Coming on the heels of several significant investigations, en-forcement actions and other government pronouncements concerning medical device companies this past year, all signals point toward 2007 as being a year in which federal and state healthcare fraud prosecutors will continue their investigation of the medical device arena, with a particular emphasis likely to be placed on sales and marketing practices, consulting relationships, educational grants and off-label promotion. Accord- ingly, device manufacturers would be well advised to review their compliance programs to ensure that they are robust and as current as possible, and to make certain that their employees and contractors are appropriately trained on the applicable laws

and regulations.  
    

A Look Back at 2006

A number of significant developments on the medical device fraud and abuse front in 2006 underscore the increased scrutiny government officials are placing on device companies.

First, the Sofamor Danek division of Medtronic entered into a $40 million settlement with the federal government to settle allegations that it paid physicians kickbacks in the form of sham consulting and royalty agreements, and luxury trips in exchange for using the company’s products. The settlement was the result of a lawsuit filed by a whistleblower several years ago under the False Claims Act.

Second, the Department of Justice (DOJ) continued its investigation of several major orthopedic companies related to their sales and marketing practices as well as their consulting and other financial relationships with physicians. This nationwide investigation initially was launched in 2004 with the issuance of subpoenas by the DOJ to these companies.

Third, subpoenas similar in scope and substance to those received by the orthopedic companies also were recently issued to several major cardiovascular companies, with the focus (at least in part) on sales and marketing and consulting relationships.  

Fourth, the DOJ issued subpoenas earlier this year to several major orthopedic companies relating to possible antitrust issues over the manufacture and sale of orthopedic implant devices.

Finally, as discussed in this column in the November/December issue of ODT, the Office of Inspector General (OIG) of the US Department of Health and Human Services released an advisory letter—in response to a request by a medical device trade association for guidance regarding physician investment interests in medical device manufacturers and distributors—in which it essentially said that such arrangements can raise potentially significant compliance issues.   

It is significant to note that there are many similarities in the activities of medical device manufacturers and pharmaceutical companies and, thus, it should come as no surprise that enforcement officials—both at the federal and state level—increasingly have turned their attention as of late to the medical device arena (while still continuing to vigorously pursue investigations and enforcement actions in the pharmaceutical arena as well).  Although both pharmaceutical and medical device companies generally do not bill federal health insurance programs such as Medicare or Medicaid for the products they furnish, they do market and sell those products to purchasers such as hospitals, physicians and health maintenance organizations, which do bill governmental programs, and it is the practices these companies employ when marketing their products that often land them in trouble with enforcement officials.

What to Expect in 2007

There are a number of potential landmines, but, based on the aforementioned developments in 2006, it appears that the following areas are likely to receive the most scrutiny from enforcement officials in 2007:  consulting relationships with physicians; discount and rebate programs; educational grants; and off-label promotion. Following is a brief discussion on each of these areas.

In general, the medical device industry is probably more vulnerable than the pharmaceutical industry to charges of kickbacks and other inappropriate relationships with physicians because of the necessarily close collaboration that is involved between device companies and physicians (typically surgeons)—who often are intimately involved in the development and testing of new products. This type of relationship is not nearly as prevalent in the pharmaceutical arena. Therefore, it is not uncommon for device companies to have a number of consulting and other financial relationships with physicians.

However, to the extent that these relationships do not involve fair market value compensation for legitimate services, they present significant fraud and abuse risks. This seems to be the focus of the subpoenas that were issued to various orthopedic companies in 2004. Extreme caution needs to be exercised when entering into financial relationships with physicians to ensure that the physicians will be providing bona fide services, and that the compensation is in line with fair market value and does not vary based on the volume or value of referrals or purchases.

The practice of providing discounts and rebates to customers such as hospitals and physician practices, although widespread, also needs to be carefully reviewed for compliance with the proscriptions of the federal anti-kickback law.  Standard volume-based rebates that are tied to the purchase of the same identical product generally can be structured in a compliant fashion, so long as the appropriate disclosures are made to any federal health insurance programs that are billed. However, the issue becomes more complicated when manufacturers structure “bundled” rebate arrangements involving multiple products, or when manufacturers offer “market-share rebates” to customers. Such arrangements can present risks and, therefore, should be assessed in light of the requirements of the discount “safe harbor” to the anti-kickback law.

Educational grants are another area in which medical device companies should focus their compliance efforts this year. A number of the recent significant pharmaceutical settlements involved allegations relating to improper grants, and the Senate Finance Committee has been investigating the propriety of certain educational grants. The general rule of thumb is that grants that are tied, directly or indirectly, to purchases of the manufacturer’s products are prohibited. It is also important to bear in mind that, as a result of several recent settlements in the pharmaceutical context, as well as guidance issued by the OIG, many manufacturers have separated their grant-making functions from the sales and marketing arm of the organization in an effort to avoid any perception that inappropriate motivations are behind the decision as to whether to make a grant.

Another area of increased focus on the pharmaceutical side, and one likely to warrant additional scrutiny in the coming year on the medical device side, has to do with off-label promotion, or the promotion of a drug for a use that is not approved by the Food and Drug Administration. Although it generally is not inappropriate for a physician to prescribe a drug or device for an off-label purpose, it is unlawful for a manufacturer to promote a drug or device for an off-label purpose. Therefore, by way of example, a company that specifically targets physicians who do not treat patients for the intended use of a device, or a company that compensates its sales representatives based on marketing for non-approved uses, could place itself at increased risk of scrutiny of its practices.

The events of 2006 illustrate that the government is continuing its fraud fighting efforts in the medical device industry, and there is no reason to think that this year will be any different. However, medical device manufacturers can substantially reduce the likelihood of becoming the target of an investigation if they conduct a thorough review of their policies, procedures and training protocols with respect to the noted risk areas to ensure compliance with applicable laws and regulations.

Mark Langdon is an attorney with the Washington, DC office of the law firm of Sidley Austin LLP. He is a nationally recognized expert on healthcare compliance issues, with a particular focus on fraud and abuse and reimbursement matters. Mark primarily represents device and pharmaceutical companies, hospitals and physicians. He can be reached at (202) 736-8162 or [email protected].