Subpoenas served to Guidant, Medtronic and St. Jude Medical by the U.S. Department of Justice appear to be investigating potential improper inducements to increase sales of pacemakers and ICDs.

On Oct. 25, the cardiac rhythm management device firms disclosed that they had received subpoenas from the U.S attorney's office in Boston.

The subpoenas, issued under the Health Insurance Portability & Accountability Act of 1996, request documents related to general business practices associated with pacemakers, ICDs and component products.

Federal investigators will review documents dating back to January 2000, according to St. Jude.

Medtronic's statement said that requested materials relate to the "provision of benefit, if any, to persons in a position to recommend purchases of such devices and the company's training and compliance materials relating to the fraud and abuse and anti-kickback statutes."

In addition, Guidant received a separate subpoena from the U.S attorney's office in Minneapolis seeking information related to the firm's Ventak Prizm 2 and Contak Renewal and Renewal 2 devices.

The devices were recalled this past summer, and Guidant recently issued an additional safety notice for the Renewal line of ICDs (¹ Also see "Regulatory News In Brief" - Medtech Insight, 17 October, 2005., p. 14).

All three firms said they plan to cooperate with the investigations.

Significance Of Using The HIPAA Statute

Some industry lawyers speculate that the probe was filed under the fraud and abuse section of the HIPAA statute because of its broader reach compared with the False Claims Act.

The HIPAA provisions apply to private health plans as well as all government payors, attorney John Reiss, PhD, explained in an interview.

HIPAA "allows the government to actually make a bigger money recovery" because any possible lawsuit is "now going to be on behalf of the health plans, as well as the government programs," Reiss said.

Shannon Hartsfield, a partner in Holland & Knight's Tallahassee office, agreed. "This is most likely a subpoena aimed at trying to investigate potential fraud against private insurance companies and other payors," she said.

Although the nature and scope of violations being investigated is unknown, Reiss, a partner in the Philadelphia office of the law firm Saul Ewing, concurred with widespread speculation that the investigation might specifically be looking into improper relationships between device manufacturers and physicians.

Potential kickbacks offered to healthcare providers, including direct payments in exchange for using a product or payments above fair market value for conducting training programs, are among the actions that could be cited as violations under the HIPAA provisions.

Meanwhile, several industry analysts point to articles in the Sept. 27 issues of The Wall Street Journal and The New York Times stating that Guidant was paying physicians to complete surveys. Medtronic and St. Jude also reported that they compensated physicians for participating in device evaluation programs.

However, all three firms maintain that the payments were appropriate for the amount of time the doctors spent.

Reiss said the government could have "a pretty good case" if the companies cannot produce documentation showing that the surveys and evaluations were actually completed, that the results were returned to the companies, and that the payments were reasonable for the work done. On the other hand, if the firms are able to produce proper records, "I don't think the government is going to have a case," he said.

In general, he said, "the government's position is, 'If it's not documented and there's no evidence that any report ever got back to the company, clearly it was a kickback.'" He added: "It's pretty hard to argue against that position."

Device Industry Enforcement Action On The Rise

The cardiac rhythm management subpoenas appear to mark the next segment of the medical device industry being targeted by government anti-fraud efforts.

The action follows a similar probe by the U.S. attorney's office in Newark, N.J. earlier this year, in which the five largest orthopedic hip and knee players were targeted (² Also see "DoJ Probe Into Orthopedic Industry Could Rattle Upward Pricing Trend" - Medtech Insight, 4 April, 2005., p. 3).

Those subpoenas requested all consulting contracts and certain other agreements dating back to 2002 that involved orthopedic surgeons using the firms' joint reconstruction products. The investigation may have been sparked by government concerns over price increases for high-end orthopedic devices.

In February, Advanced Neuromodulation Systems announced that the HHS Inspector General was investigating its sales and marketing, reimbursement, Medicare and Medicaid billing and certain other business practices (³ 'The Gray Sheet' Feb. 21, 2005, In Brief).

The string of recent probes investigating financial relationships between device manufacturers and customers appears to have been in the works for the last several years.

In late 2002, U.S. District Attorney James Sheehan predicted heightened scrutiny of manufacturer interactions with healthcare professionals under the federal anti-kickback statute.

Negative Publicity Could Have Contributed To Probe

However, the most recent inquiry may have been spurred by the slew of Guidant pacemaker and ICD recalls earlier this year and the resulting negative publicity on device safety.

During a presentation at the Cleveland Clinic's Medical Innovation Summit Oct. 25, AdvaMed President Steve Ubl alluded to the negative media attention; however, he downplayed the significance of the furor.

"This is news in the classic sense, but it's not really," Ubl asserted. "Industry has worked closely with FDA on postmarket issues over the years, and FDA has broad postmarket authority today."

He added that "there is a need for continual fine-tuning," including a need for better definition of recalls, better tracking and reporting on condition-of-approval studies and standardized communications. Ubl noted that AdvaMed is working on these issues with FDA and Hill leaders.

Nevertheless, he stated that legislation is not required. "FDA has the tools it needs to effectively regulate the industry in a postmarket sense. I think we have a shared interest in avoiding what happened on the drug side, [with] legislative intervention and creation of a safety board."

He directed industry attention to AdvaMed's voluntary code of ethics, which offers guidance to device manufacturers on the appropriate parameters for interactions with healthcare professionals (⁴ Also see "AdvaMed Ethics Code Compliance Starts At The Top – Attorney D’Emanuele" - Medtech Insight, 20 June, 2005., p. 14).

The AdvaMed code "is one of the most important things AdvaMed has done in recent years," he said.

"We are very committed to our voluntary code of conduct, and we are going to be ratcheting up our communications efforts to promote the code in the weeks ahead with major medical meetings," Ubl said.

Each of the subpoenaed cardiac rhythm management firms claims to follow AdvaMed's code or a similarly structured internal code. Nevertheless, the code itself does not protect the firms from potential charges associated with the DoJ investigation.

Will J&J Play The Subpoena Card With Guidant?

Meanwhile, the subpoenas may further jeopardize the planned merger between Johnson & Johnson and Guidant.

After Guidant's rough summer, J&J Vice Chairman & CFO Robert Daretta hinted during an Oct. 18 conference call that the firm may try to renegotiate the terms of its proposed $24 bil. deal with Guidant (⁵ Also see "J&J Ups Negotiation Dance With Guidant To Get Reduced Price After Recalls" - Medtech Insight, 24 October, 2005., p. 3).

Guidant's stock declined 3.5%, closing at $62.45 on Oct. 26 after the subpoenas were announced - the lowest the stock has been this year.

Lehman Brothers analyst Bob Hopkins conjectured that the Guidant subpoenas might give J&J more leverage in reworking the terms of the merger.

However, Piper Jaffray analyst Thom Gunderson predicted that Guidant's subpoena is unlikely to significantly alter the terms of the deal. He noted that although orthopedic firms' stocks dropped 5%-10% on the news of the subpoenas in March, all five firms - including J&J's DePuy unit - recovered from the declines within a few weeks.

Cardiac Rhythm Management Firms Targeted By DoJ Fraud Investigation

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