RICHARD G. COWART

In September, it was announced that the five largest orthopedic device manufacturers had signed deferred prosecution agreements with the United States Department of Justice and agreed to pay over $350 million in fines. In October, Bristol- Myers Squibb announced a settlement with the government and the payment of a fine of over $500 million. In both cases, the marketing practices of the companies to physicians were fundamental issues. A close review of the settlement terms indicate the prospect of a new day for the marketing rules that will define the relationship between medical device/pharmaceutical companies and physicians. Let’s take a look at the orthopedic device settlement as an example.

In the orthopedic device settlement, each of Biomet, DePuy, Zimmer, Smith & Nephew and Stryker agreed to a federal monitor to review and approve all of their market practices with physicians. The practices subject to approval include consulting agreements, royalty agreements, educational training, and contributions to charitable foundations. The federal monitor will be in place for 18 months for all companies and an additional five years for four of the five (Stryker avoided the five year add-on by being the first to cooperate in the early stages of the investigation).

In connection with consulting agreements, the guidelines are now that all consulting agreements must be hourly based at fair market value. The agreement states that fair market value cannot exceed $500 per hour. There is no inflation factor stated in the agreement. The consulting services must be supported by written contracts and time records, which have been approved and certified by the company.

In connection with product development/royalty agreements, the guidelines regulate paying physicians who participate in the product development team. The services may be hourly, or if intellectual property is developed, the payments may be in the form of royalties. However, the royalty payments will be aggregating for all physicians. The aggregate for all physician payments must be fair market value for similar royalty arrangements. Expect this to be a particularly interesting and problematic area as the companies come to grip with fair market value, the number of participants and the allocation of royalties among the participating physicians.

In connection with educational services, the companies will adhere to the Advanced Code of Ethics on Interactions. Educational services must be purely educational in nature, and must be performed at settings that are conducive for educational training (expect a decline in resort venues). The payment to the physician must be limited to expense reimbursement and can only cover the physician (no family, no staff).

Regarding charitable foundations, the investigation determined that a number of the leading physicians had established private foundations to pursue personal endeavors. Those endeavors might have included research and travel. In some cases, the foundations were constructed to reimburse uncompensated care to the physician or practice. Expect the contributions to foundations of physicians and physician groups to be significantly curtailed in light of the federal monitoring and transparency.

For large international companies to be playing “mother may I” with the federal government for the next 6 ½ years suggests a very static state to their marketing programs. Additionally, the settlement terms require an element of transparency. The companies must post on their web site the physician relationships and the amount of money paid. Of all the terms, this is likely to generate the most interest and competitive reaction within the industry.
A few years ago, the government compliance efforts rotated from hospitals and health systems to medical device and major pharmaceutical companies. Expect this pattern to continue and the terms in this settlement to be repeated in future settlements.



Richard G. Cowart is chairman of the health law/public policy department of Baker, Donelson, Bearman, Caldwell & Berkowitz. He can be reached via dcowart@bakerdonelson.com.



November 2007