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Now, Here's an Issue: Payments by medical device manufacturers to surgeons BY ROBIN R. YOUNG CFA, SEPTEMBER 13, 2004

Last week, Sofamor Danek disclosed in an SEC filing that a second "whistle-blower" lawsuit had been filed against it regarding payments to physicians. The case is under seal in Federal Court in Minneapolis. The first lawsuit against Sofamor Danek on this same subject was disclosed almost exactly one year ago, September 2003. Last week's filing discloses that this is the second lawsuit filed under the federal False Claims Act, which allows whistle-blowers to file suits on behalf of the government.

While Medtronic is saying next to nothing outside of its SEC filings, those filings made a key point: this second complaint asserts "similar allegations" and includes "essentially similar facts and circumstances" as the first action. Additionally, "the second complaint does not materially expand the nature of the existing inquiry."

Word around the industry is that attorneys for both the company and the whistle-blower/Department of Justice are interviewing a wide spectrum of people: surgeons, independent reps, employees, patients. The fact that the target is industry leader Sofamor Danek, we think, is very significant. Never mind the outcome, just the process of asking these questions within a prosecutorial context, we think, will affect industry attitudes and behavior.

How extensive are payments from manufacturers to surgeons? We have been analyzing medical technology companies for over twenty years. We have seen the pace and scope of payments from manufacturers to physician increase steadily over that period.

The days of a surgeon's pro-bono review of one's technology are essentially over. Even casual conversations are increasingly being held in expensive restaurants with the manufacturer invariably (and reluctantly) paying the tab.

Today, we believe, payments from manufacturers to surgeons are routine in every medical technology sector, from cardiovascular product manufacturers to urology products to OB/GYN to orthopedics. For some physicians, these payments, both explicit and implicit, have become a major part of their annual income.

What are these payments for? In our experience, they are truly for consulting, research, speeches, attending medical conferences on behalf of a company, inventions, making inventions better, preparing for FDA panel, designing clinical trials, conducting clinical trials and furthering the art and science of medicine.

But what if these payments are, in effect, pay-offs to purchase products? What if a practicing surgeon is, in effect, on the payroll of a manufacturer in order to influence their purchase decisions? Then we have a problem. Or, alternatively, what if surgeons ask for payment before evaluating a new technology; charging, in effect, a stocking fee for new products? Then we have still another problem.

Sometimes these issues are not so nuanced or complicated.

The Advanced Medical Technology Association (AdvaMed) is the largest medical technology trade association in the world and represents over 1,100 manufacturers of medical devices. AdvaMed has proposed the following Code of Ethics for manufacturers (the complete Code of Ethics is available from AdvaMed's website).

According to AdvaMed, what can a manufacturer pay to a surgeon?

  • A manufacturer may pay a Health Care Professional (HCP) for bona fide consulting arrangements. Companies may reasonably compensate HCPs for their services and pay reasonable and actual expenses incurred by HCPs. Hospitalities should be modest in value and subordinate in time and focus to the primary purpose of the meeting (no golfing junkets to Pebble Beach in the guise of a medical conference).
  • A manufacturer may provide modest, occasional gifts to HCP only if their serve a genuine educational function and have a fair revenues value of less than $100.
  • A manufacturer may provide product-related reimbursement and technical information as a method of providing accurate information related to costs, savings and revenues associated with the use of a product so that it can assist the HCP in evaluating whether a product is economically feasible.
  • Manufacturers may donate to charitable organizations for charitable purposes, such as independent medical research, indigent care, patient education and public education and sponsorship of events where the proceeds are charitable.

Again, the complete guidelines are available from AdvaMed.

The AdvaMed guidelines are strict but, we think, entirely appropriate and fair. How many firms live up to these guidelines? The vast majority do. Still, two lawsuits having been filed against industry leader Sofamor Danek and a broad investigation of both Sofamor Danek and industry practices is underway.

While we have no quarter with buying surgeon loyalty with anything less than superior technology and results, we still believe that the practice of paying surgeons for their intellectual property is both logical and right. Companies have made fortunes for both shareholders and surgeon-inventors bringing the surgeon's vision to revenues. At a time when surgeons are beset on all sides by regulators, litigation and declining revenues, converting their intellectual property into a new source of income is not only proper but, we believe it can lead, to better products, better science and better patient outcomes.

How could surgeons not be involved in the design and testing of new orthopedic products? And on what basis should manufacturers expect to receive this intellectual property for free?

Count us as being in favor of closer connections between surgeons and manufacturers. Count us also in favor of paying surgeons a fair price for their very valuable contributions to the science of treating patients.

And, finally, as regards Sofamor Danek's case, we would not be surprised to learn eventually that a settlement is in the works. If settlements in other industries are any indication, a settlement in this case will include some form of guidelines that could be adopted for all medical device firms. This is not to imply any sort of culpability on the part of Sofamor Danek, but to make the cases go away as well as to participate in setting industry guidelines. We could see such an agreement emerge.

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