White Collar Law

The Government's Latest Conquest: Medical Device Manufacturers

, The Legal Intelligencer

Through recent settlements with Medtronic and Advanced Neuromodulation Systems (ANS), the federal government has served notice that it has focused its withering enforcement gaze on medical device manufacturers. These companies, therefore, must evaluate their current compliance programs and ensure that those programs are robust and effective.

Recent Enforcement

In the Medtronic case, the Department of Justice (DOJ) alleged that the company paid kickbacks to physicians in a variety of forms, including sham consulting agreements, sham royalty agreements, and trips to lavish resorts. In July 2006, Medtronic agreed to resolve these allegations by paying $40 million and entering into a five-year corporate integrity agreement with the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services.

In the ANS case, the OIG alleged that the company paid kickbacks to physicians under the guise of payments pursuant to a purported marketing study of an ANS medical device. Under this program, physicians were paid $5,000 for every five patients tested with the specific ANS device who had previously been tested on a competitor's competing medical device. The OIG contended that this program did not have any clinical research value, but rather was designed to serve as an incentive for doctors to use the targeted ANS product and to increase ANS's sales. The OIG further alleged that ANS paid kickbacks to physicians in the form of free dinners, extravagant trips, grants, and other gifts. ANS agreed to resolve these allegations in July 2007 by paying a $2.95 million settlement and entering into a three-year corporate integrity agreement with the OIG.

In both of these cases, the government alleged that the medical device manufacturers ran afoul of the Anti-Kickback Statute. The Anti-Kickback Statute, codified at 42 U.S.C. Section 1320a-7b(b), broadly prohibits the payment of remuneration to induce referrals of business paid in whole or in part by a federal health care program. The statute makes such conduct a felony with penalties of up to $25,000 per kickback and imprisonment for up to five years. Although a criminal statute, the DOJ pursues violations of the Anti-Kickback Statute through the federal False Claims Act (FCA), codified at 31 U.S.C. sections 3729-3733.

Alternatively, the OIG may pursue violations of the Anti-Kickback Statute through the Civil Monetary Penalties Law (CMPL), codified at 42 U.S.C. 1320a-7a(a). Both the FCA and the CMPL carry significant civil money penalty provisions. The FCA provides for penalties of $5,500 to $11,000 per false claim submitted and up to treble damages. The CMPL provides for penalties of up to $50,000 per kickback, damages of up to three times the amount of the kickbacks, and exclusion from participation in federal health care programs.

The Compliance Landscape

Medical device manufacturers must increase their compliance efforts with respect to sales and marketing tactics. These manufacturers can identify specific risk areas by reviewing government enforcement and compliance initiatives in the pharmaceutical industry. In May 2003, the OIG issued compliance program guidance specifically for pharmaceutical manufacturers. The OIG's guidance highlighted kickbacks and other illegal remuneration as an area of significant concern. The guidance fleshed out some specific examples where caution was advisable, including discounts, product support services, educational grants, research funding, business courtesies and other gratuities, to name a few. Many sales and marketing practices of medical device manufacturers are strikingly similar to pharmaceutical manufacturers, so the same legal concerns apply.

Following on the heels of this guidance, in September 2003, the medical device manufacturer industry's trade association — Advanced Medical Technology Association (AdvaMed) — approved a Code of Ethics on Interactions with Health Care Professionals. The code recommends that AdvaMed members adhere to ethical standards and applicable laws when collaborating with health care professionals. The code itself focuses on sponsorships of training and educational conferences, consulting agreements with physicians, sales and promotional meetings, gifts, grants, and charitable donations. While the AdvaMed code does not specifically reference the Anti-Kickback Statute, the code does emphasize that its members should provide things of value to physicians for legitimate reasons only.

Lessons Learned

Sales representatives heaping cash and assorted lucre on doctors to entice additional sales or as a "thank you" for existing sales may have been "business as usual" in the past; it is not anymore. Companies, therefore, must change the culture within which their sales representatives operate. To do this, companies must institute or increase formal compliance training provided to sales representatives to help them understand the laws and regulations needed to navigate in today's complex health care environment. Companies must also follow their compliance policies and punish infractions, even where the offending party is a successful sales person or high-level manager.

Companies must also ensure that adequate internal review and approval procedures are in place to oversee relationships with physicians. This is especially true when companies retain physicians as consultants. For example, companies should ensure that payments to physicians are made only for legitimate reasons. Such oversight should begin with a fair market value analysis to determine an appropriate payment for the services rendered. Companies should also ensure that consultants document the work that they do by completing timesheets or activity logs and submitting them to the company. Furthermore, sales representatives must maintain expense reports for all expenses incurred during interactions with physicians, and companies must routinely review those expense reports.

If a company determines that a particular sales practice potentially violates the law, the company should thoroughly investigate the practice and take any necessary corrective action. This corrective action may include reporting the conduct to the appropriate law enforcement agency. The OIG's Provider Self-Disclosure Protocol permits individuals and entities to self-report suspected violations of the law in order to resolve such issues. An effective compliance program will include mechanisms to take appropriate corrective action for identified problems, including self-reporting the conduct at issue to the appropriate government authorities.

In conclusion, medical device manufacturers must strengthen their existing compliance programs by: increasing compliance training for their sales force, with special emphasis on the Anti-Kickback Statute; auditing all payments to physicians and related expenses; and fully investigating all issues or complaints and taking appropriate corrective action where warranted.

David M. Laigaie, a partner at Dilworth Paxson, heads the corporate investigations and white collar group. His areas of practice include health care fraud, securities fraud, tax fraud, export violations, pharmaceutical marketing fraud, municipal corruption, defense procurement fraud and public finance fraud. He regularly conducts internal corporate investigations. He can be reached at 215-575-7168 or dlaigaie@dilworthlaw.com.

Mark A. Wachlin, an associate with the firm, is part of the corporate investigations and white collar group. He was formerly senior counsel at the Office of Inspector General for the U.S. Department of Health and Human Services, where he prosecuted cases under the Federal False Claims Act, the Stark Law and the Anti-Kickback Statute. He can be reached at 215-575-7195 or mwachlin@dilworthlaw.com.

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