REGULATORY OUTLOOK

The sales, marketing, and promotional practices of medical device companies in countries outside of the United States create unique legal and regulatory risks. The healthcare systems in many countries are largely operated and overseen by governmental agencies, and healthcare professionals (including physicians, pharmacists, and others) are frequently government employees. As a result, improper payments to such entities or individuals can run afoul of both U.S. and foreign laws.

At an anticorruption conference in May 2007, a U.S. Department of Justice official said that U.S.-based medical device firms may be particularly at risk of violating the Foreign Corrupt Practices Act (FCPA) because healthcare systems in many countries are government controlled. The FCPA makes it a criminal offense to bribe foreign government officials to obtain or retain business.

Compliance Risks for Medical Device Manufacturers

The legal and regulatory risks for medical device companies vary widely based on laws and enforcement environments in different countries. Differences in national laws, particularly with respect to financial relationships between manufacturers and healthcare providers, pose a challenge for many companies seeking to establish global compliance policies and procedures.

Currently, most developed countries and many emerging ones have laws that make it a crime to offer bribes or other payments to improperly influence the prescribing or purchasing
decisions of doctors and other healthcare providers. The greatest variation, from compliance and risk standpoints, lies in differing and often unpredictable regulatory oversight and enforcement of long-standing national laws. In some countries (e.g., Italy), investigations can stretch on for years, during which time companies may have little insight as to what specific activities are under investigation. In other countries, such as Greece, strict laws exist but regulatory and law enforcement agencies have few resources to pursue investigations.

Oversight and Enforcement in Europe

Recent developments, however, point to an emerging trend toward greater interest from law enforcement and regulatory agencies in the relationships between manufacturers and healthcare providers. Our research indicates that after the United States, investigations and enforcement activity involving sales and marketing activities were most common in Europe. Countries there have both reasonably well-defined laws prohibiting bribes and improper payments to healthcare providers and enforcement agencies with the wherewithal to pursue investigations and prosecutions (see Table I).

Prosecutors in Croatia, Italy, and Germany have demonstrated a willingness to pursue criminal investigations into manufacturer relationships with healthcare providers, including through the use of electronic wiretaps, search warrants, and other criminal enforcement techniques. In other European countries, it appears that the majority of oversight activity has come from regulatory or industry oversight bodies, which can order companies to halt violative practices and, in some cases, impose fines for violations.

Oversight and Enforcement in Developing Regions

Enforcement in other regions of the world—i.e., Africa, Asia, and South America—is more sporadic. Just as in the United States and Europe, many developing countries have laws that prohibit bribery of public officials, and the healthcare providers in these countries are generally governmental employees. But cultural acceptance of corruption, combined with minimal investigative and enforcement resources, has resulted in little or no oversight of manufacturer relationships with healthcare providers in many emerging countries.

While enforcement has been limited to date, governments in some emerging countries are taking the issue more seriously, particularly in countries in which rising economic growth and living standards have been accompanied by substantial increases in public spending on healthcare. China is a good example.

Although corruption has been endemic in China for many years, Chinese authorities have begun cracking down on corruption in the medical supply and pharmaceutical industries, including prosecution of senior government officials and suspension of some companies' licenses to sell and market products in the country. China has also adopted a novel amnesty program, under which doctors who have received improper bribes can return the money to a special bank account and not face prosecution. The extent of enforcement activity, however, is still extremely small given the size and rapid growth of China's healthcare and health technology markets.

Self-Regulatory Codes of Conduct

With government oversight and enforcement limited in many countries, self-regulatory codes of conduct continue to play an important role in governing relationships between manufacturers and healthcare providers. In some countries, companies that belong to certain industry associations may be sanctioned for violations of the industry code of conduct.

Codes of professional conduct developed by global and national healthcare provider associations also serve to establish a set of norms for manufacturer relations with healthcare providers. In 1988, the World Health Organization adopted a resolution endorsing a set of ethical criteria for drug promotion, which included guidelines on industry-physician relations.¹ The Canadian Medical Association adopted guidelines for physician-industry relationships in 1991, followed by medical associations in the United States, Finland, Australia, and Israel, among others.²

Opinions differ on whether self-regulatory codes are effective in preventing improper relationships between physicians and industry.³ There is little doubt, however, that in the absence of more-definitive guidance from governmental authorities on industry-physician relationships, such self-regulatory codes offer the most definitive and generally well-accepted guidelines for such
relationships.

The U.S. FCPA

Although global medical technology companies face significant legal and regulatory risks for their dealings in countries around the globe, U.S.-based companies face heightened risks in their foreign business activities under the FCPA. The FCPA prohibits U.S. individuals and companies from offering or giving anything of value to foreign officials. Because many other countries rely on nationalized healthcare systems, a firm's interactions with foreign doctors could inadvertently trigger FCPA liability. In addition, more countries are implementing legislation to support the international Organization for Economic and Cooperative Development's Antibribery Convention, exposing U.S. companies to bribery allegations in those countries.

Generally, the FCPA imposes antibribery penalties on companies and individuals. The elements of an FCPA violation involve a “covered person” offering or giving “something of value” to a “foreign official” in order “to obtain or retain business” with a “corrupt” intent. It is possible that sales and marketing activities performed by sales staff in the United States would, if conducted elsewhere in the world, violate the FCPA (see the sidebar, “FCPA Settlements”).

Several global orthopedic manufacturers announced in 2007 securities filings that they are being investigated by the U.S. Securities and Exchange Commission (SEC) for potential violations of the FCPA with regard to payments and other financial relationships with physicians. These announcements follow the September 2007 settlements between the U.S. Attorney's office in New Jersey and five orthopedic manufacturers, which focused on relationships with physician-consultants.

Siemens, which is grappling with a series of bribery allegations and related investigations by U.S. and foreign law enforcement authorities, announced in November 2007 that the investigations have spread to the company's medical technologies division. According to an SEC filing, “there are currently numerous public corruption-related governmental investigations in China, involving several divisions of Siemens Ltd. China, primarily Medical Solutions, but also Automation and Drives and Siemens IT Solutions and Services.” The filing went on to say that the investigations have been initiated by prosecutors in several regions and provinces, including Guangdong, Xi'an, Wuxi, Shanghai, Ting Hu, Shandong, Hunan, and Guiyang. The company's filing also stated that “the public prosecutor in Kalimantan Province, Indonesia, has charged the head of the medical division of Siemens PT Indonesia in connection with allegations that he participated in bribery, fraud, and overcharging related to the awarding of a contract for the delivery of medical equipment to a hospital in 2003.”

Implications for U.S.-Based Manufacturers

The medical device sector faces unique risks because of complex national healthcare laws and regulations and the extensive government involvement in healthcare delivery in countries around the world. This scrutiny is likely to increase as policymakers push for greater disclosure of financial relationships between manufacturers and physicians and look for additional means to address high medical costs.

Given these challenges, device manufacturers should implement comprehensive internal controls, both in the United States and abroad, to ensure that payments and financial arrangements comply with the law and company policies. Employees involved in such activities need training on the applicable rules, and a company's internal controls should be tested on a periodic basis. Just as important, companies should implement rigorous safeguards in their relationships with local distributors, sales agents, or consultants. Contractual provisions should require such partners to comply with applicable law, provide audit rights for the manufacturer, and permit termination of the relationship if the partner engages in improper conduct.

Conclusion

Despite the challenges of navigating the global manufacturer-physician landscape, the codes of conduct developed by national and regional medical device associations provide useful guidelines for many sales and marketing practices. Compliance with such codes may help reduce a company's exposure to violations of the FCPA or foreign anti-bribery laws.

References

1. World Health Organization, “Ethical Criteria for Medicinal Drug Promotion” (Geneva: WHO, 1988).

2. Transparency International, Global Corruption Report 2006.

3. EE Roughhead, AL Gilbert, and KJ Harvey, “Self-Regulatory Codes of Conduct: Are They Effective in Controlling Pharmaceutical Representatives' Presentations to General Medical Practitioners?,” International Journal of Health Services 28 (1998): 269–279.

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