There has been aggressive momentum on the side of federal medical device anti-corruption enforcers, in particular in the Northeast.
Maureen Ruane and Scott McBride, Lowenstein SandlerThere are more questions than answers on what a new and unconventional administration in the White House will do in 2017 in many areas, no less so in medical device enforcement. One thing is certain: whatever the course, it will need to contend with aggressive momentum on the side of federal anti-corruption enforcers, in particular in the Northeast. Federal investigations and prosecutions for violations of the federal Anti- Kickback Statute (AKS), the Foreign Corrupt Practices Act (FCPA), and other anti-bribery statutes have been energetic as the U.S. Justice Dept. added resources to these efforts in recent years and enjoyed a measure of success. In international markets, device makers are compelled to contend with third-party intermediaries; supervising and controlling those entities will perpetually be a challenge. Also, as the health care industry evolves from a fee-for-service model into a more outcomes-based model, creative arrangements among providers will increase anti-bribery scrutiny. Corruption enforcement is likely to remain robust.
On the other hand, it remains to be seen whether a series of setbacks for the government in its off-label enforcement efforts—with both the courts and juries—could spell a less aggressive posture on this front in the future. At the least, companies in the government’s crosshairs have demonstrated that they are more emboldened than ever by these developments to fight allegations of illicit off-label marketing.
The Justice Dept. added resources to combat commercial corruption, which has and may inevitably continue to have an impact on the medical device industry. In November 2015, the agency announced it was increasing the size of its Fraud Section’s FCPA Unit by 50%. The FBI in turn established three new squads devoted to FCPA enforcement. Shortly thereafter, on April 5, 2016, the Justice Dept. announced a new FCPA Pilot Program, “designed to motivate companies to voluntarily self-disclose FCPA-related misconduct, fully cooperate with the Fraud Section, and, where appropriate, remediate flaws in their controls and compliance programs.” The Pilot Program allows self-disclosing companies to avoid prosecution altogether. In cases which the department determines warrant criminal prosecution of a self-disclosingg company, it will grant a fine reduction of up to 50% of the bottom of the applicable range under U.S. sentencing guidelines, and will further decline imposition of a monitor. Taken as a whole, these initiatives are plainly intended to dramatically increase the volume of FCPA matters.
Enforcement of the federal AKS will also likely remain a priority. The federal government has viewed its efforts to combat healthcare fraud as a tremendous return on investment – indeed, the Justice Dept. and the U.S. Health & Human Services Dept. have boasted publicly that for every dollar they spend on healthcare fraud investigations, they recover nearly $8 for taxpayers – and its AKS and other anti-bribery investigations should continue unabated as a result. The investigators pursuing these cases have also benefited from the Affordable Care Act, which relaxed the criminal intent standard to make AKS cases easier to prosecute. It also created the Sunshine Act, which requires healthcare companies to disclose most of their payments to physicians. The Sunshine Act has resulted in negative publicity for the industry and enabled the federal government to use the payment data to investigate corruption more effectively.
A recent example of the Justice Dept.’s success in anti-corruption is the prosecution of Olympus Corp.’s U.S. and Latin American units, announced March 1, 2016. Olympus, the largest U.S. distributor of endoscopes and related equipment, agreed to pay a staggering $646 million to resolve criminal and civil probes into illegal kickbacks and bribes to hospitals and doctors. The Justice Dept. hailed the settlement as the largest ever for violations of the AKS. Meanwhile, a portion of the company’s payout, $22.8 million, resolved similar bribery allegations in Latin America. The massive settlement was the result of an investigation that revealed Olympus made payments in various forms – research grants, consulting arrangements, luxury trips, and free equipment – to induce influential doctors to order more Olympus devices at prominent hospitals and to keep competitors’ equipment out of those hospitals.
Were it not for the ultimate outcome in the matter, Olympus’ marketing strategy appeared to have been successful. After one key doctor took a trip to Japan and received a grant from Olympus, an Olympus executive sent an email that joyfully declared, “We have received all of the orders expected and have kept [a competitor] completely out of the [hospital] system. Hooray!”
As U.S. Attorney for New Jersey Paul Fishman stated, “Kickbacks are illegal because they taint buying decisions.”
“Doctors and hospitals should decide to purchase medical devices based solely on legitimate considerations, like quality and price,” not based on “free trips, free equipment, consulting agreements or research grant money,” Fishman wrote.
Another recent investigation brought by the Justice Dept. was a parallel criminal and civil qui tam case alleging that Hollister Inc. and other manufacturers of continence and ostomy care products paid unlawful kickbacks to medical device distributors such as Byram Healthcare Centers, aiming to have the distributors conduct promotional campaigns designed to refer patients to the manufacturers’ own products. Hollister settled with the Justice Dept., agreeing to pay $11.4 million to resolve the matter, and Byram Healthcare Centers agreed to pay $9.3 million. U.S. Attorney for Massachusetts Carmen Ortiz echoed the Justice Dept.’s dedication to these cases, stating, “We are committed to rooting out commercial bribery, especially in the healthcare industry, where the payment of kickbacks erodes patients’ trust in the quality of their medical care.”
Ortiz said the “unlawful cash incentives also threaten the integrity of the healthcare system and siphon taxpayer dollars from our nation’s healthcare programs.”
But not all of the manufacturers and distributors targeted in Massachusetts agreed to resolve the matter by settling with the government. CCS Medical, one of the distributors alleged to have received kickbacks, filed a motion to dismiss the qui tam complaint. CCS argued that the discounts were permissible under a recognized safe harbor within the AKS.
The district court initially ruled in CCS’s favor and dismissed the complaint. However, the qui tam relators filed a motion for reconsideration, and the Justice Dept., highlighting its anti-corruption commitment, filed a statement of interest urging the judge to revisit the decision. The relators and the Justice Dept. had both argued that the AKS safe harbor for discounts does not shield an arrangement in which the continence and ostomy manufacturer gave price reductions to CCS. Instead, they argued that because the price reductions were contingent on CCS’s “conversion” of patients to the given manufacturer’s products, they were kickbacks and not mere discounts. The district court granted relators’ motion for reconsideration August 24, 2016, prompting CCS to file its own motion for reconsideration and also ask the court to certify the ruling for interlocutory appeal to the First Circuit if the court does not reconsider its most recent determination. Additionally, on September 23, 2016, the Pharmaceutical Research & Manufacturers of America trade association filed an amicus brief supporting CCS’s motion, arguing that the government was unconstitutionally regulating “through a statement of interest in litigation.” The motions are pending.
The Justice Dept. also devoted considerable resources to offlabel enforcement. For example, the bureau’s FCA efforts – which frequently target illegal off-label marketing in the medical device industry – were reinforced in recent years. In September 2014, the Justice Dept. announced it was “redoubl[ing its] efforts to work alongside” qui tam relators, creating a new protocol where new complaints are immediately shared by the Civil Division and Criminal Division to determine whether a parallel criminal investigation is in order. According to the Justice Dept., it recovered more than $18.3 billion in FCA cases involving fraud against federal health care programs. Much of this comes from U.S. attorneys in the Northeast, including New Jersey, which has reportedly collected more than $1.3 billion since 2010.
The Justice Dept. also obtained a number of notable settlements in the off-label space, but a series of recent letdowns has signaled the courts’ increasing willingness to protect drug and device makers’ First Amendment right to truthful and non-misleading statements about potential off-label uses of their products. These setbacks may also signal a decreased willingness of juries to convict individuals for engaging in such behavior.
The Acclarent case is illustrative of the government’s challenges in off-label enforcement. Acclarent, a California-based medical device manufacturer, was purchased by Johnson & Johnson in 2010. In 2011, an Acclarent saleswoman filed a qui tam complaint alleging that the company marketed its Relieva Stratus microflow spacer off-label as a steroid delivery product, notwithstanding the FDA’s refusal to approve that use. The resulting federal investigation led, in April 2013, to federal indictments for two former Acclarent executives, ex-CEO William Facteau and ex-sales vice president Patrick Fabian. Facteau and Fabian were alleged to have carried on the off-label scheme.
While Johnson & Johnson ultimately settled its case with the Justice Dept., agreeing to pay $18 million to resolve the matter, Facteau and Fabian went to trial. After six weeks, a federal jury convicted the pair only of misdemeanor misbranding counts, acquitting them of all felony charges involving willful and fraudulent conduct. The jury appeared to reject the government’s allegation that the defendants conspired to conceal from the FDA their true intent to market the spacer as a steroid delivery device. Worse yet for the government, the jury also may have convicted on the misdemeanor counts solely as a result of the trial judge’s instruction allowing use of the controversial Park Doctrine, which provides for strict liability for corporate executives with authority to prevent violations, even if they had no knowledge of the violations. The defendants appealed their convictions, arguing that, by virtue of their acquittals on the fraud counts, their misdemeanor convictions were based solely on truthful, non-misleading speech about the Stratus’ off-label use. It remains to be seen whether or to what extent the First Circuit will join the Second Circuit’s Caronia holding that such speech cannot form the basis of a prosecution.
Another setback for the government was the case against Vascular Solutions and its CEO Howard Root . The Justice Dept. indicted Root and his company in the Western District of Texas in 2014 for conspiring to market Vascular Solutions’ Vari-Lase Short Kit, a laser energy to treat varicose veins, for unapproved uses. The government argued that Root’s sales force had been coached to market the kit as a treatment for deep veins, even though the FDA had approved its use only for veins near the skin’s surface. After being instructed by the trial judge that it is not a crime to provide truthful, nonmisleading information to doctors about unapproved product uses, the jury acquitted Root and Vascular Solutions of all charges. Summary The federal government’s aggressive anti-corruption efforts in the medical device industry have a great deal of momentum behind them. Enforcement agencies have publicly committed to these efforts through their words and backed up those words with increased resources and impressive resolutions. Meantime, off-label enforcement in the medical device area will probably fade significantly as healthcare companies continue to challenge such allegations in court, and the federal government reassesses its posture given the recent success of some of those courtroom challenges under a new administration.
The federal government’s aggressive anti-corruption efforts in the medical device industry have a great deal of momentum behind them. Enforcement agencies have publicly committed to these efforts through their words and backed up those words with increased resources and impressive resolutions. Meantime, off-label enforcement in the medical device area will probably fade significantly as healthcare companies continue to challenge such allegations in court, and the federal government reassesses its posture given the recent success of some of those courtroom challenges under a new administration.