In many business environments, agreements that serve as financial or other incentives to use one product rather than another are commonplace — even desirable — and perfectly legal. In the heavily regulated healthcare environment, such arrangements can be fraught with peril for physicians and for nonphysician participants in the healthcare industry such as device manufacturers, device distributors, pharmaceutical vendors, hospitals and health plans.
A recent lawsuit exemplifies why business transactions between physicians and nonphysician participants need to be assessed for their likely short- and long-term impact on societal goals expressed in the law and in codes of professional ethics.
A neurosurgeon practicing in Searcy, Ark., Patrick Chan, was arrested Sept. 20 by FBI agents for allegations of fraud involving the treatment of Medicare and Medicaid enrollees. Dr. Chan allegedly extracted financial consideration from medical device manufactures and/or their distributors as a condition for his use of their product(s), according to Robin Young in Orthopedics This Week; the payment apparently represented a portion of the sales representatives’ customary commission. The agreement, in place for an undisclosed period of time, reportedly resulted in Dr. Chan receiving $23,000 in payments from industry sales representatives between July and September 2006 in transactions recorded by FBI surveillance equipment. After entering a not guilty plea, Dr. Chan was freed on a $4 million bond, and the case was scheduled for trial in November.
While the individual’s guilt or innocence is to be determined by a jury, the issues raised by this case are worthy of discussion, particularly if the defendant “is not the only surgeon who can be accused of taking money as an inducement for purchasing a particular company’s products,” as asserted in Young’s article.
Legal Considerations
The behavior described in this particular case is in violation of the federal antikickback statute. The statute proscribes the offering of payment or receipt of remuneration in exchange for patient referrals or referral of other business for which payment may be made by a federal healthcare program such as Medicare and Medicaid. A reciprocal provision of the antikickback statute also prohibits the solicitation or receipt of any prohibited remuneration under similar circumstances. Thus, there is equal legal risk for both the person offering or paying and the person soliciting or receiving improper remuneration. Violations of this statute are sanctioned with cash penalties of $25,000 to $50,000 per violation and possible imprisonment. Those found guilty of violating the antikickback statute receive felony convictions, which also may result in revocation of license to practice medicine.
The law is intended to address situations in which a physician leverages his or her control of utilization decisions involving devices and technology that generate significant commissions for industry sales representatives by committing to use a vendor’s product in return for a financial consideration. Such behavior represents fraud because the physician is leveraging public assets (government purchasing power) for personal gain, and any price reduction negotiated outside the boundaries of a safe harbor transaction as delineated by the Office of the Inspector General must be returned to the government. The failure to do so, as alleged in this case, results in diversion of taxpayer money to the physician.
Because physicians are in a position of recommending medical devices to their patients, any value transferred by a manufacturer of such devices to the treating physician, with the expectation of revenue from future sales to the physician’s patients, in most circumstances represents an illegal arrangement.
Ethical Considerations
Most device manufacturers are represented by the Advanced Medical Technology Association. AdvaMed has a Code of Ethics that delineates appropriate boundaries for the transfer of value between vendors and physicians.
The AdvaMed Code of Ethics states that “Physicians should not receive anything of value with the expectation of referring or arranging for the referral of business to suppliers or providing certificates of medical necessity.”
This idea generally aligns with the American Medical Association Code of Medical Ethics, which does not explicitly address the financial arrangements between industry device manufacturers and physicians but does promulgate Council on Ethical and Judicial Affairs’ related opinions, including the following.
- Under no circumstances may physicians place their own financial interests above the welfare of their patients. The primary objective of the medical profession is to render service to humanity; reward or financial gain is a subordinate consideration. (Opinion 8.03, Conflicts of Interests: Guidelines)
- [Entities] that compensate physicians for referral of patients are engaged in fee splitting which is unethical. (Opinion 6.03, Fee Splitting: Referrals to Health Care Facilities)
- A physician should not charge or collect an illegal or excessive fee. (Opinion 6.05)
The AMA Code of Medical Ethics opinions are underpinned by the Principles of Medical Ethics, in this example principles II and III:
- A physician shall uphold the standards of professionalism, be honest in all professional interactions, and strive to report physicians deficient in character or competence, or engaging in fraud or deception, to appropriate entities. (Principle II)
- A physician shall respect the law and also recognize a responsibility to seek changes in those requirements which are contrary to the best interests of the patient. (Principle III)
It is clear that accepting money or items of value from a manufacturer or distributor of medical devices used in the care of patients enrolled in government programs is both illegal and in violation of professional codes of ethics. What remains unclear is whether surgeons taking money as an inducement for utilizing a particular product is widespread behavior.
Fraud and Abuse Incidence
The federal government won or negotiated approximately $1.47 billion in judgments and settlements of healthcare fraud cases in 2005, according to the FBI Web site. Last year U.S. Attorneys opened 935 new criminal healthcare fraud investigations in addition to 1,689 criminal investigations that were pending and convicted 523 people. The Department of Justice also opened 778 new civil healthcare fraud investigations in addition to the 1,334 civil cases that were pending and filed complaints or intervened in 266 cases. Since the Health Care Fraud and Abuse Control Program began in 1997, it has turned over $8.85 billion to the Medicare trust fund.
Based on a review of recent information, illegal kickback behavior does not seem to be widespread among physicians. Public reports by the FBI demonstrate that fraud is prevalent in Medicare and Medicaid programs, which account for some 44 percent of all healthcare fraud. Losses total more than $100 billion annually. A review of FBI press releases reveals that the majority of cases involving trials of doctors for criminal activity are cases of fraudulent claims (typically billing for services not rendered). Very few are related to monetary kickbacks for use of medical devices. Many of the indictments for illegal kickbacks in the healthcare industry actually do not involve physicians, but rather involve business people, hospital administrators and politicians.
However, in medicine there often is a separation of purchase decision-making from payment responsibility that results in little physician accountability for the cost of their choices; sales, therefore, are influenced by attributes other than price, a circumstance that is appropriate to the extent that these attributes emphasize patient care goals over cost savings. But it is shortsighted to ignore the potential for precedence of nonpatient-centric attributes such as working relationships between physicians and manufacturer’s representatives, personal convenience of working with preferred products, and other factors that hinder price competition.
Although physician professional fees are highly regulated to facilitate societal goals of access to and affordability of healthcare, medical device costs are established by free market factors. Spinal implants, for example, generate profit margins large enough to create incentives for fraudulent activity. The elevation of physician clout in such a market is offset by personal accountability and sanctions, which appear to be an effective deterrent to illegal or unethical behavior.
Moreover, a market typically is regulated in response to failure of free market forces to support societal goals. The extent to which fraud interferes with price competition and thus containment of device expenditures, the more likely government regulation becomes.
Financial relationships between physicians and nonphysician participants in the healthcare industry must be undertaken with consideration of prevailing legal, ethical and regulatory constraints designed to balance the personal gain of participating physicians with the aspirations of the profession and the goals of social policy. The law establishes the minimally acceptable behavior, professional ethics represent the best practices of behavior, and regulation is an attempt to increase the likelihood of meeting social policy goals. The critical considerations are whether such financial relationships result in fair market exchange of services for reimbursement, and whether the services at issue are consistent with professional ethics, prevailing laws and free market competition.
Patrick W. McCormick, MD, FACS, MBA, is a partner in Neurosurgical Network Inc., Toledo, Ohio. He is associate editor of the AANS Bulletin.