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Orthopedic and Dental Industry News Complete Archive »

Appeals Court Deals Zimmer Setback BY ROBIN R. YOUNG CFA, OCTOBER 11, 2004

The U.S. Court of Appeals for the Third Circuit (Pennsylvania and New Jersey) breathed new life last week into an otherwise moribund case against Zimmer. In remanding the case back to a lower court, which had dismissed it earlier, the U.S. appeals court raised the possibility that Zimmer Inc. may have violated the anti-kickback and Stark acts.

The case, which was a "whistle blower" or a qui tam action, was brought by a Philadelphia based orthopedic surgeon against Mercy Health System and Zimmer. The surgeon claimed that Zimmer entered into a contract with Mercy's purchasing agent in which the manufacturer would provide the implants to Mercy for five years. Under the contract, Zimmer offered Mercy a "conversion incentive" which included a price discount for previous purchases, a 2 percent bonus on purchases if it met certain pre-set commitments, and additional incentives.

The Appeals Court specifically noted that that the rewards given to Mercy were paid to it in "cash or cash equivalents." This appeared to Appeals Court Judge Rendell Stapleton to be inconsistent with Zimmer's safe harbor theory.

In another aspect of its ruling, the appeals court found that, through its incentives, Zimmer intended to influence and obtain favorable treatment from hospitals like Mercy who participate in Medicare programs. The court found that Zimmer would like to induce hospitals to purchase its products and increase its market share for orthopedic implants. (Well, yeah.)

Apparently, Mercy's failure to disclose to Medicare that it made claims for more than it paid Zimmer for the implants was not a part of Zimmer's marketing materials or activities. The contract between Zimmer and Mercy specifically said that such discounts should be disclosed.

And the ruling goes on. But to "where" is, we think, the relevant question. We could not help but note how weak the language was in remanding this case back to the original court; "...could not rule out the possibility" that Zimmer "may have violated the anti-kickback and Stark acts". And, of course, Zimmer's marketing materials clearly say that Mercy or any other hospital purchasing products must, in turn, make legal and full disclosures of its costs in claims to Medicare or any other reimbursement agency.

If anything, this ruling adds more confusion to an already difficult area. The danger, of course, is manufacturers come to believe that they don't know what the rules of the game are. Is this interpretation too narrow? If Zimmer requires its customers to make full disclosure is it also responsible to double check on that?

More broadly, are the anti-kickback rules based on clear and consistent goals, like better patient outcomes and lower implant costs? We know, they are based on combating fraud, however, that is defined and interpreted.

If an activity is truly fraudulent, someone along the line will overpay for a device. If it is in the form of a discount for purchasing products as good or potentially better for the patient, we have a hard time spotting the fraud. Even if it means that the surgeon is compelled to use a Zimmer product when they would really rather use a Stryker product, for example.

Finally, we worry that overly narrow interpretation of the anti-kickback rules will get in the way of strategies on the part of both hospitals and suppliers to lower orthopedic healthcare costs. Under some interpretations of the anti-kickback rules, for example, could a hospital manufacture or have private labeled its own implants and share the profits with its surgeons? It seems almost impossible.

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