The Medical Device Safety Act and government investigations are changing the business landscape for medical device companies.
|Caryn Silverman||Evan Smith|
The Medical Device Safety Act of 2009 (MDSA)—H.R. 1346—was introduced by Representatives Frank Pallone Jr. (D–NJ), chair of the Energy and Commerce Subcommittee on Health, and Henry A. Waxman (D–CA), chair of the Energy and Commerce Committee, on March 5, 2009. Many thought that the MDSA would be enacted quickly, effectively overturning the U.S. Supreme Court’s holding in Riegel v. Medtronic Inc. Although that has not yet happened, the risk environment for medical device companies is still quite active on several fronts.
In February 2008, a majority of the Supreme Court found that the express preemption provision of the Medical Device Amendments (MDA) to the Federal Food, Drug, and Cosmetic Act (FD&C Act) preempted state law claims seeking damages for injuries caused by medical devices that had received premarket approval (PMA)from FDA. That ruling created a strong preemption defense against future plaintiffs who might bring suits for injuries allegedly caused by a PMA device, and manufacturers of such devices have been largely successful in obtaining dismissals of pending lawsuits alleging certain state law tort claims.
Although Riegel and its progeny have appeared to reduce the risk of newly initiated litigation involving PMA devices, most observers believe that this is really only a hiatus and that the MDSA will eventually pass, allowing such litigation to resume. If it is a hiatus, however, it is an uneasy one. Although medical device companies may be experiencing less product liability litigation surrounding their PMA devices, their risks may be increasing elsewhere. Companies are facing an unprecedented level of government investigation into their sales, marketing, and promotional practices. This article examines the current risk environment and offer some concrete suggestions for proactively mitigating these risks.
Government investigation of healthcare companies is not new. The federal government has been investigating the sales, marketing, and promotional practices of the pharmaceutical industry for almost two decades. Operating under the authority of the False Claims Act (31 USC 3729-33), the Antikickback Statute (42 USC 1320a-7(b)(2)), and the FD&C Act (21 USC 331, et seq.), the Department of Justice (DOJ), through various U.S. attorney’s offices, has launched full-blown investigations into certain sections of the medical device industry. These investigations arose from the DOJ’s interest in a specific company or group of companies in the device sector. However, more often than not, they came about as a result of third-party interest including:
Once a government investigation begins, it usually lasts for years before it is brought to closure. Even after resolving a government investigation, companies often face “follow on” litigation by state attorneys general. They may allege Medicaid fraud or pursue civil litigation alleging harm from the devices implicated in an investigation. Harmful publicity often leads to shareholder or derivative litigation. To avoid more onerous consequences, medical device companies often enter into settlements with the federal government. The ultimate cost of resolution includes the settlement itself, attorney fees, potential civil fines, and the cost of implementing a corporate integrity agreement (CIA). It is an understatement to say that resolving a government investigation is costly. However, one cannot understate the potential risks created by government investigations.
From 2001 to 2004, U.S. attorneys in Boston, Philadelphia, and Newark, NJ, began to scrutinize the sales, marketing, and promotional practices of device makers similar to the way in which they scrutinized the activities of pharmaceutical companies. In 2005, enforcement activity appeared to increase. Subpoenas were issued to several companies requesting training and compliance materials, particularly those related to compliance with the fraud and abuse or antikickback statutes. In each of its investigations, the DOJ contended that certain sales, marketing, and promotional practices were actually inducements to get physicians to use a particular company’s product and that patient safety was being jeopardized by such practices. Early investigations focused on the orthopedic device industry and illustrated the course that investigations can take, how they are resolved, and the follow-on, postresolution risks.
In March 2005, then-U.S. attorney for New Jersey, Christopher Christie, initiated investigations of Biomet, DePuy, Smith & Nephew, Stryker, and Zimmer that focused on financial relationships with orthopedic surgeons using the companies’ hip and knee replacement devices. The government expressed concern that surgeons were performing surgical procedures for their own financial benefit and not in the best interests of patients. These investigations had two specific focus areas:
Charges were eventually brought against these companies under the Antikickback Statute and False Claims Act. The five companies reached settlements with the DOJ in September 2007. Most of the settlements included criminal and civil penalties and a CIA, compliance with which would be monitored by a third party for up to three years. In announcing these settlements, Christie advised that “[t]his industry routinely violated the antikickback statute by paying physicians for the purpose of exclusively using their products.” The civil settlements of these matters ranged from $26.9 million to $169.5 million, depending on the specific company’s market share, and all but one company entered into a deferred prosecution agreement to resolve the criminal charges. Stryker voluntarily cooperated with the DOJ’s office before the other companies and secured a nonprosecution agreement that required only 18 months of monitoring.
Government investigation of the medical device industry increased steadily from 2005 through 2009. Current investigations include those of companies selling biliary stents, surgical ablation devices, and bone cement employed in spinal surgery. Many of these investigations started after civil litigation complaints were filed by internal whistleblowers or by competitor whistleblowers. Although most of the investigations alleged kickbacks, promoting off-label device use has been a growing area of focus.
In January 2009, Senators Chuck Grassley (R–IA) and Herb Kohl (D–WI) introduced the Physician Payments Sunshine Act of 2009. The bill, S. 301, requires medical device manufacturers to report payments given to doctors that total more than $100 to HHS. The agency also posts this information online. Like the MDSA, the bill is subject to committee consideration. In the meantime, it is safe to assume that financial relationships between physicians and medical device companies, concerns about patient safety and off-label promotion, and concerns about physician ownership of medical device manufacturers and related businesses will continue to attract government attention.
In the development of new technologies and products, the interaction between device manufacturers and healthcare professionals can be highly valuable. Physicians play an essential role in the design, testing, and training involved in producing effective and safe medical devices. They also provide ideas and feedback, conduct research and clinical trials, and share their knowledge through participation in medical education programs. As a result, device companies can legitimately compensate physicians for their actual time and intellectual contributions. However, there has been a growing concern over whether the receipt of substantial compensation from medical device companies through stock options, royalty agreements, consulting agreements, research grants, and fellowships can create a significant risk that such payments would improperly influence medical decision making.
Risk Preparedness: Part I
The government will continue to mitigate risks related to patient safety through enforcement actions, outreach to promote compliance, and increased transparency. Companies avoid or mitigate risk by implementing voluntary antifraud and compliance measures. The following points are essential to any compliance program:
Implications of the MDSA
If passed, the MDSA will have far-reaching consequences for a medical device company’s workforce, investors, and most importantly, patients who rely on medical devices. From a legal perspective, the passage of the MDSA has the potential to result in increased product liability litigation for device companies and could prevent new products from reaching patients. Just as important as a rigorous compliance program designed to ward off government investigations, medical device companies must prepare for the potential passage of the MDSA. Initially, companies will need to allocate resources to ensure approved and marketed devices continue to meet both state and federal standards, which will increase the cost of doing business. The potential for product liability litigation could both stymie innovation and keep potentially lifesaving devices from reaching patients if the proper compliance stop-gaps are not in place.
Although many devices are never commercialized for a host of reasons, thousands of approved devices have both saved and improved the quality of life for millions of patients. For example, implantable cardioverter-defibrillators (ICDs), the subject of numerous legal disputes, have improved survival rates in patients with heart damage. An article published in the journal Circulation: Cardiovascular Quality and Outcomes demonstrated how ICDs were shown to reduce the risk of mortality by 30% in patients younger than 65 years old, between 65 and 74 years old, and 75 years and older.1
Passage of the MDSA could also deter potential investors from financing medical device companies, because they would be seen as higher-risk investments. This vicious cycle will ultimately lead to a reduction in patient treatment options and, more broadly, to a reduction in healthcare quality at an increased financial cost.
Educating Your Audiences
As the MDSA continues to be debated, medical device companies should take certain immediate steps to ensure they are adequately prepared for any potential issues that may arise if and when the law is passed.
First, every medical device company should evaluate the extent to which it regularly communicates its core values, quality and product development standards, and its position on critical issues that will affect current and future business. Companies must communicate steps they’ve taken to ensure their devices are safe, and put the potential implications of this law into context for its shareholders. If a company does not take the lead in addressing potential issues, it runs the risk of others driving the conversation, which could potentially damage the company’s reputation and enterprise value.
Companies should also actively discuss the standard operating procedures that they have in place to ensure that only the highest-quality products reach the market. This can be communicated by leveraging a company’s corporate Web site, press interviews, conference presentations, and meetings with the investment community. Other steps to ensure device safety, such as postmarketing surveillance trials, should also be communicated.
Lastly, since many audiences are not aware of the regulatory review and approval or clearance path for medical devices, companies should take the time to educate all relevant parties, including patients, on this process. As part of this initiative, they should have continuing conversations about their products with their legal counsel and regulatory specialists. An internal communications infrastructure should be implemented to relay appropriate information to key stakeholders.
The Risk Interplay
It is important to keep in mind that risks associated with devices can go beyond litigation and may lead to investigations by the DOJ or state attorneys general. To help mitigate these potential issues, scientific, legal, and compliance teams should implement electronic discovery, or e-discovery, platforms in preparation for any sudden lawsuits, inquiries, or investigations. E-discovery platforms house massive amounts of sensitive data from numerous stakeholders, and yield fast results and control over stored data. To effectively implement this process, companies should have a strong document retention policy, a developed information management policy, internal or external software, or a combination of these to ensure that they can effectively manage and cull through data. They should also assess the types of litigation and regulatory matters they may be facing, and the processes and support that would be needed to address these issues.
As mentioned earlier, companies should hold candid discussions with all relevant parties about the implications of the MDSA, rather than leaving it solely to a few large players or industry groups. They should discuss the potential effects of the MDSA on their ability to create and market devices that, in some cases, can enhance and even save lives. Using data-driven examples to convey how resources that may have been intended for product development are now being shifted toward product liability litigation are critical to this education process.
Given the current climate, companies need to consistently remind their audiences of the steps they are taking to ensure that their devices are safe, that medical devices help benefit millions of Americans every year, and that the passing of the MDSA could significantly inhibit their ability to develop innovative devices for patients.
Risk Preparedness: Part II
Tips to prepare for the potential passage of the MDSA and other government investigations include the following:
There continues to be a heightened level of oversight and scrutiny on medical device manufacturers related to a number of issues including patient safety and sales and marketing practices. To address and mitigate risk associated with increased congressional oversight and a more assertive posture of the DOJ and state attorneys generals, companies must implement voluntary antifraud and compliance measures as outlined in this article. Senior leadership must be engaged and visible in the process to ensure a comprehensive program is established and enforced throughout the organization.
In addition, as the MDSA or other potential sources of litigation continue to lurk on the horizon, companies should take the necessary steps to establish a formal and systematic process for identifying and addressing potential risk signals. Companies must implement a communications strategy that monitors and evaluates key issues, establish a master plan that ensures transparency with key stakeholders, and establish relationships with the media to ensure a company’s position is heard and understood. Given the significant financial and reputation costs associated with government investigations and litigation, exercising procedures that proactively anticipate and address issues should help mitigate these costs and ensure the safety and soundness of the organization.
1. PS Chan et al., “Impact of Age and Medical Comorbidity on the Effectiveness of Implantable Cardioverter Defibrillators for Primary Prevention,” Circulation: Cardiovascular Quality Outcomes (2009); available from Internet: http://circoutcomes.ahajournals.org/cgi/content/short/CIRCOUTCOMES.108.8....
Evan Smith works at Chandler Chicco Companies . Caryn M. Silverman is partner at Sedgwick, Detert, Moran & Arnold LLP (both New York City).