U.S. Focuses Enforcement on Manufacturers

Judith A. Waltz

Judith A. Waltz

August 16, 2010

10 Min Read
U.S. Focuses Enforcement on Manufacturers

Recent legal settlements with medical device manufacturers indicate that the federal government has focused enforcement activity on how providers are billing products to government healthcare programs. Coming under the False Claims Act (FCA), these settlements with the U.S. Department of Justice involve billings to programs that include Medicare and Medicaid. This focus on product billing follows several years of enforcement activity against device manufacturers for their relationships with healthcare practitioners. The government considered these relationships to have had improperly influenced clinical decisions.

The government is basing the device billing enforcement actions against manufacturers on the theory that a manufacturer may be liable for causing the submission of improper claims even if it did not directly submit the claims itself. The government is also continuing to pursue manufacturers for violating other laws that result in hospitals and physicians submitting what the government considers to be false claims. In essence, the government’s theory is that such violations of other laws may taint the claim so as to make it false. For example, in one case discussed below, improper product promotion was alleged to have resulted in the submission of claims for services that were not medically necessary. The government asserted that the manufacturer was thus liable. 

Pricing strategies also are coming under government scrutiny for improper customer rebates, which allegedly result in false claims for products covered by those rebates. In addition, at the request of the Senate Finance Committee, the Government Accounting Office (GAO) recently began a study to determine how prices paid by hospitals for certain medical devices affect Medicare spending. Devices are often included in bundled prospective payments at set rates and are not billed separately to Medicare. The study’s outcome will likely result in a close review of pricing structures and strategies, including congressional commentary which could potentially lead to enforcement scrutiny.1

Because of this focus on device reimbursement issues, manufacturers should carefully review any reimbursement advice they provide to customers that will submit claims for government payments related to their products. Device manufacturers should also confirm that pricing strategies for these customers are not contrary to law. Furthermore, manufacturers must recognize the government can use the FCA as an enforcement tool for violations of other laws if those violations result in claims being submitted to the federal healthcare programs. This awareness will help device manufacturers to avoid allegations that the claims are tainted by such violations and therefore false under the FCA.


FCA Overview

Under the FCA, any individual or entity that knowingly submits, or causes the submission of, false or fraudulent claims to the federal government may be held liable for those claims. (31 U.S.C. §§ 3729-3733, emphasis added). The FCA includes qui tam, or whistleblower, provisions that have largely fueled the government’s lucrative anti-fraud efforts by allowing private individuals to share in the government’s recoveries. The federal anti-kickback statute (AKS) makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive remuneration to induce the referral of federal healthcare program business. (42 U.S.C. § 1320a-7b(b).) Whether a particular arrangement violates the AKS depends on the specific facts and circumstances of the arrangement, including the intent of the parties. However, the statute has been broadly interpreted to include situations where even one purpose of the arrangement is to induce referrals of federal healthcare program business. Recent healthcare reform amendments to the AKS make claims resulting from kickbacks into civil false claims, making it easier for the government to demonstrate damages and liability for conduct that violates the statute.



FCA settlements with the Department of Justice do not generally include an admission of liability by the settling party, and because the cases are settled rather than litigated there are no court findings as to the propriety or impropriety of a particular practice. Manufacturers typically settle cases in order to avoid the high costs and uncertain results associated with preparing defense strategies and risking potential litigation. Notwithstanding their lack of precedent-setting value, however, these settlements signal conduct that the government considers problems that require enforcement action. Therefore, these settlements provide guidance as to probable risk areas for entities in similar situations.



FCA settlements often include a Corporate Integrity Agreement (CIA) with the Office of Inspector General (OIG) of the Department of Health and Human Services, which is essentially a prospective “contract” prescribing post-settlement corporate conduct. A manufacturer enters into a CIA in order to avoid the exercise of OIG’s discretionary authority to exclude an entity from participation in the federal healthcare programs. CIAs typically include specific requirements such as training, new and targeted policies and procedures addressing the conduct that resulted in the FCA settlement, independent reviews of certain business practices, and even personal assurances by high-ranking corporate personnel that the company is now in compliance with various requirements. For companies that are not parties to the FCA settlement, CIAs can provide guidance as to what practices OIG would like to see manufacturers incorporate into their compliance programs.



Reimbursement Advice

Providing product support that includes reimbursement advice is a common practice of device manufacturers, and one contemplated and supported (within specified parameters) by the AdvaMed Code of Ethics on Interactions with Healthcare Professionals. Additionally, in its Compliance Guidance for Pharmaceutical Manufacturers, which OIG has publicly stated should also be viewed as guidance for device manufacturers, OIG recognizes the practice of offering reimbursement advice. However, the inspector general’s office cautions that providing advice, under certain circumstances, could violate the AKS if coupled with other benefits that might be construed as remuneration (e.g., a guarantee against loss from denied claims.) Apart from confirming that product support programs are structurally compliant, manufacturers must ensure that any reimbursement advice they provide is accurate and complete and not designed to, or result in, inappropriately increased costs to federal healthcare programs. Device manufacturers should also carefully scrutinize their advice to ensure that it does not directly or indirectly promote off-label use or provide support for improper patient inducements or referrals.



Recent Settlement Examples

Recent settlements in which manufacturers were assessed liability for the allegedly improper claims of their customers, as described in the following excerpts from government press releases, include:


  • Atricure Inc. The settlement resolves allegations that the company marketed its medical devices to treat atrial fibrillation, a use that is not approved by FDA. Atricure also allegedly promoted expensive heart surgery using the company’s devices when less invasive alternatives were appropriate, advised hospitals to “up-code” surgical procedures using the company’s devices to inflate Medicare reimbursement, and paid kickbacks to healthcare providers to use its devices. The United States asserted that by engaging in this conduct, Atricure knowingly violated the Food, Drug, and Cosmetic Act and caused the submission of false and fraudulent claims in violation of the False Claims Act.2

  • Spectranetics Corp. The device manufacturer agreed to pay the United States $4.9 million in civil damages for causing false claims to be submitted to Medicare, plus a $100,000 forfeiture to resolve claims against the company, according to DOJ. The claims arose from allegations that the company illegally imported unapproved medical devices and provided them to physicians for use in patients and conducted a clinical study in a manner that failed to comply with federal regulations. DOJ also alleged that Spectranetics promoted certain products for procedures for which the company had not received FDA approval or clearance.3

  • Quest Diagnostics. The civil settlement resolves allegations that a now-defunct subsidiary, NID, manufactured, promoted, and sold the Intact PTH and Bio-Intact PTH test kits, despite the knowledge that between May 1, 2000, and April 30, 2006, some of the kits produced results that were materially inaccurate and unreliable. This activity caused some clinical laboratories that purchased and used the test kits to submit false reimbursement claims to federal health programs. It also caused some medical providers to submit false reimbursement claims to the health programs for unnecessarily prescribed treatments.4

  • Kyphoplasty. Nine hospitals in Alabama, Indiana, Florida, Michigan, South Carolina, New York, and Minnesota have agreed to pay the United States more than $9.4 million to settle allegations that the healthcare facilities submitted false claims to Medicare, according to DOJ. The settlements resolve allegations that the hospitals overcharged Medicare between 2000 and 2008 when performing kyphoplasty, a minimally invasive procedure used to treat certain spinal fractures that often are due to osteoporosis. In many cases, the procedure can be performed safely as a less costly outpatient procedure, but the government contends that the hospitals performed the procedure on an in-patient basis in order to increase their Medicare billings.



The settlement with these facilities follows the settlements that the government reached in May and September 2009 with nine other hospitals for alleged kyphoplasty-related Medicare fraud claims, as well as the government’s May 2008 settlement with Medtronic Spine LLC, the corporate successor to Kyphon Inc. Medtronic Spine paid $75 million to settle allegations that the company defrauded Medicare by counseling hospital providers to perform kyphoplasty procedures asan in-patient procedure, even thoughin many cases the minimally-invasive procedure should have been done on an out-patient basis.5



These obviously costly settlements demonstrate the significant risks to manufacturers resulting from how their products are billed to the federal healthcare programs. Review of the CIAs for these settlements can be used as a roadmap for compliance program improvements. 


Scrutinize Pricing, Support Strategies

Manufacturers should also be aware that they’re at risk of government enforcement action for strategies that may involve various price adjustments for different product lines or customers, including rebates. The AKS specifically references rebates as “remuneration,” along with bribes and kickbacks. There is, however, a “safe harbor” for discounts, which may include appropriately structured rebates, if all the specified requirements are adequately met. (42 C.F.R. § 1001.952(h)) A settlement announced in June 2010 against a device manufacturer, St. Jude Medical Inc. and its hospital customers reflects the risks associated with pricing strategies that are alleged to be noncompliant. As described in the Department of Justice press release:



“The kickbacks included alleged rebates that were ‘retroactive’ and paid based on a hospital's previous purchases of St. Jude heart-device equipment and rebates that St. Jude paid for purchases of heart-device equipment sold by its competitors to induce purchases of similar equipment from St. Jude in the future. Under the terms of the settlement, St. Jude, headquartered in St. Paul, MN, will pay $3,725,000. Parma Community General Hospital, located in Parma, OH, is paying $40,000, and Norton Healthcare in Louisville, KY, is paying $133,300. The government asserted that Parma and Norton were recipients of improper rebates from St. Jude.”6



Healthcare enforcement activity is dramatically increasing under the Obama administration. There is greater funding and a high-profile, cross-departmental focus by DOJ and the Department of Health and Human Services known as HEAT for the Healthcare Fraud Prevention and Enforcement Action Team. (For more information, seethe comprehensive Web site, www.stopmedicarefraud.gov.) Given this enforcement climate, manufacturers would be wise to review the settlements discussed above, along with corresponding CIAs, and consider whether further scrutiny of their product support services and pricing strategies may be warranted.



  1. Cost of Implantable Medical Devices, GAO Engagement No. 290857, (estimated start date April 2010.)

  2. U.S. Dept. of Justice press release, “Atricure to Pay U.S. $3.76 Million to Resolve Medicare Fraud Allegations,” February 2, 2010.

  3. U.S. Dept. of Justice press release, “Colorado-Based Spectranetics Corporation to Pay $5 Million to Resolve Allegations Relating to Its Medical Devices,” December 29, 2009.

  4. Press release from the U.S. Attorney’s Office for the E.D. New York, “Quest Diagnostics Incorporated to Pay $302 Million to Resolve Allegations That a Subsidiary Sold Misbranded Test Kits,” April 15, 2009.

  5. U.S. Dept. of Justice press release, “Nine Hospitals in Seven States to Pay U.S. More Than $9.4 Million To Resolve False Claims Act Allegations Related to Kyphoplasty,” May 17, 2010.

  6. U.S. Dept. of Justice press release, “Heart Device Manufacturer in Minnesota and Hospitals in Ohio & Kentucky to Pay Nearly $4 Million to Resolve Fraud Allegations,” June 4, 2010.

Judith A. Waltz is a partner with Foley & Lardner LLP (San Francisco) and co-chair of the firm’s life sciences industry team. She may be reached at 415/438-6412 or [email protected].

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