REGULATORY OUTLOOK

During the past several years, government enforcement authorities have focused an increasing amount of attention on the marketing activities of medical device companies. This increased scrutiny has taken the form of investigations through subpoenas and intervention in qui tam lawsuits (lawsuits initiated by a third party on behalf of the government). Often, these actions are brought by whistleblowers under the Federal False Claims Act (FCA).

Many of these investigations have focused on the federal healthcare program antikickback statute. The statute was designed to prevent companies from offering remuneration to persuade someone to purchase a product. In the device industry, practices such as providing travel expenses for training or compensation for product development and participation in clinical trials are crucial to developing safe and effective devices. However, the difference between legitimate support and illegal remuneration may be blurry, and some companies may cross the line. Device makers must be aware of the antikickback statute, how it pertains to doing business, and how the government is using the FCA to enforce violations.

Antikickback Statute and FCA Risk Areas and Enforcement

Simply stated, the federal healthcare program antikickback statute provides that it is a felony to offer or to pay anything of value to anyone if that payment is to induce the person to purchase or order a product that is covered under a federal healthcare program.¹ This includes “arranging for or recommending” the purchase of a covered product.

Breaking this statute could mean criminal penalties of up to five years imprisonment, $250,000, or both for an individual. For companies, it could entail criminal penalties of up to $500,000, civil monetary penalties (up to $50,000 for each act plus three times the amount of illegal remuneration), and exclusion from federal healthcare programs.^2–4

Several sources of guidance explain why the government may view a particular arrangement as illegal remuneration. These documents include exemptions in the statute and safe harbor regulations (e.g., payments to employees, personal services contracts, and discounts). They also include the Office of Investigator General (OIG) Compliance Program Guidance (CPG) for Pharmaceutical Manufacturers, OIG advisory opinions, and indictments and settlement agreements. AdvaMed's “Code of Ethics on Interactions with Health Care Professionals” may also be included.

The FCA prohibits knowingly presenting a false claim for payment or knowingly using a false record or statement to get a false claim paid.⁵ Penalties for such violations can be $5,500–$11,000 per claim, plus treble damages.^5,6 The statute also contains a qui tam provision, which permits a plaintiff to sue on behalf of himself and the government. If the government takes over prosecution of the case, the original plaintiff receives 15–25% of any settlement or award.⁷

Conduct at the heart of recent FCA cases has included violations of the Federal Food, Drug, and Cosmetic Act (e.g., failure to submit a PMA supplement for a device, concealment of medical device reports, and off-label product promotion). It has also included violations of the antikickback statute and the provision of reimbursement advice. It is uncertain whether an antikickback law violation by an entity that does not submit claims to the government programs (such as a device manufacturer) can state a claim under FCA. In cases that have settled, the government has frequently alleged that such kickbacks constitute FCA violations. However, court opinions on whether an antikickback violation is actionable under the FCA are inconsistent.

Each proposed marketing activity must be examined on its own merits. However, certain types of activities involving purchasers or prescribers are more likely to raise red flags if a company handles them incorrectly. These activities include giving gifts, entertainment, free goods, consulting arrangements, and grants. Each of these areas garners its own set of enforcement actions.

Gifts, Entertainment, and Free Goods

The provision of gifts, entertainment, and free goods by companies to customers is an easy target for the government. Therefore, it has been the subject of numerous enforcement actions. The Medtronic case (see the sidebar, “Medtronic Settlement”) included allegations of providing lavish trips to desirable locations to physicians that purchased Medtronic's spinal products.

But Medtronic is only one example. Many companies have had similar offerings to promote products. Medical equipment supplier Lincare Inc. was accused of providing illegal kickbacks, including sporting and entertainment tickets, gift certificates, rounds of golf, golf equipment, fishing trips, meals, advertising expenses, office equipment, and medical equipment. OIG brought the allegations, and the company agreed to a $10 million settlement in May 2006.

With regard to gifts, entertainment, and free goods, at a bare minimum, it is imperative that companies neither explicitly nor implicitly tie these items to purchases, prescribing, or use of products. Following the guidelines in the AdvaMed code of ethics should help reduce the risk that a gift or giveaway would be regarded as unlawfully intended to induce prescribing or purchasing of products.

Consulting Arrangements

Medical device companies may pay fees to customers or potential customers for bona fide services, such as paying physicians for consultations on scientific or marketing matters. The government's concern with such arrangements is that they could be used as a vehicle to induce purchasing, prescribing, or leasing of a company's products.

Accordingly, the government has targeted consulting fee arrangements if they are tied to prescribing practices or use of the company's products. The government has also tackled consulting arrangements when the fees are in excess of fair market value for services rendered. Additionally, companies are targeted when there is doubt as to the legitimate need for the consulting services, or when there is no documentation of services rendered or audit rights.

There have been several recent enforcement actions for which the alleged illegal conduct included improper or sham consulting arrangements. For example, the Medtronic case included allegations of payments to physicians under sham consulting and royalty agreements. Similarly, the Lincare settlement included allegations that Lincare paid illegal kickbacks, including payments for “Medical Director Agreements” and other purported sham consulting agreements.

In addition, five manufacturers of orthopedic devices received subpoenas from the Department of Justice in March 2005. The subpoenas demanded information relating to consulting contracts, professional service agreements, or remuneration agreements with orthopedic surgeons using joint reconstruction products manufactured or sold by the companies dating back to January 2002. According to the trade press, some industry analysts believe that consulting fees paid by orthopedic companies to physicians have exceeded seven figures and that companies may have entered into contracts with physicians to provide compensation when no work was performed.⁸

With regard to consultant fee arrangements, it is important to keep several rules in mind. Consultants should be paid fair market value for their services and should be selected based on expertise, not for purchasing or prescribing practices. A consulting agreement should meet as many of the requirements of the personal service contract safe harbor rule as possible. The safe harbor rule requires that the parties have a written agreement for a term of no less than one year that sets forth the services to be provided and the compensation to be paid.⁹

When establishing the format of any meetings that paid consultants will attend, a company should clearly state that the purpose of the meeting is to solicit information rather than disseminate it. Didactic presentations must be subordinate to opinion gathering, and the views of the consultants must be systematically recorded and used. Moreover, at any such meetings, the number of consultants should be no greater than necessary to achieve the objective of the meeting. Social events must be subordinate to consulting, and companies cannot detail products.

Grants

The government's concern regarding educational and research grants is that companies will use them to induce prescribing or purchasing of their products. Research grants to physicians and their institutions have been targeted when they are linked to prescribing practices, provide for research with questionable scientific value, or are excessive for the research performed. In June 2005 and January 2006, the Senate Finance Committee sent letters to numerous pharmaceutical companies requesting information relating to educational grants for continuing medical education programs.¹⁰ Among other things, the letters sought information relating to the role of sales and marketing personnel in the grant approval process. They also expressed concern that grants were steered to recipients that were known to promote the use of the companies' products for unapproved uses. Device makers should understand that the Senate Finance Committee's attention to the pharma- ceutical industry could shift easily to devices.

To minimize the inherent risks, grants for research or educational programs should never be used as an inducement to prescribe or purchase. In addition, they cannot take into account the requestor's prescribing or purchasing practices. Research grant requests, including the protocol, should undergo review for scientific merit by medical or clinical personnel along with regulatory affairs and legal personnel. Funding should come from departments other than sales or marketing. There should be a written grant agreement and periodic status reporting.

Unrestricted educational grants from medical device manufacturers must be for independent educational programs, be reviewed for potential benefit to the medical community, and comply with the AdvaMed code and FDA's Continuing Medical Education Guidance.¹¹ Whenever possible, such grants should be given only to institutions accredited by the Accreditation Council for Continuing Medical Education or other recognized accrediting bodies.

Compliance

In 2003, AdvaMed published a code of ethics. The code provides guidelines for medical device companies in the following areas:

In addition to following the code of ethics put forth by AdvaMed, medical device companies should also follow, as appropriate, the CPG for pharmaceutical manufacturers issued by the OIG. Many of the principles articulated in the CPG also apply to medical device companies. In fact, an endnote in the CPG specifically states that compliance program elements and potential risk areas may have application to manufacturers of medical devices.¹²

The CPG provides a template for a voluntary program of internal controls and procedures that can be put into place to promote compliance with fraud and abuse laws. It also describes the seven elements of an effective compliance plan. Such a plan includes policies and procedures, creation of a compliance officer or committee, training, communications (e.g., hotline), internal monitoring, enforcement, and investigations and corrective action. A compliance plan that meets the CPG elements enables a company to comply with the law as well as reduce penalties or settlements should there be a violation.

Conclusion

With the increased scrutiny on the marketing practices of medical device companies as illustrated by recent enforcement actions like the Medtronic case, it is clear that the federal government has realized that there is money to be obtained from medical device enforcement actions.

It is therefore important for device companies to have effective compliance programs and follow the guidelines in the AdvaMed code. This is particularly true in areas such as gifts, consulting arrangements, and grants, which have been the subject of numerous previous government investigations and settlements.

Jeffrey Wasserstein is a principal at Hyman, Phelps & McNamara (Washington, DC), and can be reached at [email protected]. Michelle Butler is an associate with the firm and can be contacted at [email protected].

References

1. U.S. Code, 42 USC 1320a-7b(b).

2. U.S. Code, 18 USC 3571.

3. U.S. Code, 42 USC 1320a-7a(a)(7).

4. U.S. Code, 42 USC 1320a-7(a), (b)(7).

5. U.S. Code, 31 USC 3729.

6. Code of Federal Regulations, 28 CFR 85.3(a)(9); (adjusting the civil penalties in the statute for inflation).

7. U.S. Code, 31 USC 3730.

8. “DOJ Probe into Orthopedic Industry Could Rattle Upward Pricing Trend,” The Gray Sheet 31 (April 4, 2005): 3.

9. Code of Federal Regulations, 42 CFR 1001.952(d).

10. “Drug Companies Asked for More Information about Grant Money Awarded to Promote Particular Medicines” [online] U.S. Senate Committee on Finance, June 10, 2005 [cited 11 January 2007]; available from Internet: http://finance.senate.gov/press/Gpress/2005/prg061005.pdf.

11. “Guidance for Industry, Industry-Supported Scientific and Educational Activities,” Federal Register, FR 62: 64093–64100.

12. “OIG Compliance Program Guidance for Pharmaceutical Manufacturers,” Federal Register, FR 68:23742.

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