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Recent Activities Signal Continued Scrutiny for Orthopedic Companies
By Mark Langdon
Sidley Austin LLP
A new year can mean a fresh start for many, but the orthopedic industry still will have its hands full in 2008 dealing with healthcare regulatory issues that have been plaguing orthopedic manufacturers for the past several years. Last year, the US government finally reached groundbreaking agreements with five of the largest global orthopedic companies after scrutinizing their subpoenaed records related to their relationships with consulting surgeons (see November/December 2007 Regulatory Viewpoint column). Many in the industry thought that these agreements would have a sweeping effect on other orthopedic device companies, spurring them to review and make appropriate changes to their policies, procedures and, specifically, their relationships with consulting surgeons to be consistent with the government’s pronouncements.
In all likelihood, they were right, as healthcare entities typically pay very close attention to major settlements announced in their industry and often conduct an internal examination of their own practices to assess their conformity with the recently announced guidance. This is especially important in an area such as healthcare fraud and abuse, for which there is little case law to provide concrete guidance on the types of activities that might be considered inappropriate under applicable laws and regulations. Settlements and similar agreements announced by the government are viewed as precedent in a given area that likely will signal how enforcement authorities might decide to proceed in the future and what areas they consider to be ripe for review. As such, other healthcare companies tend to review them very carefully for any lessons that can be gleaned.
In addition, many also probably thought that, with the announcement of these agreements, the government had made its major “statement” in the orthopedic device arena and that, although the government would continue to aggressively investigate instances of alleged fraud and abuse that were brought to its attention, it probably would not simultaneously subpoena multiple companies in the same sector as it did with respect to the five other companies.
They were wrong.
It’s Not Over Yet
Late last year, the US Attorney for Newark, NJ—the office that investigated Biomet, Inc.; DePuy Orthopaedics, Inc.; Smith & Nephew, Inc.; Zimmer, Inc.; and Howmedica Osteonics Corp. (on behalf of its division Stryker Orthopedics) and entered into deferred prosecution agreements and settlements with four of those companies, and a non-prosecution agreement with the fifth—subpoenaed two other device companies, Wright Medical and Exactech, for records related to surgeon consulting and professional service agreements dating from 1998 to the present.
Based on public reports, it appears this investigation is on the same course as the one that produced the agreements with the other five orthopedic companies. In addition, other recent enforcement actions and activities underscore just how serious the government is about continuing to investigate and prosecute healthcare fraud and abuse in the medical device sector.
For example, in a July 2007 filing with the Securities and Exchange Commission, device company Orthofix disclosed that its subsidiary, Blackstone Medical, had received a subpoena from the Office of Inspector General of the Department of Health and Human Services and the US Attorney for Nevada asking for documents dating back to 1999. The disclosure states that the investigation relates to compensation and gifts provided to physician consultants. This investigation may be similar to the one the government performed on the spinal division of competitor Medtronic, which eventually resulted in a $40 million settlement in 2006.
Further, an Arkansas neurosurgeon recently pleaded guilty to soliciting and accepting kickbacks from a sales representative who worked for Orthofix, as well as three other device companies, and agreed to pay $1.5 million to settle the charges. It has been reported that the physician was accused of receiving stock options in the company in exchange for using its products.
Finally, even Congress recently has stepped up its oversight and investigation of medical device practices, with influential Sen. Charles Grassley (R-IA), who serves on the Senate Finance Committee, issuing a letter to Medtronic seeking information relating to the company’s practices concerning payments to physicians and the promotion of its products, as well as introducing, along with Sen. Arlen Spector (R-PA) from the Judiciary Committee, a bill that would require medical device manufacturers to submit certain pricing information to the federal government on a quarterly basis related to sales prices for implantable medical devices.
Don’t Be a Target
These developments, along with the Web site postings of financial relationships with physicians that have been made by the five orthopedic device companies that entered into an agreement last year, make it clear that the interest of federal and state enforcement authorities in the sales and marketing practices of medical device companies—and, specifically, the orthopedic sector—likely will continue unabated in the coming year. As has been written many times in this space before, this underscores the need to take compliance with federal and state healthcare and other laws very seriously. The sooner that a company can learn the lessons from prior settlements, anticipate future areas of legal scrutiny and take appropriate internal measures to address these issues, such as developing and implementing sound and ethical policies relating to interactions with physician consultants, and training and monitoring their sales representatives on sensitive risk areas, the greater the likelihood that the company will not become a target of an investigation, or that it can reduce its risk of substantial exposure if it is.
The most important step that such companies immediately can take is to review their compensation arrangements with physician consultants to ensure that the physicians are being paid fair market value for appropriate and necessary services. Such a review should be undertaken in consultation with legal counsel and, ideally, an independent third-party appraiser working under the direction of outside counsel. In addition, companies should scrutinize other financial relationships they may have with customers, such as surgery centers and hospitals, to ensure compliance with applicable laws, as well as programs relating to the provision of discounts and grants.
