Government regulation and enforcement of the medtech industry became increasingly stringent in 2009. In addition, both government and industry associations encouraged greater transparency—particularly concerning financial relationships between medtech companies and referral sources, such as physicians.

These trends, along with changes in key regulatory leadership positions, suggest medtech companies can expect the regulatory bar to continue rising in 2010.

Health Care Fraud Remains Top Government Priority

The U.S. Department of Justice set new records in 2009 for fraud and abuse recoveries from the health care industry. The government secured $2.4 billion in civil settlements and judgments in cases involving fraud against the government in the fiscal year ending Sept. 30, 2009, and capped the year with a $2.3 billion criminal plea and civil settlement from Pfizer, Inc.

According to the DOJ, 83 percent of the dollars recovered in false claim cases and settlements in federal fiscal year 2008 involved health care companies. Given the size of the recoveries, health care fraud continues to be an enforcement priority. In May, the Obama administration launched the Healthcare Fraud Prevention and Enforcement Action Team (HEAT), a multi-agency task force focused on increasing coordination and prosecution of Medicare fraud.

Expansion of the False Claims Act

Without much fanfare, Congress enacted the Fraud Enforcement and Recovery Act of 2009, S. 386, (FERA) in May. FERA, however, will likely have a long-term impact on medtech companies because it extends the reach of the federal False Claims Act (FCA), the primary civil enforcement tool used to prosecute fraud against the government.

While many medtech companies do not directly bill federal government programs for their technology, Medicare does ultimately pay for medical technology that is furnished to Medicare or Medicaid beneficiaries. Under the FCA, a person who knowingly submits a false claim for payment to the government is liable for damage and significant penalties.

FERA extends the reach of the FCA by removing the requirement that a false claim be submitted to the government and attaching liability to false claims that are paid out of federal funds or with funds that are "spent or used on the Government's behalf or to advance a Government program or interest." Considering that medical technology is covered and reimbursed by federal health care programs, medtech companies may find that enforcement under the FCA may be implicated not only by their direct dealing with the federal government, but also with other entities that receive significant federal funding (potentially including health systems, hospitals, managed care plans).

More Stringent Industry Codes

The trend toward transparency was evident in changes to the ethics codes of the major medtech trade associations. Both the Advanced Medical Technology Association (AdvaMed) and the Medical Device Manufacturers Association (MDMA) revised their codes on interactions with health care professionals effective July 1, 2009.

The revised codes encourage more disclosures and impose new restrictions on a variety of arrangements between medical device manufacturers and health care professionals, a term that includes not only physicians but also other individuals in a position to make purchasing decisions for medical products. Arrangements covered by the revised codes include manufacturer support for continuing medical education, consulting services, royalty payments, meals and entertainment, sales and business meetings, product training, educational and charitable grants, and reimbursement support.

Both organizations encourage members to certify publicly to their adherence to these codes. Further, although the codes are voluntary, it has become clear that regulators, such as the Office of Inspector General, see them as the de facto minimum standards for acceptable conduct.

State Reporting Requirements

Another trend to encourage transparency was the adoption by several states of laws that restrict financial relationships between drug and device manufacturers and physicians and other health care providers. These laws require manufacturers to disclose the terms of their financial arrangements with health care providers. For example, Massachusetts and Vermont each implemented stringent versions of these laws.

The Massachusetts law prohibits a variety of payments by drug and device manufacturers to physicians, including certain travel and meal expenses, as well as expenses related to continuing medical education, scientific and educational conferences. The law also prohibits any payments of cash, including scholarships, grants or subsidies, unless paid for bona fide services and requires manufacturers to adopt compliance programs consistent with industry ethics codes. New disclosure provisions compel manufacturers to send annual reports to the state describing payments exceeding $50 that are made to physicians and other health care providers. In addition, the law mandates compliance reports that describe the company's compliance program and training for staff. A number of other states are considering similar legislation.

Federal Oversight and Disclosure

For several years, Congress has been considering federal disclosure legislation known as the Physician Payments Sunshine Act. This legislation would prohibit drug and device manufacturers from giving physicians and health care providers gifts and require disclosure of payments from drug and device manufacturers to physicians and health care providers. Companies that failed to comply with the proposed law would face significant financial penalties.

Congress has also requested detailed information about the relationships between the medtech industry and health care providers. In December, Sen. Charles Grassley sent letters to 33 major medical groups requesting detailed information about the financial support they receive from the drug and device manufacturing industry. The most recent letters follow earlier requests from Grassley for information concerning the relationship between industry and research physicians, academic medical centers and medical journals.

New Leadership at FDA

In March, the Obama administration nominated new leadership for the Food and Drug Administration. Margaret Hamburg, M.D., who previously served as New York City's health commissioner, was nominated to serve as FDA commissioner. Joshua M. Sharfstein, M.D., was nominated to be chief deputy commissioner.

When the nomination was announced, commentators generally praised Hamburg's experience in managing complex organizations and as a scientist with a strong public health and research background. Scharfstein's professional history includes working as an advisor to Rep. Henry Waxman, a strong advocate for consumer protections and sometimes critic of FDA. Although the full impact of these appointments was not clear in 2009, these new leaders are expected to emphasize product safety and industry oversight.

Proposed Changes to 510(k) Process

The FDA announced in September that it had commissioned the Institute of Medicine to study the 510(k) review process, the agency's premarket notification program used to review and clear certain medical devices that are substantially equivalent to devices already cleared for marketing.

The Institute of Medicine is charged with reviewing whether this approval process optimally protects patients and innovation—and recommending legislative, regulatory and administrative changes it deems appropriate.

The FDA also announced an internal review in its Center for Devices and Radiological Health to evaluate and improve the consistency of FDA decision making in the 510(k) process. Historically, the 510(k) process has been seen as less demanding than the premarket approval process, however, the 510(k) process has continued to become more stringent and exhaustive, particularly in the last several years. Medtech companies can expect further tightening of the 510(k) process for new devices in the coming year.

Increased Enforcement of Off-label Marketing

For several years now, the government has been bootstrapping alleged violations of the FDA's off-label restrictions into violations of the FCA. The settlements the government has obtained are for significant amounts of money and are not limited to pharmaceutical companies. In two separate cases, medical device companies Atricure Inc. and Endoscopic Technologies Inc. paid $3.8 million and $1.4 million, respectively, to settle allegations related to the off-label marketing of surgical ablation devices. The government theory in these cases appears to be frighteningly simple: if a manufacturer violates the FDA's prohibition of off-label marketing and the manufacturer's products are reimbursed by Medicare and Medicaid, then the violation of the FDA Act is actionable under the FCA.

The government's strategies to determine whether a manufacturer engaged in off-label marketing, however, are anything but simple. For example, the government has claimed that the provision of samples to physicians who are not in the correct specialty for on-label use (but who are in a specialty that commonly uses a drug for off-label purposes) is evidence of off-label marketing. The bottom line is that medtech companies whose products can be used in an off-label manner must be extremely careful about potential off-label marketing.