11.12.07
Orthopedic Settlements Set a New Tone for the Industry
By Mark Langdon
In an eagerly awaited development in the medical device industry, the United States Department of Justice recently announced agreements with five companies settling and deferring prosecution on charges that the companies paid financial inducements to orthopedic surgeons to use their products. The five companies involved are Biomet, Inc., DePuy Orthopaedics, Inc.; Smith & Nephew, Inc.; Zimmer, Inc.; and Howmedica Osteonics Corp. (on behalf of its division, Stryker Orthopedics). This development is significant not only for the financial penalties imposed on the companies and the corresponding integrity and monitoring agreements by which each company is bound, but also for the impact it surely will have on the orthopedic device industry as a whole and, more specifically, medical device companies’ financial relationships with their physician consultants.
The government had alleged that the companies violated the Federal Anti-Kickback Statute by entering into consulting arrangements with orthopedic surgeons in part as an inducement for the surgeons’ use of the companies’ artificial hip and knee devices. Specifically, the government found that, from 2002 to 2006, the consulting physicians did little or no work for the payments they received. Furthermore, according to the government, the physicians failed to disclose the existence of these financial arrangements to the hospitals where the surgery was performed, or to patients.
The government entered into deferred prosecution agreements (DPAs) with all of the companies except Stryker, deferring prosecution of the criminal complaints for a term of 18 months. Under the agreements, at the end of the 18 months, if the companies are in compliance with their obligations, the government will dismiss the complaints and agree not to prosecute further those matters within the DPA’s scope. However, should the companies breach the agreements within the 18-month term, the government has the discretion to criminally prosecute the companies and/or exclude them from participation in the federal healthcare programs. Additionally, the government reached a $311 million agreement with these four companies to settle claims under the Anti-Kickback Statute and the civil False Claims Act.
Stryker entered into a non-prosecution agreement (NPA) with the government lasting a period of 18 months. According to the government’s announcement, the parties entered an NPA, rather than a DPA, because Stryker voluntarily cooperated with the government before any other company. Stryker has not entered into any civil settlement with the government but has not been given any release from civil liability from the government.
What These Companies Face
The DPAs and the NPA contain a number of requirements designed to ensure the five companies’ future compliance with healthcare fraud and abuse laws. These requirements should be carefully scrutinized by medical device companies and, when possible and appropriate, companies should consider whether to revise their compliance and training programs to take these into consideration. Although a full summary of these requirements is beyond the scope of this article, some of the major requirements are summarized below:
• Retention of a monitor. The five companies must retain an outside, independent “monitor” to evaluate their compliance with the DPA or NPA. The monitor must have full access to all relevant non-privileged company documents. The monitor is responsible for evaluating the companies’ relevant policies and making certain reports to the government.
• Needs assessment. The companies are required to conduct an annual “needs assessment,” which consists of an evaluation of all “expected, commercially reasonable needs for all consulting services to fulfill its medical, clinical, training, educational, and research and development needs.” Among other things, the assessment must specify the nature of the services needed, the hours needed to complete the services, the number of consultants needed and the maximum fair market value payment for each consulting service.
• Payments to consultants. Of particular note, the agreements provide that payments to consultants must be fair market value at an hourly rate of no more than $500 for time actually expended by the consultant in performing the contracted services. Should a company wish to pay at a higher hourly rate or at a different rate, the company must obtain a fair market value analysis conducted by an independent organization approved by the monitor. The $500 per hour guideline is very significant in that it might set a new standard for consultant payments in the orthopedic device arena.
• Royalty payments. The agreements contain several provisions related to royalty payments. For example, they provide that the aggregate royalties paid per project to all the consultants may not exceed fair market value expressed as a certain percentage of all domestic and international product sales of the product(s) that are the subject of the product development agreement and approved by the monitor. Further, a company may not pay any royalties in advance or in anticipation of product development that might result in a royalty.
• Disclosure. For all new consulting agreements, companies must require consultants to disclose their financial arrangements with the companies to their patients and their affiliated hospitals, as well as make certain disclosures on their Web sites regarding the amount of payments made to consultants. This is consistent with the government’s recent emphasis on transparency in both the pharmaceutical and medical device sectors.
Impact on Industry
As noted above, the effect of these settlements is likely to be wide-ranging in the device industry. Notably, the requirements set forth in the DPAs and NPA likely reflect and influence the government’s perspective regarding all medical device consulting arrangements, not just those relating to hip and knee devices. Given the potential broad implications of these settlements within the medical device industry, there are important principles to be gleaned. These settlements clarify the government’s expectations in terms of the robust descriptions for services sought by consultants, the documentation of the necessity for such services, the verification of services provided, establishing payments that are fair market value for consultant compensation and adherence to the needs assessment.
Accordingly, it is imperative that each device company carefully consider the anticipated need of consultants for the entire year, even if there is an opportunity to modify the needs assessment should a bona fide, commercially reasonable and unexpected business need arise. With respect to fair market value, it will be important for companies to attempt to adhere to the “benchmark” that appears to have been set by the government, unless it can be objectively demonstrated that a higher rate may be appropriate and is consistent with fair market value, as determined by an independent third party. Medical device companies would be well advised to carefully review their arrangements with physician consultants in light of this settlement to ensure that their practices are compliant with applicable healthcare fraud and abuse laws.