March 31, 2003

Medical Device Companies Next Target for Major Federal Fraud Enforcement

Holland & Knight Alert
Christopher A. Myers | Michael R. Manthei

Medical device company executives and boards of directors should take immediate steps to examine their company’s current marketing, continuing medical education, discount pricing and consultant arrangements with physicians, hospitals and others in a position to refer business.

Federal prosecutors in Illinois recently unsealed the first of what they promise will be many indictments alleging hundreds of millions of dollars in Medicare, mail and wire fraud by medical device companies. The indictments arise out of what prosecutors described as the largest health care sting operation in U.S. history. The indictments allege that device company executives and sales staff encouraged and instructed customers on how to submit allegedly fraudulent Medicare claims.

In recent years, government enforcement actions, bolstered by “whistleblower” lawsuits under the qui tam provisions of the Federal False Claims Act have focused on the pharmaceutical industry. With the unsealing of this indictment, federal prosecutors have signaled an apparent expansion of those efforts to include medical device companies. To make this point absolutely clear, Associate U.S. Attorney for the Eastern District of Pennsylvania, James Sheehan, recently told attendees at a health care conference that device companies were “worse than” pharmaceutical companies. Sheehan specifically put device companies on notice that they had become targets of the government’s enforcement machine.

Enforcement Likely to Reflect Concerns/Strategies Developed in Pharmaceutical Industry Investigations

In October 2001, a settlement was announced between the federal government and TAP Pharmaceutical Products, Inc. TAP agreed to pay $875 million, the largest such settlement in history, to resolve criminal and civil charges based on allegedly fraudulent drug pricing and marketing conduct. The settlement followed a four-year investigation by the government into TAP’s marketing practices.

The TAP investigation and recent guidance from the Office of the Inspector General of the Department of Health and Human Services (OIG) (see Draft OIG Compliance Program Guidance for Pharmaceutical Manufacturers, 67 Fed. Reg. 62057 (Oct. 3, 2002)), identify four “major risk areas” for device companies: (1) integrity of data used to establish government reimbursement; (2) relationships with purchasers – discounts and other terms of sale; (3) relationships with physicians and other health care professionals; and (4) other remuneration, including any “arrangements that offer benefits, directly or indirectly, to physicians or others in a position to generate or influence referrals.” These would include consulting arrangements and continuing medical education programs.

Like the pharmaceutical companies before them, device companies can no longer rely on the fact that they do not directly bill the Medicare or Medicaid programs. We expect more investigations and possible indictments in the months to follow. Rigorous and effective compliance programs are the best method for avoiding investigations and prosecution, and for detecting and correcting potential problems. Waiting for the government to come calling is a very risky option.

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