Artificial-Joint Makers Settle Kickback Case

By BARNABY J. FEDER
Four of the nation’s biggest makers of artificial hips and knees have agreed to pay a total of $310 million in penalties to settle federal accusations that they used fake consulting agreements and other tactics to get surgeons to use their products.
Under the settlements, which were announced yesterday by the United States attorney in Newark, the four companies were charged with criminal conspiracy to violate anti-kickback laws. But they will not be prosecuted if they follow new compliance procedures under federal monitoring for 18 months.
“This industry routinely violated anti-kickback statutes by paying physicians for the purpose of exclusively using their products,” said Christopher J. Christie, the United States attorney in Newark. “Prior to our investigation, many orthopedic surgeons in this country made decisions predicated on how much money they could make — choosing which device to implant by going to the highest bidder.”
The fines will settle potential civil charges against the companies and preserve their ability to receive federal Medicare reimbursements. None of the companies admitted any wrongdoing.
A fifth big maker of orthopedic devices, Stryker Orthopedics, accepted federal supervision for 18 months. But the Justice Department agreed not to file criminal charges because Stryker was the first company to cooperate in the investigation, according to the government. The company admitted no wrongdoing.
Stryker Orthopedics, which is based in Mahwah, N.J., and is a unit of the Stryker Corporation of Kalamazoo, Mich., did not reach any settlement of potential civil charges. But Dean Bergy, Stryker’s chief financial officer, said the company was not aware of anything in connection with the investigation that might lead to civil charges or any restriction on Medicare reimbursements.
The other companies involved included Biomet; the DePuy Orthopaedics unit of Johnson & Johnson; and Zimmer Holdings, all based in Warsaw, Ind. The fourth was Smith & Nephew, a British company whose orthopedics subsidiary has headquarters in Memphis.
The government said the five companies represented 95 percent of the hip and knee implant market.
Although no doctors were cited in the settlements, the investigation is continuing, Mr. Christie said.
The inquiry began in March 2005 when Mr. Christie’s office sent subpoenas to the companies, requesting documents related to their consulting and “professional service” agreements with doctors from 2002 on. Later, the inquiry expanded backward into relationships with doctors starting in the late 1990s and included matters like the terms of research grants. Wall Street learned the investigation had reached the stage of preliminary settlement negotiations in a Biomet filing with the Securities and Exchange Commission in July.
Relationships between orthopedics companies and their customers are among the most complicated — and potentially conflicted — in health care. In contrast to drugs, which are typically developed in company laboratories, many orthopedic devices and related tools originate from inventions by doctors, who often retain a financial stake in their market success.
Even when devices are invented by companies, they are often extensively modified during development in consultation with leading doctors, whom the device companies then turn to for help in commercial application of the products and training other doctors to use them.
The costs of the devices are usually charged to a hospital or clinic rather than the surgeons, even though the surgeons have control over which are used. And while some orthopedic devices are highly specialized, others are mature products that vary little from company to company.
As a result, as surgeons select among devices, companies have strong incentive to court them with paid consulting agreements or other financial inducements.
The settlements allow the companies to continue to enter into product development agreements with doctors that reward them with royalties based on future sales. But the companies will be required to pay for consulting and other services on an hourly basis, with a cap of $500 an hour. Zimmer, the market leader in hips and knees, is paying $169.5 million to settle the civil charges. “Importantly, the resolution agreements clearly define how we and our key competitors will interact with physician collaborators, thereby establishing a standard of conduct across the industry,” said David Dvorak, Zimmer’s president and chief executive.
DePuy, which is paying $84.7 million, said in a news release that it “supports this agreement and the government’s efforts to further positive change throughout the industry.”
Smith & Nephew, paying $28.9 million, issued a statement from David Illingworth, its chief executive. “We are satisfied that the industrywide compliance program made uniform by this settlement will ensure continued, appropriate use of consultants,” Mr. Illingworth said.
Shares of all four public companies rose after the settlement announcement.
Biomet, which was fined $26.9 million, was acquired by private equity investors in an $11.4 billion deal that closed Tuesday. It no longer trades as a public stock.
“The dollar figures were a little higher than expected, but this is being viewed as a speeding ticket for these companies,” said Robin Young, a consultant and publisher of Orthopedics This Week, a newsletter.
Mr. Young said he happened to be running a panel at a conference in Warsaw on innovations in orthopedics when news of the settlement arrived. He said one theme in the ensuing discussion was that the government might now turn attention to smaller orthopedics companies. Those companies have been taking market share from the industry leaders and often have more extensive financial relationships with their customers than the industry leaders. Government scrutiny of those relationships could make it harder to snatch business from the bigger companies.