Orthopedic Surgeons May Dictate True Impact of DOJ Settlement

In March 2005, when the U.S. Department of Justice (DOJ; Washington, DC) first announced its probe into the sales and promotional practices of leading orthopedic firms, most industry analysts did not perceive the inquiry as cause for alarm. The general consensus among industry observers was that wrists would be slapped and fines would be paid—but no significant or long-term industry downside was anticipated. That same sentiment largely prevailed this past September, when DOJ announced the terms of its settlement with the firms.

Since then, however, orthopedic manufacturers have begun posting on their Web sites the fees they have paid to surgeons—as required under the terms of the settlement—and many observers are changing their minds about the full impact of the deferred prosecution agreement. The news that nearly 50 physicians received payments of $1 million or more made headlines not only in industry press outlets, but also in the general business and mainstream media. All together, the five manufacturers involved in the government probe—Biomet Corp. (Warsaw, IN); DePuy Orthopaedics Inc. (Warsaw, IN), a Johnson & Johnson company; Smith & Nephew plc (London); Stryker Corp. (Kalamazoo, MI); and Zimmer Holdings Inc. (Warsaw, IN)—disclosed that they have paid more than $207 million in consulting fees to physicians over the first nine months of 2007.

Although DOJ's enforcement actions have focused almost exclusively on orthopedic manufacturers, analysts are now taking note of the response of orthopedic surgeons to the terms of the settlement. Many believe that a change in the attitudes and behaviors of orthopedic surgeons could have a profound effect on the sector.

Kathleen Mc Dermott, an attorney with Sonnenschein, Nath & Rosenthal LLP (Washington, DC), referred to the settlement as a “seismic event.” She expects the settlement will result in “significant modification in the behavior of orthopedic surgeons toward manufacturers, who, in turn, will have to make their own adjustments . . . even beyond the formal terms of the DOJ settlement.”

McDermott was a key presenter in a recent Webinar, Orthopaedists at Risk: Navigating Industry Relationships, which was hosted by the American Academy of Orthopedic Surgeons (AAOS; Rosemont, IL). She told event attendees that “The settlement is having a chilling effect on orthopedic surgeons, who are obviously concerned about avoiding conflicts of interest and maintaining their professional integrity and reputations.” AAOS reports than nearly 800 surgeons attended the program.

Presenting at the AAOS Webinar, Murray Goodman, MD, of Salem Orthopedic Surgeons (Salem, MA), said that there is growing concern among patients and the general public regarding fees paid to physicians by implant manufacturers. Goodman, who is also chair of the professionalism committee of AAOS's board of councilors, acknowledged the need for collaboration with industry and its benefits in terms of moving implant advances from concept to fruition, ultimately improving patient care. But he noted that conflict-of-interest concerns are at the heart of the move to develop and police professional standards. If physicians do not change their behavior, he cautioned, the federal government will likely intercede.

James H. Beaty, MD, AAOS president, said in a prepared statement that a number of AAOS members are engaged in developing new medical devices to better serve patient needs, and that the academy supports “appropriate” financial disclosures to patients regarding relationships between orthopedic surgeons and implant manufacturers. However, Beaty said he is concerned about “financial disclosures that display only the name of the physician and an aggregate dollar amount received, without any explanation of the nature of the relationship, and without educational context—which may be confusing and misleading to the public and patients.”

Beaty said he favors a method of disclosure that would distinguish manufacturer payments to physicians by category, such as royalty payments, consulting agreements, funding for research, and medical education support. But manufacturers opposed the idea of specifying any details about the fees paid to physicians, Beaty noted, and they apparently prevailed in their negotiations with DOJ.

Attorney McDermott says that certain provisions of DOJ's deferred prosecution agreement with manufacturers will place a greater burden of documentation upon implant manufacturers before they can structure a consulting contract with an orthopedic surgeon. “With this agreement, the overall compliance bar for manufacturers has been raised considerably,” she says. McDermott also says that manufacturers will receive greater scrutiny from hospitals as they begin to rein in some of the more “free-wheeling relationships” that some doctors have had with suppliers.

Michael S. Matson, senior medtech analyst with Wachovia Capital Markets LLC (New York City), says that DOJ's settlement with the five leading knee- and hip-replacement manufacturers has the potential to shake up the industry. “Surgeons are feeling the heat, and the situation has also intensified for manufacturers, who had already begun to clean up their act, particularly with regard to some of the more egregious practices regarding consulting fees,” he says. “The current system was prone to potential abuse, and, quite frankly, no one is likely to miss it.”

Matson anticipates greater pressure on manufacturers going forward, particularly as hospitals begin to leverage their position to negotiate lower prices for implants. Yet, on the upside, as compliance policies take hold, Matson expects companies to see a boost in their bottom line as the overhead costs associated with sales and marketing are reduced.

Matson also sees the possibility for some market-share shifts, although he notes that the extent of such shifts is difficult to forecast at this juncture. “The DOJ settlement could ultimately have the effect of leveling the playing field to some extent,” he says. “As consulting arrangements get harder to come by, surgeons may be more receptive to implants offered by other manufacturers—particularly if a case can be made for innovative technology and ease of use.” He says Wright Medical Technology Inc. (Arlington, TN) and Smith & Nephew are best positioned to pursue market-share gains.

Both McDermott and Matson see the DOJ settlement as yet another indication of the federal government's move toward greater oversight of the medtech industry. “Any new investigation of the medical device industry is likely to be more—not less—exhaustive than the DOJ probe into orthopedics,” says McDermott. “We appear to entering an era of greater scrutiny and control over medical devices . . . and with greater calls for tougher enforcement provisions.”

Legislation recently proposed in the U.S. Senate confirms McDermott's supposition. The Physician Payments Sunshine Act (S 2029), which was introduced in September, would require drug and device manufacturers to file quarterly reports listing all payments and gifts to doctors with a value of $25 or more. The Transparency in Medical Device Pricing Act (S 2221), introduced last month by Senators Charles Grassley (R–IA) and Arlen Specter (R–PA), would require manufacturers to report their average and median sales prices for all devices implanted each quarter.

© 2007 Canon Communications LLC

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