You’ve just contracted with a prominent surgeon to develop and market a device that he created to provide better care to his patients. Of course, your agreement provides that your company will provide compensation to that surgeon for the years of toil he spent refining his invention, whether through a lump sum payment or continuing royalty payments. As a result of this transaction, does your company have any requirement to publicize your arrangement with the surgeon? Not yet, but it may soon.

Currently, four states and the District of Columbia have laws requiring the disclosure of pharmaceutical company payments to physicians.¹ An additional seven states proposed similar disclosure laws in 2007.² Notably, none of the existing statutes require medical device manufacturers to report payments to physicians. Although certain public interest groups claim “there is no basis for this distinction,”³ those responsible for regulating the industry recognize that medical device manufacturers are unique from pharmaceutical companies, in that they have greater reliance on physician experience and feedback to develop better treatments for patients.⁴ Moreover, it is essential that physicians receive education and training because the effectiveness of a device often depends on a physician’s skill in using it.

That is not to say that royalty payments, consulting arrangements, paid education and travel, or other gifts to physicians from medical device manufacturers have gone unnoticed by the government. The Federal Government already uses a variety of criminal, civil, and administrative enforcement mechanisms to discourage financial arrangements that distort physicians’ professional judgment.

The Senate is currently considering adding another arrow to the government’s quiver. In September 2007, U.S. Senators Chuck Grassley (R-IA) and Herb Kohl (D-WI) introduced legislation to require manufacturers of pharmaceutical drugs, devices, and biologics to disclose the amount of money they give to doctors through payments, gifts, honoraria, travel, and other means. On February 27, 2008, the Senate Special Committee on Aging held a hearing with the ominous title “Surgeons for Sale: Conflicts and Consultant Payments in the Medical Device Industry.” Representative Peter DeFazio (D-OR) introduced a companion bill in the House of Representatives on March 13, 2008. The Subcommittee hopes to see the legislation included in a Medicare bill considered by the Senate this year.

This article briefly discusses the existing enforcement statutes in this area and the proposed legislation and industry recommendations. As the proposed legislation is still in its formative stages, both the Senate and the House continue to encourage industry input.

Existing Statutes Used by the Federal Government to Penalize Financial Arrangements between Medical Device Manufacturers and Physicians

The Office of Inspector General (OIG) for the Department of Health and Human Services (HHS) and the Department of Justice currently allocate substantial resources to the investigation and prosecution of medical device companies who engage in illegal schemes disguised as consulting arrangements. The False Claims Act (FCA), the federal anti-kickback statute, and the Civil Monetary Penalties (CMP) Law are the primary enforcement mechanisms through which the government addresses what it deems to be illegal and unethical industry-physician financial relationships. Each has unique benefits to the government.

Under the FCA, the government may obtain substantial penalties against a person who knowingly submits or causes the submission of false or fraudulent claims to the federal government.⁵ The federal anti-kickback statute makes it a criminal offense to knowingly and willfully offer or pay remuneration to induce the referral of federal healthcare program business. The statute also criminalizes the knowing and willful solicitation or receipt of remuneration in exchange for such referrals.⁶ In addition to criminal fines and possible jail time, the statute provides for exclusion from federal healthcare programs — recognized as a “death penalty” to most medical device manufacturers.⁷

Finally, the OIG may also pursue violations of the anti-kickback statute under a provision of the CMP Law.⁸ The civil penalty is treble damages (three times the illegal remuneration), a $50,000 fine per violation (offer, payment, solicitation, or receipt of remuneration), plus possible exclusion from participation in federal healthcare programs. Through the CMP, the OIG can pursue heavy penalties for anti-kickback violations that it proves with a simple preponderance of the evidence, a standard much easier to satisfy than the criminal standard of beyond a reasonable doubt. Moreover, cases are tried before an HHS administrative law judge, and the rules of evidence are relaxed to permit the admission of hearsay.

In recent years, the government has used each of the statutes listed above to address alleged illegal remuneration to physicians from medical device companies. For instance, in September 2007, Zimmer Inc., DePuy Orthopaedics Inc., Biomet Inc., and Smith & Nephew Inc. entered into civil settlement agreements with the government collectively totaling $311 million to resolve allegations that the companies provided illegal inducements to physicians in the form of sham consulting agreements, lavish trips, and other perks. To avoid criminal prosecution, the companies each also entered into an eighteen-month Deferred Prosecution Agreement (DPA) with the United States Attorney’s Office.

In July 2006, Medtronic agreed to pay $40 million to resolve allegations under the FCA that Medtronic offered kickbacks to spine surgeons to induce the doctors to choose devices marketed by a subsidiary. Medtronic also entered into a five-year Corporate Integrity Agreement (CIA) with the OIG requiring the company to put into place compliance systems as well as be subject to monitoring by an independent review organization.

In July 2007, Advance Neuromodulation Systems Inc. paid $2.95 million in a CMP settlement and entered into a three year CIA with the OIG to resolve allegations that it paid certain physicians $5,000 for every five new patients tested with an ANS product where the physicians provided no significant clinical value to the company.

These recent enforcement actions demonstrate that the government is committed to ferreting out physician payment schemes that it thinks improperly influence medical decision making. However, the OIG acknowledges that “it would be both inappropriate and impractical to rely solely on government enforcement to address an issue of this complexity.”⁹ Not surprisingly, the OIG backs disclosure legislation as an additional tool to reduce the risks raised by financial relationships between companies and physicians.

Proposed Physician Payment Sunshine Act

In introducing the proposed legislation, the sponsoring senators recognized that ethical relationships between surgeons and device innovators are critical to the collective mission of improving patient outcomes; however, they also decried the sometime corrosive influence financial incentives can have on physicians. In the medical device context, physicians are largely, if not solely, responsible for selecting the appropriate medical device — which often costs thousands of dollars — to be used on a patient. Through the legislation, the Special Committee on Aging hopes that subjecting industry-physician financial relationships to reporting requirements will result in greater transparency and promote integrity. Senator Grassley believes the proposed legislation “fosters accountability by empowering consumers and other watchdogs.”

Original Legislation

The proposed legislation, S. 2029, as originally introduced in September 2007, requires manufacturers of drugs, devices, or medical supplies to submit both quarterly electronic reports and an annual summary report to the Secretary of HHS identifying any payment or transfer of value over $25 to any physician or physician’s group including:

• name of physician or entity;
• value of payment;
• date of payment;
• a description of the nature of the payment (payment or transfer of value includes any compensation, gift, honorarium, speaking fee, consulting fee, travel, discount, cash rebate, or services); and
• the medical issue or condition that is the basis for the transfer.

This information would then be available to the public though a website that is “easily searchable, downloadable, and understandable.”¹⁰ Failure to comply with the statute could result in civil money penalties ranging from $10,000 to $100,000 for each act of noncompliance. The original bill applied only to companies with annual gross revenues that exceed $100 million.

During the February hearings, the Special Committee on Aging heard testimony from representatives from OIG, The Association for Ethics in Spine Surgery, Applied Medical Resource Corporation, Styker Corporation, Zimmer Holdings Inc., and Advanced Medical Technology Association (“Adva-Med”). All parties recognized that that there had been “excesses” in the past and endorsed some form of disclosure legislation resulting in greater transparency of physician-industry collaborations. Industry representatives requested specific changes to help achieve the appropriate balance between innovation and disclosure. In addition to the testimony at the hearings, many corporations submitted written remarks and suggestions for improvements to the proposed legislation. The primary requested revisions are discussed below.

Expressly Preempt State Reporting Requirements

Most parties agree that any federal disclosure legislation should expressly preempt state reporting requirements to avoid multiple inconsistent collection and disclosure systems. As previously noted, four states and the District of Columbia already require some form of disclosure reporting for pharmaceutical manufacturers. Proposed legislation is pending in other jurisdictions that would require disclosure reporting for device manufacturers as well. In the absence of an express preemption provision, medical device manufacturers could be subject to multiple reporting systems creating heavy administrative costs. Moreover, multiple data collections in varying formats could prove confusing to consumers.

Last fall, Congress included an express preemption provision in the portion of the FDA Amendments Act requiring registration of drug and medical device clinical trials into a central database. Like the clinical trials database, express preemption in the Physician Payment Sunshine Act would create a central repository for information patients can easily access.

Allow Companies to Provide Context for Payments

As defined in the original proposed legislation, payments to physicians can take many forms ranging from royalties to paid travel. If a physician is involved in the development of a product, she may receive large royalty payments from a medical device manufacturer for her role in the creation of the product. Similarly, a physician heavily involved in a clinical trial may receive substantial compensation even though she is paid at fair market value. To avoid the implication that any large payment to a physician is suspect, medical device manufactures should be afforded the opportunity to provide the proper context for any given payment. To further clarify the purpose of certain payments, some manufacturers propose clearly separating out payments related to clinical research.

Require Compliance by Physician-owned Manufacturers, Distributors, and Group Purchasing Organizations

Physician ownership of medical device manufacturers and related businesses is a growing trend in the medical device sector. The OIG has closely scrutinized these relationships under the fraud and abuse laws because of “the strong potential for improper inducements between and among physician investors, the entities, device vendors, and device purchasers.”¹¹ In addition to OIG, AdvaMed also supports the inclusion of these groups in the legislation, regardless of whether such a company meets the revenue threshold originally included in the bill: “Patients should be informed about the practices of companies in which physicians have both an equity ownership interest and who are also major revenue generators for the company.”¹²

Protect Proprietary Information through Delayed Reporting

Consistent with the recently enacted clinical trials database, information about a company’s products under development through a product development agreement or a clinical trial should be disclosed only after a product is approved or cleared by the FDA or the clinical trial information is required to be posted online. This addition would protect proprietary information from competitors and help further and reward innovation.

Cap the Amount of Potential Penalties

As AdvaMed points out, under the original legislation, accounting errors made by a manufacturer could quickly add up to millions of dollars in fines annually. Rather than decrease the amount for any single violation, AdvaMed and others in the industry recommended an annual cap on fines under the statute.

Threshold for Compliance?

Controversy remains as to whether or not smaller device manufacturers should be exempt. The first iteration of the bill required disclosures only by companies with more than $100 million dollars in annual revenue. At hearing, Chad F. Phipps, Senior Vice President and General Counsel for Zimmer Holdings Inc. made it clear that the legislation should provide for “transparency across the board” by applying to all manufacturers regardless of annual income. Senator Bob Corker (R-TN) agreed, stating: “Being able to abuse your way to a certain level and then have to comply in a different way doesn’t make a lot of sense.”¹³

In contrast, AdvaMed voiced the concern that smaller medical device companies may lack the resources to meet the administrative requirements set forth in the bill. Rather than the original $100 million dollars in annual revenue threshold, AdvaMed advocates the exemption of companies that make payments to physicians of less that $250,000 annually.

Revised Legislation

All of the revisions noted, with the exception of the threshold for compliance, have been included in the revised summary of S. 2029. Although the revisions are not included in the version of the bill available on Thomas.gov, the summary can be viewed as part of the Special Committee on Aging’s May 13, 2008, press release.¹⁴ According to the policy advisor with the Special Committee on Aging, although the senators will not reintroduce the legislation with the revised provisions, they will push for inclusion of those revisions as the bill works it way through the full Senate. In key part, the revised summary provides for:

• Reporting on an annual basis beginning March 31, 2011;
• Annual caps on monetary penalties for failure to report;
• Proper context for payments;
• Appeal and correction process;
• Delayed reporting for product development agreements and clinical trials;
• Express preemption of state reporting requirements;
• Application to all manufacturers regardless of annual revenue.

The following companies have written Senator Grassley confirming their support for the revised legislation and applauding the increase in transparency: Eli Lilly and Company; AstraZeneca Pharmaceuticals LP; and Merck & Co. Inc. In addition, two key trade organizations, PhRMA and AdvaMed have endorsed the current version of the proposed legislation. Eli Lilly and Company hopes the legislation will be “an important step in building public trust in and understanding of the relationships between pharmaceutical and device industries and physicians.”¹⁵

Conclusion

To some extent, the transparency sought by this legislation already exists. With the OIG actively pursing enforcement actions against pharmaceutical and medical device manufacturers involving illegal financial incentives for physicians, many companies already voluntarily publish certain financial gifts. For instance, Eli Lilly and Company reports all educational grants and charitable contributions.¹⁶ Similarly, AstraZeneca makes public their medical education grants and contributions to non-profit organizations. Other companies, such as Zimmer Holdings Inc., post the majority of information contemplated by the bill on its website pursuant to the DPA. Finally, OIG is considering requiring the disclosure requirements that are currently part of the DPA to be included in future CIAs with device and pharmaceutical companies.

Nevertheless, if the proposed bill is enacted this fall, it will impose an additional administrative burden on the medical device industry. As reflected by the revisions included in the summary of S. 2029, the Special Committee on Aging has, to date, been responsive to suggested changes from the industry that minimize the administrative burden while continuing to achieve the sought after transparency. When the bill reaches the full Senate, medical device companies and their advocates should continue monitoring the bill’s progress and offer constructive input when needed to ensure the revisions discussed in this article are included in the final bill.

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[1] Maine, Minnesota, Vermont, West Virginia, and the District of Columbia require disclosure of certain pharmaceutical company payments to physicians. Me. Rev. Stat. Ann. Tit, 22 §2698-A; Minn. Stat. Ann. §151.47; Vt. Stat. Ann. Tit. 33 §2005; W. Va. Code. ann. §5A-3C-13; D.C. Code Ann. §48-833.

[2] Some version of disclosure law was proposed by the legislature in Massachusetts, Mississippi, Nebraska, New Hampshire, New York, Oregon, and Washington in 2007. Although some are carried over into the 2008 legislative session for consideration, none have passed to date. See National Conference on State Legislatures. “2007 Prescription Drug State Legislation,” February 8, 2008. Available at <http://www.ncsl.org/programs/health/drugbill07.htm>; National Conference on State Legislatures. “2008 Prescription Drug State Legislation,” May 28, 2008. Available at <http://www.ncsl.org/programs/health/drugbill08.htm>.

[3] Peter Lurie, Public Citizen’s Health Research Group, et al. “Testimony on State Laws Requiring Disclosures of Pharmaceutical Company Payments to Physicians (HRG Publication #1817).” June 27, 2007. Available at <http://www.citizen.org/publications/print_release.cfm?ID=7531>.

[4] For instance, Senator Kohl recognized that the financial relationships between the medical device industry and surgeons and physicians “can play an important role in product innovation.” Opening Statement of Senator Herb Kohl. Special Committee on Aging Hearing. “Surgeons for Sale: Conflicts and Consultant Payments in the Medical Device Industry.” February 27, 2008.

[5] See 31 U.S.C. §§3729-3733.

[6] See 28 U.S.C. §1320a-7b(b).

[7] In his testimony before the Senate subcommittee, Chad F. Phipps, Senior Counsel and Secretary of Zimmer Holdings Inc., stated that forced withdrawal from federal healthcare reimbursement is “in effect a death penalty for a company such as ours.”

[8] See 28 U.S.C. §1320a-7a(a)(7).

[9] Written testimony of Gregory E. Demske, Assistant Inspector General for Legal Affairs, Special Committee on Aging Hearing. “Surgeons for Sale: Conflicts and Consultant Payments in the Medical Device Industry.” February 27, 2008.

[10] S. 2029 §1128G(d)

[11] OIG Response to Request for Guidance Regarding Certain Physician Investments in the Medical Device Industry, October 6, 2006. Available at <http://oig.hhs.gov/fraud/docs/alertsandbulletins/guidancemedicaldevice%20(2).pdf>.

[12] Attachment to written testimony of Christopher L. White, Executive Vice President, General Counsel and Secretary of AdvaMed, Special Committee on Aging Hearing. “Surgeons for Sale: Conflicts and Consultant Payments in the Medical Device Industry.” February 27, 2008.

[13] Oral testimony from Special Committee on Aging Hearing. “Surgeons for Sale: Conflicts and Consultant Payments in the Medical Device Industry.” February 27, 2008. Available for download at <http://aging.senate.gov/hearing_detail.cfm?id=293677&>.

[14] Available at <http://aging.senate.gov/hearing_detail.cfm?id=297721&>.

[15] Correspondence from John C. Lechleiter, Ph.D., President and CEO of Eli Lilly and Company to The Honorable Charles Grassley, May 12, 2008. Available at <http://aging.senate.gov/record.cfm?id=297721>.

[16]  <www.lillygrantoffice.com>.

Finis