No Doctoring the Books

Industry executives may be unfamiliar, however, with a less obvious interpretation of the statute that poses a more difficult compliance challenge. This challenge entails payments made to, or benefits provided to, physicians, technicians, or hospital administrators as part of a device or pharmaceutical company’s normal marketing and promotional efforts.

 Many industry executives are surprised to discover that under the broad interpretations of the FCPA adopted by U.S. enforcement agencies, these decision-makers can qualify as foreign officials if the decision-makers’ company is owned or controlled by a foreign government. In these circumstances, normal marketing and promotional activity directed at these persons potentially can create FCPA liability.
David W. Simon

This is more than a theoretical concern. Recent government actions make it clear that medical device and pharmaceutical companies are squarely in the crosshairs of those charged with enforcing the FCPA. Senior Department of Justice (DOJ) officials publicly have stated that the DOJ intends to make FCPA enforcement in the pharmaceutical and medical device industries a top priority.

On November 12, 2009, Assistant U.S. Attorney General Lanny Breuer stated that “one area of criminal enforcement that will be a focus for the Criminal Division in the months and years ahead [is] the application of the Foreign Corrupt Practices Act... to the pharmaceutical industry."1 He further noted that prosecution would not be limited to corporations but also would extend to the “investigation and prosecution of senior executives,” a remark that was echoed during the same conference by Assistant U.S. Attorney General Tony West, Chief of the DOJ’s Civil Division. West noted that he recently had testified before the Senate Judiciary Committee that “[i]n those cases where the facts and law allow us to pursue criminal cases against individuals responsible for illegal conduct, we will do so.”2

Erin J. Holland

Furthermore, Charles McKenna, Chief of the U.S. Attorney’s Office for the District of New Jersey Criminal Division, informed attendees at a 2009 meeting of the American Bar Association’s program on medical device and pharmaceutical litigation that FCPA enforcement trailed only terrorism as a DOJ enforcement priority. It is clear, therefore, that both medical device and pharmaceutical companies and individuals working in the industry need to be aware of FCPA issues.3

Although the FCPA was enacted in 1977, the statute has seen unprecedented enforcement activity in the first decade of the 21st century. This enhanced attention has resulted in both repeated record fines (culminating in total FCPA fines exceeding $800 million paid by Siemens) and attention to numerous industries that traditionally had not seen enforcement activity. As discussed below, multiple companies in the pharmaceutical and life sciences area already have been the subject of enforcement activity and have paid large fines, including fines for payments to government-owned hospitals. Because the healthcare industry has been targeted for increased scrutiny and enforcement activity, pharmaceutical and medical device companies and their executives would be wise to enhance their FCPA compliance efforts. For example, in its most recent 10-K, Eli Lilly disclosed that the DOJ and SEC had expanded its FCPA investigation of Lilly’s subsidiaries. Lilly indicated that it had been subpoenaed by the SEC and that both the SEC and DOJ had asked the company to voluntarily provide information related to the activities of subsidiaries in “a number of other countries.”4 These requests follow SEC subpoenas that Lilly previously received regarding an FCPA investigation into activities by Polish subsidiaries of a number of pharmaceutical companies.

FCPA, Antikickback Statute Explained

The FCPA prohibits U.S. companies and citizens, foreign companies listed on a U.S. stock exchange, or any person acting while in the United States, from paying or offering to pay, directly or indirectly, money or anything of value to a foreign official in order to obtain or retain business. These are the statute’s “antibribery provisions.”5 The FCPA also requires “issuers” (i.e., any U.S. or foreign companies with securities traded on a U.S. exchange or other­wise required to file periodic reports with the SEC) to keep books and records that accurately reflect business transactions. These entities also must maintain effective internal controls.6

Gregory Husisian
The FCPA was enacted in response to a series of SEC investigations that resulted in over 400 U.S. companies admitting that they had made over $300 million in questionable or illegal payments to foreign government officials, politicians, and political parties.7 The law was enacted to halt such activity and “to restore public confidence in the American business system.” The legislation is jointly enforced by the DOJ and the SEC. Proof of a U.S. territorial connection is not required for either government agency to implicate U.S. companies and citizens in FCPA violations. Indeed, FCPA violations can, and often do, occur even if the prohibited activity takes place entirely outside of the United States.
The antibribery provisions apply to more than just straight bribes paid to foreign government leaders to secure a government contract type of scenarios. Both the DOJ and the SEC broadly interpret several elements of the antibribery provisions, such as the terms anything of value, foreign official, and obtain or retain business. More specifically:
Anything of Value.The FCPA term anything of value is poorly defined in the statute, and the statute’s legislative history is not particularly helpful, either. The term has been construed broadly and includes not only cash or cash equivalents but also discounts, gifts, the use of materials, facilities, or equipment, entertainment, drinks, meals, transportation, lodging, insurance benefits, and the promise of future employment.8 There is no minimum value associated with the anything of value element, and even payments of less than one hundred dollars have formed the basis for an enforcement action. The perception of the recipient and the subjective valuation of the thing conveyed often are key factors considered in determining whether anything of value has been given to a foreign official.
Some examples of recent FCPA matters that involved the provision of nonmonetary benefits include action against Lucent Technologies, which agreed in 2007 to resolve allegations that it had violated the FCPA in connection with travel and entertainment practices involving employees of state-owned telecom customers. The thing of value that supported the violation was Lucent’s funding of approximately 315 trips involving over 1000 employees of Chinese state-owned telecom companies. The trips featured a disproportionate amount of sightseeing, entertainment, and leisure.9 In a June 2004 FCPA enforcement action against Schering-Plough the SEC alleged that a donation to a charity that provided no tangible monetary benefit to the foreign official was sufficient to confer something of value on the official. The commission apparently reached its decision on the theory that the foreign official welcomed the donation and hence “valued” it.10
Recent domestic enforcement activity under the federal Antikickback Statute (AKS) and analogous state laws also is illustrative. The AKS is familiar to most healthcare companies because it prohibits individuals or entities from knowingly and willfully offering, paying, soliciting, or receiving remuneration to induce referrals of items or services covered by Medicare, Medicaid, or any other federally funded program.11 The AKS emphasis on the elements of a quid pro quo exchange makes the statute comparable to the antibribery provisions of the FCPA. This focus thus provides insight into the interpretation and potential enforcement theories of the FCPA by the DOJ, which can bring enforcement actions under both laws.
Most AKS and similar state law enforcement actions based on nontraditional benefits also could support FCPA prosecutions had they been provided to physicians employed by state-controlled health systems. For example, in 2007, 14 Illinois radiology centers settled charges filed by the Illinois attorney general for allegedly paying kickbacks to doctors in exchange for referrals.12 The Illinois AG alleged that the radiology centers entered into sham lease agreements with doctors under which the doctors paid a reduced rate for MRI and CT scans, charged the patient’s insurance carriers a higher rate, and then pocketed the difference. Similarly, in a 2009 settlement, NeuroMetrix agreed to pay $3.7 million as part of a deferred prosecution agreement based on allegations that it paid kickbacks to physicians in the form of free disposable biosensors for use with the NeuroMetrix’s NC-stat System to encourage physicians to recommend the device to colleagues.13 If these actions had occurred in a foreign country and been made to physicians who worked in state-owned healthcare systems, there is little doubt that the DOJ would consider these actions to violate the FCPA.
Foreign Official. The antibribery provisions defineforeign official to include, in pertinent part, “any officer or employee of a foreign government or any department, agency or instrumentality thereof . . . or any person acting in an official capacity for or on behalf of any such government, department, agency, or instrumentality. . . .”14The enforcement agencies broadly interpret this term to include not only traditional government officials but also employees of state-owned or state-controlled entities under the theory that state-owned entities are instrumentalities of the foreign government. Even if a foreign company is not wholly-owned by a foreign state, it still may be considered an instrumentality of the foreign government if it exercises substantial control over the entity. FCPA enforcement actions and other enforcement agency pronouncements instruct that once a foreign company, such as a hospital or laboratory, is deemed an instrumentality of a foreign government, every single employee of the entity, regardless of rank or title, will be considered a foreign official. This interpretation applies regardless of how local law may characterize the employee.
Proof of the breadth of which the term foreign officialis construed is provided by cases where payments made to physicians or lab technicians are considered to violate the FCPA based on employment by a company at least partially owned by a foreign government. For example, in United States v.DPC (Tianjin) Ltd., DPC pleaded guilty to an FCPA violation based on payments of illegal commissions given to physicians and laboratory personnel employed by government-owned hospitals in the People’s Republic of China. DPC, too, was subjected to a large fine of $1.6 million and agreed to the appointment of an FCPA monitor, among other remedial measures. In SEC v. Micrus Corporation, an FCPA violation was premised on payments to physicians in various foreign countries.15And in United Statesv.Syncor Taiwan Inc.,Syncor Taiwan made illicit payments totaling at least $400,000 to doctors who controlled the purchasing decisions for the nuclear medicine departments of certain hospitals, including some hospitals owned by the government of Taiwan, for the purpose of obtaining or retaining business with those hospitals.16Syncor Taiwan pleaded guilty and was fined $2 million dollars by the DOJ.
Obtain or Retain Business. Theobtain or retain businesselement of an antibribery violation also has broad application and can be satisfied even if the improper payment to a foreign official does not lead to a government contract. Courts have held that Congress, by passing the FCPA, intended to prohibit a wide range of improper payments, not just those that directly influence the acquisition or retention of government contracts. Several recent FCPA enforcement actions concern improper payments to a foreign official to secure special tax or custom treatment, to secure government licenses or permits needed to do business in a foreign jurisdiction, or otherwise to secure an improper advantage over competitors. For example, in United States v. Kay, the Fifth Circuit Court concluded that making improper payments to a foreign official to lower corporate taxes and custom duties could satisfy the obtain or retain business element of an FCPA antibribery violation by providing an unfair advantage to the payor over competitors.17 The court found “little difference” between paying a bribe to secure a contract and a situation where a contract is gotten lawfully but then followed by a bribe to ensure the contract can be completed profitably.
In the healthcare context, a broad variety of payment situations can satisfy this standard. These could include payments made for regulatory approvals, such as payments to secure the right to sell a drug in a country, or to secure favorable licensing terms. They could also involve payments made to healthcare providers, such as payments designed to persuade them to use a medical device, to steer testing to certain laboratories, or to prescribe a certain drug. Similar payments have been the predicate for millions of dollars of FCPA penalties in recent years.
Third-party Payment Provisions.U.S. companies are not insulated from FCPA risk by doing business in foreign countries through third parties such as agents, consultants, distributors, or joint venture partners. The antibribery provisions contain broad third-party payments provisions under which the actions of foreign subsidiaries and other third parties can result in FCPA liability to a parent company or the entity engaging the third party. These provisions apply if improper payments are made to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to a foreign official.”Throughout this article, third party refers to agents, consultants, distributors, and joint venture partners.
Under the FCPA, knowledge is defined broadly and is present when one knows that an event is certain or likely to occur. Failure to investigate suspicious circumstances can be sufficient to violate this standard, because failing to take note of an event that reasonably should have roused suspicion, or being willfully blind, also can constitute knowledge.
Agents, distributors, and other third parties are frequent sources of FCPA violations. Some examples include:
  • In November 2009, John Joseph O’Shea, former General Manager of Swiss ABB Ltd.’s Texas-based subsidiary, was arrested for his alleged role in a conspiracy to violate the FCPA. The DOJ alleges that the ABB subsidiary hired a third-party representative to pay bribes to officials at the Comisión Federal de Electricidad (CFE), a Mexican state-owned electricity company, to secure contracts with the CFE.18
  • In December 2009, the SEC charged Bobby Benton, former vice president of western hemisphere operations for Texas-based offshore oil rig operator Pride International, with FCPA violations.19 The SEC alleged that Benton authorized a $10,000 payment to a third-party agent for payment to a Mexican customs official in return for lenient treatment in connection with an inspection of port facilities leased by Pride’s Mexican subsidiary.
  • In February 2009, KBR and Halliburton settled allegations by the SEC that KBR subsidiary Kellogg Brown & Root bribed Nigerian government officials to obtain construction contracts. The SEC held Halliburton responsible because it was the parent of KBR, which was a member of a joint venture that allegedly hired the agents who paid bribes to the Nigerian officials.20
The medical devices and pharmaceutical industries are particularly susceptible to FCPA problems arising from the use of intermediaries. Agents frequently are used in these industries as a means of navigating complicated government licensing regimes and procurement hurdles. It is also very common for pharmaceutical companies and medical device manufac­turers to use local distributors and to establish joint ventures, both to spread risk and to provide foreign companies with sufficient incentive to commit significant resources to increasing sales and obtaining necessary government approvals. The frequent use of agents, distributors, and other third parties, and the often-diminished control that U.S. companies have over such actors, can lead to tricky FCPA issues even for companies with the best intentions.

FCPA Recordkeeping Requirements

The FCPA’s recordkeeping requirements have two main stipulations. The first is that books, records, and accounts be kept in reasonable detail that accurately and fairly reflect transactions and dispositions of assets. The second requires that a system of internal accounting controls:
  • Provide reasonable assurances that transactions are executed in accordance with management’s authorization.
  • Ensure that expenses are recorded as necessary to permit preparation of financial statements and to maintain accountability for assets.
  • Limit access to assets except in accord with management’s authorization.
  • Make certain that recorded accountability for assets is compared with the existing assets at reasonable intervals and that appropriate action is taken with respect to any differences.21 While the recordkeeping provisions technically apply only to issuers and not to foreign subsidiaries, the enforcement agencies routinely hold parent companies liable for false or fraudulent entries for subsidiaries, especially where there are any books or records that ultimately are consolidated with an issuer’s books and records for financial reporting purposes.
In many instances, improper payments to a foreign official to obtain or retain business result not only in antibribery violations but also in recordkeeping ones, given that improper payments often are falsely characterized on a company’s books and records as miscellaneous expenses, commissions, and so forth. In some cases, the SEC has chosen to proceed under an accounting-based theory when its real target appeared to be substantive antibribery violations. The commission likely took this approach because a books and records charge was easier to prove or because a company preferred to settle on that basis. Also relevant is the government’s view that the presence of effective internal controls should be sufficient to prevent many violations of the FCPA’s antibribery provisions, which in effect turns violations of the antibribery provisions into accounting violations as well.
The creativity with which the SEC can proceed, and the extent to which FCPA liability can arise in unexpected ways, is reflected by the July 31, 2009, settlements entered into by two former executives for Nature’s Sunshine Products. The SEC charged that employees of a Nature’s Sunshine subsidiary used third-party brokers to transmit approximately $1 million to Brazilian customs agents to, among other things, avoid product-registration requirements. What is most notable about the settlement is that the SEC did not even allege that the executives parti­cipated in or knew about the bribery scheme. Rather, culpability was premised on their violation of the “control person” provision of the Securities Exchange Act because of inadequate supervision of the subsidiary’s activities.
Unique Challenges
In the Justice Department’s view, increased FCPA enforcement in the healthcare industry is an obvious and necessary expansion of the considerations that inform AKS enforcement. Recent AKS settlements that target medical device and pharmaceutical companies illustrate the effectiveness of the government’s fraud and abuse enforcement program.22The Justice Department is making good use of its healthcare fraud expertise by creating special teams composed of certain members of its healthcare fraud unit and members of its FCPA unit.
The Justice Department seems well-poised to aggressively investigate and prosecute healthcare companies for FCPA violations. This is because the antikickback laws present many of the same compliance challenges presented by the FCPA—most obviously, oversight of sales and marketing practices and the potential to use payments to steer business in violation of the laws. As Assistant Attorney General Lanny Breuer observed: “[T]he types of corrupt payments that violate the FCPA because they are given to obtain or retain business in other countries are not any different than the items of value that would violate the Antikickback Statute if given within the United States—cash, gifts, charitable donations, travel, meals, entertainment, grants, speaking fees, honoraria, and consultant arrangements, to name a few.”1 Similarly, the various model codes of ethics, including Eucomed Guidelines on Interactions with Healthcare Professionals, the International Federation of Pharmaceutical Manufacturers & Associations Code of Pharmaceutical Marketing Practices, and the Medical Device Technology Companies Code of Conduct also contain useful guidance and information regarding industry standards for dealing with some of these same issues raised by the FCPA.
Although the AKS and FCPA provisions can raise overlapping issues, the FCPA raises additional concerns because of the breadth of its provisions and its application to foreign situations.23 This means that even companies that have AKS compliance programs in place do not necessarily have all the tools that they need to ensure that they have up-to-date FCPA compliance programs. Some of the significant and unique challenges that the FCPA raises for medical device companies include:
  • Difficulty Identifying Foreign Officials. Of great concern to healthcare companies is the difficulty of identifying “foreign officials” for purposes of the FCPA. As well as the obvious officials, such as health ministry and customs officials, foreign officials may include less obvious actors, such as doctors, pharmacists, and lab technicians, because hospitals and other medical facilities in many foreign countries often are partially or completely government-owned or controlled. As Assistant Attorney General Breuer stated, because most healthcare facilities are state-owned, “under certain cir­cumstances and in certain countries, nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a ‘foreign official’ within the meaning of the FCPA.”23
  • Increasing globalization of healthcare. As developing nations increase spending on healthcare, U.S. providers are expanding their operations abroad to meet the increased demand for medical devices, pharmaceuticals, and medical supplies.24 Since many of these nations have a history of corruption, these new business opportunities are accompanied by increased FCPA risks.
  • Significant regulation. Medical devices frequently are subject to a high degree of regulation, leading to frequent interaction with government officials. In addition to the marketing and promotion risks discussed above, medical device companies face FCPA risks in connection with the approval of devices, licenses, permits, and the like. This is especially true where companies hire agents or consultants to obtain approvals on their behalf.
  • Frequent and large transactions. The sale of medical devices may involve frequent and large transactions, making government approvals and purchases extremely valuable, thereby giving agents and distributors an even greater incentive to use illegal incentives to achieve their goals.
  • Competitive sales focus. For many healthcare companies, the competitive nature of their business requires them to persuade providers to use their products or services, raising the difficult question of determining where legitimate persuasion becomes improper inducement. This risk is particularly high in countries where business norms may conflict with the FCPA’s strict requirements.
  • Reliance on third parties. Many healthcare companies rely on third-party intermedi­aries, whether in the form of a joint venture, distributors, agents, consultants, or other facilitators to market their products in foreign countries. Absent sufficient due diligence and controls, intermediaries can heighten FCPA risks. Given the broad scope of the FCPA’s antibribery provisions, a company cannot escape liability by turning a blind eye to a third party’s activities.

Avoiding FCPA Exposure

In light of the current climate, medical device companies should review their corporate compliance programs to ensure that they are sufficiently robust. Generally, an effective FCPA compliance program should be risk-based, meaning that it should be tailored to detect and monitor a company’s activities where the risk is greatest. This assessment first should identify internal potential areas of risk, for example, the extent to which the company relies on relationships with distributors, resellers, agents, and other third parties. A company also should take into account the foreign locations in which a company is operating and consider additional procedures for countries that have a history of corruption.(Each year, the Transparency International Corruption Perception Index ranks countries on a scale of 1 to 10, with a 1 representing perceptions of highly corrupt and a 10 representing perceptions of highly clean.) Finally, the level of regulation in foreign countries should be taken into account to determine the level of interaction that company representatives will have with foreign officials.
Every company should give careful consideration to the following points when designing, implementing, or updating its FCPA compliance program:
  • Written policies and internal controls. A compliance program should begin with a clearly articulated corporate policy prohibiting violations of the FCPA and other applicable anti-corruption laws. It also should reflect the promulgation of a compliance code, standards, and procedures designed to detect and deter violations of the FCPA and other anticorruption laws, and should otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance. 
  • Oversight. The board of directors should have overall responsibility for the compliance program and must remain knowledgeable about the content and operation of the program. One or more senior corporate officials within the organization should have day-to-day responsibility for the implementation and oversight of the FCPA policies, standards, and procedures. The person or persons responsible for the day-to-day compliance program must be given adequate resources and authority and periodically report to senior officials within the organization and to the board of directors or to a designated subgroup, such as an audit committee.
  • Communication and training. Mechanisms should be designed to ensure that the FCPA’s policies, standards, and procedures are communicated to all directors, officers, employees, and third parties, including through periodic training and periodic written communications regarding FCPA requirements. Each individual should be required to certify annually and in writing that: one, he or she has read, understands, and will comply with the company’s FCPA policies, standards, and procedures; two, has not participated in any unreported or prohibited transactions or activities within the reporting period; and three, knows of no participation in prohibited activity by any other director, officer, employee, or third party. 
  • Reporting procedures. Companies need to ensure that they have both direct and confidential reporting mechanisms, such as hotlines or special Web sites, for individuals to report suspected criminal conduct or violations of FCPA compliance policies, standards, and procedures. Companies should have procedures that ensure that credible complaints are dealt with in a timely manner.
  • Accounting procedures. Companies should integrate their antibribery procedures and internal accounting controls. An effective set of accounting controls is essential to ensure that illegal payments are not made. Companies should incorporate review and approval guidelines designed to detect and deter questionable payments and put in place mechanisms to ensure the accurate tracking of funds and recording of disbursements, including for payments made to agents and consultants.
  •  Addressing potential violations. The compliance program should include policies, standards, and procedures that allow an organization to respond reasonably to any violations detected, including appropriate investigative procedures and mechanisms. After the completion of any investigation, a final analysis should be made to deter­mine what modifications to the compliance program may be necessary to prevent future similar misconduct.
  • Disciplinary procedures. Appropriate disciplinary procedures should be developed and implemented to address, among other things, conduct that violates the FCPA and other applicable anticorruption laws, as well as the failure to take reasonable steps to prevent and detect misconduct by others.
  • Due diligence for third parties. Companies need to ensure that the organization’s compliance program includes appropriate vetting and oversight of third parties.25 Before selecting a third party, companies should consider contacting the commercial attaché of the U.S. embassy, conducting background checks using Department of Commerce’s Commercial Service’s private databases, and checking references. After selecting a third party, companies should consider conduct frequent audits of expenditures by agents and consultants, particularly in high-risk countries. Compensation systems for agents and consultants that create potential incentives for corrupt payments to foreign officials, such as success fees, also need to be monitored closely.
  • Standardized agreements for third parties. Standard provisions should be included in contracts with third parties that are reasonably calculated to prevent and detect FCPA violations. These provisions may include: one, FCPA representations and under­takings relating to compliance with the FCPA; two, the right to conduct audits of books and records; and three, termination rights if there is any breach of any anticorruption law or a breach of representations and undertakings related to such matters. The provisions must also provide the ability to disclaim and reverse any economic benefit that otherwise would be received based on the actions of the third parties.
  • Periodic audits and risk assessments. An effective compliance program should include periodic audits and risk assessments to ensure compliance with, and the successful implementation of, FCPA policies, standards, and procedures.

Risks Can Be Minimized

As recent enforcement activity underscores, the DOJ and the SEC have publicly indicated that the medical device and pharmaceutical industries are receiving special attention and are likely sources of future FCPA enforcement actions. While companies cannot eliminate the potential for FCPA violations entirely, conducting an appropriate risk assessment—and using the results to implement a tailored version of the compliance measures described above—can minimize the FCPA risks inherent to device and pharmaceutical manufacturers alike.


1. Lanny Breuer, Assistant Attorney General, Criminal Division, Department of Justice, Keynote Address to the 10th Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (Nov. 12, 2009), available at
2. Tony West, Assistant Attorney General, Civil Division, Department of Justice, Address to the 10th Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (Nov. 12, 2009), available at
3. Charles McKenna, Chief, Criminal Division, U.S. Attorney’s Office for the District of New Jersey, Panelist, “Current Issues in Medical Device and Pharmaceutical Litigation,” (Nov. 12, 2009).
4. Eli Lilly & Co., Annual Report (Form 10-K), at 15 (Feb. 22, 2010).
5. 15 U.S.C. §§ 78dd-1-3 (2000).
6. 15 U.S.C. § 78m(b)(2)(A).
7. Layperson’s Guide to FCPA, available at
8. See id. §§ 78dd-1(a) (issuers), 78dd-2(a) (domestic concerns).
9. See Release, Department of Justice, “Lucent Technologies Inc. Agrees to Pay $1 Million Fine to Resolve FCPA Allegations” (Dec. 21, 2007).
10. See SEC v. Schering-Plough Corp., Litigation Release No. 18,740 (June 9, 2004).
11. 42 U.S.C. § 1320a-7b(b). The Federal Employees Health Benefits Program is excluded from the Act’s coverage.
12. Press Release, Illinois Attorney General, “Attorney General Madigan Settles MRI Kickback Case for $1.2 Million” (Jan. 14, 2009).
13. Release, Department of Justice, “Neurometrix Agrees to Deferred Prosecution for Illegal Kickbacks Paid to Physicians” (Feb. 9, 2009).
14. See 15 U.S.C. §§ 78dd-1(f)(1) (issuers), 78dd-2(h(2) (domestic concerns).
15. See SEC v. Micrus Corp., Litigation Release No. 17,887 (Dec. 10, 2002).
16. Release, Department of Justice, “Syncor Taiwan, Inc. Pleads Guilty To Violating The Foreign Corrupt Practices Act” (Dec. 10, 2002).
17. See United States v. Kay, 359 F.3d 738, 743-56 (5th Cir. 2004)
18. Throughout this article, “third party” refers to agents, consultants, distributors, and joint venture partners, and other entities authorized to act in some fashion on behalf of the U.S. company.
19. See SEC v. Bobby Benton, Litigation Release No. 21,335 (Dec. 14, 2009).
20. See SEC v. Halliburton Co. and KBR, Inc., Litigation Release, Release No. 20,897A (Feb. 11, 2009).
21. See 15 U.S.C. § 78m(b)(2).
22. For example, see Department of Justice Release, “Boston Scientific Pays $22 Million to Settle Claims that its Guidant Subsidiary Used Post-Market Studies to Pay Kickbacks to Physicians” (Dec. 23, 2009) ($22 million settlement);Department of Justice Release, “Oklahoma Hospital Group Pays U.S. $13 Million to Settle False Claims Act Allegations” (Dec. 22, 2009).
23. Greg Husisian, The Foreign Corrupt Practices Act: Risk-Management and Compliance Strategies For Life Sciences and Pharmaceutical Companies (2009), available at
24. Mike Koehler, A Malady in Search of a Cure—The Increase in FCPA Enforcement Actions Against Healthcare Companies, 38 U. Mem. L. Rev. 261, 263 (2008).
25. Although due diligence is not affirmatively required by the FCPA, as the DOJ and the Department of Commerce noted in a 2002 joint release, “[t]o avoid being held liable for cor­rupt third-party payments, U.S. companies are encouraged to exercise due diligence and to take all necessary precautions to ensure that they have formed a business relationship with reput­able and qualified partners and representatives.” Department of Justice and Department of Commerce, “Foreign Corrupt Practices Act: Antibribery Provisions” (Mar. 15, 2002).
David W. Simon is a partner with Foley & Lardner LLP and a member of the government enforcement, compliance, and white collar defense and the securities enforcement and litigation practices. He may be reached at Erin J. Holland is an associate with Foley & Lardner and a member of the firm’s government enforcement, compliance and white collar defense practice. She may be reached at Gregory Husisian is of counsel with Foley & Lardner and a member of the firm’s government enforcement, compliance, and white collar defense, the securities enforcement and litigation, and the appellate practices. He may be reached at

Tracking Reimbursement and Payment Trends

Charles Schneider

Most major functions of medical technology companies are inextricably linked to reimbursement. It directly affects capital funding, company valuations, and the commercialization of products. Because of reimbursement’s central role, the device company executive must carefully consider the impact that coding, coverage, payment, and policies have on target markets and corporate reimbursement functions. These activities support the future use of codes, sales projections, insurance coverage, regulatory filings, product labeling, and other key company business. Device firms that thoughtfully plan their reimbursement strategies are positioned to secure market share and sales they might otherwise have lost.

This article examines U.S. reimbursement trends, future coverage, coding, and payment mechanisms likely to affect medical technology companies, innovators, care providers, and patients. After a brief review of the recently passed healthcare bill, the article considers trends affecting coverage and coding, then looks at payment trends. Issues such as comparative effectiveness research, financial risk, and evidence development for product commercialization are also addressed. Finally, the article considers whether medical devices and biologics technologies will fall prey to formulary limitations or selective contracting by payors in the future.

Healthcare Policy

In 2009, five major reform bills were proposed between the U.S. House of Representatives and the Senate. On February 22, 2010, President Obama announced his healthcare reform proposal, and held a political forum with members of the Executive branch, House, and Senate in order to discuss policy differences. Partisan efforts continued, and the Patient Protection and Affordable Care Act (PPACA) passed into law on March 23, 2010 (Pub.L 111-148). These regulations were further amended through passage of the Health Care and Education Reconciliation Act of 2010 that was signed into law by the president on March 30, 2010 (Pub.L 111-152).
Despite passage of the PPACA, there appears to be little consensus among Democrats and Republicans, as issues presented during the healthcare reform debate continue to linger. Judicial, political, and financial challenges are expected to continue, and medical technology companies are encouraged to pay close attention to regulatory activities in Washington and in states that also intend to pursue their own reform initiatives. 
Policy and politics aside, stakeholders within the healthcare reform debate seem to agree that fundamental changes are required. Healthcare spending now exceeds 16% of the U.S. gross domestic product. At its current pace, projected spending on healthcare is expected to exceed $4.3 trillion, or 19.3% of GDP, by 2019. Medicare beneficiaries are expected to increase from 46 to 60 million during this same period, while hospitals, physicians, allied, and ancillary care providers continue to see declining payment levels, without relief from increased business-related expenses.
Notwithstanding passage of the PPACA, as amended, healthcare reform has been occurring for many years. Led principally by the Centers for Medicare & Medicaid (CMS), commercial insurance companies, professional societies, and other stakeholders have been successfully modifying U.S. reimbursement systems for many years. Reforms already in motion are attempting to transform U.S. healthcare from a volume-based system to one that rewards quality outcomes and evidence-based medicine. These include coverage policy changes that require published evidence supporting access to medical technologies, the evolution of severity adjusted diagnosis related group (MS-DRG) payment systems, and CPT-4 code development and society guideline development now based more upon outcomes presented within the literature. The emergence of hospital value analysis assessments prior to facility adoption as well as demonstration projects promoting risk-sharing relationships between facility and physician are among the changes as well. In addition, there has been a shift in financial risk relating to hospital-acquired conditions.

Coverage Analysis

Insurance coverage is directly related to published clinical evidence that clearly communicates outcomes and makes comparisons to alternative treatments and technologies. Payors consider whether there are biases that may influence outcomes, consider statistical methods used, and study designs. Major insurers have initiated more formal review processes of technologies, and make public some of their coverage decisions. Absent a randomized, controlled trial, many carriers reject case series data that help to explain outcomes, define patient populations, or provide meaningful insight into the technology’s use or limitations. Payors frequently dismiss regulatory approval of technologies that have undergone the rigorous review process required by FDA. Some may delay or deny coverage requiring long term outcomes of more than two years, despite published data to the contrary. However, comparisons between different policies suggests consistent review methods are not used by these organizations, and the full body of published literature is frequently not considered when making benefit decisions that affect patient access to care. This is true as well for technology assessment organizations that claim to evaluate technologies using a rigorous review process, which has not proven to be true in many instances.

Regardless of payor bias, technology companies must be mindful of the need to support development of high-quality, published outcomes that continue to demonstrate quality, safety, and direct impact on economic outcomes as compared with competing technologies and alternative treatment options. Thorough review of these issues, literature and payor education strategies are required to overcome these barriers.

Absent a randomized, controlled trial, many carriers reject case series data that help to explain outcomes, define patient populations, or provide meaningful insight into the technology’s use or limitations. Payers frequently dismiss regulatory approval of technologies that have undergone the rigorous review process required by FDA. Some may delay or deny coverage requiring outcomes longer than two years despite published data to the contrary. Thorough review of these issues, literature and payer education strategies are required to overcome these barriers.

Payment Trends

Depending upon the procedure, facility payments continue to show some favorable trends, while physician payments from Medicare remain suppressed. According to the data management company PearlDiver Technologies (Ft. Wayne, IN), from
Figure 1. Payment trends (average charges and reimbursement) for knee replacements. Click here to expand.
January 1, 2005, to December 31, 2007 the average facility charges for total knee replacements (see Figures 1 and 2) increased from $35,262 to $41,998 (19.1%). For total hip replacement (see Figures 3 and 4) the average facility charges increased from $38,521 to $45,621 (18.4%). Actual Medicare payments for these same services increased from $10,411 to $11,108 (6.7%) and $10,216 to $10,850 (6.2%), respectively. For Medicare fiscal year 2010, the national average payment for total hip and total knee replacement is $10,766 (MS-DRG 470) when the procedure has no complications or associated comorbidities. Given that Medicare payments are based upon historical claims data and cost reporting, one would expect near-term payment trends for these procedures to continue. On average, the Centers for Medicare & Medicaid (CMS) announced an overall increase for in-patient facility payments of 1.9% for FY2010.
Figure 2. Knee replacement trends involving facility and physician average charges. Click here to expand.
Conversely, physician payments have remained stagnant for the past several years. In part, physician payment rates have been suppressed because of congressional mandates based upon a flawed calculus that requires payment reductions to meet budget expectations.
Using total hip and total knee procedures for illustration, average billed charges for total hip procedures (see Figure 3) decreased from $972 to $942 (–3.1%), while actual payments decreased from $771 to $753 (–2.3%) from January 1, 2005, to December 31, 2007. Total knee replacement procedures (Figure 4) showed similar decreases in billed charges from $1,053 to $1,023 (–2.9%), while payments decreased from $837 to $818 (–2.3%) during this same period.
The national average of allowed payment amounts for total hip (CPT-4 Code: 27130) and total knee replacement (CPT-4 Code: 27446) is reported to be $1,375 and $1,055, respectively.
Figure 3. Hip replacement average charges and reimbursement trends. Click here to expand.
Congress must once again act and provide supplemental appropriations in support of physician payments, or the Medicare sustainable growth rate will decrease payments to physicians. On February 26, 2010, the House of Representatives passed a supplemental bill that would avoid a 21% automatic payment reduction to physicians until the end of March 2010. On March 15, the President signed legislation to extend current Medicare payment rates through May 31, 2010. However, Senators must once again act to avoid significant payment reductions on June 1, as this issue was not addressed through passage of the PPACA. Given recurring payment concerns and pricing/reimbursement pressures, technology innovators must develop products that directly reduce the overall cost of care, increase efficiency, and demonstrate actual value to the healthcare community.

Ongoing Payment Reforms

Payment reforms have been continuing for some time. A few examples include quality-based purchasing (also called pay-for-performance), shifting financial risk through policies that exclude payment for hospital-acquired infections, and composite payments for episodes of care.
Figure 4. Hip replacements trends regarding facility and physician average billed charges. Click here to expand.
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA, Pub.L. 108-173) included provisions that would attempt to transition from payments based on service volume to one based on quality outcomes. This set the stage for quality based purchasing initiatives, including pay-for-performance demonstration projects encouraging sustainable patient outcomes through various methods of clinical delivery and management.
Beginning October 1, 2008, the 2005 Deficit Reduction Act (DRA) requires CMS to identify hospital-acquired conditions and preclude assignment of a hospital stay to a higher paying diagnosis-related group unless it can be demonstrated by the hospital that the condition was not present upon admission. The list of hospital-acquired conditions grows each year, as allowed under Section 5001(c) of the DRA. Medicare, as well as many commercial insurance carriers, has also published noncoverage policies for “never events” in which certain activities (for example, amputation of the wrong appendage) should never occur.
Using its authority under Section 1866C of the Social Security Act, Medicare in fiscal year 2009 initiated several demonstration projects that included global payments for an episode of care, in which the physician and hospital would have financial incentives to lower the overall costs of care. For example, the Medicare Acute Care Episode (ACE) Demonstration focused upon select cardiovascular and orthopedic services.

Financial Burden Shifting

While none of these initiatives represents new payment methodologies, they do represent a continuing trend towards delegated risk relationships that shift the financial burden to care providers. Physicians and hospitals will pay even closer attention to clinical outcomes associated with technologies, impact on cost, and price. Quality training, monitoring patient outcomes, post-approval studies, and support of long-term registries are some of the areas where technology companies may support outcomes associated with alternative products, procedures, and techniques. It is now clear that innovators have a stake in quality clinical outcomes to ensure future viability of the product offered to medical prescribers.
Foreseeable trends in U.S. healthcare finance include the continuing consolidation of the insurance community, making it more difficult for providers to negotiate favorable payment rates. Demand for quality published outcomes will continue, resulting in a substantial increase in comparative effectiveness studies between different procedures, technologies, diagnostic tools, and techniques. Selective contracting may become more prominent among healthcare providers and payors, including delegated authority granted to the Secretary of Health and Human Services. While at some point in the future, implantable medical devices, biologics, and other supplies may find competition for placement on formularies similar to experiences found within pharmaceuticals.
To remain competitive or introduce new technology into the U.S. marketplace, innovators must first consider each of these trends. Then they need to understand the mechanics associated with coverage, coding, and payment, and execute thoughtful strategies that support not only market entry but also sustainable success within this marketplace.
Charles Schneider is vice president of reimbursement for Musculoskeletal Clinical Regulatory Advisers LLC (MCRA; Washington, D.C.). He may be reached at (202) 552-5800 or