Medical Device Daily Executive Editor

DANA POINT, California - Memo to medical device company executives: They're out to get you.

In this case, "they" refers to government prosecutors – largely those representing the U.S. Justice Department, but as some former executives at Tyco International (Pembroke, Bermuda) can attest, state and local prosecutors also can get in on the act.

A panel discussion at the Advanced Medical Technology Association's (AdvaMed; Washington) annual meeting at the St. Regis Monarch Beach Resort & Spa focused on what device firms are – or should be – doing to comply with fraud-and-abuse laws. Compliance is something that every company, from the CEO on down, needs to be paying close attention to, because, as panelist Kevin McAnaney noted in describing the current enforcement environment: "It's bad ... and it's going to get worse."

McAnaney, who has his own law practice in Washington specializing in healthcare fraud and abuse laws, knows whereof he speaks in issuing warnings to companies in regulated industries. He served as chief of the Industry Guidance Branch in the Office of Counsel to the Office of the Inspector General (OIG) from 1997-2003, with responsibility for issuing formal guidance via advisory opinions, fraud alerts and special bulletins, and compliance guidances.

By way of supporting his "bad and getting worse" warning, he noted first that the size of corporate settlements with the government in such cases is going up, with two $1 billion settlements occurring within the past few years and those in the $300 million range becoming routine.

Secondly, "there are more and more cases," McAnaney said, with a recent twist seeing the government going after individuals within the company, along with the corporate entity itself.

And as if those two points aren't enough to earn device companies' attention, there's a third, particularly daunting point to consider: Government officials have publicly identified device companies as being in their sights.

Noting that the OIG's Compliance Program Guidance for Manufacturers "specifically identifies device companies," McAnaney added: "Subpoenas are out there." Indeed, the Wall Street Journal has reported in recent days that device firm Advanced Neuromodulation Systems (Plano, Texas) has received subpoenas in connection with just such a case.

And there are more to come, he cautioned, in part because "you're the only people left that have money that the government hasn't gone after" in its fraud and abuse campaign.

Calling the Compliance Program Guidance for Pharmaceutical Manufacturers a "roadmap" for prosecutors to follow, McAnaney said that the vulnerabilities of device firms include payments to physicians for what he characterized as "sham research projects," FDA and other regulatory violations – especially in 510(k) clearances and promotion of off-label uses of products approved for other indications – and discounts to purchasers.

Most importantly, he said, "they only have to get you on one good claim" in order to make it easier for other charges to stick.

"Device companies are extremely vulnerable on payments to physicians," McAnaney said. "They give a lot more dollars to fewer doctors than do pharma companies, and there often are situations where as few as a thousand docs can control an entire market."

Such situations, he said, can make for "very straightforward and compelling kickback cases."

The second big area for government fraud-and-abuse action against device companies is discounts, in part, McAnaney said, because "government advice in this area is confusing." But one thing is certain, he said: "Tying discounts to purchases is a flashpoint for the government."

He put in a plug for corporate compliance programs, noting, "Companies with effective compliance programs will receive better treatment."

One company that takes its compliance efforts ultra-seriously is Medrad (Indianola, Pennsylvania), whose senior vice president and CFO, Michael Howard, described the importance the maker of contrast-agent injection systems and other imaging-related equipment attaches to those programs.

Simply put, he said Medrad "view[s] compliance as good business."

At that mid-sized company, with its $343 million in annual revenues and 1,300-plus employees, separate business growth and quality improvement efforts were merged in the late 1990s into an overall Performance Excellence program.

"The key is our people," Howard said. "We give them proper training and a chance to be involved."

A proposed code of conduct was developed by employee focus groups and released in 2000. The code has continued to evolve, built in part upon AdvaMed's Code of Ethics, which the association developed as a tool to help its member companies focus on that area.

"We adopted [AdvaMed's code] lock, stock and barrel," Howard said, adding that Medrad also used the pharma-focused code of ethics promulgated by its parent company, Schering AG (Berlin, Germany), as part of its own code of conduct "pyramid."

In January of last year, Medrad formalized the compliance function at a very high level with the naming of Julio Rivera as senior vice president of corporate compliance and chief compliance officer, reporting to President and CEO John Friel.

Expanding on his earlier "compliance is good business" comment, Howard said that building a reputation for honesty "improves customer satisfaction."

At Medrad, he said, "compliance enhances our business goals [and] ... increases value" in the company.