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U.S. Justice Department Scrutinizes Orthopedic Firms

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

For more than two years, leading orthopedic manufacturers have lived under a cloud of intense scrutiny by the U.S. Department of Justice (DOJ), which focused its attention on sales and promotional practices in the orthopedics sector. At the end of September 2007, 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.

Stryker Corp. (Kalamazoo, MI), which was the first company to voluntarily cooperate with the DOJ inquiry, was not required to pay a fine. The company signed a nonprosecution 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. 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.

Kevin McAnaney, a Washington, DC-based attorney who specializes in healthcare fraud and abuse issues, says the settlements are likely to establish new benchmarks for managing physician consulting arrangements. "As part of the settlements, each of the companies agreed to develop an annual comprehensive needs-assessment document that sets out and provides written support for the specific consulting services needed in the coming year, the quantity of services, and their fair market value, by discrete category," he says.

"In addition, as part of the settlements, the companies have adopted specific policies on payments for product development services, including royalties; payments for clinical data, research activities, and fellowships; contributions to private foundations associated with physician consultants; and distributorships with which physicians have a relationship," he adds. "Proactive companies will be reviewing their compliance policies to address these areas of concern."

Despite the settlement, 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.

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