bases. This information will be evaluated and confirmed before a decision is made to initiate an investigation. Therefore, once an investigation is opened, the likelihood that a targeted investigation of a pharmacy or physician will result in some kind of action is relatively strong.

    It is DEA's policy that technical violations are discussed with the registrant on-site and upon expressing their intent to correct them are not pursued further. We understand that human mistakes will inevitably be made in the course of generating and maintaining a large volume of records and even a cursory review of documents by trained investigators will uncover a few errors which would, under a strict interpretation of the CSA, constitute violations of the Controlled Substances Act. Some members of industry accuse DEA of embarking on a program of routinely targeting and civilly prosecuting pharmacies who either bring their own errors to DEA's attention or who have made a few minor mistakes.

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Investigations of pharmacies and physicians are only initiated upon receipt of information, which indicates that there is evidence of actual diversion or there are serious deficiencies in their safeguards against diversion. Upon completion of an investigation, it has been, and continues to be, DEA's policy that only those cases that reveal criminal activity, substantial shortages of controlled substances, or egregious disregard for regulatory obligations will be referred for civil action or criminal prosecution.

DEA has established a full range of options to deal with variety of mistakes and violations we encounter. The vast majority of record keeping errors are discussed with the registrant at the time. Corrective action is then taken, and no further action is warranted. For more serious incidents where the investigation shows a pattern of errors and omissions, DEA issues a Letter of Admonition. This is a notification letter sent by the local DEA office which details the violations discovered and requests that the registrant write back explaining what actions it will take to correct them. An Administrative Hearing is a more formal opportunity for the registrant to come before a mid-level DEA Diversion Manager and explain his or her plans to correct the cited violations. This approach is taken in the cases where the violations have a greater chance of resulting in diversion and often when a previous Letter of Admonition has been unsuccessful in bringing about a correction of the practices which violate the CSA. Criminal and civil fines, of course, are determined by the court or upon a settlement agreement between the company and the U.S. Attorneys Office. A voluntary surrender of registration is almost always the result of a criminal conviction of the pharmacy owner for drug diversion or where the state has revoked the license of the owner/pharmacist, again most often as a result of criminal diversion activities. In some instances if there are mitigating circumstances or where a state has taken action for the same violations, DEA may forego action at all. One such situation developed just last year. Just prior to a nationwide buy out of a well known pharmacy chain by one of the largest pharmacy chains in the United States was consummated, a number of substantial recordkeeping and security violations were investigated. Although legally liable for the violations of the company being acquired, including filling forged and altered prescriptions, failure to provide adequate controls against the loss or theft of controlled substances, and incomplete or missing records, a decision was made by DEA not to proceed civilly against the purchasing company. A draft complaint alleging 510 violations of the Controlled Substances Act, which amounts to a potential civil exposure of $12, 750,000, was prepared and discussed with the attorney's for the company. However, in light of the fact that the new owners have expressed their strong intention to resolve the problems and in view of the 1.5 million dollar judgement assessed against the company by the state of Virginia for many of the same violations, it was decided by DEA and the U.S. Attorney's Office not to seek a monetary settlement in this case.

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    I would like to provide the Subcommittee with a few relevant statistics to illustrate this point. As you can see from these charts, DEA, which has a total registrant population of over 950,000, comprised of manufacturers, distributors, exporters, importers, narcotic treatment programs, pharmacies, and physicians, initiated 2,211 diversion investigations during 1997. This number includes scheduled periodic investigations of manufacturers, distributors, and narcotic treatment programs, as well as the 151 complaint investigations against pharmacies. These 2,211 investigations resulted in a total of only 116 civil fines being levied; in other words, 1 hundredth of one percent of the industry received civil fines in 1997. Of these, 35 were levied against pharmacies. The corresponding figures are similar for 1996.

    Of the 2,211 investigations conducted by DEA in 1997, 151 were on pharmacies. It is important to keep in mind that of the thousands of pharmacies DEA visited to review records in 1997, only 151 investigations were initiated. And, as I mentioned earlier, these investigations are initiated based on referrals and information from state and local authorities, allegations of criminal activity by individuals arrested for prescription forgeries or doctor shopping, and suspect purchasing patterns. Those 151 investigations disclosed that 130 pharmacies were deemed to have violations that were actionable; 35 received civil fines but, most importantly and indicative of our commitment to only pursue civil fines in the most egregious cases, 52 (or 40 %) of the actionable cases received Letters of Admonition. Of the pharmacy investigations conducted in 1996, only 103 were deemed actionable. Of the 103 actionable cases in 1996, 40 (or 38.8%) received Letters of Admonition. There were no administrative hearings held on pharmacies in 1996, and only 2 in 1997.

    Our investigation resulted in 13 criminal fines in 1996 and 22 in 1997. There were 14 pharmacies who voluntarily surrendered their registrations for cause in 1996 and 19 in 1997.

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With respect to the issue of civil fines which the chain pharmacy association is opposed to, of the 930,000 or so individuals and institutions registered with DEA in 1996, 124 paid civil fines; of the 950,000 or so registrants in 1997, 116 paid civil fines. For pharmacies in 1996, of the 60,000 registered, 36 were assessed civil fines; and in 1997, out of 63,000 pharmacies, 35 paid a civil fine. In preparation for this hearing, Mr. Chairman, the Office of Diversion Control determined that a total of 121 contact letters had been sent to pharmacies in the last two and a half years notifying them of the potential for civil penalties. What these figures show is that DEA does not have a program to routinely target pharmacies or to seek civil penalties whenever violations are discovered. Both the absolute numbers and corresponding percentages clearly reflect the judicious use of what is a powerful, but sometimes necessary, means of penalizing those who have shown gross disregard or worse towards their statutory obligations.

It is important to understand the potential deleterious effects that registrants, who don't abide by existing record keeping requirements, or worse yet, are knowingly involved in the diversion of controlled pharmaceutical drugs, have had on public health and safety. The investigations of the 71 pharmacies which were assessed a civil penalty in 1996 and 1997 revealed that, in 46 of these pharmacies, 1,278,561 dosage units of controlled substances could not be accounted for by the registrants. In 9 other cases, the lack of required records did not permit the investigators to conduct an audit to determine if there were shortages. Of the 71 cases in which letters were sent notifying the registrant of potential civil fines during the 2 years reviewed, there was documented diversion in 47 of the cases. A total of 30 people were ultimately arrested for acts of diversion directly related to the failures of these registrants to safeguard or account for their controlled substances. In 5 of the cases, the registrant had been previously cited for the same or similar violations. Two had received Letters of Admonition, one had been the subject of an Administrative Hearing, one was referred for a revocation action and later an Administrative Hearing, and one was previously fined $50,000 in a civil settlement.

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    The single largest fine, and certainly among the most serious cases during this two year period, was a case against a mail order pharmacy which had filled numerous prescriptions without physician authorization or verification. This company filled prescriptions for an undercover Special Agent utilizing the name of the physician as the name of the patient. Controlled substances were also mailed to the Special Agent in his undercover role. This mail order pharmacy had previously received a Letter of Admonition for failure to maintain complete and accurate records in 1994. The pharmacy was cited for 132 record keeping violations, including dispensing unauthorized refills, dispensing on expired registrations, and dispensing on altered or incomplete prescription information. The pharmacy paid a fine of $2,100,000 in 1997.

    The case with the smallest fine was initiated as a follow-up from a previous state inspection. The subject pharmacy had a prior history of record keeping violations dating back to 1988. As a result of this investigation, the pharmacy was cited for: failure to take a biennial inventory; a computer problem resulting in the prescription refill log not being readily retrievable; and for merging purchase invoices for Schedule III-V controlled substances with other business documents.

    While the potential liability for these three counts was $75,000 and the pharmacy was ultimately fined $1000. In another case, it was determined that 130,000 dosage units of controlled substances had been diverted by a pharmacy employee, which were not reported to DEA. In this case, the pharmacy paid a civil fine of $150,000. The fact that the diversion had taken place was discovered by DEA more than one year later from a source other than the pharmacy. Upon learning of the diversion, DEA investigated and criminally prosecuted the diverter, who had only been terminated for his actions by the pharmacy. By not notifying DEA of the criminal acts of their employee, he could have quietly relocated and commenced employment in another pharmacy, again with access to controlled substances.

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    I would like to discuss the impact of the proposed statutory changes currently under consideration by Congress. In that context it is important to review why there are strict liability requirements for record keeping and reporting in the Controlled Substances Act. When the United States Congress passed the Controlled Substances Act in 1970 and established a closed system of distribution, they recognized that these legitimately manufactured substances are virtually identical, in form and potency, to the clandestinely manufactured narcotics, stimulants, and depressants which are so widely abused on America's streets.

    In order to assure both their availability for medicinal use and to prevent their diversion into the illicit market, Congress established this closed system of registration and accountability for the pharmaceutical and health care industries. Anyone wishing to legally manufacture, import, distribute, or dispense controlled substances in the U.S. must become registered with DEA. In turn, those individuals and institutions so registered commit to safeguarding their stocks of controlled substances from theft or diversion and to keep and maintain records of their receipt and disposition. In this way, DEA and the regulated community work together to provide effective safeguards against potential controlled substance diversion and abuse. The unquestioned need for such controls to prevent diversion and abuse are as evident today as they were at the time of the passage of the Controlled Substances Act. When one looks at the frequency of emergency room admissions, the price that these drugs command in the illicit market, and the number of thefts and robberies reported by our nation's pharmacies every year, there is incontrovertible evidence of the continued misuse of these licitly manufactured substances.

    The proposal under consideration before this Congress would have the net effect of denying civil prosecution for any registrant. Any registrant which fails to make, keep, and maintain required controlled substance and chemical records or who fails to file reports cannot be fined unless it is proven that such failure was done with knowledge and intent. In essence, this is the standard of proof for criminal prosecutions not civil. The amendment to the Senate Commerce-Justice-State Appropriations bill would reduce the penalty for such willful acts from the current 25,000 dollars per violation to 500 dollars. Mr. Chairman, the effect of these changes if enacted would be to virtually eliminate legislated incentives for legitimate, as well as disreputable, pharmaceutical and chemical registrants from maintaining records or filing required reports with DEA. The principal source of evidence in most criminal diversion cases are the records and reports that are required to be kept. We do not foresee the lack of a significant deterrent to required record keeping as changing the manner in which the vast majority of registrants maintain their records. They will continue to comply with existing regulations. However, lax registrants and intentional diverters will fully exploit the opportunity to cover their tracks by not keeping records, thwarting DEA's investigative efforts and significantly impacting our ability to document diversion through evidence. They will simply consider the $500 fine a cost of doing business.

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    Mr. Chairman, DEA believes strongly that the strict liability standard imposed by Congress to promote adherence to the regulations controlling the activities of the pharmaceutical industry is vital to insuring that these dangerous and abusable drugs are not diverted into the illicit market where they can do irreparable harm to our nation. In light of the extremely rare occurrences encountered in the past 27 years, I am confident that the additional actions taken by DEA to prevent honest and scrupulous registrants from even the possibility of unfair treatment will be more than sufficient to prevent a recurrence in the future.

    Mr. Chairman, this concludes my prepared remarks, and I would welcome any questions you or the Subcommittee members might have.

    Mr. McCollum. I did not mean to interrupt either you or Ms. Warren, but I just want to asmonish both the Justice Department and DEA. They need to prepare you to summarize your testimony, because the amount of time consumed today may be all right, because we are not under pressure at the moment, but we may be later. It is just difficult to take a long statement and put the whole statement in the record, then read it. Not getting on your case individually, but I am sure there are others here who are listening, and I would like to be sure that message is taken back.

    Secondly, I want to say Ms. Jackson Lee had to leave, and she requested that her complete statement be admitted in record, without objection. It is so ordered.

    [The prepared statement of Ms. Jackson Lee follows:]

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PREPARED STATEMENT OF HON. SHEILA JACKSON LEE, A REPRESENTATIVE IN CONGRESS FRON THE STATE OF TEXAS

    I would like to thank Chairman McCollum and Ranking Member Schumer for holding this important hearing on federal law enforcement efforts to curb the problem of drug diversion here in the United States.

    Drug diversion is a serious problem. Basically, the term describes the misappropriation of legal, prescription medication for illegal uses. Currently, our efforts to curb this sort of abuse have focused on the heavy regulation of the retail pharmaceutical industry.

    Currently, regulation of the retail pharmaceutical industry consist of targeted reporting and records. requirements, and stiff penalties for violations. Those fines, imposed under a theory of strict liability, have been fairly successful in the past in curbing the practice of drug diversion. However, now we are hearing cries from the retailing community that application of these laws is impeding their ability to do business effectively.

    Today's hearing should provide us with valuable information, allowing us to understand the magnitude of the problem. If the problem, is in fact as serious as alleged, then we will have to take a long, hard look at the Controlled Substances Act (CSA) to make sure that it cannot be improved.

    One of the proposals on the table today involves a restructuring of the penalties for violations of the CSA. It changes the law by requiring proof of ''knowing'' intent, in order to prosecute certain violations under the Act. Furthermore, the proposal places a cap of $500 on violations, in order to maintain some pressure on pharmacists while deterring the DEA from overzealous prosecution.

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    The Department of Justice strongly opposes any efforts to change the CSA. In their letter to Chairman McCollum on this issue, Acting Assistant Attorney General Sutin warned that these steep penalties are necessary to maintain strict compliance with the CSA. Furthermore, he stressed that our drug diversion policy is not only about stemming the abuse of prescription medication, but also about the control of chemicals used as precursors to make highly-addictive illicit drugs like methamphetamine (meth).

    For that reason, I am hesitant to fully support the proposals. Although I do not support the proposals as I see them today, there may be a better balance that can be struck between the protection of pharmacist's business interests, and the important national goal of ridding our streets of dangerous drugs.

    I look forward to hearing the testimony of the panelists today, and having a honest and frank discussion about the possibilities before us.

    Mr. MCCOLLUM. I am going to yield myself 5 minutes for questions and then go to the rest of our members.

    This is the second time in the past year that it has been brought to my attention that the Justice Department or an agency of the Justice Department in a health-related matter has had a problem with overzealous letters, either from a U.S. attorney, assistant U.S. Attorney or a DEA or agency person, making statements in the form of threatening letters; and then the Justice Department having come back and said, we really didn't mean that, and it is the statement of someone who was not authorized to speak for the agency. The first case was the False Claims Act regarding hospitals, and now I see this with regard to at least one or two cases in the pharmaceutical area.

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    Ms. Warren, can you assure us that there is some kind of a check going on to make sure we don't see this in other areas? This is two times in a year. I don't remember seeing this, two times in 10 years before that coming to my attention, and I have been sitting on this committee quite a long time now.

    Ms. WARREN. The Department of Justice, through the executive office of U.S. attorneys and main Justice, has worked to put together a series of training efforts reaching out to those who do these civil affirmative action enforcement efforts. I have a long list of training that has gone on in the past year and what is scheduled for the next year, that I would like to provide the committee with——

    Mr. MCCOLLUM. Please do.

    Ms. WARREN [continuing]. To show that we are working with them individually, in their offices, with their supervisors and with the U.S. attorneys directly, to ensure that this overzealousness is not repeated. There will be lots of checks
    Mr. MCCOLLUM. I just want to admonish in this sense, too, that I recognize your effort, and I appreciate it; and I think that is positive, and we are all pleased. But the reality is that when you have a person who is working and is one of those people you described earlier as one of the vast majority of very cooperative people in this industry, be it pharmacies or hospitals or whatever, and they are making errors unintentionally, which they are going to make occasionally, they feel extremely threatened by the potential liability that exists in these civil matters; and their jobs are threatened, in their view. So the kind of harsh letters and the threatening types of things that go out really do resonate much more than maybe would be the case had it been in some other arena.

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    Anyway, Mr. Williams, your testimony states that the DEA action in Wichita Falls was outside of existing protocol and is not accepted under established guidelines. I am curious to know, in your judgment, how did it happen, and what confidence do we have in the ability of the protocols and guidelines to prevent this in the future? I know you said they have been changed, but I am curious to know how those persons who departed from the protocols and guidelines are held accountable and how these new guidelines make a difference?

    Mr. WILLIAMS. Mr. Chairman, presently we have what we call a Program Manager. That is a senior Diversion Investigator that actually oversees all operations in the field. In the future, any investigation that is conducted or any review of a pharmacy or checks on pharmacies would actually be documented and sent to the Program Manager, and he would review the findings of the Investigator to ensure that everything has been looked at, that the graduated actions have been taken, that we work very closely with the pharmacy or registrant to determine if they are willing to fix a problem that we have actually identified and brought to their attention prior to taking it or approaching the U.S. Attorney's Office to pursue any other type of action.

    Mr. MCCOLLUM. Well, now, how did this happen in the first place? How did we have this Wichita Falls matter happen in the first place?

    Mr. WILLIAMS. The information was brought to us that there were violations being conducted at the pharmacy. Agents went out—excuse me, diversion Investigators went out, conducted an audit of what they were doing at the pharmacy, and the violations were drafted and sent to the U.S. Attorney's Office for review.

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    Mr. MCCOLLUM. But the incident involved a departure from existing protocol. What was that departure?

    Mr. WILLIAMS. We feel that just the drafting of the letter and advising the pharmacy that they were looking at multiple violations and their exposure to a large fine, they could be fined up to, and I think it was $2 million or $5 million—I don't remember the exact amount; but if they were willing to settle, go to a settlement hearing, that the fine would be less. We feel that that is inappropriate, and that will not be taking place in the future.

    Mr. MCCOLLUM. And that is exactly the same type of letter that Justice was criticized for in the False Claims Act for sending, or having some U.S. attorneys or assistant U.S. attorneys send, to hospitals. You may not know that, but I am just saying its related—and that is what I admit when I said to Ms. Warren that we have seen this twice in the past 2 years in different arenas.

    Have those people been held accountable in any way for doing that?

    Mr. WILLIAMS. Yes, sir. It came to the administrator's attention. He has actually put safeguards in place now that this would not ever happen again, and the Program Managers and also our Deputy Administrator for Diversion will be reviewing and looking at all future investigations.

    Mr. MCCOLLUM. The False Claims Act has a knowing standard. It says that an individual is subject to civil fines only for knowingly causing a false claim to be filed with the government; and that is defined as actual knowledge, deliberate ignorance or reckless disregard of the truth.

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    Why should this area of controlled substances have a lesser standard? Why the strict liability, Ms. Warren, in this case, as opposed to the False Claims Act?

    Ms. WARREN. Because this is a closely regulated area, like a nuclear disposal area, like a toxic waste disposal area. It is a foregone requirement that the individuals, the registrants in this instance, are required to know the rules and to follow them, and the compliance is assumed or opportunities for diversions arise. In the false claims area, it is not that closed area of strict scrutiny that individuals register and take on those extraordinary responsibilities of handling nuclear or toxic waste or these very powerful drugs.

    Mr. MCCOLLUM. Well, what do you have to say about what the pharmacists are going to tell us later, that they make mistakes every day in paperwork and they are totally unavoidable, and there are hundreds of them made and they feel intimidated by this? It is the same thing I get from the hospitals and the doctors who say, we have to file these forms and we make mistakes every day.

    I know that you are saying these mistakes made by pharmacists are more serious in this case than the doctors in filing a claim. I suppose I can see that, but I also can see where they are thinking, gee whiz, I am getting zapped for something I can't help, but—I am just going to do it. It is going to happen.

    Ms. WARREN. And there will be occasions of lapses, and those are understood, and the guidance from DEA and from the Department of Justice is that we are not to act on each of those technical violations, but look carefully and exercise our discretion scrupulously. That is what the memo from the administrator advises, and that is what the executive office of the U.S. attorneys and the leader of the attorney generals advisory counsel U.S. attorneys have sent out to all U.S. attorneys.

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    Mr. MCCOLLUM. The difference between $25,000 and $500 is huge in terms of what is being proposed in a change, per violation, but these are paperwork violations, am I not correct, record-keeping violations?

    Ms. WARREN. They refer to—that is correct, the regulations at issue are in terms of record-keeping, but necessary records in this dangerous business.

    Mr. MCCOLLUM. I know, but what I am getting at is while I certainly don't think necessarily we ought to bring the violation down to a $500 fine for each one—although that can add up in a hurry if there are enough of them, I know that—somewhere between $25,000 and $500 it would seem to me to be appropriate. $25,000 for one technical violation when we have got some evidence on the type of stuff where somebody doesn't check the right box or doesn't keep the paperwork, is a little bit sloppy.

    $25,000 for any one of those you have the authority to hold them for, boy. I know what you're saying, you want some kick in it when people are really bad apples, but $10,000 a violation would be a big kick.

    I will yield at this point to, I think Mr. Gekas was the next one to arrive, and I am going to let you ask 5 minutes of questions.

    Mr. GEKAS. I thank the Chair.

    I want to continue to press on the nerve that the chairman has touched on, the question of the discrepancy and the level of fines imposable. Both of you, in your testimony, I take it, seem to favor continuation of the strict liability parameters, and are hostile then to the proposals in the Senate that the fines be lowered in certain cases to a maximum of $500.

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    The question arises in pursuit of what the chairman has started in his questioning: If it is strict liability to start with, but you know that this particular violation was deliberate and done with knowledge and was done with profit as its motivation and so forth, you know that you want to hit that person with $25,000 for a particular violation; but under the scale that is already existing, a person who inadvertently—a pharmacist who inadvertently adds up 11 and 11 and gets 23, which I do constantly, is also susceptible to the same fine.

    I am trying to—our office is trying to draft a compromise proposition that I would ask you to look at in pursuit of what the chairman has elucidated here.

    Shouldn't we have some differences in the imposability of fines based on the nature of the motivation? If it was sheer negligence, a bookkeeper's error, surely you are not going to want to impose a $25,000 fine; and if you know that this is a pharmacist that—draped in drug dealer's clothing, who will do anything at any time to divert, then that $25,000 should apply.

    Shouldn't you be determining, with us, a scale that would reflect the knowingness of a violation from a bookkeeping error? That is what the whole gist of this argument is.

    Ms. WARREN. I won't repeat my reasons why I think strict liability is necessary in this particular closely regulated system, but $25,000 is the maximum. There are clear considerations that the court applies in setting those civil penalties, and the Department of Justice attorneys apply in any settlement. So it is not $25,000 automatically.

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    Mr. GEKAS. I know that.

    Ms. WARREN. There are four considerations that the courts have developed. One is the willfulness of the action; the other is the harm to the public that was felt, the profit taken by the defendant, and the defendant's ability to pay. So those criteria are built into where this civil fine should be set.

    Mr. GEKAS. And in my question, I incorporated those very same criteria.

    Ms. WARREN. But that is being done now.

    Mr. GEKAS. But I am saying to you, if that is already being done by your office and the judges are reflecting that, why not codify it, thus, putting it into words and provisions so that everyone would have notice as to what the courts are doing, what the discretion is that is being exercised by your office, and the whole world of the controlled substances and the pharmacists arena will know where they are. Fewer letters would go out, fewer mistakes would be made by your office, fewer people would be threatened to close shop, et cetera.

    I am asking whether you oppose codifying what your office does in exercising discretion and determining how much fine should be imposed, or recommending to the court what fine should be imposed, and the court decisions in the past to which you have just referred, which give special credence to the profit made or to the motivation, the intention and knowingness, the corruption that might be incurred, all of that.

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    I am asking you; if you can give an answer now, fine. If not, you can have your superiors let us know what opposition you would have to codifying what they already do.

    Ms. WARREN. I would ask to follow up after I have spoken back at the Department.

    I would suggest on my behalf at this time that it might not be necessary to codify it. Language from this hearing alone I think can give that kind of advice in a very forceful way, just as you did in the Appropriations Act last year.

    Mr. GEKAS. Well, you give us more credit than anybody else gives us.

    Ms. WARREN. I give you enormous credit.

    Mr. GEKAS. But I think it will be stronger if we continue down the path of trying to develop legislation that might fall in between what you have condemned, lightly condemned, on the part of the Senate in their proposals, with what is presently in this bill.

    I thank the Chair.

    Mr. MCCOLLUM. Thank you, Mr. Gekas.

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    Mr. Coble, you are recognized for 5 minutes.

    Mr. COBLE. Thank you, Mr. Chairman.

    First of all, I want to apologize for my late arrival. I had two other meetings, and I have another one going on now, so I probably won't take my full 5 minutes.

    Mr. Williams and Ms. Warren, I don't want anything that I say to be construed as favoring the dissemination of illegal drugs. I think the abuse of illegal drugs—be it consuming, be it trafficking, whatever—is a plague on our country and on our society generally. However, I want to continue on this path that the chairman and the gentleman from Pennsylvania have pursued.

    Ms. Warren, I am pointing no accusatory finger at you or at Mr. Williams. You may be guilty. I am not saying you are. But I can see why folks back home in my district, when they hear that someone from the Federal Government is coming, they instinctively think, my gosh, let me run for cover, because I am going to get hassled one way or the other.

    And, folks, I want to see the day come when small business people, small pharmacists specifically, would warmly embrace the presence of a Federal agent, would warmly say, come in here, I am not going to be hassled, we are going to solve this thing, we are going to get this thing worked out.

    I think if for no other reason, Mr. Chairman, this hearing is probably very worthwhile because, more and more, I hear back home that they pay your salary, they pay my salary, and by George, I think they figure that they are getting rooked. They figure they are not getting a fair shake out of it.

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    I think maybe all of us could do a better job.

    Having missed the testimony, Mr. Chairman, I won't ask a specific question, but I felt obliged to insert my oars into those waters.

    Mr. Williams, I will be glad for you and Ms. Warren to refute or to confirm anything that I have said.

    Ms. WARREN. If I just might respond, sir, frankly I do believe there are many occasions and most occasions that it is not in any way an adversary relationship when those examiners come into the pharmacies. Mr. Williams went through the numbers of times during the past year that pharmacies have been visited, and it is such a minuscule portion of those, ten one-thousandths of a percent, where any fines were imposed.

    But for the most part, there are warm embraces, or close to it out there. The examiners work with the pharmacists to try and show them how they might better comply. It is done in that way. That is the way the situation is resolved in all but the most minute percentage of the cases.

    Mr. COBLE. The gentleman from Pennsylvania pointed out, if you have a pharmacist out there who is no good and you know it, I say, slap it to him, give him the max. But I am inclined to think most of them don't fit that category.

    Ms. WARREN. I agree. And frankly, they are put at a competitive disadvantage by those few who would cut corners and divert——

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    Mr. COBLE. I don't know if they are at a disadvantage, but may be even forced to close their doors.

    Ms. WARREN. Absolutely.

    Mr. COBLE. Go out of business.

    Ms. WARREN. If those who don't employ the personnel who will take the care to ensure that these very dangerous drugs aren't safeguarded and records aren't kept and aren't appropriately locked up, you save money that way and you undercut the people who are trying to do it right, and maybe they do close their doors. And that is an important function then that the DEA must serve, and find those very few who would be so lax with such dangerous drugs.

    Mr. WILLIAMS. I would just like to add on to what Ms. Warren said.

    The DEA is committed to doing a graduated type of enforcement. We definitely want to go out, we work with pharmacies and all the registrants to make sure that they are aware of all of the policies and guidelines that they are supposed to follow.

    It is only when we find a blatant disregard for the actual record-keeping procedures and the policies that have been established for registrants to maintain, that is when we would pursue some type of fine or criminal action against these individuals. But we will work with them, answer all questions, assist them in making sure that they establish the appropriate record-keeping processes in their pharmacy, and do everything that we can to educate them on how to prevent any type of action being taken by the Federal Government.

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    Mr. COBLE. Thank you both.

    Mr. Chairman, I deceived you. I did use my 5 minutes.

    Mr. MCCOLLUM. Oh, well, we understand.

    Mr. Chabot, you are recognized for 5 minutes.

    Mr. CHABOT. Thank you, Mr. Chairman. I will try to be brief.

    Just a couple of comments, first of all. This reminds me a little bit of when I am back home I like to go out and go through some of the businesses and factories and stuff, meet with the workers and the owners, and one of the complaints I hear an awful lot about OSHA and the fact that rather than being of assistance to some of the businesses and finding ways of improving safety, that a lot of the business people feel that they are just looking for violations and fines and that sort of thing.

    And I don't know all of the facts here, and as Mr. Coble said, I have meetings going on, and I was a little late too, so I didn't hear all of the testimony. I tried to review it as you all were talking here, and I am sure I saw some of the business owners—I assume they were the business owners—on this issue, when you said that you hope they are warm embraces, some of them kind of cringed.

    I don't know, the term ''warm embraces'' and the Federal Government just don't seem to go together too well.

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    One thing I was wondering—and we have a memorandum up here that I have also been reviewing; it says that there are like 63,000 pharmacies that are registered with the DEA and that there were 35 that paid civil penalties.

    Could you tell us—and if you already did in your testimony, I apologize, but could you tell us what the range of fines was among those 35 that you actually did hit with fines? Were any of them at the $25,000 level, for example, and if so——

    Mr. WILLIAMS. I mentioned there was one fine that was as low as $1,000. So it really varies.

    Mr. CHABOT. Were there some at the $25,000 range, or what?

    Mr. WILLIAMS. I am not really sure, but I can find that out.

    Mr. CHABOT. My inclination in this area is that if you do have somebody that is knowingly abusing the system or somebody that is actually willfully violating the regulations and selling the drugs, et cetera, I mean, couldn't you in some cases actually bring criminal charges if they were knowingly——

    Ms. WARREN. Section 842 does provide for criminal penalties as well. It starts at the civil level in the strict liability standard; and then with a knowing violation, it is a criminal misdemeanor, up to a $25,000 fine and a term in jail.

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    Mr. CHABOT. Because my inclination would be, if you have somebody that is knowingly abusing the system and really helping to add to the drug problems that we have got in this Nation, I think we ought to crack down on them to the fullest extent of the law.

    On the other hand, if I have somebody that maybe, through oversight, just isn't properly filling out the forms, I would be more inclined to let them know what the problems are, encourage them to do the job right, but not necessarily be hitting them over the head with fines up to $25,000. That is just one inclination, but I do appreciate the witness' testimony.

    Unfortunately, I have several other hearings going on at the same time, so even if I am not here, I would like to let the pharmacy folks know that we will review their testimony as well, even if we don't actually see you in person.

    Thank you, Mr. Chairman.

    Mr. MCCOLLUM. Thank you.

    For the purposes of allowing Mr. Thornberry an opportunity to ask questions under the rules of our committee, I am going to have a second round and I am going to yield 5 minutes of my time to Mr. Thornberry.

    Mr. Thornberry.

    Mr. THORNBERRY. Thank you, Mr. Chairman. Again, I appreciate the opportunity to be here. I think members of the subcommittee have really hit on some of the key areas, and I don't want to replow that ground.

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    I do want to take just a second and express my appreciation to Ms. Warren and Mr. Williams for the apology that was in your testimony. It doesn't take away the distress of 6 months of thinking that you weren't going to keep your business, it doesn't prevent it from happening in the future, but it is important; and I personally am grateful for the attitude, as I mentioned, that DEA has shown since this matter came to our attention.

    I do worry a little bit that if this had been one pharmacist in Wichita Falls, rather than 27 that got these letters all of a sudden, we might not be here in exactly this situation. And as this thing has developed, I have gotten reports from a pharmacist here, a pharmacist there; and if it had isolated one person, one store, that had these troubles—it is a much different situation than if you know the whole community is being affected.

    I think the bottom-line question that I have is, are you completely opposed to any changes in the law? As Mr. Gekas was talking about, there may be something between what the Senate has done and no changes at all.

    I am very impressed, Mr. Williams, by the guidelines that you cite in the diversion Investigator's manual on how it should be done, and yet it was not done in this case.

    Is there not some added flexibility that ought to be put in the law for these technical violations?

    Ms. WARREN. Perhaps it could be done in codifying the general considerations that the courts are giving now. Some of the like statutes have this kind of list of considerations or criteria within the statute. We would be opposed to the codifying of a strict scale of which penalty to apply, but instead, have a list of criteria to apply to the situation.

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    Mr. THORNBERRY. Let me—the chairman's point on ''knowingly,'' let me also mention for the record that my understanding is that there is a ''knowingly'' standard in the civil context in addition to the False Claims Act in the Clean Water Act, Fair Labor Standards Act, Endangered Species Act, the Federal Hazardous Materials Transportation Act, and the Securities Act.

    And Ms. Warren, I take—I understand what you are saying, that your point is that there needs to be strict liability because they are so closely regulated. I would only mention to you that the reverse of that is, they are so closely regulated with so many requirements that mistakes are inevitable, and so the strict liability in a highly regulated sort of business—and perhaps the Securities Act and the Federal Hazardous Materials Transportation Act, may be similar sorts of situations; I don't know those examples—but maybe that is even more reason to have some flexibility in the law where mistakes are totally inevitable because of the regulated structure.

    Ms. WARREN. I suggest that there needs to be the discretion that is included in the guidance that is given to the DEA examiners and to the U.S. attorneys, and is clear in the statistics of what penalties have been imposed over the past year that that is where we have the flexibility.

    The Food, Drug and Cosmetic Act has a strict liability standard, the Clean Water Act, Refuse Act, Federal Water Pollution Control Act, Mine Safety and Health Act, Endangered Species Act has a strict liability standard for people engaged in the business. Others outside those engaged in the business have only a ''knowingly'' standard.

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    Mr. THORNBERRY. But I guess my point is, there is a ''knowingly'' standard in a number of civil laws, and some of them may also have a strict liability standard, but at a different level.

    Anyway, if I can just ask a couple of brief technical questions. Mr. Williams, the figures you gave on how many fines and all that, did that include settlements? Did it include instances where there were dismissals and those sorts of things?

    Mr. WILLIAMS. Yes, sir.

    Mr. THORNBERRY. All of that was included in the numbers?

    Mr. WILLIAMS. Yes, sir.

    Mr. THORNBERRY. You say there are about 63,000 pharmacists in the country. How many of them get visited by DEA a year, about?

    Mr. WILLIAMS. I have those numbers. I would probably say that we visited 2,000.

    Mr. THORNBERRY. One of the concerns that has been brought to my attention is that the pharmacies account for roughly 6.5 percent of total registrants, and yet about 41 percent of the fines were received from pharmacies. I worry a little bit, if they are easier to pick on in some ways. Do you have a response to that?

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    Mr. WILLIAMS. I don't believe that they are easier. I think our problem is that when you go into a pharmacy they handle so many more documents and things like that, that the audits are more extensive, I believe.

    Registrants, if a registrant is—excuse me, a doctor is actually in violation, I think that the doctors probably run more risk of even seeing a criminal action being taken against them, more than just a civil.

    Mr. THORNBERRY. Okay. Thank you, Mr. Chairman.

    Mr. MCCOLLUM. Thank you, Mr. Thornberry.

    Does anybody else wish a second round of questioning?

    If not, I am going to thank the panel for coming today. We know how important this is, and despite the fact we may have been admonishing and questioning and probing in regard to the particulars of this issue, there is no doubt that this subcommittee cares a great deal about diversion, and pharmacies keeping proper records is very much a part of that effort.

    Thank you very much for being here today, both of you.

    Mr. MCCOLLUM. Our second panel, our first witness on the panel is Mr. Rick Beard from Burkburnett, Texas. Mr. Beard has been the owner of Harvest Drug & Gift since 1982. He taught vocational agriculture at the high school level for 13 years. Mr. Beard and his wife Janet have two boys, Joe and Jacob.

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    Mr. Beard, we appreciate you joining us today.

    Our next witness today is Mr. Philip Burgess from Chicago, Illinois. Mr. Burgess is currently the National Director of Pharmacy Operations with Walgreen Corporation.

    In his present position, Mr. Burgess supervises three regional directors who, in turn, supervise over 100 pharmacies in 34 States and Puerto Rico. He has been affiliated with Walgreen Corporation now for 20 years, previously serving as a staff pharmacist, a store manager, the corporate manager of pharmacy recruitment, and the manager of pharmacy operations. Before he began his career with Walgreen, he worked for his father at Burgess Pharmacies, Incorporated. Mr. Burgess received his B.S. in Pharmacy at the University of Tennessee and his MBA at the University of Chicago.

    Our next witness is Mr. David Work, and I will call on Mr. Coble to introduce Mr. Work, because I think he is one of his constituents, at least from the fair State of North Carolina. Mr. Coble.

    Mr. COBLE. He does have exposure in our district.

    David, good to see you.

    Mr. Work, Mr. Chairman and Members, holds degrees from the University of Iowa in pharmacy and the University of Denver in law. He has experience as a pharmacist, a corporation lawyer for Blue Cross in Chicago, a college professor at the University of North Carolina, Chapel Hill, an association executive with the National Association of Retail Druggists, and is currently, since 1976, the Executive Director of the North Carolina Board of Pharmacy.

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    One of David's special affections is teaching a course in pharmacy law and ethics in the spring semester at the university in Chapel Hill. David writes articles for newspapers statewide and is a commentator on local and National Public Radio. He is also a frequent guest on television news programs in the Research Triangle, and has appeared on national network morning and evening television programs, as well as CNN. He is a former president of the National Association of Boards of Pharmacy and the Licensing Board Retirement Plan.

    Mr. Chairman, I thank you for having given me the privilege of introducing David.

    Mr. MCCOLLUM. You are quite welcome, Mr. Coble.

    Thank you, Mr. Work, for being here.

    Our final witness on this panel today is Mr. James Phelps, a principal in the law firm of Hyman, Phelps & McNamara, where he represents parties regulated by the Food and Drug Administration and the Drug Enforcement Administration. Before establishing his firm in 1980, Mr. Phelps was vice president and general counsel of the pharmaceutical house, G.D. Searle & Company. Mr. Phelps has also been a trial attorney for the Food and Drug Administration and an assistant United States attorney for the District of Columbia. He is a graduate of the University of Cincinnati, where we received an A.B. with honors in history and an LL.B. from the law school.

    I would say that we have relationships on this panel in indirect ways with everyone sitting up here. Mr. Chabot has walked out, but he is from Cincinnati; I know we have a Texan here, Mr. Thornberry. Mr. Gekas, we don't have any Pennsylvanians or Floridians here.

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    Mr. GEKAS. There are plenty around.

    Mr. MCCOLLUM. All of your written testimony will be admitted into the record as you have submitted it, without objection. I hear none, so it is so ordered.

    Because of the time constraints we have, again I would ask, as I did the first panel, but was unsuccessful with, if you would condense your testimony. I want to run a little light over here on the 5-minute side, it doesn't mean absolute, but please try to stick pretty close to that because otherwise we are going to have problems getting this hearing completed today.

    Mr. Beard, you are first. We will go in the order we introduced you.

STATEMENT OF RICK BEARD, OWNER, HARVEST DRUG & GIFT, BURKBURNETT, TX

    Mr. BEARD. Thank you. I welcome the subcommittee's attention to this, and I appreciate the consideration that you all have in changing the bill, or the law.

    The first letter we received, or information, was around 10-1-97, a phone call from a DEA agent asking us if we would help in an investigation. They didn't say who it was about or anything. We got the facts that you all have before you later that day, that mentioned a physician's activity summary for some physicians at a particular clinic in Wichita Falls.

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    So we gave them the information they asked for, and that is all we ever heard from them until December 22nd, when we received our letter saying—and I will summarize it a little bit for you for time. It said that you have 10 violations. We are going to fine you for four at $25,000 apiece. You can send us a certified check or a cashier's check. Thank you. If you have any questions you can call us.

    Well, when somebody from the Justice Department fines me $100,000 and does not state specifically why, I am going to ask them some questions. The numbers and laws that they all said we broke, they didn't list the laws, they just listed the statute numbers.

    We called the DEA and asked them if they could tell us what laws we had broken, because we did not put the two times together. We didn't know they were the same deal. We were working, trying to make a living. And they told us that a college student might want to look those up for us. It might be something good for them to do.

    So upon that, it had a phone number there to call and the letter was from Thelma Colbert, the lead Assistant United States Attorney. We called her office that day. I did talk to her. I told her who I was, where I was from; and when I told her where I was from and the letter I received, she said, I need your number and I will call you back. I didn't know that—I thought she meant that day.

    As time went on, we called back later that afternoon and she was gone for the holidays, being December 22nd, she was gone until the 5th of January. I understand that.

    The other document you have there in front of you, there is one there that states that we had a meeting with her on the phone at 3 p.m. on 1-7-97 and at 3:45, she was supposed to call us. We had not received that phone call, she said she was sick, and I understand that.

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    But on January 9th was our deadline to pay $100,000, and due to—everybody we called, they were all out on vacation, because of the time of year. I understand that.

    At this time we had contacted Congressman Thornberry's office and we knew—we thought he was working on it; we had no idea what was going on. We were faced with a $100,000 fine. We don't have $100,000 in our account, so we did have turmoil mentally, emotionally, wondering, we are just an independent, one-store, family pharmacy. We have had it for 16 years.

    The other information here is just times that there was deadlines to meet, and they canceled. We would call and set up appointments, and when we would talk and they would not notify us that they were canceled until after the deadline; and we would call them, and they said, we have canceled it.

    So finally, on May 8, we met in Fort Worth and they told us that there would not be a fine and they said—some people said, they apologize. At that time we were just told that we were going to try a new approach and that we wouldn't be fined.

    So other information is the effect that this had on our customers in the whole county, since the whole county was affected. We had people, elderly people especially, who wanted to buy as much prescriptions as they possibly could legally and with the money they had, because they knew the next time they needed prescriptions they would have to go out of the county because they felt like all the stores were getting ready to be closed. They listened to the news, they thought it probably would have happened. If all stores would have closed, that would have been, I guess, illegal because people couldn't obtain their prescriptions, so we would break the law again, I guess.

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    So as the time went forth, the other pharmacies in the area—we never hired an attorney; other pharmacists hired attorneys and were out legal expenses, of what nature I do not know. When we finally met with the DEA in June, they came in, they did apologize. The Justice Department, DEA, the U.S. Attorney's Office, and during that meeting we asked questions, how we could correct this.

    What happened was, when we would get a prescription that needed a DEA number for that particular clinic, it was residents sending those prescriptions in, and some residents have DEA numbers, some do not. So at that time we would call the receptionist, or whoever answered the phone at the clinic; we would say we need a DEA number for Dr. So-and-So, they would give us a number. We assumed in good faith that that was the correct number. We did not fill a large number of prescriptions from that clinic, and we never realized it was the same number they were giving us, and our computer at that time could not distinguish different numbers. Now we have our computer updated, so if a duplicate number should happen to come in, it will not fill a prescription, and it will note what the problem is, and then we can call back.

    At that time the meeting now—well, in that area now, for instance, there have been people dismissed from hospitals or in nursing homes in the middle of the night or hospitals on Saturday afternoon with pain prescriptions that they need, and if those prescriptions are not 100 percent accurate, well, nobody is going to fill them.

    In an instance that happened this last week, we were notified by a pharmacist in the area who said, a man came in there that had been in an agriculture accident and lost his arms and he had been dismissed from the hospital, he had been in there some time and he needed some pain pills. And the DEA number was not on the prescription. He called the hospital, the hospital doctor finally got the doctor in charge, he said, yeah, call this number and they will give you the DEA number. So the number he called was the main office to the hospital. The hospital gave him, our understanding is, their DEA number, but no suffix. So lately he could not fill that prescription. Whether or not he did, we do not know; we did not ask him and we do not want to know. But that is the kind of things we get into. That is an extreme deal.

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    But nursing homes have patients that they have problems during the night that they need a prescription immediately, and if you get a resident that calls it in and doesn't have a DEA, if we fill that, that is a $25,000 fine.

    So, in closing, as far as as how our meeting in Wichita Falls went with the DEA, we appreciated them coming and taking the time to talk to us and the U.S. Attorney's Office and we feel like we had a real good meeting. We felt real good about what they had to say. It was kind of after the fact, somebody had talked to them besides us, because when we talked to them, we didn't get very far, you know. So we appreciate whatever happened that took place there.

    A DEA agent told us in that meeting that if a prescription came in from a doctor, we knew that was his signature, we knew the doctor, we knew everything was right on it; even though he didn't put his DEA number on the front of that, we had it on file, just go ahead and write his DEA number on there and that would be right, or fill in any other problems with the prescriptions, and use good judgment. We thought we were using good judgment, and they fined us $100,000.

    Talking about how a $500 fine would not affect you. Folks, they could come in there and find enough deals for $500 and then the $25,000 looks like the same by the time they got through, in my opinion. They could find them. We did this paperwork in good faith and we made a mistake, but we didn't know it until this time.

    Some of the intimidation factors. We were never—there has never been a DEA agent in our pharmacy. We have never had another conversation with them about this issue, about any intent or anything. This was an indigent care facility. The amount of profit was very minimum. It really didn't do you any benefit to fill a prescription financially, so there was no intent to divert drugs or to make a profit.

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    Some of these pharmacies in the area where the DEA did come into, we have been told that they brought local law enforcement of some kind with them and stayed with them during the time that they were there, which in some cases was, I think, maybe 2 days. And when you have people in suits in rural communities come in with law enforcement and your customers come in and buy prescriptions from you, that is a hard thing to overcome. That did not happen to us.

    So I am going to close. I will be glad to answer any questions. There is more, but I am going to stay within my 5 minutes.

    Mr. MCCOLLUM. Thank you very much, Mr. Beard, for both giving the testimony and staying around the 5-minute mark.

    [The letters referred to follow:]

62151I.eps

62151H.eps

62151G.eps

62151F.eps

62151E.eps

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62151D.eps

62151C.eps

62151B.eps

62151A.eps

    Mr. MCCOLLUM. Mr. Burgess, you are recognized.

STATEMENT OF PHILIP P. BURGESS, R.Ph., M.B.A., NATIONAL DIRECTOR OF PHARMACY OPERATIONS, WALGREEN CORPORATION, DEERFIELD, IL

    Mr. BURGESS. Mr. Chairman and members of the Subcommittee on Crime, thank you for the opportunity to appear before you today to testify on the serious matter of DEA oversight. Accompanying me today is Larry Kocot, General Counsel and Senior Vice President of Government Affairs at the National Association of Chain Drug Stores.

    My name is Philip Burgess. I am the National Director of Pharmacy Operations for Walgreen. This position carries the responsibility for the overall operations of over 2,400 pharmacies in 34 States and Puerto Rico. Walgreens is an Illinois-based corporation, and we are also the largest dispenser of retail prescriptions in the country.

    Based on my 29 years of experience as a Walgreen employee and also as an actively licensed pharmacist, I believe Walgreen to be unique among drug chains in that the majority of our senior management personnel are also registered pharmacists themselves. Pharmacy is the heart of our company. We pride ourselves on our adherence to Federal and State regulations and, in particular, those that impact the practice of pharmacy. This pride and value of our reputation as the ''Pharmacy America Trusts'' has driven Walgreen to design systems that safeguard against the diversion of controlled substances and assist our responsible personnel in detecting possible diversion. The irony of the situation is that because of these efforts, we now find ourselves frustrated with a system of justice that penalizes our efforts to detect and prevent diversion.

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    A case in point, which I cannot specifically identify since it is still currently unresolved, involves a pharmacist that Walgreen discovered was dispensing medications based upon fraudulent prescriptions. This case demonstrates some of the problems that occur in trying to deal with the routine practice of pharmacy in a community setting and responsibly reporting to the DEA.

    In 1994, Walgreen opened a drugstore in a community with several existing independents. We purchased one of the pharmacies, which was right next door to where our new store was going to be, and we purchased the files and we also hired the owner of that independent store. Approximately 15 months later, we discovered that this same pharmacist had been creating profiles for five bogus customers and had been filling one prescription per month per patient for controlled substances using—these were hard copy prescriptions written by multiple different prescribers, very well written, so he was very smart in how he did this.

    Again, only one prescription per month per patient, but we caught him, Walgreen caught him. The pharmacist only filled these prescriptions during hours when he was on duty by himself, and he never attempted to pass one of these prescriptions when anyone else was on duty.

    The number of bogus prescriptions dispensed by this pharmacist amounted to 0.2 percent of the total prescriptions that were dispensed in that location during that time period. Again, we caught him, we performed a complete investigation, we conducted extensive audits, and then we turned all that information over to the Federal and local authorities. As the result of our conducting such a thorough investigation, we have been notified by the Department of Justice office of a demand for a substantial fine.

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    Just as a side note, this pharmacist now, 3 years later, is still able to practice pharmacy in the State. Now, that is not my definition of a warm embrace.

    Because of the existing law and the apparent limited knowledge of the practice of pharmacy by the U.S. Attorney's Office, we are faced with a lengthy negotiation and perhaps what we strongly feel is a very unsatisfactory solution: payment of a fine for self-reporting. This type of case strongly supports the need for legislation with flexibility and recognition of the true nature of the practice of community pharmacy.

    A second case, which we feel equally strongly about, is one that is settled and for which we have already now paid a substantial fine. This case involves problems with what is referred to as the ''NTIS tape.'' This tape is provided by the Department of Commerce based upon information that they get from the DEA. This tape is sold to companies like ours who are attempting to determine the status of DEA registration numbers for practitioners throughout the U.S. For all practical purposes, it is the only workable resource that actually exists. However, the DEA and the Department of Commerce warn that they take no responsibility for the accuracy or completeness of information that is on the tape.

    Walgreens, unlike other major chain pharmacies in the country, actually performs an automated system-initiated cross-reference of this tape during the actual prescription filling process. We have on-line checking against this tape information. Any practitioner that does not have a valid number is flagged and identified prior to the prescription ever even leaving the pharmacy department. Our pharmacists, using good-faith dispensing practices, professional judgment and knowledge of the communities in which they practice, are required to make conscious decisions to dispense a prescription if the practitioner's DEA number is identified as not being found on the tape. Again, we pride ourselves in providing our pharmacists with the tools which maximize the benefit from the information that is available. Most other chain pharmacies perform this function at the end of a specific time period or do it manually through paperwork.

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    Briefly, if I can cover quickly, this case I want to mention involved a dentist who was practicing in a seemingly normal setting whereby prescriptions were written for antibiotics and small quantities of controlled substances. Therefore, there were no indicators or good-faith dispensing issues that would cause a pharmacist to inquire about a dentist writing these types of prescriptions. Irregularities did not exist. Further, the dentist's name remained on the NTIS tape apparently long after his State license had been revoked. In fact, we have learned that practitioners whose licenses have even expired 10 years ago still remain on current tapes. Because of the nature of existing regulations which impart a dual responsibility for prescribing and dispensing on the pharmacist, and the fact that we had invalid prescriptions based on that expired DEA number, we faced potential of a lengthy litigation. We chose to settle that and paid a $240,000 fine.

    Again, I don't know how you—going back to Mr. Williams' comment of a blatant disregard, how could that possibly be viewed as a blatant disregard of the law?

    Unfortunately, these are not rare instances. Our competitors would tell of similar instances and some with a far greater frequency. I, on behalf of the Walgreen Company, believe that these instances point to the need for the amendments under consideration today. We ask that the amendments be reported out of the subcommittee, or adopted with your support by the Commerce, State, Justice and Judiciary Appropriations conference committee as soon as possible.

    Thank you, Mr. Chairman and members of the subcommittee.

    Mr. MCCOLLUM. Thank you, Mr. Burgess.

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    [The prepared statement of Mr. Burgess follows:]

PREPARED STATEMENT OF PHILIP P. BURGESS, R.PH., M.B.A., NATIONAL DIRECTOR OF PHARMACY OPERATIONS, WALGREEN CORP, DEERFIELD, IL

    Mr. Chairman and Members of the Subcommittee on Crime, thank you for the opportunity to appear before you today to testify on the serious matter of DEA Oversight. Accompanying me today is Larry Kocot, General Counsel and Senior Vice President of Government Affairs at the National Association of Chain Drug Stores.

    My name is Philip Burgess. I am the National Director of Pharmacy Operations for the Walgreen Company. This position carries the responsibility for the overall operations of over 2400 pharmacy departments operating in 34 states and Puerto Rico. Walgreens is an Illinois based corporation and the largest retail dispenser of prescriptions in the country.

    Based upon my 29 years of experience as a Walgreen employee and an actively licensed pharmacist, I believe Walgreens to be unique among drug chains in that the majority of our senior management personnel are also registered pharmacists themselves. Pharmacy is the heart of our company. We pride ourselves on our adherence to state and federal regulations, in particular those impacting the practice of pharmacy.

    This pride and value of our reputation as the Pharmacy America Trusts has driven Walgreens to design systems that safeguard against the diversion of controlled substances and assist our responsible personnel in detecting possible diversion. The irony of this situation is that because of these efforts, we now find ourselves frustrated with a system of justice that penalizes our efforts to detect and prevent diversion.

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    A case in point, which I cannot specifically identify since it is currently unresolved, involves a pharmacist that Walgreens discovered was dispensing medications based upon fraudulent prescriptions. This case demonstrates some of the problems that occur in trying to deal with the routine practice of pharmacy in a community setting, and responsibly reporting to the DEA.

    In 1994, Walgreens opened a drugstore in a community with several existing independents. We purchased one of the pharmacies, including its files, and hired the owner as a staff pharmacist. Approximately 15 months later, we discovered that this pharmacist had created profiles for five bogus patients and had been filling one prescription per month per patient for controlled substances using multiple prescribers. The pharmacist only filled these prescriptions during hours when he was on duty by himself and never attempted to pass one of these prescriptions while anyone else was on duty.

    The number of bogus prescriptions dispensed by this pharmacist amounted to less than 0.2% of the total number of prescriptions dispensed at this location. And yet we caught him, performed a complete investigation, conducted extensive audits and turned all information over to federal and local authorities. As the result of our conducting such a thorough investigation, we have been notified by the Department of Justice office of a demand for a substantial fine. As a sidelight, now 3 years later this individual continues to practice pharmacy in that same state. Because of the existing law, and the apparent limited knowledge of the practice of pharmacy by the U.S. Attorney's office, we are faced with a lengthy negotiation; and perhaps, what we strongly feel is a very unsatisfactory solution, payment of a fine for self-reporting. This type of case strongly supports the need for legislation with flexibility and recognition of the true nature of the practice of community pharmacy.

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    A second case, which we feel equally strongly about, is one that is settled and for which we have paid a substantial fine. The case involved problems with what is referred to as the ''NTIS tape.'' This tape is provided by the Department of Commerce based upon information obtained from the DEA. This tape is sold to companies like ours who are attempting to determine the status of DEA registration numbers for practitioners throughout the United States. For all practical purposes, it is the only workable resource that exists. However, the DEA and the Department of Commerce warn that they take no responsibility for the accuracy or completeness of information on the tape.

    Walgreens, unlike any other major chain pharmacy in this country, performs an automated system-initiated cross reference of this tape, during the prescription filling process. Any practitioner that does not have a valid number is flagged and identified prior to the prescription leaving the pharmacy department. Our pharmacists, using good faith dispensing practices, professional judgement and knowledge of the communities in which they practice are required to make conscious decisions to dispense a prescription if the practitioner's DEA number is identified as not being found on the tape. Again, we pride ourselves in providing our pharmacists with the tools which maximize the benefit from the information that is available. Most other chain pharmacies perform this function at the end of a specific time period or require their pharmacist to manually search through a paper record.

    Briefly, this case involved a dentist who was practicing in a seemingly normal setting whereby prescriptions were written for antibiotics and small quantities of controlled substances. Therefore, there were no indicators, or good faith dispensing issues that would cause a pharmacist to inquire concerning this dentist. Irregularities did not exist. Further, the dentist's name remained on the NTIS tape apparently long after his state license had been revoked. In fact, practitioners whose licenses expired 10 years prior have been found on current tapes. Because of the nature of existing regulations which impart a dual responsibility for prescribing and dispensing on the pharmacist, and the fact that we had invalid prescriptions (based upon the expired DEA number) in our records; the potential for lengthy litigation was great. Walgreens chose to settle this case; and paid a penalty of approximately a quarter of a million dollars.

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    Unfortunately, these are not rare instances. Our competitors would tell of similar instances and some with a far greater frequency. I, on behalf of the Walgreen Co., believe that these instances point to the need for the amendments under consideration today. We ask that the amendments be reported out of this subcommittee, or adopted with your support by the Commerce, State, Justice and Judiciary Appropriations Conference Committee, as soon as possible. Thank you Mr. Chairman and Members of the Subcommittee.

    Mr. MCCOLLUM. Mr. Work, you are recognized.

STATEMENT OF DAVID R. WORK, EXECUTIVE DIRECTOR, NORTH CAROLINA BOARD OF PHARMACY, CARRBORO, NC

    Mr. WORK. Thank you, Mr. Chairman.

    I have submitted my comments in writing, and I have three main points, and I will comment on them; but before I do that, I want to mention one additional thing.

    Earlier today we heard several comments about how many deaths are due to drugs and they do kill people, unfortunately. The North Carolina Board of Pharmacy is the only pharmacy board in the United States that has a rule requiring the reporting of deaths due to drugs dispensed from pharmacies. We get about 20 reports a year, and it is increasing. We expect it to hit perhaps 30 this year, and we know we are getting underreporting.

    The significant part of this is, we have a list of drugs which have come up more than once in these reports. There is a list of about 10 drugs. Only one of those drugs is a controlled substance: morphine. Other drugs kill people too. So I hope you put this in perspective about a controlled substance being one small slice of a large area of drug therapy.

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    My three points are that I believe that pharmacists are unfairly subjected to civil penalties under the Federal Controlled Substances Act and regulations for minor infractions which do not involve diversion or willful conduct.

    Number two, the Controlled Substances Act and regulations are unequally applied only to pharmacists where others are equally culpable.

    And number three, Federal action in this area is an extra layer of bureaucracy which may be unwarranted for health professionals who are already subject to prosecution by State law enforcement authorities, as well as discipline by their State licensing boards.

    Under point number one about unfairly subjected to civil penalties, I have three cases to mention to you, one involving Rex Hospital in Raleigh 7 or 8 years ago where the DEA proceeded to pursue fines of $225,000 and they paid that amount of money for infractions which were primarily for failing to check the box on the third copy of the DEA schedule 222. There was no dispute about the drugs being received, there was no dispute about the accuracy of the records, and there was no diversion, but they were able to find 10 violations like that, which amounted to $250,000. They decided to give them 10 percent off if they paid, and they paid $225,000.

    The next one involves Kerr Drug, which is a chain store which was started by one person, Mr. Banks Kerr, from Raleigh. He started a long time ago in the early 1940's and built one store up to 95 stores, maybe more than that, less than 100. It came time to try and sell his stores, and you don't just sell a group of stores like that that easily. He arranged a stock exchange with the J.C. Penney Company, and 3 days before the exchange was supposed to occur, DEA showed up in their offices with a demand for payment, or they would go public, and if they went public they were afraid they would lose the whole deal because Penney's is a very conservative company and might want to back away from something like that. At that point, they decided to pay the money, for $325,000, many of these things were reported to DEA by Kerr.

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    The third instance is a Revco case in South Carolina which was just settled late last year. It involved several offenses, largely surrounding a forger, a con man who was also a narcotic addict, who managed to work in one of the pharmacist's homes as a tradesman and convinced her that it was a valid situation and he passed several forged prescriptions at that pharmacy.

    She turned the perpetrator in, helped law enforcement catch the fellow in the store, and for that, Revco and six pharmacists were subjected to a civil complaint for over $3 million worth of exposure liability. The complaint reads—the caption of the complaint is ''United States of America v. Revco and Paul Bookstaver, Deborah Dixon, Mary Fisher, James Ozmint, Elbert Singleton and Melanie Vaughn.''

    Of those people, six are pharmacists. These are people that are working, making $50,000 to $60,000 a year facing a $3 million liability exposure. That has got to be just terrifying, and I expect in this situation that will be the last time she reports a forged prescription if she expects that kind of response from the government.

    Just to give you an idea of the charges here, which were over 130 charges, 39 of which were for fraudulent prescriptions, 34 charges for lacking a date on the prescription; six for invoices lacking a date; five for incomplete 222, that is, a form block not being checked, et cetera, et cetera. Thirty-two invoices, 80 percent of the charges were for events like that.

    It is activities like this which cause pharmacists to really be concerned about filling prescriptions that they know are not just absolutely perfect, and I got a phone call from a citizen last week, and she was sobbing because she couldn't get a prescription filled under circumstances which I couldn't really help her, and I doubt she would have called me if it was a forged prescription.

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    Seeing as my red light is on, I will make two other points. One is that in both the South Carolina Revco situation and the Texas situation, the physicians left these dates off the prescriptions also, but they didn't receive any action by DEA.

    Number three, my last point is that the health professionals especially, and chain drugstores are subject to investigations by the police, the sheriff, the State Bureau of Investigation, the State controlled substances authorities, the State prosecutor and the occupational licensing boards. There is no shortage of people to prosecute these people.

    With that, I will end my presentation.

    Mr. MCCOLLUM. Your points are well made. Thank you, Mr. Work.

    [The prepared statement of Mr. Work follows:]

PREPARED STATEMENT OF DAVID R. WORK, EXECUTIVE DIRECTOR, NORTH CAROLINA BOARD OF PHARMACY, CARRBORO, NC

    If you think only bad people get in trouble with drug law violations, think again. Take, for example, a recent case in Florence, South Carolina against six pharmacists and their employer. The civil complaint alleged more than 130 violations at $25,000 per charge for a total of over $3 million dollars against these first offenders. The large majority of allegations were of a technical nature such as having a prescription dated in one place and not another or failure to complete a box on a federal form.

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    The core of the problem involved a carpet installer who did some work in a pharmacist's home. She did not realize that, in addition to his carpet skills, he was a con man with a history of several drug convictions in the Carolinas. When he learned that she was a pharmacist he laid the groundwork for a scam to get drugs for his personal use.

    He spoke of all the problems with his father's terminal illness so she saw nothing irregular when he brought a prescription to her store for a strong narcotic for his dad. After the first prescription was filled a natural assumption of therapy to continue pain relief bypassed the scrutiny ordinarily applied to new prescriptions. Other pharmacists filled more of these prescriptions believing that they were meeting a legitimate need. When the pharmacists realized that the man's prescriptions were phony they turned him into authorities and he is now in prison.

    The federal Drug Enforcement Administration (DEA) then aggressively took over the case and combined it with some technical violations in two other stores more than 100 miles away for an overwhelming number of charges and penalties into the millions of dollars. All of this for conduct that may have been nai
AE0ve but never intentionally illegal with no profiteering and no diversion to the illicit market. One could not find a better example of the ''unwarranted use of federal power'' as recently described by Attorney General Janet Reno.

    Now as a practical matter the defendants in the case can attempt to fight the government but they are not likely to win more than 130 in a row. Not to mention that in today's climate there is often a public presumption of some culpability with so many charges and even moreso when drug offenses are involved. As you might imagine the pharmacist defendants felt avalanched when they received the court papers stating ''The United States of America v. Jane Doe''. Three of the six pharmacists in the case are women.

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    This is not the first time a case such as that one has occurred. In Raleigh, North Carolina, for example, a non-profit hospital paid $225,000 and a local chain drug store coughed up $325,000 to settle similar claims. While all of this is couched in proper legal terminology as a civil penalty the solid citizen respondents in the case look on it as nothing less than extortion.

     There are several reasons why this kind of complaint has not surfaced in the past. Laws and rules on drugs are so extensive that it is virtually impossible for a physician, pharmacist or nurse to effectively serve the public without a violation. I have a standing offer to all pharmacist that they can have one week to get their pharmacy in order and if I can't find a violation in three minutes I'll give them five dollars. Over the last twenty five years nobody has accepted that offer. This reflects a realistic acceptance that there are so many drug laws that any health practitioner with a conscience who serves the public is probably a violator on a daily basis.

    One such example occurred when, a few days before Christmas last year letters arrived at 25 of the 30 pharmacies in Wichita County Texas at the instigation of the Drug Enforcement Administration (DEA). This greeting placed them on notice that penalties were due in amounts up to $400,000.

    The violations our federal friends found was that prescriptions for controlled substances were written by resident physicians using a supervising doctor's DEA number with a suffix. Pharmacists at independent and chain pharmacies filled these prescriptions and all were charged with failure to conform to federal rules. Except for the chain stores every owner said that paying up would put them out of business.

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    It is noteworthy that these same federal rules provide that the prescriber is responsible for proper prescribing and the pharmacist has a corresponding responsibility. When doctors have primary responsibility for prescribing but pharmacists—and not physicians—are charged with offenses committed by prescribers something is, as they say in the south, bad wrong.

    It's important to note that none of these situations involved diversion of drugs to the resale market.

    One could draw an analogy to basketball where the referee and other officials regulate the conduct of players. Those who violate the rules are charged with fouls, similar to pharmacist offenders getting tagged by enforcement authorities. Basketball has evolved from a time when any touching of an opponent was a foul to the current standard of no harm, no foul. As of today the DEA is calling $25,000 ''touch fouls'' on pharmacists. What's needed is a more reasonable position such as a ''No harm, No foul'' standard.

    It is significant that in the South Carolina case 34 of the 130+ violations were for failure to have a date on the prescription. While the pharmacists maintain they did date the prescription by placing a sticker on the back of the document, there had been no date on the front of the prescription as completed by the prescriber. Federal rules provide at 21 CFR 1306.05(a) that:

''the prescriptions may be prepared by the secretary or agent for the signature of practitioner, but the prescribing practitioner is responsible in case the prescription does not conform in all essential respects to the law and regulations. A corresponding liability rests upon the pharmacist who fills the prescription not prepared in the form prescribed by these regulations.''

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Please note that the prescriber (physician) omitted the date from the prescription document but was not charged with a civil penalty. Only the pharmacist was charged based on the ''corresponding liability'' specified in the rule.

The same principle applies to the Wichita Falls example where only the pharmacist received threatening letters. No such letters went to physicians even though they were the original perpetrator of the inaccurate DEA registration numbers. This is a clear example of singling out pharmacists for penalties when others are equally responsible but are not charged.

This is a call for the Drug Enforcement Administration to adopt a reasonable and contemporary standard of pursuing civil penalties only where it could establish knowing or willful wrongdoing. In this way the federal authorities could stop the growing erosion of respect for them among pharmacists. If the current unjustified policy continues it will be necessary to re-examine the need for DEA jurisdiction over practicing professionals. These people are already supervised by state law enforcement officials, and professional licensing boards and our national government looks more and more like an unnecessary third layer of bureaucracy.

SUMMARY

1. Pharmacists are unfairly subjected to civil penalties under the Federal Controlled Substances Act and Regulations for minor infractions which do not involve diversion or willful conduct.

2. The Controlled Substances Act and Regulations are unequally applied only to pharmacists when others are equally culpable.

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3. Federal action in this area is unwarranted for health professionals who are already subject to prosecution by state law enforcement authorities as well as discipline by their state licensing boards.

    David Work has a degree from the University of Iowa in Pharmacy and the University of Denver in Law. He has experience as a pharmacist, a corporation lawyer fer Blue Cross in Chicago, a college professor at UNC-Chapel Hill, an association executive with the National Association of Retail Druggists and is currently, since 1976, the Executive Director of North Carlonia Board of Pharmacy. His special affection is teaching a course in Pharmacy Law and Ethics in the spring semester at UNC-Chapel Hill

    Davis writes articles for newspapers statewide and is a frequent guest on television news programs in the Reasearch Triangle. He has appeared on national network morning and evening television news programs as well as CNN. He's a former President of the National Association of Boards of Pharmacy.

    Mr. MCCOLLUM. Mr. Phelps.

STATEMENT OF JAMES R. PHELPS, ATTORNEY AT LAW, HYMAN, PHELPS & McNAMARA, P.C., WASHINGTON, DC

    Mr. PHELPS. Mr. Chairman, my experience in the control of drugs of abuse begins before there was a Controlled Substances Act. In those days, violations involving barbiturates, amphetamines and the like were prosecuted under the Federal Drug and Cosmetic Act, and as a Federal attorney for the FDA, I tried those cases. And as an assistant United States attorney, I tried the cases for what was then the Federal Bureau of Narcotics for heroin, cocaine, marijuana. So I come here as a supporter of the law that DEA enforces. It is a considerable improvement over what we used to have in the past.

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    As a supporter of that law, I argue that change is needed in the standard for the assessment of civil penalties under the CSA. I believe that experience tells us that law enforcement purposes would best be served by putting a standard into the law that requires a demonstration of some degree of culpability before civil penalties are assessed.

    Chairman McCollum, you asked, how did the Wichita Falls case happen? I have some thoughts on that.

    First, the state of the law is such that the prosecutor expected to prevail in the absence of any culpability on the part of his target. Because of the state of the law, he rightly felt that he had a pat hand and could make his collections without being concerned about the facts beyond knowing that there was a technical violation.

    Next, the Wichita Falls case happened because of the mindset promoted by the strict liability standard. Government personnel simply do not accept the view that there is such a thing as minor record-keeping errors. They view the records as such a vital part of the system of regulation that they cannot accept anything less than 100 percent compliance 100 percent of the time. To do so, you heard them argue today, would cause the system to leak and to facilitate diversion.

    The problem with this zero tolerance policy is that no matter what the expectations of government personnel might be, there will be minor record-keeping errors. These are the types of errors that occur despite the best efforts of everyone, because record-keeping is dependent upon the actions of individuals, and individuals will err. You cannot expect, in reality, 100 percent compliance, and extracting huge penalties will not eliminate these errors that we all don't want to see. On the other hand, penalties where there is a demonstrable lack of vigilance will establish the proper discipline in the regulated industry.

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    Another reason that the Wichita Falls case happened is the incentives that are built into the system. Notwithstanding the DEA's managers don't view the collection of fines as a kind of competition, it appears that DEA personnel view the fines that way.

    In the Freedom of Information materials that my office recently secured from the DEA, reflecting DEA's history of fines for the years 1989 through 1997, we see that the agency keeps track of the fines by the different offices; and in one instance when a large fine was collected, the record says that the offices shared the credit for the fines. If there is no interoffice competition, why is it necessary to be so meticulous about sharing credit?

    More problematic and also causing the Wichita Falls situation is that the Department of Justice is given its own bureaucratic interest in collecting fines. The Affirmative Civil Enforcement program, the ACE program, was designed to encourage the collection of fines for the United States. Three percent of those fines collected in the ACE program are given back to the Department of Justice. Civil penalties under the CSA are part of the ACE program. Encouraging prosecutors to collect fines, giving them recognition for it, and then allowing them to use a strict liability basis to collect those fines is an invitation for abuse and excess.

    There are other instances in my experience and in the experience of others known to me when the Department of Justice and DEA have sought civil penalties with no more justification than in Wichita Falls. These cases go beyond pharmacies and involve fines against manufacturers and distributors of controlled substances. I put descriptions of some of those cases in my formal statement at tab 2, and there is no need for me to repeat them today. You have heard enough examples.

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    Too often the DEA and the Department of Justice have sought to penalize companies for technical violations even where no diversion has occurred, and a common theme in those cases of which I am familiar is that the government threatens the company with an outrageous amount of fines, often tens of millions of dollars, by summing individual occurrences of violations arising from the same inadvertent error. The government may see this as just a way of setting the theoretical upper boundaries of what a settlement might be, but to a company facing the threat of civil fines, the amount is all too real. I am particularly troubled by the extent of civil fines that have been levied against retail pharmacies.

    DEA has provided information that pharmacies represent 6.5 percent of the total DEA registrants, and that investigations of pharmacies represented only 9.6 percent of the total investigations in 1996 and 6.8 percent in 1997. However, based on information that we have obtained under our Freedom of Information Act request from 1989 to 1995, retail pharmacies accounted for almost 42 percent of the civil fines paid by all DEA registrants.

    I have not seen a specific breakdown of the civil fines for 1996 and 1997, but DEA has reported that total fines for these 2 years are 12.1 million. Even if the over 63,000 pharmacy registrants do not represent a significant proportion of the total DEA investigations, they appear to pay a disproportionately greater amount of civil fines.

    I know from my own experience that many DEA Investigators and assistant U.S. attorneys do take a reasoned approach when faced with inadvertent and minor violations. Unfortunately, because of the current standard, others, who are not reasonable, are free to pursue civil penalties when alternative and, arguably, more effective corrective action is available.

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    It should be stressed that the Wichita Falls cases could have been pursued under the law as it exists today. Those cases were a failure of judgment, not a misreading of the law. Eliminating the strict liability standard will not erode DEA's ability to do its work; those of a criminal bent will continue to look for ways to evade the law, and because they do not maintain proper records, they will be subject both to the civil and the criminal sanctions under the CSA.

    The argument made by government representatives that conscientious individuals will have ''far less incentives'' to meet their record-keeping responsibilities is erroneous. The DEA needs to appreciate that the regulated industries and all DEA registrants are the agency's partners in drug control. Their incentives to maintain the closed system of regulation will not change when the standard of liability is changed. Possibly the government's witnesses just do not credit the regulated community with having the sense to know that the ability to maintain their businesses depends on the public being assured that potentially dangerous drugs are not being mishandled.

    Well, the businesses do know that. And if the fear well-intentioned citizens have of DEA is lessened by making the standard of civil penalties fairer, that will be a good thing. Fear is certainly a powerful tool, but it is not one to be used by this government against people who intend no harm. In the absence of fear, DEA will see the desire and ability to cooperate with the agency is enhanced and not diminished.

    The DEA's Mr. King and his deputies have made a big difference in the past few months at the agency. I personally have seen the agency recede from threats of civil penalties for minor record-keeping violations. But for fairness we should not need to rely on the personnel at DEA, personnel who come and go. The good intentions of DEA managers are important, but our institutions, our laws, should protect us by assuring that fair standards for liability are used.

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    I believe the amendments to the CSA that have been proposed are appropriate in that they impose a requirement of culpability on the part of the DEA registrants. The proposed amendment would add a ''knowingly'' standard to record-keeping and reporting violations. There are abundant precedents for such a standard in other statutes involving civil penalties. I provided a summary of these at tab 3. You will see that a ''knowingly'' penalty for civil offenses is not inconsistent with the ''knowingly'' penalties for criminal offenses because of the way the courts interpret one or the other.

    It is my opinion that a definition of ''knowingly'' under the CSA that encompasses a showing of negligence or reckless disregard would be appropriate for civil penalties. Such a standard provides a protection sought by industry from overzealous individuals and does not overburden the government's ability to seek civil fines when justified.

    Today you heard DEA's Mr. Williams describe the standards that they would like to employ as a matter of policy for bringing civil cases. He talked about there being a standard of egregious violations or was a gross disregard for the regulations. Well, if that is the standard, that would be met by the law as it is proposed to be changed.

    For example, if there were a distributor of listed chemicals, who failed to keep any records required under DEA regulations, those actions, even if the registrant doesn't make himself aware of the regulations, would subject him to civil penalties under the law that we propose be changed. The proposed amendments would also lower the maximum fine for violation.

    I think, Chairman McCollum, you recognize that lowering the amount of the fine will not hinder the agency if it wishes to assess a large fine for a large number of violations. When there is a record-keeping problem, they can add up the violations to make the $500 add up to be a lot more than just a simple $500 violation.

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    I would add a third recommendation to those already proposed, and that is that the funding and commitment to corporate compliance programs be expressly recognized in the CSA as an alternative to the payment of civil fines. DEA will, I believe, attest to the fact that corporate compliance programs, when they are properly executed, can be a vital part of the effort to control drugs of abuse; and allowing companies to receive credit for resources expended to operate a DEA compliance problem would be a very good innovation.

    I thank you.

    [The prepared statement of Mr. Phelps follows:]

PREPARED STATEMENT OF JAMES R. PHELPS, ATTORNEY AT LAW, HYMAN, PHELPS & MCNAMARA, P.C., WASHINGTON, DC

    Mr. Chairman, and members of the Subcommittee, my name is Jim Phelps and I am a partner of the law firm of Hyman, Phelps & McNamara, P.C. I appreciate the opportunity to appear before the Subcommittee on Crime to speak on the issue of civil penalties under the Controlled Substances Act (CSA).

    My firm advises many sectors of the pharmaceutical industry on statutory and regulatory compliance issues under the CSA and DEA regulations. My own experience in the control of drugs of abuse began before there was a Controlled Substances Act. As a trial attorney for FDA, I prosecuted cases brought under the Federal Food, Drug, and Cosmetic Act; and as an assistant United States attorney in the District of Columbia, I prosecuted cases for DEA's predecessor, the Federal Bureau of Narcotics. I come here as a supporter of the law that DEA enforces, and as one who holds the brave and resourceful personnel of the agency in high regard. In support of the CSA and of DEA's mission I argue that change is needed in the standard for assessment of civil penalties under the CSA.

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    The current state of the law is that any record keeping or reporting violation, such as having the wrong address or zip code on a DEA required form, may be subject to a fine of up to $25,000. This is true, even if the error is inadvertent and if it did not result in diversion of drugs. I believe that the strict liability standard encourages enforcement abuses of the law. To the extent that the law is subject to abuse it loses respect. I believe that experience tells us that law enforcement purposes would be best served by a standard that requires a demonstration of some degree of culpability before civil penalties are assessed.

    The CSA, with its comprehensive program of control, has provided a rational, rigorous framework within which our nation attempts to deal with the availability of substances of abuse. The CSA creates a closed chain of distribution in which each sector of the industry and the government depend on one another to reduce the potential for diversion of legitimate medicines. Though many of these drugs have a great potential for abuse, they are critical in the treatment of serious disease, particularly in the treatment of pain. The public and private sector must cooperate to assure that drugs having a potential for abuse are made available to patients who need them, while protecting the public from misuse.

    To be sure, in the 27 years of the CSA, there have been many areas where the regulated industry and DEA have disagreed on day-to-day compliance issues. This interaction however, has been generally open and civil and has resulted in a better understanding of the needs of both parties. The current state of the law as it applies to civil penalties, on the other hand, contributes to a hostile environment of mistrust that threatens the constructive relationship between the regulated and regulator under the CSA. Civil penalty violations under the CSA have been interpreted by the courts and the Department of Justice to be based on a strict liability standard. It has been my experience that the government's pursuit of these civil fines has often been overzealous, involving minor, inadvertent, and frivolous violations under the CSA.

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    In the recent Wichita Falls cases, an assistant United States attorney demanded civil fines from over twenty pharmacies in Wichita County, based upon a technical violation. All seem to agree that doing this, without giving consideration to the special facts in each case, was deplorable. How did this happen?

    First, the state of the law is such that the prosecutor expected to prevail in the absence of any culpability on the part of his target. Because of the state of the law he rightly felt he had a pat hand, and could make his collections, without being concerned about the facts, beyond knowing that there was a technical violation.

    Next, it happened because of the mind set promoted by the strict liability standard. Government personnel simply do not accept that there is such a thing as minor record keeping errors. They view the records as such a vital part of the system of regulation that they cannot accept anything less than 100% compliance, 100% of the time. To do so, they argue, would allow the system to leak, and facilitate diversion.

    The problem with this ''zero tolerance'' policy is that no matter what the expectations of government personnel may be, there will be minor record keeping errors. These are the type of errors that occur despite the best efforts of industry, because record keeping is dependent upon the actions of individuals, all of whom will err at one time or another. Exacting huge penalties will not eliminate these errors. On the other hand, penalties where there is a demonstrable lack of vigilance will establish the proper discipline in the regulated industry.

    Another reason for cases such as Wichita Falls is the incentives built into the system. Notwithstanding that DEA's managers do not view collection of fines as a kind of competition, it appears that DEA personnel view the fines that way. In the Freedom of Information materials that my office recently secured, reflecting DEA's history of fines for the years 1989–1997, we see that the agency keeps track of fines by the different offices. In one instance, when a large fine was collected, the record says that offices ''shared'' the credit for the fines. If there is no intra-office competition, why is it necessary to be so meticulous about ''sharing'' credit?

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    More problematic is that the Department of Justice is given its own bureaucratic interest in collecting fines. The Affirmative Civil Enforcement (ACE) program was designed to encourage the collection of fines for the United States. United States attorneys frequently issue press releases telling the world how much in the way of moneys they have collected, how the cost of their offices are met with those penalties. I have provided some examples at Tab 1 of my submitted testimony. Three percent of fines collected in the ACE program are given to the Department of Justice.

    Civil penalties under the CSA are part of the ACE program. Encouraging prosecutors to collect fines, giving them recognition for it, and then allowing them to use a strict liability basis to collect those fines is an invitation for abuse and excess.

    There are other instances, in my experience and of others known to me, when the Department of Justice and DEA have sought civil penalties with no more justification than that in Wichita Falls. These cases go beyond pharmacies and involve fines against manufacturers and distributors of controlled substances. Brief descriptions of some of these appear at Tab 2 of my submitted testimony. These examples are offered to illustrate that the current standard of liability breeds abusive enforcement, but not to condemn, anecdotally, the government's enforcement of the CSA.

    Too often the DEA and the Department of Justice have sought to penalize companies for technical violations even where no diversion has occurred. A common theme in the cases of which I am familiar is that the government threatens the company with an outrageous amount of fines, often tens of millions of dollars, by summing individual occurrences of violations arising from the same inadvertent error. The government may see this as just setting the theoretical upper boundaries of a case for purposes of discussions, but to a company facing the threat of civil fines the amount is all too real.

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    Such tactics only serve to prolong resolution of the problems that may exist, and they certainly do not promote the cooperative relationship critical to success of the CSA. The current climate in the industry is one of justifiable concern that any error or violation, no matter how technical, will result in significant fines.

    I am particularly troubled by the extent of civil fines that have been levied against retail pharmacies. DEA has provided information that pharmacies represent about 6.5 percent of the total DEA registrants and that investigations of pharmacies represented only 9.6 percent of the total investigations in 1996 and 6.8 percent in 1997. However, based on information obtained under our Freedom of Information request, from 1989 to 1995 retail pharmacies accounted for almost 42 percent ($13.6 million) of the civil fines paid by all DEA registrants ($33 million). I have not seen a specific breakdown of the civil fines for 1996 and 1997, but DEA has reported that total fines for these two years are $12.1 million. Even if the over 63,000 pharmacy registrants do not represent a significant portion of the total DEA investigations, they appear to pay a disproportionately greater amount of civil fines.

    I know from my own experience that many DEA investigators and assistant United States attorneys do take a reasoned approach when faced with inadvertent and minor violations. Unfortunately, because of the current standard, others who are not reasonable are free to pursue civil penalties when alternative and arguably more effective corrective action is appropriate. It should be stressed that the Wichita Falls cases could have been pursued under the law as it exists today—those cases were a failure of judgment, not a misreading of the law.

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    Eliminating the strict liability standard will not erode DEA's ability to do its work. Those of a criminal bent will continue to look for ways to evade the law, and because they do not maintain proper records, they will be subject to the civil and criminal sanctions provided by CSA.

    The argument made by government representatives that conscientious individuals will have ''far less incentive'' to meet their record keeping responsibilities is erroneous. The DEA needs to appreciate that the regulated industry and all DEA registrants are the agency's partners in drug control. Their incentives to maintain the closed system of regulation will not change when the standard of liability is changed. Possibly the government's witnesses just do not credit the regulated community with having the sense to know that good drug control is in their interest. But they do know it; they know that the ability to maintain their businesses depends on the public being assured that potentially dangerous drugs are not being mishandled.

    If the fear well-intentioned citizens have of DEA is lessened by making the standard for civil penalties fairer, that will be a good thing. Fear is certainly a powerful tool, but it is not one that should be used by this government against people who intend no harm. In the absence of fear, DEA will see that the desire and ability to cooperate with the agency is enhanced, not diminished.

    Mr. King and his deputies have made a difference in the past few months. I personally have seen the agency recede from threats of civil penalties for minor record keeping issues. But for fairness we should not need to rely only upon the personnel at DEA, personnel who will come and go. The good intentions of DEA managers are important, but our institutions, our laws, should protect us by assuring that fair standards for liability are used.

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RECOMMENDATIONS

    I have reviewed the amendments to the CSA proposed by the National Association of Chain Drug Stores. I believe these amendments are appropriate in that they impose a requirement of culpability on the part of the DEA registrants. The proposed amendment would add a ''knowingly'' standard to record keeping and reporting violations. There are precedents for such a standard in other statutes involving civil penalties. I have provided a summary of these laws at Tab 3, but I wanted to mention just a few.

    Under the Clean Water Act, 41 U.S.C. §55(a)(1), the government may initiate a civil action and recover a civil penalty from an individual who knowingly engages in kickback schemes involving a prime contractor or subcontractor under the Act. The penalty consists of twice the amount of each kickback with a limit of $10,000 per violation. If the activity is not ''knowing'' the U.S. may recover only the amount of the kickback.

    Under the False Claims Act, 31 U.S.C. §3729, an individual is subject to civil fines for knowingly causing a false claim to be filed with the government. ''Knowingly'' is defined to include actual knowledge, deliberate ignorance, or reckless disregard of the truth.

    The Endangered Species Act, 16 U.S.C. §1540(a)(1), imposes civil penalties of up to $5,000 per violation for ''knowing'' record keeping and reporting infractions. Case law has defined ''knowing'' under the Act to mean ''knew or should have known.'' Finally, under the Federal Hazardous Materials Transportation Act, 49 U.S.C. §5123, the government can pursue civil fines of between $250-$25,000 per violation for knowing violations involving transportation of hazardous materials. ''Knowing'' is defined as actual knowledge or knowledge a reasonable person exercising reasonable care would have known.

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    It is my opinion that a definition of ''knowingly'' under the CSA that encompassed a showing of negligence or reckless disregard would be appropriate in cases of civil penalties. Such a standard provides the protection sought by industry from overzealous individuals and does not overburden the government's ability to seek civil fines where justified.

    For example, in an instance where a distributor of listed chemicals failed to keep any records required under DEA regulations, such actions, even if the registrant was unaware of the requirements, would clearly rise to a level of reckless disregard of the obligations of a DEA registrant. Someone in that business would be negligent not to ascertain the record keeping responsibility.

    The proposed amendments would also lower the maximum fine per violation in cases where there has been no evidence of diversion. I believe this is also a reasonable change. In my experience, the government can usually, and does, identify numerous violations where a company fails to maintain appropriate record keeping and reporting systems. Thus, even at $500 per violation, the amount of the total fine would be substantial.

    I would add a third recommendation to those already proposed; that is, that the funding and commitment to corporate compliance programs be expressly recognized in the CSA as an alternative to the payment of civil fines. DEA will, I believe, attest to the fact that corporate compliance programs, when properly executed, can be a vital part of the effort to control drugs of abuse. Allowing companies to receive credit for resources expended to operate a DEA compliance program would be a good innovation.

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EXAMPLES OF PRESS RELEASES DEPARTMENT OF JUSTICE AFFIRMATIVE CIVIL ENFORCEMENT (ACE)

From a May 11, 1998 press release from the Newark U.S. Attorney on sentencing of a company for obstructing an investigation into defects in aircraft landing cable equipment they sold to the U.S. Navy:

'' . . . The parallel civil settlement, negotiated by U.S. Attorney's Affirmative Civil Enforcement (''ACE'') Unit, resolves a July 16, 1997 federal complaint brought under the False Claims Act, that sought unspecified damages. . . . According to Assistant U.S. Attorney Michael A. Chagares, ACE director, Grimaldi and Grimco have paid more than $500,000 towards the settlement amount.''

From a March 17, 1997 press release for fiscal year 1996 from the Executive Office of US Attorneys:

''FY96 U.S. ATTORNEYS' REPORT SHOWS PROSECUTORS COMPLETED MORE CASES AGAINST MORE CRIMINALS, RESULTING IN HIGHER CONVICTION RATE. . .

AFFIRMATIVE CIVIL ENFORCEMENT

Affirmative civil enforcement is important as a powerful legal tool to help ensure that federal funds are recovered, that federal laws are obeyed, and that violators provide compensation to the government for losses and damages they cause as a result of waste, fraud and abuse of government funds and resources. Among the civil enforcement actions filed by the U.S. Attorneys are those brought under the False Claims Act, the Clean Water and Clean Air Acts, civil enforcement of controlled substance violations, RICO, defense procurement fraud actions, and health care fraud enforcement.

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The U.S. Attorneys' affirmative civil enforcement initiative resulted in the government collecting $546.6 million in FY 1996.''

From an April 10, 1996 press release in New Mexico:

''Honeywell Reaches Settlement with U.S.

U.S. Attorney John J. Kelly and the Department of Defense, Defense Criminal Investigative Service announced today that on April 4, 1996, Honeywell, Inc., Defense Avionics Systems in Albuquerque reached a $592,799.00 civil settlement with the United States . . .

This investigation was conducted by the Defense Criminal Investigative Service (the investigative arm of the Department of Defense Office of Inspector General) with audit assistance from the Defense Contract Audit Agency. The settlement was handled by Assistant United States Attorney Edwin G. Winstead, of the Affirmative Civil Enforcement Unit, United States Attorneys Office, District of New Mexico.''

From a November 25, 1996 press release from Middle District of Florida:

Fiscal Year 1996 U.S. Attorney Statistical Results

United States Attorney Charles R. Wilson announced today that the Middle District of Florida. . .

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The total of $31.5 million in civil judgments and settlements relates to the following categories of cases, among others: (1) affirmative civil enforcement (''ACE''), including frauds against federal programs such as Medicare and food stamps; (2) defaulted federally insured student loans; (3) bankruptcy debts; (4) foreclosures of mortgages held by the various agencies of the United States; (5) actions for overpayments of federal benefits; and (6) civil penalty actions for violations of environmental, bank fraud or certain other laws.

The emphasis placed upon affirmative civil enforcement reflects a view that collection of up to treble damages and various civil penalties is often a necessary complement to criminal prosecution or even a substitute for criminal prosecution in appropriate cases. Three percent of monies collected nationwide are earmarked for reinvestment towards ACE and other collection efforts. The Middle District of Florida has received budgetary allocations for a new, four-person ACE team, consisting of an attorney, auditor, paralegal and secretary. The efforts of this team and several other attorneys and staff members throughout the district and in Washington resulted in the collection of almost $8 million in ACE recoveries during Fiscal Year 1996.''

EXAMPLES OF DEA CIVIL PENALTY CASES INVOLVING MINOR OR TECHNICAL VIOLATIONS

In 1997, a chain pharmacy paid a civil fine for violations involving several of its distribution centers. Many of the violations were extraordinarily technical in nature. For example, the government alleged that records showed shipments were made to an unregistered location which turned out to be an erroneous address for one of the chain's retail stores. The shipment was actually sent to the right location, but the government sought a penalty anyway. The government also alleged that the distribution center failed to record the shipper and customer DEA registration number on several invoices, but the shipments were intracompany transactions between the distribution center and its retail stores and the company was able to quickly correct the records. Notwithstanding this, the government sought penalties.

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In another case involving a chain pharmacy, the government initially sought a $13 million fine based on alleged failure to keep accurate records of seventeen drugs. The government also cited one of the chain's retail stores for failure to report a theft/loss of controlled substances even though the retail store had made a report to the appropriate state authorities. The case ultimately settled for less than $150,000 primarily because it was demonstrated that the government's calculations were erroneous for all but four of the drugs.

A pharmaceutical company recently was notified by an assistant United States attorney that the government intended to pursue civil penalties of up to $25,000 for each of five violations where the company failed to keep appropriate records of transactions involving two over-the-counter drug products containing small amounts of controlled substances. The company believed, in error, that the products were exempt from the CSA. The company had appropriately requested an exemption from DEA for other products, but believed the two products in question were already exempt. The company received notification of this action two years after its last correspondence with DEA, at which time the company believed it had corrected the problem to the satisfaction of DEA. The matter is still pending.

In a case that took almost five years to settle, a large manufacturer of controlled substances paid a small fine (after the government sought $175,000) to settle a matter based on alleged violations stemming less from violations of the DEA regulations and more from violations of policy arbitrarily established by a DEA Field Office. For example, one count of the government complaint stated that on one of the company's invoices for controlled substances it failed to use an asterisk or designation of a ''C'' to distinguish the controlled drugs from the noncontrolled substances. The company normally did this as a courtesy to the DEA Field Office, even though DEA regulations do not require such designation. Moreover, because the information on controlled substances was ''readily retrievable'' through the company's computer system, the designation was unnecessary.

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A wholesale distributor of controlled substances paid over $700,000 in fines for technical violations of DEA record keeping and reporting violations. One violation alleged by DEA was that the distributor incorrectly reported to DEA the date that the distributor processed returns of controlled substances rather than the date the returns were actually received. The company was cited for 50 instances of this violation. The company was also cited for an additional 50 violations for reporting the processing date of receipt of controlled substances from its supplier rather than the actual date that the drugs arrived at the facility.

THE STANDARD OF ''KNOWINGLY'' IN THE CIVIL AND CRIMINAL CONTEXTS

In opposing a modification of the statutory standard of the record keeping provisions in the Controlled Substances Act, the Department of Justice has argued that the application of a ''knowingly'' standard would require proof of a criminal level of culpability. The Department's argument is misplaced. Courts have interpreted the statutory standard ''knowingly'' differently in the civil versus the criminal context. In the criminal context, a prosecutor must prove specific and guilty knowledge, whereas in civil cases, the courts apply a negligence standard.

The criminal test for ''knowing'' considers the defendant's mental state, and is sometimes referred to as the Latin term of mens rea, or guilty knowledge. It requires that the prosecutor show that the defendant consciously knew of his or her actions or omissions, and did not act by ''ignorance, mistake, or accident.''(see footnote 1) In practice, the Courts often require specific intent, proven with evidence of the ''defendant's conduct and by all the facts and circumstances surrounding the case.''(see footnote 2)

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    A civil test for ''knowingly'' is a lower bar, requiring a showing that the defendant acted negligently or lacked reasonable care.(see footnote 3) At one extreme, this test does not require actual awareness or intent, and on the other, it does not require carelessness or recklessness. For example, a civil action of misrepresentation, even when the defendant's assertion was ''made with an honest belief in its truth may still be negligent, because of lack of reasonable care in ascertaining the facts . . .''(see footnote 4) Therefore, the issue in a civil test is whether the defendant should have known.

    Furthermore, a civil test for ''knowingly'' can be either subjective or objective. The issue in a subjective test is whether the defendant was in fact aware that the activity was unlawful, whereas in an objective test, it is whether the defendant should have known, or whether a reasonable person would have known.(see footnote 5)

(A) the person has actual knowledge of the facts giving rise to the violation; or

(B) a reasonable person acting in the circumstances and exercising reasonable care would have the knowledge.''

    Given how courts have interpreted the standard ''knowingly'' differently in the civil and the criminal context, the addition of this standard to the Controlled Substances Act would not undermine the Drug Enfrocement Administration's law enforcement ability. U.S. v. Allied Chemical Corp. WDNY 1977, 431 F. Supp. 361 (explains willful versus knowingly).

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''KNOWINGLY'' IS A REASONABLE STANDARD FOR THE CONTROLLED SUBSTANCES ACT

The recently passed Senate Commerce, Justice, State, and Judiciary appropriations bill amends the Controlled Substances Act to require that a person acted ''knowingly'' in order to violate the Act's record keeping requirements. In adopting this provision, the Senate recognized that there have been an increasing number of civil penalties imposed for these violations where the errors were entirely unintentional and unrelated to drug diversion. In meetings with the House Judiciary Committee staff, the Department of Justice expressed concerns that the Senate's addition of ''knowingly'' is inappropriate because, they argued, it is a criminal and not a civil standard. The Department of Justice's argument is misplaced. In fact, numerous important federal statutes already contain a ''knowingly'' or ''willfully'' standard for civil liability, including statutes that have separate criminal liability. For example:

The Federal Hazardous Materials Transportation Act (49 U.S.C. §§5123, 5124) This Act imposes a civil penalty of ''at least $250 but not more than $25,000'' for each violation when a person ''knowingly violates'' provisions of the Act, and criminal penalty of a fine and/or imprisonment for up to 5 years for ''willfully violating'' the Act. The Act regulates the safe handling, labeling, and transportation of hazardous materials.

Endangered Species Act (''ESA '') (16 U.S.C. §§1540) This law imposes both a civil penalty of $500–$25,000 for each violation and a criminal penalty of up to $20,000 and one year in prison for ''knowingly'' violating the Act. Specifically, the ESA prohibits harming or killing endangered species on federal lands, and importing, exporting, selling, or possessing endangered species. Of particular note, the Act exempts violations of record keeping and reporting regulations from these penalties.

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Government Contracts (41 U.S.C. §§54, 55(a)(1))Federal law imposes both a civil penalty of not more than $10,000 for each violation and a criminal penalty of fines and imprisonment of a maximum of 10 years for ''knowingly'' offering, accepting, or attempting to offer or accept a kickback in a contract with the U.S. government.

Federal Election Campaigns (2 U.S.C. §§437g) This Act provides for both a civil penalty up to $10,000 and a maximum criminal penalty of a $25,000 fine and one year imprisonment for a ''knowing and willful'' violation of the Act. Prohibited activities under this law include unlawful contributions and expenditures made either by or to political campaigns and candidates for public office.

Internal Revenue Code (26 U.S.C. §§16701(a), 7216(a)) A number of tax statutes require that the person knew or had reason to know that his or her action was unlawful to establish a violation. For example, a preparer of tax returns who ''knowingly'' uses or discloses the taxpayer's information may be fined up to $1000 and imprisoned for up to one year. Additionally, a person who advises a taxpayer in the preparation of a tax return, and ''knows'' that the figures represent an understatement of income, is liable for a $1000 civil fine for each document.

The standard ''knowingly'' of ''willfully'' is routinely used in statutes imposing civil penalties. A sampling of these statutes includes:

Securities Act (49 U.S.C. §46301) This Act imposes a civil fine of up to $10,000 for each violation when a person provides information ''knowing'' to be false, when authorities are investigating incidents of piracy of an aircraft, interference with the flight crew, or the carrying of a weapon or explosive on an airplane.

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Fair Labor Standards Act (29 U.S.C. §255) A provision in this Act increases the statute of limitation for a ''willful violation'' from two years to three years when an employer fails to pay minimum wages, overtime compensation, or damages under the Act.

False Claims Act (31 U.S.C. §3728) This Act imposes a $2000 civil fine in addition to any costs associated with the violation for ''knowingly'' presenting a false claim for payment or reimbursement to the U.S. Government.

Administrative Procedures Act (APA) (5 U.S.C. §§445, 557) The APA forbids anyone from ''knowingly'' violating or causing a violation of the provisions prohibiting ex parte communications related to an administrative proceeding.

Immigration Documents (8 U.S.C. §1324c) Federal law imposes a civil fine of $250-$5000 per document when a person from ''knowingly'' forges, falsifies, or counterfeits immigration documents.

Federal Deposit Insurance Act (12 U.S.C. §93) This Act imposes a civil fine of up to $1,000,000 for a bank director who ''knowingly'' violates any provisions of the Act intended to protect the security of depositors' money.

Regulation of Meat and Dairy Products (21 U.S.C. 122) Federal law imposes a civil fine of up to $1,000 for ''knowingly'' violating the regulations of the handling of diseased animals in order to prevent the spreading of the disease.

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Federal Food, Drug, and Cosmetic Act (21 U.S.C. §335b) The Act imposes a civil fine of up to $1,000,000 when a person ''knowingly'' makes a false statement, fails to disclose important information, or obstructs an investigation into a drug product application by the Department of Health and Human Services.

Notice of Funding Decisions by the Department of Housing and Urban Development (42 U.S.C. §3537a) Federal law imposes a $10,000 civil penalty an employee who ''knowingly'' discloses information relating to a Departmental funding decision to an unauthorized person.

    Mr. MCCOLLUM. Thank you, Mr. Phelps. And I thank the entire panel. I made one observation and would ask a couple of questions.

    I remember years ago I was a Navy JAG officer and I remember working with a claims program at one time on a medical care recovery act, which was something a little esoteric, many of you wouldn't know about it, and the military does go out and try to recover claims from insurance companies and others for the losses that they sustain in treating active duty and related personnel in naval hospitals or Army hospitals or for injuries and so on.

    And I remember one fellow who was a civil service employee of the Navy who was in charge of claims in one of the districts—the naval districts encompassed the entire United States—and I did active duty, but later I did 2 weeks of active duty when I was a reservist with him.

    He had a reputation that was just true, his whole life was to recover as much as possible. He wanted to have the most recoveries, the largest dollar amount, whatever it took to get there, and he would needle the other claims officers and the other districts about how he was doing better than they were doing.

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    This was not a policy set of Washington. This was a culture of collection, because this was his life.

    Now, not everybody trying to collect fines or claims has that attitude, obviously, but it is a fact, it exists. Competition is human nature as much in the world at large as it is on the football field. And I think that that is part of what we see here and are concerned about.

    And we always are trying to strike some balance here. Diversion is a terribly important problem, in terms of some of these precursor chemicals, and in particular right now with the methamphetamine problem. But this is a very serious matter for us to try to balance the equities here.

    I would like to know, Mr. Work, you have said that pharmacists are unfairly subjected to civil penalties. Is it your opinion that civil penalties have always been unfair or have they just become more unfair in recent years?

    Mr. WORK. No, I do not think that civil penalties are always unfair. I think there are instances when they are unfairly applied. And I will point, for example, to the South Carolina cases involving Revco, where a number of the prescriptions, 34 prescriptions, lacked a date; they said—the DEA agents said there was no date in the prescription. There was a date on the prescription, it was on the reverse side, on—in their system of keeping records, they use a computer printout and stick it to the reverse side of the prescription, which has the date on the prescription. The physician had not put a date on the prescription.

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    But they are willing to bring charges against the pharmacist that had dated the prescription, but the physician who has the obligation—the primary obligation to date the prescription had no charges brought against them.

    Mr. MCCOLLUM. Let me ask another question to both you and Mr. Burgess in particular and Mr. Beard, but I think as an individual pharmacist, it is probably not the right question for you.

    In your examples, both of you, Mr. Work and Mr. Burgess, gave us some horror stories. And I expected you to do that; that is what you are supposed to do up here. Are there cases on the other side of the ledger, though, where you have come across—either in North Carolina in your experience, or the Walgreen system where you actually have had some serious chemical diversion problems where people have fudged the records, where the system has ''worked,'' if you will, and DEA has been right and not excessive in what they have done?

    Have there been cases that you are aware of where that is true?

    Mr. BURGESS. Yes, we have had cases in which we have met with DEA people, and we have been able to resolve matters and it has not come to a fine or come to any kind of a threat of action. But we are——

    Mr. MCCOLLUM. Before you go on, though, what I was asking wasn't just whether you were able to resolve them amicably, but were there egregious cases. You gave us some examples of things where you went out of your way to—as a company, to turn somebody in when you found something wrong. You gave us some other examples which sounded like, and I agree they were, inappropriate for pursuit in the way they were pursued.

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    But have you not had some mea culpa, if you will, in some cases, where perhaps there were pharmacists that did not conduct themselves in your shop the way they should have, and where—you obviously wind up settling those, I assume. But it does—what I'm trying to get at is, doesn't it exist in the system that there are problems from time to time that are real, rather than just problems that are overly aggressively pursued?

    Mr. BURGESS. Absolutely, certainly, Mr. Chairman.

    I think one of the things that—the point that I was trying to make is that—what happens is when, in fact, you have a situation like in Albuquerque, that I was mentioning earlier, where you have a situation where the pharmacist feels totally like, we didn't do anything wrong, we had no way of knowing this dentist, his number wasn't a valid number.

    And yet they then—now feel that they are—their licenses are being placed in jeopardy; so, yes, Walgreen paid $240,000. But they, those individual pharmacists felt threatened. They feel that their jobs are on the line and they feel that the profession is on the line. And what the long-term impact is, that we really haven't talked very much about, is that then when that patient comes through the door with that pain medication and the DEA number is not on it or the date is not on it, what they will have a tendency to do is turn that patient away.

    And, I mean, this is not a red herring. This happens every day, particularly young pharmacists, just getting out of pharmacy school, they go through, they learn all the laws. They are scared to death of breaking a law; they hear these war stories about DEA, and they are not going to do anything to jeopardize their license.

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    Now, a fair amount of fear is good; I am not saying—they need to be concerned with abiding by the law. But somewhere along the line, we have lost the balance here, and I guess that is what we are trying to say; and if the long-term impact is that patients are denied needed medication, then that is wrong. I think that goes way beyond a fine, way beyond anything else.

    And we have—every day, we have people being sent away from our drug stores. The wealthy, upper-income, knowledgeable people, they find it. The lower-end income, limited transportation, no money, they are sent away and they don't know what to do.

    Mr. MCCOLLUM. Mr. Work, do you concur, there are cases that you have come across where the diversion is real, where the pharmacists have messed up and where they really should get some penalty?

    Mr. WORK. Oh, yes. We do, like everybody else does, and there is no doubt that that does exist. And I have testified for the United States against pharmacists in criminal cases on several occasions. It does happen. And when it is—and we want those people gone, too.

    My point earlier was that the folks in South Carolina—and one of those was a North Carolina pharmacist who I taught as a student 30 years ago—those folks, one of them just got duped bad, but she faced more charges and more civil charges than the perpetrator faced criminal charges.

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    Mr. MCCOLLUM. I hear you.

    Mr. Gekas.

    Mr. GEKAS. I thank the Chair.

    Mr. Beard, I was interested in the flurry of letters that went back and forth until you could finally have a meeting—the letter of April 27th, 1998, by Thelma Colbert; and in it, in the letter she says, ''It will not be necessary for you to bring any documentation with you.''

    What was the purpose—what did she want to discuss at that meeting?

    Mr. BEARD. Well, we drove to Fort Worth and we met with her and a DEA agent; and basically she told us, we are going to try—all she said, we are going to try a new approach here, and you all won't be fined. But we will come back to your stores within 6 to 9 months for a thorough investigation, and finding errors at that time, we will levy fines and what needs to be done.

    Mr. GEKAS. So you then—what she was saying in effect was that their internal investigation finally proved that these were technical errors; is that correct?

    Mr. BEARD. Well, that is what we felt like. But I am not going to put words in her mouth. She didn't say that.

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    Mr. GEKAS. I understand that.

    Mr. Phelps, I, too, believe that categories of offenses should be a part of the parcel of regulations and laws that happen in this field. And you put a finger on the key, and that is, when there is actual diversion, nobody in the world is going to argue against a look back to have the investigation disclose where, even in bookkeeping, there might have been a cause for the diversion to have happened, and that is extremely serious.

    But if you find that same bookkeeping error and there is not an iota of evidence as to any diversion, there should be a concomitant consultation, without fine, in my judgment.

    These are the points that you are advancing here. Do you believe that it would be possible? I believe it would be possible. Do you agree with me that we should look to codification of the criteria that are already, according to the spokesman for the Department, in force as part of a new way to look at this whole situation?

    Mr. PHELPS. Yes, sir, I do. And I think, particularly on the issue of whether or not there is a ''knowing'' violation. Mr. Williams today articulated for you their own internal criteria that they say they are using now. And if they follow those criteria, a ''knowing'' violation, as that is interpreted for civil offenses, would be on all fours. So there should be no—we shouldn't be arguing about this. We should be in full agreement about it.

    If those are the criteria they are using, there should be no objection to putting it into the law.

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    Mr. GEKAS. Mr. Burgess, just one other question that I have. You settled for a quarter of a million dollars at that one point. Was that the the only time in the recent past where you settled for a big sum like that?

    Mr. BURGESS. We have some other cases that we have been dealing with. We have some still-pending cases that we have yet to reach any concurrence with, and so I, on the——

    Mr. GEKAS. On this specific one, you paid that rather than to hassle with them; is that right?

    Mr. BURGESS. Yes, sir.

    Mr. GEKAS. And that, too, is a waste of resources, in my judgment.

    Mr. BURGESS. Well, Mr. Gekas, just to go one step further, and just trying to stay on a very high level here, but what actually was painted to us is, this was a fine; we expect to fine you 240,000, if you don't take that settlement, we will be in your stores, we will have our inspectors in your stores, and we can find a whole lot more than that.

    So when you are faced—in Albuquerque, we have about 45, 50 stores—you are faced with that kind of a ''take it or leave it,'' we took 240,000.

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    Mr. GEKAS. They offered a bargain which you could not refuse?

    Mr. BURGESS. Yes, sir.

    Mr. GEKAS. I thank the Chair. I have no further questions.

    Mr. MCCOLLUM. Mr. Coble, you are recognized.

    Mr. COBLE. Thank you, Mr. Chairman.

    I appreciate you all being here. I regret that Ms. Warren and Mr. Williams could not stay, but I hope their colleagues are here, because I think this has been illuminating.

    For emphasis' sake, I want to read the final paragraph of the letter from—that you received Mr. Beard.

    ''Our office, prefers, when appropriate, to resolve matters without the expense of litigation.'' In other words, we are doing you a real big favor, Mr. Beard, we are not going to force you to get a lawyer and go through a lot of expense. And so, having said that, without further investigation, our office will accept 100,000. And then she concludes, ''I look forward to hearing from you.''

    And as we say in the rural south, I reckon she did. When I write a letter and demand 100,000 bucks, I am going to anxiously await a prompt response.

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    My friend, Ms. Warren, says sometimes warm embraces are encountered, and I hope that is right. But, folks, if this is the kind of warm embraces that are being exchanged, I don't want to be the beneficiary of a hostile voice. I mean, this is a horror story. I hope it does not speak generally; I hope it is the exception.

    As you pointed out, Mr. Work, you all are not defending pharmacists who are guilty of wrongdoing with intent, and neither are we. That is why I made my statement earlier. I am not speaking in defense of people who disseminate illegal drugs, they need to be thrown in jail and let the door slam behind them.

    But you mentioned, Mr. Chairman, Mr. Burgess mentioned it, perhaps others did, that it appears to me that the word that is conspicuously absent is ''balance.'' We need balance.

    So before the red light goes on and being in the chairman's dog house: DEA assures us that they have incorporated new guidelines. What is your view, gentlemen, of the consistency and uniformity of enforcement of these guidelines, and what do you think can be done to give guidelines teeth, if they are missing teeth now?

    Mr. BEARD. Can I make a comment? The doctors that issued these prescriptions were visited by the DEA. They did not receive a fine or a letter or any type of intimidation. And at the June meeting, whenever the pharmacists were meeting with the DEA and the Justice Department, we asked the question, why weren't these doctors treated as we are. And they said, well, doctors are just hard to get a hold of and to talk to.

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    One pharmacist stood up and said, if you send them a fine for 200,000, you will get every one of them in this room. So I think that is evidence that we were an easy target, especially independents, because of the fees that it would take to fight something of that nature. And I think that is why it has been pointed out that—the dollars' worth of fines that have been paid over the years, most of it has come from the pharmacy profession, because we do try to do what is right, and we want to get along and stay in business.

    And so we are intimidated. And if those fines would have been, say, 2,500 for a pharmacist, or 5,000 maybe, but 2,500 for sure, every one of them would have been paid and everybody would have been scared to death.

    Mr. PHELPS. Mr. Coble, you asked about the efficacy of these programs that DEA and the Department of Justice have instituted to try to be fair. I think we all are delighted that they are doing that. But the frailty of such a program is that, in a year or so when Congress is perhaps not interested and personnel changes, you still have the same built-in incentives to turn back to the way it was before.

    So we would, I think, uniformly much rather see the protections of fairness put into the statute and not left up to the bureaucrats.

    Mr. WORK. It would seem to me that if the policy is a good policy, it would be a better statute. The folks at DEA said that the proposed change in the statute would send the wrong message. I think it would send the right message on reasonableness.

    Mr. BURGESS. We have experienced a wide variance in dealing with the different offices and how those different offices operate and how they deal with us. So, clearly, whatever the guidelines may be that purportedly are throughout the entire agency, they are not administered equally. And so we end up being impacted.

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    We operate in 34 States, so we see a wide variance in different parts of the country.

    Mr. COBLE. Mr. Chairman, I think it has been a good hearing.

    Thank you, gentlemen. I appreciate you all being with us.

    Mr. MCCOLLUM. Thank you, Mr. Coble.

    I will do what I did earlier and go to a second round and yield to Mr. Thornberry.

    Mr. THORNBERRY. Thank you, Mr. Chairman. I just want to ask one basic question that we have not quite asked yet, and the concern I had is—as maybe you heard in my conversation with Ms. Warren, this is such a highly regulated business, it is inevitable that there are going to be mistakes or violations. Somebody mentioned, ''didn't check the box on the third page,'' for example.

    Is it your view that—that it is so highly regulated, if they want to find something, they can always find something because of the regulations?

    Mr. Beard?

    Mr. BEARD. Well, a comment on that: Paul Coggins, the United States Attorney for the North Texas District, was at that meeting that we had in Wichita Falls, and he said, if you all want to come in and check all of our files and all of our cases, you will find the same problems we found with you all. And so I think they understand that.

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    But all of that was after the fact. I mean—and I appreciate him saying that, I appreciate their comments, I appreciate them coming to Wichita Falls, but a lot of this has happened after the fact. And I think if extra pressure hadn't been put on them in Wichita Falls, I don't know if those comments would ever have been made.

    And not taking nothing away from them, but we were just told at one time—we would like to talk to Mr. Coggins. We were told that he wouldn't know anything about the case, so we couldn't talk to him. And there was a shield there; we couldn't go any further.

    But at that meeting that day, they give out their personal line phone numbers, where we could talk to them from here on. And I know now we can talk to them. And I just felt like that was, when you get a letter like that, everybody is on vacation, and you try to talk to the head person in charge and you are told by his secretary, that, well, he wouldn't know anything about it, so you can't talk to him. And I think that is—that is not due process.

    Mr. THORNBERRY. Do you all agree?

    Mr. WORK. Yes, I have had a standing offer for at least the last 25 years to any pharmacist in North Carolina. Give them 1 week to get their pharmacy in order; I would bet $5, I can find something wrong in 3 minutes. And so far nobody has taken me up on it.

    Mr. THORNBERRY. Mr. Chairman, the only other point I would make is to reiterate the concern that I think we have to consider about the chilling effect that some of these activities have caused. And Mr. Beard gave some of the examples in our area of what has happened.

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    Even though the fines were dismissed, everybody says it was all a mistake, we are sorry, there is a chilling effect, people in a nursing home in the middle of the night can't get prescriptions. And I think we have to face—in Congress what do we expect people to do if somebody lost both of their arms in an accident with farm machinery in the middle of the night, the hospital sends the hospital's DEA number, not the doctor's DEA number, you can't reach the doctor, he has an unlisted number, his office is closed, what do you do in the middle of the night?

    That is what these folks face every day. And we have got to decide what policy we are going to implement and enforce, and we have some tough choices with that.

    I thank you.

    Mr. MCCOLLUM. I thank you, Mr. Thornberry.

    Mr. Coble, a second round?

    Mr. COBLE. I have no more questions, Mr. Chairman.

    Mr. MCCOLLUM. I want to thank this panel very much. I think we have gotten out of your testimony a great deal today. We have our work to do, and you have given us the foundation for doing it. And we appreciate it, very, very much.

    This hearing is adjourned.

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    [Whereupon, at 11:55 a.m., the subcommittee was adjourned.]

A P P E N D I X

Material Submitted for the Hearing Record

PREPARED STATEMENT OF JOHN M. RECTOR, SENIOR VICE PRESIDENT OF GOVERNMENT AFFAIRS AND GENERAL COUNSEL FOR THE NATIONAL PHARMACISTS ASSOCIATION.

Mr. Chairman, Members of the Subcommittee'

    I am John M. Rector. I serve as Senior Vice President of Government Affairs and as General Counsel for the National Community Pharmacists Association, formerly the National Association of Retail Druggists.

    The National Community Pharmacists Association (NCPA) represents more than 35,000 independent pharmacies, where over 75,000 pharmacists dispense most of the nation's prescription drugs and related services. Independent pharmacists serve 18 million persons daily. NCPA has long been acknowledged as the sole advocate for this vital component of the free enterprise system. We are the only national pharmacy association with universal state association membership, including those of the Committee's members.

    NCPA members are primarily family businesses. They have roots in America's communities. The neighborhood independent pharmacist typifies the reliability, stability, yet adventuresomeness that has made our country great.

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    Our members function in the market in a variety of forms. They do business as single stores ranging from apothecaries to full line high volume pharmacies; as independent chains; and as franchisees such as NCPA members involved with Medicine Shoppes. Whatever the form of the business entity, however, independent pharmacists are the decision makers for this wide variety of NCPA member companies.

    The independent community pharmacist of today is simultaneously a health care professional and a small businessperson. NCPA and its members vigorously support the American free enterprise system which provides the only meaningful climate under which a small business can economically survive, have the opportunity to succeed through personal efforts, and provide an important and essential service to the community.

    As owners, managers and employees of independent pharmacies, our members are committed to legislative and regulatory initiatives designed to protect the public and to provide independent pharmacy a level playing field and a fair chance to compete. We appreciate the opportunity to assist the Subcommittee in accessing the appropriateness of the Drug Enforcement Administrations' (DEA) actions in the investigation of small business DEA registrants not involving drug diversion.

    NCPA has worked for years to require DEA to again treat pharmacies registered to dispense controlled substances as legitimate businesses and not as street criminals. Congress intended such a bifurcated law enforcement policy when it enacted the 1970 Controlled Substance Act (CSA).

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    In October of 1990, our House of Delegates unanimously approved a resolution on DEA lawlessness:

WHEREAS, 20 years has elapsed since the enactment of the Federal Controlled Substance Act (CSA); and

WHEREAS, the last congressional review of pharmacy and the CSA was in 1974, including ways to trace allegedly inappropriate CSA prescriptions; and

WHEREAS, NCPA has received an increasing number of complaints and information alleging that the Drug Enforcement Administration (DEA) has abused and harassed pharmacists via misrepresentations or violations of the CSA:

BE IT RESOLVED that NCPA urge the appropriate congressional committees to conduct oversight hearings into these allegations and subsequently to develop regulatory and legislative changes to help ensure that DEA is acting in a manner consistent with appropriate federal objectives and with the lawful practice of pharmacy.

    In June of 1991, the American Druggist published ''Is the DEA On Your Case?'', which highlighted a variety of DEA actions which many community pharmacists viewed as harassment.

    A letter to the editor in August of 1991 commenting on the June expos6 noted that:

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''The sad part is that while our government fights its war on drugs innocent persons are caught in the indiscriminate means of waging this battle. George Orwell was only seven years off when he wrote 1984. Big Brother is here in 1991 and his names is DEA''.

    In intervening years, we periodically express concern to the Justice Department and appropriated Congressional Committees about what appeared to a ''Cocaine Cartel'' law enforcement mentality employed against legitimate health care professionals who own small businesses registered under the Controlled Substances Act.

    Interestingly, a recent report of DEA's Office of Diversion Control analyzing civil penalties collected from registrants under the CSA from 1989–1995 ($33,051,498) seems to document that pharmacies, especially non chain pharmacies have been unfairly targeted by the DEA. During these years, 41.1% of the fines collected from registrants were collected from retail pharmacies ($13,613,730). Retail pharmacies only accounted for 6.5% of the registrants. Notably more than 35% of the total civil fine cases involved non chain pharmacy registrants which comprised 3.3% of all registrants.

    Fortunately, in the 104' Congress the House and Senate Appropriation Committees began to discuss taking action to deter what appeared to be an inequitable law enforcement policy and in the 105'hCongress's 1997 Commerce, Justice, State, and the Judiciary conference report 105–48 at page 25 advised that the DEA as follows:

The Committee recommends that DEA shall exercise appropriate discretion in monitoring compliance with statutory or regulatory record keeping requirements as they relate to legitimate commercial businesses. DEA should not impose unreasonable monetary penalties on legitimate commercial businesses to avoid prosecutions for minor, unintentional violations of statutory or regulatory record keeping requirements. Also, the Committee believes that DEA should not prosecute legitimate going concerns or impose significant monetary penalties for unintentional human error or omissions when the business has, in good faith, attempted to comply with statutory or regulatory record keeping requirements.

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    This very pointed directive from the Congressional Appropriation Committees was the culmination of years of complaints, especially by the NCPA small business pharmacies. Our members were pleased that the Congress had ''Just Said No'' to DEA pharmacy registrant harassment.

    Unfortunately the DEA blatantly disregarded the Congressional concern about their. heavy handed harassment of pharmacy registrants. Late in 1997, with no prior warning, two dozen pharmacists in the Wichita Falls, Texas area received letters from.the US Attorney demanding up to $400,000 in civil fines for alleged record keeping violations which involved no diversion of controlled substances. You will hear revealing testimony today from Janet and Rick Beard with Harvest Drug and Gifts, Burkburnett, Texas, near Wichita Falls, about their experiences as a DEA target for excessive penalties for unintentional record keeping involving no drug diversion.

    DEA had acquiesced to the record keeping in question for more than twenty years in Wichita Falls which involved hospital interns employed by a local clinic using their supervising physicians' DEA number.(see footnote 6)

    NCPA worked closely with Congressman Mac Thornberry and other members of Congress to address this DEA harassment. We told the Justice Department that these pharmacists have been ''especially defamed, suffering injuries to both their businesses, and personal reputations.'' The American public has repeatedly awarded community pharmacists the highest level of respect for honesty and integrity. Consequently, the potential damages in these cases is extraordinary. We also requested an apology for this most recent outrageous episode.

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    Subsequently, the DEA administrator indicated that the letters to pharmacists in Wichita Falls were ''inappropriately, unnecessarily harsh. . . and that they should have advised the pharmacies of the violations and fines that could be assessed if these problems are not corrected.'' Unfortunately others are also deserving of similar apologies.

    For the 2nd session of the 105' Congress we had planned to focus on the proper implementation of the Appropriation Committees' directive the DEA. Obviously, the advise to DEA from the Appropriation Committees was not sufficient to deter inappropriate DEA conduct.

    Much has been said about the scandalous Justice Department conduct in Wichita Falls and the blatant disregard for expressed Congressional concerns. The Honorable Tom DeLay captured the concerns of NCPA members very well when he told the House of Representatives on April 29, 1998:

Mr. Speaker, just before adjournment last year, Congress passed the Commerce, Justice, State Appropriations Conference Report directing the Drug Enforcement Administration (DEA) to ''exercise appropriate discretion'' and ''not impose unreasonable monetary penalties for minor, unintentional violations'' of record keeping requirements.

Unfortunately, in January of this year, the DEA either failed to take that directive seriously, or they have a seriously, or they have a serious problem interpreting the definition of the words ''inappropriate discretion,'' ''unreasonable penalties'', and ''minor, unintentional violations.'' In Wichita Falls, Texas, twenty-five pharmacies received letters from the DEA asking them to pay fines up to $400,000 for record keeping mistakes that were not even their fault.

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Mr. Speaker, it appears we may have another federal agency out of control. I only hope we don't have anther IRS-type fiasco on our hands. At the very least, we have a flawed statute if it allows any federal agency to fine a business $25,000 per paperwork mistake. If the shoe was on the other food, and taxpayers were able to deduct a sum of that size from their taxes for unintentional errors generated by bureaucrats in federal agencies the government would be dead broke.

Mr. Speaker, we should not take lightly or tolerate a federal agency's disregard or neglect of a very clear directive by the Congress. I plan to support by colleagues to come up with an appropriate solution.

NCPA has proposed and/or supported several amendments to curb DEA harassment:

An amendment on DEA harassment similar to the IRS Reform bill provision that would terminate any agent who threatens a pharmacist with inappropriate actions including retaliatory sanctions.

The transfer of GSA provisions granting DEA authority over legitimate business activities to the State Boards of Pharmacy.

A requirement that any unintended record keeping violation could not be sanctioned.

To provide courts with greater discretion in records keeping cases with no drug diversion and to reduce the maximum civil fine from $25,000 to $500.

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    Under the leadership of Senator Judd Gregg, Chairman of the Senate Appropriation Subcommittee on Commerce, Justice, State, and the Judiciary, great progress has been made. On July 23, 1998, the US Senate approved 2 provisions aimed at DEA harassment. One which prevents fines for unintentional record keeping errors and another which limits fines to $500.

    The Justice Department has opposed the provisions approved by the Senate in a very extreme manner claiming that DEA drug diversion regulatory authority would be eviscerated. On the other hand, they claim that their civil penalty authority is used very sparingly. Consequently, the Senate provision would impact only a few cases. Additionally, they claim that harm to the public, willfulness, and the ability to pay, are matters that are mitigating factors in determining the appropriate civil fine. However, these factors are applied by a court. The heavy handed settlements targeted by the Senate provisions have been extracted in lieu of going to court, obviously without the application of these factors. Lastly, anyone familiar with the economics of independent pharmacy including the very modest, if any profit margins, on prescriptions would conclude that a $500 sanction is a more than a sufficient deterrent.

    You would think that the cases in Wichita Falls area involved a ''cocaine cartel'' instead of unintentional records keeping errors involving Ro drug diversion. If these amendments truly ''disrupt'' DEA operations, it is a well deserved and long overdue ''disruption''.

    Speaking of ''disruptions''. It seems likely that provisions of the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA), which was included as part of the Contract with America's Advancement Act of 1996 (P.L. 104–124, 110 Stat 847) should provide relief to the Wichita Falls, Texas small business pharmacist whose business, professional and personal lives were significantly disrupted by the inappropriate and excessive conduct of the DEA and the United States Attorney's office. Since these pharmacists have not committed willful violations of law or otherwise acted in bad faith, it seems the agency should be liable for the fees and expenses they incurred in relationship to defending against the excessive demands.

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    In conclusion, the National Community Pharmacists Association urges the Subcommittee to support the bi-partisan provisions approved by the Senate or the similar approach designed by your colleague Representative Gekas.

    We thank the Subcommittee for the opportunity to participate in crafting a more balanced DEA policy for cases involving unintentional records keeping violations with no drug diversion.

PREPARED STATEMENT OF LAWRENCE S. KOCOT, SENIOR VICE PRESIDENT OF GOVERNMENT AFFAIRS AND GENERAL COUNSEL FOR THE NATIONAL ASSOCIATION OF CHAIN DRUG STORES (NACDS)

    Mr. Chairman and Members of the Subcommittee, my name is Larry Kocot and I am Senior Vice President of Government Affairs and General Counsel for the National Association of Chain Drugs Stores (NACDS).

I. Background

    Please permit me to briefly discuss our association and our industry. Founded in 1933 and based in Alexandria, Virginia, the National Association of Chain Drug Stores (NACDS) membership consists of 135 retail chain community pharmacy companies. Collectively, chain community pharmacy comprises the largest component of pharmacy practice with over 91,000 pharmacists. The chain community pharmacy industry is comprised of 19,000 traditional chain drug stores, 6,300 supermarket pharmacies and nearly 5,000 mass merchant pharmacies, together operating more 30,000 retail community pharmacies with annual sales totaling over $135 billion. Chain operated community retail pharmacies fill over 60% of the more than 2.7 billion prescriptions dispensed annually in the United States. Additionally, NACDS membership includes more than 1,300 suppliers of goods and services to chain community pharmacies and has grown to include 86 members from 20 foreign countries.

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    On behalf of our industry, let me thank you for the opportunity to discuss this issue today. Let me begin by saying that we are in complete agreement with the Drug Enforcement Administration (DEA) and the Department of Justice (DOJ) that we need to do all we can to stop the diversion of legal prescription medications for illicit uses. Indeed, beyond our legal responsibility, stopping diversion is in our business interest; diversion of any product hurts our bottom line. And with most pharmacies operating with a 2 to 3 percent profit margin, we cannot afford any unnecessary losses.

    To put this in context, we are not here today to discuss the cost of diversion. We are here to address the millions of dollars in fines that are assessed against community pharmacies for minor recordkeeping violations where, in most cases, no diversion of drugs even occurred. The Department of Justice and DEA have tried to minimize the impact of the fines by pointing out that civil fines have run a rate of .001% per DEA registrant and that pharmacy registrants make up only 6.6% of the 955,207 DEA registrants. But what they don't tell you is that retail pharmacies paid 41.9% of the total civil fines assessed between 1989 and 1995. As the DEA recently told this Subcommittee, ''the vast majority of . . . DEA registrants are honest and ethical people who strive to satisfy their legal and regulatory requirements.'' Then why are retail pharmacies paying so much in fines for minor recordkeeping violations?

    Judiciary Committee and Subcommittee staff and industry representatives were recently told by Department of Justice representatives that drug stores could afford to pay large fines because we ''could absorb this as a cost of doing business.'' This ''deep pockets'' mentality is wrong. Assessing fines for minor, harmless paperwork errors made by legitimate businesses, rather than focusing on criminals who divert drugs, hurts these businesses and diminishes the legitimate role of federal law enforcement.

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II. The Problem: Current Law Allows DEA and the Department of Justice to Impose Huge Fines for Small Recordkeeping Errors

    An increasing number of DEA investigations have led to civil penalties for minor recordkeeping violations. 21 USC §842(a)(5) and (10) permits the government to institute a civil action for minor recordkeeping violations . . . and because the courts have interpreted the law as a ''strict liability'' statute . . . the only question is how much will a pharmacy have to pay for a harmless, minor recordkeeping error. Many of the ''violations'' by chain drug stores stem from technical requirements which are unnecessarily duplicated between paper and computer record systems. The statute allows DEA and the Department of Justice to impose civil penalties that cost pharmacies up to $25,000 per violation. Indeed, across the United States these fines totaled over $12 million in 1996 and 1997.

    As the chart entitled ''DEA Criminal and Civil Fines'' demonstrates, civil fines increased from $1.7 million to $7.3 million between 1989 and 1996 (the last year most cases have been settled), a 329% increase. On the other hand, criminal fines during this period declined from $4.53 million to about $2.6 million, a reduction of nearly 42%.

    In response to the concerns of a broad range of controlled substance registrants regarding the aggressive civil enforcement activities of DEA and DOJ, the 1998 Commerce, State, Justice Appropriations bill contained the following report language as part of the DEA's FY 1998 appropriation:

The Committee recommends that DEA shall exercise appropriate discretion in monitoring compliance with statutory or regulatory recordkeeping requirements as they relate to legitimate commercial businesses. DEA should not impose unreasonable monetary penalties on legitimate commercial businesses to avoid prosecutions for minor, unintentional violations of statutory or regulatory record-keeping requirements. Also, the Committee believes that DEA should not prosecute legitimate going concerns or impose significant monetary penalties for unintentional human error or omissions when the business has, in goodfaith, attempted to comply with statutory or regulatory recordkeeping requirements.

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    Despite the clear instructions of Congress regarding minor recordkeeping penalties, late last year, DOJ launched an enforcement effort involving 25 pharmacies in Wichita Falls, Texas, resulting in threatening letters from the local U.S. Attorney demanding payment of $100,000 to $400,000 fines.

III. The Solution: Amend the Statute

    In response to the Wichita Falls debacle and many other ongoing enforcement incidents
S. 2260, the Senate Commerce, State, Justice and Judiciary FY '99 appropriations bill, which passed the Senate on July 23, 1998, included legislative provisions responding to the DOJ's continued assessment of excessive fines for minor recordkeeping errors.

One solution would compel the U.S. Attorneys to offer proof that a recordkeeping violation was ''knowing'' and not an unintended mistake or omission.

Another solution is a reduction in civil fines to $500 from $25,000 per violation where no drug diversion has occurred.

A third solution substitutes the word ''may'' for ''shall'' relating to the fines, giving the court discretion to reduce or forego a fine for minor violations.

    Legislation mirroring the Senate appropriations bill will be introduced shortly in the House of Representatives. Community retail pharmacy supports these provisions to address an ongoing and increasing pattern of overzealous pursuit of fines for minor paperwork errors.

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A. Section 118: The ''knowingly'' Standard

    Section 118 would allow DEA to impose fines of up to $25,000 if a registrant ''knowingly'' fails to keep records of controlled substances. Section 118 merely codifies DEA's own stated policy. DEA recently wrote that ''Policies in effect since 1991 have stated that civil action will not be a primary enforcement tool in the absence of . . . egregious conditions'' such as ''actual, willful diversion'' or ''irresponsibility or unwillingness to comply'' with the law. See Memo from DEA to all diversion investigators, FSS: 060–01 (May 1, 1998). Thus, DEA's stated policy is to avoid civil fines for unintentional errors that do not involve diversions. Section 118 is necessary because DEA has failed to follow its own policy.

    Contrary to DOJ claims, the knowingly standard is frequently used in civil law statutes?(see footnote 7) Adding this requirement to the Controlled Substances Act would not change DOJ's authority to penalize registrants who fail to keep records, but would provide relief for registrants who inadvertently make minor recordkeeping errors. See 21 USC §842(a)(5), (10).

B. Section 119: Lower Fines For Non-Diversion

    Section 119 would make recordkeeping fines discretionary rather than mandatory, and would limit fines to $500 where no diversion of controlled substances occurred. Section 119 is necessary because DEA has taken advantage of the ''strict liability'' statute to unfairly penalize registrants for harmless recordkeeping errors. A $25,000 fine is not commensurate with the nature of a minor paperwork violation.

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    Moreover, there is no evidence that lowering the fine to $500 would ''invite drug and chemical handlers to cut comers, use inadequate systems, and pay the smaller fines as a cost of doing business if and when caught,'' as suggested by the Department of Justice. A $500 fine is a significant amount to a community pharmacy. The net profit a pharmacy receives for dispensing a prescription averages 50 cents. Thus, it takes a pharmacy 1,000 prescriptions to realize enough profit to pay for one $500 fine.

IV. Misstatements By the Agencies Should Not Be Allowed to Mislead the Subcommittee About the Solutions in the Senate Bin

    In a July 14, 1998 letter to Chairman McCollum, the Department of Justice took issue with the Senate language. Unfortunately, the letter is filled with inaccuracies and hyperbole, and omits key facts.

    For example, in his letter, Acting Assistant Attorney General L. Anthony Sutin made the unfounded claim that ''If enacted, these provisions would eviscerate DEA's regulatory authority to control the diversion of drugs and chemicals from licit sources to illicit channels.'' To the contrary, the Senate Bill does not in any way affect the penalties for illicit drug diversion. NACDS strongly supports legitimate efforts to prevent illegal drug diversions. The provisions that reduce recordkeeping fines are specifically limited to situations in which ''no unauthorizedperson obtains unlawful control of a controlled substance. '' The fact is that the bill is designed to refocus the agencies' efforts on drug diversion and away from innocent recordkeeping mistakes.

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There is no causal link between innocent recordkeeping mistakes and drug diversions. Chain pharmacies keep extensive records on controlled substances in full compliance with laws and regulations. See 21 USC §827. Moreover, chain pharmacies have no tolerance for drug diversion. Therefore, chain pharmacies would have no reason to support S. 2260 if they believed it would increase drug diversions.

In short, DOJ's assertions about the impact of Sections 118 and 119 of S. 2260 have been grossly overstated. Specifically, the solutions embodied in S. 2260:

Do NOT amend DEA's authority to control the diversion of drugs;

Do NOT alter DEA's recordkeeping requirements;

Do NOT reduce fines for diversion;

Do NOT require DEA to prove that diversion occurred ''knowingly'';

Do NOT eliminate strict liability for diversion;

Do NOT affect DEA fines for intentional recordkeeping violations; and

Do NOT affect the penalties that may be imposed under the Comprehensive Methamphetamine Control Act.

V. Conclusion

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    In closing, Mr. Chairman, we are not basing our concerns on isolated or anecdotal evidence. We are focusing on pervasive problems in enforcement activities surrounding a narrow section of the Controlled Substance Act dealing with paperwork errors . . . and only those errors that are innocent and involve no drug diversion. Pharmacies in Wichita Falls, Indiana, Detroit, South Carolina, Chicago, Florida, and all across the country have a problem with the way present law is being enforced and interpreted by federal agencies. The focal point of our concern is that the present law provides strong encouragement for pursuing minor, innocent mistakes, for the purpose of obtaining huge settlements over the threat of even larger fines.

    Thank you again, Mr. Chairman, for holding this hearing. We certainly understand your concern over drug diversion and hope you will support a reasonable but firm legislative solution to the unwarranted pursuit of huge fines for innocent, inadvertent paperwork errors.

62151apA.eps

62151apB.eps

Introduction

    The National Wholesale Druggists' Association (NV87DA) is the national trade association representing distributors of pharmaceutical and related healthcare products. NWDA active member companies operate 221 distribution centers throughout the country that service every state, the District of Columbia and U.S. territories. NWDA's active members provide distribution services to 21,000 independent pharmacies, 18,000 chain pharmacies, 7,500 hospital pharmacies, 220 mail order pharmacies, 7,000 food stores, 5,000 mass merchandisers, 4,000 long-term care and home health facilities, 56,000 clinics and 1,000 HMOs.

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    NWDA has a long history of working with DEA on ways to prevent controlled substance diversion, starting in the early 1970's with the implementation of the Controlled Substances Act (21 U.S.C. §§801 et seq.). DEA oversight and enforcement activity at the controlled substance distributor level is very active, with the majority of our member distribution centers having an inspection visit at least once every few years. Over the years, NWDA has worked hard to keep the lines of communication open with DEA officials in Washington and our members try to do the same with their local DEA agents. Overall, the industry represented by NWDA spends over $50 million annually on DEA compliance. As a result, diversion of controlled substances at the drug wholesaler level is not a common occurrence.

The Problem

    NWDA members have not recently experienced the specific ''Wichita, Texas'' situation that led to today's hearing and a public review of DEA's regulatory enforcement practices. However, some of the allegations made about agency activities have a familiar ring. Like the Texas pharmacies, NWDA members have had significant fines imposed or threatened for minor paperwork violations that were in no way related to diversion of product.

    A most telling example of this in our industry happened a few years ago. Due to an unintentional computer input error, over 1500 transactions between a distributor and its pharmacy customers involving the ordering of one particular product over several months were incorrectly recorded. The error was in no way related to attempted diversion of product and no product was unaccounted for. The distributor was then audited by DEA and notified that a fine in excess of $50 million was to be assessed. This amount included assessing $25,000 each time the computer error repeated the incorrect information over the time period. After costly and time consuming negotiations, the fine was lowered to just under a million dollars. Unable to devote any more time or resources to the negotiations, the company felt forced to settle on the lower but still considerable fine.

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    This may have been an exception to the rule, but we often hear from our distributor members about threats of very high fines for minor, unintentional recordkeeping effors. These fines are often lowered at the informal hearing stage, but not until after considerable expenditure of time, money and anxiety, leaving the registrant with the impression that industry is being hassled for things that cannot hold up under scrutiny.

    NWDA and our member companies strongly support the need for strict controls to prevent diversion of controlled substances and recognize that DEA needs the enforcement tools necessary to carry out its responsibility. The problems arise when these tools are used to threaten fines in the hundreds of thousands or millions of dollars for paperwork errors in which there has been no diversion or intent to divert product. It is then that industry perceives it is being unreasonably targeted for enforcement actions. Instead of being able to work with the agency as a partner in the effort to eliminate diversion, DEA is viewed with suspicion and fear. Resources, time and energy that could be used to address truly criminal behavior are instead expended on dealing with minor technical violations in which no diversion was intended or occurred.

Recommendations

    NWDA recognizes that DEA leaders appear to realize that this type of behavior needs to be changed. We commend the agency for re-establishing the Diversion Program Manager (DPM) positions throughout the country, and look forward to working with the agency to make this a success. Among other things, DPMs are charged with looking into reasonableness and regional variance in policy interpretation and enforcement, something that has been an industry complaint throughout the years. Reports from our members indicate that this program is being well received. We would encourage DEA to make sure that registrants are aware of this resource and would support DPMs efforts to engage in a proactive and open dialogue with registrants.

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    We were especially encouraged by the memo, dated May 1, 1998, from DEA Deputy Assistant Administrator John King to all Special Agents in Charge, Diversion Program Managers, and Diversion Group Supervisors (see attached). While NWDA might not agree with all statements made in the memo, we certainly agree with Deputy Assistant Administrator King when he writes, . . .when DEA pursues civil action for relatively minor technical violations resulting from a registrant's honest mistake or misunderstanding of the regulations, our credibility and effectiveness plummet.''

    His reminder to DPMs regarding recently enacted legislation that ''. . .agencies reduce and for waive civil penalties except in the instances of repeat violations and for willful or criminal conduct'' and his direction that, ''. . . demand letters should not be structured to threaten the recipients with excessive and unreasonable monetary demands far in excess of what would routinely be awarded by the court'' is a message that is welcomed by industry.

    However, we are concerned that Washington's good intentions will not be appropriately understood or implemented by those in the field. Therefore, we recommend that a concerted effort be undertaken now by DEA leaders to educate their field operatives to ensure that this stated philosophy is one that is practiced and not just viewed as another memo from headquarters. It is also vital that registrants regulated by DEA are also informed about the May 1 memo; NWDA stands ready to work with the agency on this effort.

    Because it is important that the word get out and that there be consistency throughout all regions, NVVDA strongly recommends that key elements of the May 1 memo from Mr. King be formalized through the legislative process. Such a step is necessary to remove any uncertainty as to the role and responsibilities of regulators and registrants.

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    NWDA believes that significant fines and other punishment should be imposed in cases where there has been an intent to divert controlled substances and diversion has occurred. However, in cases where there are inadvertent computer input errors, incorrect zip codes or other innocent human errors that do not result in diversion, DEA should provide a formal notice or warning rather than threaten fines. Of course there are times when fines would be appropriate, such as when the same ''minor'' errors persist despite DEA warnings. But there should be flexibility under the statute to impose different fine amounts, starting with an amount much less than the current $25,000 per violation amount. This should take into account the entire picture surrounding the enforcement action including the registrant's history with DEA, how many minor discrepancies relative to the total number of audited records were found, and whether this is the registrant's first offense.

    Finally, NWDA would encourage DEA to work with industry to develop computer system capabilities to allow for electronic verification of registrants, electronic ordering and the electronic filing of all reports and records. Such modernization will allow DEA to carry out its mission in a more efficient and effective manner as well as provide long-term savings for both the agency and industry.

Conclusion

    NWDA members can point to many situations where working together with DEA on a common problem brought about the best results. Whether it be collaborating to make incremental improvements in DEA Form 222, having industry-specific provisions included in the Comprehensive Methamphetamine Control Act of 1996 or serving together on the Suspicious Orders Task Force, the lesson learned is that problems can be solved if both industry and DEA enter into a respectful partnership. It is NWDA's hope and expectation that we will be able to continue to work together to achieve our common goal-preventing controlled substance diversion.

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PREPARED STATEMENT OF JOHN H. KING, DEPUTY ASSISTANT ADMINISTRATOR OFFICE OF DIVERSION CONTROL

MEMORANDUM

Over the past several years, the issues generated by President Clinton's regulatory reform program as well as Congress's Contract with America have been detailed in a number of memoranda to you from former Deputy Administrator Stephen H. Greene and former Acting Deputy Administrator Peter F. Gruden. In short, both Congress and the Administration have mandated that agencies waive the imposition of civil penalties entirely or in part for first time violators when violations are of a minor, technical nature, or when firms or individuals immediately take corrective action. Instead of taking punitive action, agencies are to take affirmative steps to assist with the terms of compliance. Agencies throughout the government are closely scrutinized and queried to ensure that they have incorporated these mandates into their respective regulatory enforcement programs.

Since its inception, the DEA Diversion Program has emphasized cooperation and voluntary compliance with the regulated industries in a way that is consistent with the current initiatives. Serious sanctions against registrants and their agents, such as civil or criminal prosecution, have typically been pursued in instances where actual, willful diversion has occurred or when a registrant's irresponsibility or unwillingness to comply has created a strong potential for diversion. Policies in effect since 1991 have stated that civil action will not be a primary enforcement tool in the absence of such egregious conditions. These policies are entirely consistent with those mandated by regulatory reform and, when followed consistently, they allow DEA to withstand even the closest scrutiny and criticism.

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    On the other hand, when DEA pursues civil action for relatively minor technical violations resulting from a registrant's honest mistake or misunderstanding of the regulations, our credibility and effectiveness plummet. Assertions to Congress, to industry, and to the public regarding the validity and righteousness of our regulatory and enforcement programs with respect to legitimate drug and chemical handlers are dismissed with a simple referdnce to the ''unreasonable'' case—regardless of the fact that its existence is truly an anomaly.

    Since the role of the Diversion Program Manager is to ensure proper implementation of DEA policies with respect to program activities within the Division, it is appropriate that they monitor case activity and concur on all referrals to the U.S. Attorney's Offices for civil or criminal action. This issue was discussed at the recent Diversion Program Manager's (DPH) conference and all parties agreed that a policy should be established to require DPM approval in advance of any referral for prosecution.

    DPMs are reminded that provisions of the Small Business Regulatory Fairness Act require that agencies reduce and/or waive civil penalties except in instances of repeat violations and/or willful or criminal conduct. In addition, when—an agency's demand in an adjudication substantially exceeds and appears unreasonable compared to the final decision, the agency will be liable for legal fees incurred by the defendant unless the defendant has committed a willful violation of law or acted in bad faith. This office has worked with the national coordinator for the U.S. Attorney's Affirmative Civil Enforcement Program (ACE) in drafting a sample demand letter for use by their attorneys which should eliminate DEA's exposure to this liability. At a minimum, demand letters should not be structured to threaten the recipients with excessive and unreasonable monetary demands far in excess of what would routinely be awarded by the court. Ideally, direct reference to potential monetary penalties should be avoided. A copy of the sample demand letter provided to the National ACE Coordinator by the Drug Operations Section is attached for your information.

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Questions concerning this policy with respect to the impact of regulatory reform on DEA policy and program activity may be directed to Patricia Good, Chief, Liaison and Policy Section, at (202) 307–7297. Question3 concerning the ACE program or case specific operational matters should be directed to either the Drug or Chemical Operations Sections as appropriate.

(Footnote 1 return)
See, e.g,. jury instructions for United States v. Lawson, 780 F.2d 535, 542 (6th Cir. 1985), in Devitt, Blackmar, Wolff and O'Malley, Federal Jury Practice and Instructions (1992), 626.

(Footnote 2 return)
See, e.g., Federal Jury Instructions of the Seventh Circuit, Instruction No. 6.04, . 86–87 (1980), in Devitt, Blackmar, Wolff and O'Malley, Federal Jury Practice and Instructions (1992), 627.

(Footnote 3 return)
U.S. v. Cooperative Grain & Supply, 476 F.2d 47, 60 (1973).

(Footnote 4 return)
Id., 60 (citations omitted).

(Footnote 5 return)
For example, the Federal Hazardous Materials Transportation Act (49 U.S.C. § 5123(a)) incorporates both tests in its definition of ''knowingly'' in determining civil penalties: '' . . .A person acts knowingly when:

(Footnote 6 return)
(series of articles from a local newspaper from Wichita Falls, Times Record News from 1/5/98–7/8/98, and American Druggyist March 1998 page 15, ''Texas Pharmacies Fight DEA Nightmare'')

(Footnote 7 return)
A number of examples of the use of the Imowing standard in civil laws were supplied to the Subcommittee earlier.