Orthopedic Firms Settle with U.S. Justice Department

For more than two years, leading orthopedic manufacturers have been living under a cloud of intense scrutiny by the U.S. Department of Justice (DOJ), which has been focusing its attention on sales and promotional practices in the orthopedics sector. Industry observers and companies alike have expected that the DOJ probe would eventually result in punitive actions of some kind. But no one was predicting when DOJ would bring an end to its investigation, or how serious industry's punishment might become.

Some of those questions were at last resolved at the end of September, when DOJ announced that it had induced the five companies under investigation to enter into a settlement agreement. In return for shelving the government's probe of alleged industry violations of the Federal Healthcare Antikickback Act and the False Claims Act, the companies accepted the imposition of corporate integrity agreements, deferred prosecution agreements, and fines totaling $311 million.

First announced in March 2005, the DOJ probe was conducted by the U.S. attorney's office for the district of New Jersey, based in Newark.

Stryker Corp. (Kalamazoo, MI), which was the first company to voluntarily cooperate with the DOJ inquiry, was not required to pay a fine. But the company signed a deferred prosecution agreement and promised to adhere to the same reforms as those imposed on the other companies during an 18-month monitoring period.

Each of the other firms—Biomet Corp. (Warsaw, IN); DePuy Orthopaedics Inc. (Warsaw, IN), a Johnson & Johnson company; Smith & Nephew plc (London); and Zimmer Holdings Inc. (Warsaw, IN)—was required to pay a fine. The amounts of the respective fines were: Biomet, $26.9 million; DePuy, $84.7 million; Smith & Nephew, $28.9 million; and Zimmer, $169.5 million.

According to U.S. attorney Christopher Christie, lead prosecutor on the case, the amount of each company's fine was determined on the basis of its market share, not the degree of its alleged wrong-doing. “The differential in the respective civil settlement amounts is reflective of market share and other related business factors during the relevant time period, and not the relative culpability among the companies,” Christie said.

According to John Engelhardt, CEO of Knowledge Enterprises Inc. (Chagrin Falls, OH) and publisher of OrthoKnow, a monthly orthopedics industry newsletter, the sales generated by the five companies under investigation by the DOJ represented 94.3% of the 2006 U.S. market for reconstructive hip and knee implants.

In a strongly worded statement about the settlement, Christie referred to the alleged violations as a “common practice” among orthopedics firms. “This industry routinely violated the antikickback statute by paying physicians for the purpose of exclusively using their products,” said Christie. “Prior to our investigation, many orthopedic surgeons in this country made decisions predicated on how much money they could make—choosing which device to implant by going to the highest bidder. With these agreements in place, we expect doctors to make decisions based on what is in the best interests of their patients—not the best interests of their bank accounts.”

In agreeing to the civil settlement, the companies admitted no wrong-doing. Company representatives were quick to point out the government's stipulation that no patient experienced harm or adverse effects from the business practices that were under investigation.

Even as the civil settlement was announced, however, the DOJ was filing criminal complaints against Biomet, DePuy, Smith & Nephew, and Zimmer. The complaints accuse the four companies of using consulting agreements with orthopedic surgeons as inducements to use a particular company's artificial hip and knee reconstruction and replacement products. The criminal complaints will be dismissed after the 18-month monitoring period if the companies fully comply with the terms of the deferred prosecution agreements. Other terms of the settlement included the following.

During the 18-month monitoring period, the companies will be fully eligible for Medicare reimbursement. According to the Department of Health and Human Services (Washington, DC), Medicare recipients account for almost two-thirds of the 700,000 hip and knee replacement surgeries performed annually in the United States.

Most industry analysts viewed the outcome of the DOJ inquiry as being pretty much in line with expectations forecast when the probe was first announced. According to Michael S. Matson, senior medtech analyst with Wachovia Capital Markets LLC (New York City), companies instituted many of the corrective actions required by the civil settlement soon after the original subpoenas were issued.

In a research note, Matson suggested that the long-term impact of the settlement may also be less severe than companies feared. “The settlement will limit, but not eliminate surgeon consulting agreements,” Matson wrote.

Moreover, Matson doesn't expect the agreement to influence any significant shift in market share. “We expect surgeon loyalty to the implant firms to remain high given close relationships with the sales reps and high switching costs and learning curve associated with switching implant systems,” he wrote.

Although the DOJ probe is not officially over, OrthoKnow's Engelhardt believes that the government will not pursue action against the smaller players in the knee and hip replacement market. “We don't believe the remaining 5–6% of the business will be worth the trouble. However, DOJ may try to make an example out of a surgeon or two.”

However, companies in the orthopedics sector may have little time to catch their breath, as yet another investigation of the industry is already under way. This time, Medtronic Inc. (Minneapolis) joins Biomet, Smith & Nephew, Stryker, and Zimmer in an apparent probe of potential violations of the Foreign Corrupt Practices Act.

Just days after the DOJ settlement was announced, the five orthopedic firms reported that they had received formal notice of an investigation by the U.S. Securities and Exchange Commission (SEC; Washington, DC). DePuy was not included. Earlier this year, the company notified both DOJ and the SEC that one of its senior international executives was resigning over alleged improper overseas payments.

Although the SEC has declined to comment on the matter, industry analysts generally see the commission's inquiry as a continuation or extension of the original DOJ investigation. And, they say, it will likely take just as long to come to a resolution.

© 2007 Canon Communications LLC

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