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Sweetheart consulting contract settlements could get announced soon
Industry insiders think the DOJ investigation into surgeon consulting contracts may end soon.
A recent press report suggested a settlement may come soon between major orthopedic device makers and the U.S. Justice Department regarding inquiries into alleged sweetheart consulting agreements with surgeons. How is all that shaping up? Orthopedic and spine device analyst Matt Miksic of Morgan Stanley answers questions from Orthopedics Today.
Orthopedics Today: What is the basis for this investigation?
Matt Miksic: First a quick recap before I explain their thinking: As we know, surgeons are often paid for their time when they participate in product design teams, or train other surgeons or lecture on behalf of a manufacturer. But the nature of those contracts has been called into question.
All the major orthopedic manufacturers have been under investigation by the Justice Department (DOJ) since March 2005 with respect to those consulting agreements.
That was when DOJ subpoenas required the companies to produce documents for the period of January 2002 through March 2005 pertaining to their surgeon consulting contracts, and also professional service and other agreements the companies might have used in paying certain fees to orthopedic surgeons.
Then, back in July 2006, the DOJ requested documents related to consulting and service agreements going back even further — from January 1998 through July 2006 — as well as research and other grant agreements for the period. The DOJ also asked for copies of the agreements identified in the supplemental request on an on-going basis. Additionally, the DOJ wanted information related to company-sponsored training events, the selection process for identifying consultants and researchers, the companies’ product-design process for hip and knee implants, and even information on the companies’ orthopedic sales force.
In short, they began the investigation to find out whether and to what degree these contracts and payments may have been used inappropriately by manufacturers as a marketing tool to entice surgeons to use their implants.
OT: How have the companies responded?
Miksic: Over the past 2 to 3 years, most major orthopedic manufacturers have moved toward adopting the AdvaMed code of conduct related to ethical marketing practices, and have generally become more diligent in paying surgeons a reasonable rate for time spent on these types of activities. The question is, what will the DOJ find related to manufacturers’ earlier practices, and if any wrong-doing is found, what potential penalties or remedial actions will the government apply?
OT: What seems likely if wrongdoing is found?
Miksic: We think it will most likely be some kind of a settlement. Until recently, there has been little visibility into the progress of the investigation, or the potential timeframe for resolution. The view at Morgan Stanley is that the investigation is more likely to result in a series of fines and commitments by manufacturers to remain compliant going forward, rather than a major change in the way manufacturers and sales reps interact with surgeons.
As an example, Medtronic’s settlement with the DOJ in June of 2006 entailed a $40 million fine, a Corporate Integrity Agreement (CIA), and no admission of guilt. To put this into perspective, this was a 4- to 5-year qui tam investigation (a whistle-blowers suit), during which the government had the help of two insiders.
Another sign of what may be coming: With a regulatory filing on July 9 this year, Biomet reported that the U.S. Attorney’s Office and the company recently began discussions on a potential resolution. The company indicated that the results of a resolution remain uncertain, but could require monetary payments, cause Biomet to significantly change some of its existing business practices, and include the potential for additional governmental oversight.
Discussions are still in the preliminary stages with respect to the terms of any proposed resolution and, according to the filing, there is no assurance that Biomet will enter into a consensual resolution of this matter with the U.S. Attorney’s Office.
OT: So, is the talk of an imminent settlement likely to be true?
Miksic: The whole matter seemed off the radar screen until a May 8, 2007 article in the Newark Star Ledger reported that the investigation could potentially get settled sometime this summer, according to unidentified sources. This has sparked the speculation that the investigation could be coming to an end, despite the fact that the manufacturers involved (Zimmer, Stryker, DePuy and Biomet) remain relatively silent on the issue.
Our field checks on the subject with surgeons and distributors yielded a wide range of expectations in terms of the potential timing of a settlement, however the consensus is that discussions have ramped up and the matter could be settled over the next few months. Whether this view has been influenced by the newspaper article is difficult to say.
OT: What is the likely long-term effect of this?
Miksic: A settlement involving fines which does not interfere with the relationship between the surgeon and the sales rep would be a positive for the industry.
This would effectively eliminate the uncertainty related to this issue and would not significantly restrain the industry from continuing under the current model – which involves a high degree of service from the sales rep to the surgeon and the hospital.
Assuming that quality, safety and efficacy of implants and instruments are a given for most major manufacturers, we believe that manufacturer preference for most surgeons is heavily influenced by reliable service and a trusted relationship with the sales rep, and to a much lesser degree by any consulting agreements the surgeon may have in place with manufacturers.
For more information:
- Matt Miksic, an orthopedic and spine device analyst, can be reached at Morgan Stanley, 1585 Broadway, New York, NY 10036; 212 761-6261; e-mail: Matt.Miksic@morganstanley.com.