Abelson, Reed. "Possible Conflicts for Doctors are Seen on Medical Devices," New York

 

Abelson, Reed. "Possible Conflicts for Doctors are Seen on Medical Devices," New York
Times, 22 September 2005, pp. 1, C6.

As an assistant professor at the Louisiana State University Health Sciences Center in Shreveport,
Dr. William Overdyke oversaw operations to replace worn-down knees. From 2000 through the
middle of 2001, whenever a patient needed an artificial knee, he or the residents he supervised
implanted one made by Sulzer Medical, state documents show.

Dr. Overdyke has said that he used the Sulzer implant because it was the best available. But
Louisiana state officials say he had another incentive as well: the $175,000 a year that he stood to
make from contracts with the company. The contracts called for him to consult on product design
and "promote and educate other surgeons" on the virtues of Sulzer products.

Before signing with Sulzer, Dr. Overdyke said, he had never used the company's artificial knee.
Earlier he had a contract with another company, Wright Medical. And during that time, he and
his residents largely used Wright's artificial knees.

Dr. Overdyke paid $10,000 in fines after investigators determined that his consulting
arrangements with Sulzer were an improper conflict of interest under the state ethics code.
Hospital officials said they had been unaware of his relationship with the company.

Yet in a variety of ways, many doctors have unusually close, if largely unseen, ties to device
makers. And those relationships are a central issue on an emerging battleground in the health care
wars: the upward cost spiral of implantable medical devices.

Countless patients have been helped by these new technologies - artificial knees that allow aging
weekend athletes to play on, stents that help keep once-clogged arteries clear, defibrillators that
correct potentially fatal heart arrhythmias.

But the rising cost of the devices and the relationships between doctors and manufacturers are
causing profound concern among hospital executives, health care economists and other experts,
mirroring recent reactions to the way pharmaceuticals are marketed. In the last two years,
Medicare payments to hospitals for implant surgery have risen about 40 percent, from $10 billion
to $14 billion, according to an analysis of Medicare records. And federal prosecutors have begun
to investigate some device makers' deals with doctors, trying to determine if they amount to
payoffs for using a product.

Among the loudest objectors have been hospitals, which buy the devices and most immediately
feel the pain. But health care economists stress that consumers and insurers are also hurt by the
rising cost of medical technology, including implantable devices.

"We're paying for it, but no one can see it," said Paul Ginsburg, president of the Center for
Studying Health System Change, a research group in Washington.

The device companies occupy a privileged corner of the medical economy, where many of the
checks and balances that have come to govern health care costs simply do not apply. Hospital
officials and health care experts say the companies have used their relationships with doctors and
a climate of secrecy to ensure that their products remain unusually profitable.

Central to this equation are the surgeons, who typically decide which devices are used yet bear no
financial burden for their costs. Hospitals, which do bear that burden, have been reluctant to
challenge doctors about their choices and are mostly in the dark about the inner workings of the
marketplace. One large device company, Guidant, has even sued two hospital consultants
because they divulged pricing information to competing hospitals.

Prices paid by hospitals vary widely, yet information is so scarce that hospitals say they are often
unaware if they are overpaying, and impotent to negotiate a better price. Many hospital
executives say some orthopedic and cardiovascular operations, once a major profit center, have
become a marginal, even money-losing, endeavor.

Nor do the hospitals generally know which of their doctors have relationships with the device
companies and if so, the details of those arrangements. In addition to six-figure consulting
agreements that also pay doctors to promote a given device, companies pay royalties on new
devices, send doctors to educational conferences, sponsor fellowships and provide unrestricted
grants.

The device companies' trade association, AdvaMed, says the industry is highly competitive and
spends heavily on innovation. As for the consulting contracts and other benefits, the companies
and doctors say they are intended not to buy loyalty but to pay for research and training and for
the help doctors provide in designing these sophisticated devices.

Two years ago, AdvaMed approved a voluntary code of ethics that recommends limiting the
value of company gifts to under $100 and hiring consulting doctors for their expertise, rather than
their abilities to generate the most business.

"If there have been inappropriate payments made, I think companies regret that, and that's why
they have been aggressive in implementing this code of ethics," said Blair Childs, an AdvaMed
executive vice president.

The president of the American Academy of Orthopedic Surgeons, Dr. Stuart L. Weinstein, says
that since doctors are responsible for most of the innovations in medical devices, "There have to
be these close relationships between surgeons and industry." What is important, he adds, is that
these relationships are aboveboard and disclosed to the patient, and that the doctor chooses the
best device for that patient.

In March, the United States attorney in Newark issued subpoenas to five orthopedic implant
companies, asking them about their consulting agreements and other arrangements with doctors.
"A number of investigations are under way," said Lewis Morris, chief counsel to the inspector
general for the Department of Health and Human Services.

The question for investigators, he said, is whether the companies and the doctors have crossed a
line from legitimate compensation for valuable services rendered in the development of the
devices to unethical payoffs for securing competitive advantage in a crowded marketplace.

"The potential for inappropriately steering medical decisions is always at play, and there is
always the risk that doctors will prescribe a particular device because of their own financial
interest and not the interest of the patient," Mr. Morris said.

A Potential Conflict

In the modern health care marketplace, prices and fees are increasingly determined by
negotiation. Yet when it comes to implantable devices, that dynamic often barely exists. Even
though the Lee Memorial Health System in Florida is one of the nation's busiest joint
replacement centers, James R. Nathan, the system's chief executive, says he has little leverage
negotiating discounts. The marketplace, he says, "doesn't work."

Part of the blame lies with the hospitals, which often seem to lack the financial sophistication
needed to negotiate lower prices for these devices. While hospitals have been successful at
cutting costs for standard supplies like light bulbs and bandages, many hospitals' accounting
systems are so inadequate that they have little idea what they actually pay for more complex
devices, said Dr. John Cherf, a knee surgeon with a business degree who consults with hospitals
and health care businesses.

With manufacturers guarding pricing information closely, the price of a given device can vary by
thousands of dollars from one hospital to the next. One hospital in the New York area, for
example, paid $8,000 more for a DePuy hip than a competitor, according to a recent survey by
the Greater New York Hospital Association.

"It's almost been a black box around it, what people pay," said Timothy Glennon, an executive
with the association, which is now examining prices for cardiac implants.

Prices are soaring. A defibrillator now runs as much as $35,000; the price of the latest artificial
knee approaches $10,000. A single screw used in spinal surgery can cost as much as $1,600. In
all, in the last two years alone, spending on implant surgeries by Medicare, the federal insurer for
the elderly, increased twice as fast as the program's spending over all, according to the Medicare
analysis by Orthopedic Network News, an industry newsletter.

Rising prices have made device companies unusually profitable: according to an analysis by
Medicare, they enjoyed net profit margins of nearly 20 percent at the end of 2003, more than
twice the average for the Standard & Poor's index of 500 companies.

The hospitals, though, say they are finding themselves squeezed, as rising costs outstrip any
increases in reimbursement. While the average price paid for a hip or knee implant has climbed
by about two thirds since 1995, according to estimates by Orthopedic Network News,
reimbursement from Medicare, which pays for the bulk of these operations, has not increased.

Hospital officials also argue that the constant introduction of new, and more expensive, models
can have less to do with innovation than with the appearance of innovation. While some higher
prices are a result of clear improvements, like a drug-coated stent that helps reduce scarring that
can block an artery, hospitals say many new models offer no significant upgrades and sometimes
are too sophisticated for patients who get them.

Dr. Calvin Weisberger, a cardiologist for the California health plan Kaiser Permanente, says an
enhanced single chamber defibrillator costs $5,000 to $8,000 more than a basic model. "The
average patient does not need all of the bells and whistles," said Dr. Weisberger, who helps the
plan's doctors and hospitals evaluate new devices.

Asked about the range of prices, the companies say it reflects a variety of business
considerations, including volume. And Mr. Childs, the executive with the device-makers' trade
group AdvaMed, argues that the hospitals' overall costs have not gone up significantly, because
improvements in these devices let doctors operate faster and patients go home sooner. Medicare
payments largely reflect the hospitals' overall costs, he said.

Doctors, Mr. Childs says, do consider price when choosing implants. "Physicians are a very
discriminating customer," he said. "It's not like you're selling to a bunch of stooges."

Financial Ties

For the device companies, the most important relationship is with the doctors, and they spend
considerable money and energy nurturing it. "The vendors work hard at these relationships," said
Ed Epperson, chief executive of Carson-Tahoe Hospital in Nevada. The extent and precise nature
of the relationships remain largely hidden. The companies and doctors are unwilling to discuss
specific arrangements. Hospitals are often unaware of them, because the doctors using their
operating rooms and admitting patients are usually not employees. Even academic medical
centers may require the disclosure of financial ties only if a doctor is conducting a clinical trial.

Even so, a range of relationships begins to emerge from a review of published research, court
papers and other government documents. And perhaps the clearest available view comes from
the case of Dr. Overdyke in Louisiana.

Dr. Overdyke had been a consultant for Wright Medical, which paid him $150,000 to $200,000
annually, according to his deposition. His arrangement ended in 1998, and he soon became
involved with Sulzer; at about the same time, a distributor to the hospital, MD Medical, also
changed its representation to Sulzer. A founder of MD Medical later became Dr. Overdyke's
wife.

The contract with Sulzer paid Dr. Overdyke $75,000 a year to consult on the design of two
products, including a refinement on one of its Apollo knee systems, and to "promote and educate
other surgeons on the benefits" of these devices. He also signed two royalty agreements in 2001,
each providing advances of $50,000 a year on products not yet being marketed.

Over two years, the state university spent nearly $200,000 on Sulzer orthopedic products. Dr.
Overdyke said he never told the residents which brand to use. Asked why the residents chose
Sulzer, he replied, "You'll have to ask them."

Dr. Overdyke was never accused of directly profiting from using Sulzer implants. But the
hospital says his ties to Sulzer represented a clear conflict of interest under Louisiana ethics laws,
which forbid state employees from doing business with companies with which they have
financial ties. He left the hospital in 2001; the hospital says it did not renew his contract for
reasons unrelated to his relationship with Sulzer.

Dr. Overdyke and his wife declined to discuss the case, their lawyer said; Zimmer, which has
since bought Sulzer's business, also declined to comment. But the counsel for the state ethics
board, R. Gray Sexton, said the case "involved conditions routinely tolerated" in private hospitals
across the nation.

Mr. Epperson, the Nevada hospital executive, says he sees some parallels to the practices
employed by pharmaceutical companies, which have been criticized by consumer groups and
regulators for trying to influence doctors with a variety of benefits.

In addition to consulting and royalty agreements, the device companies send doctors to
educational conferences about their latest models. They provide financing to medical
associations. DePuy, a unit of Johnson & Johnson, paid for a one-year foot and ankle fellowship
at the University of Virginia Health System and financed a Web site for an orthopedic surgeon in
Tulsa, Okla.

A DePuy spokeswoman said these payments helped educate surgeons and patients. Indeed, the
device companies say their relationships with doctors differ from the drug makers' because the
surgeons are intimately involved in perfecting new devices and techniques. The companies
finance much of the clinical research in the field. And while a general practitioner may not need
to go to Europe for a meeting on the latest painkiller, a surgeon using an artificial spinal disk for
the first time may need training in how to implant it.

Still, hospitals say that the closeness of these relationships makes it almost impossible to enlist
the physicians in the battle for better prices. Dr. Cherf, the knee surgeon, says the device industry
has "done a brilliant job" exploiting the erosion of the traditional alliance between hospital and
doctor. At the same time, hospital administrators and consultants say hospitals often hesitate to
question surgeons' decisions, since the doctors are a main source of patients and revenue.

One hospital that did protest was Grant Medical Center in Columbus, Ohio, which in 2003 sued
Biomet and one of its distributors, saying the distributor had tried to take advantage of an
important orthopedic surgeon's insistence on using Biomet's implants.

The surgeon, Dr. Adolph V. Lombardi Jr., performed about 1,200 joint replacements a year at the
hospital, according to the lawsuit. Grant Medical said the distributor had offered an ultimatum:
pay 35 percent more or purchase a service agreement worth several hundred thousand dollars.

While the lawsuit noted that Dr. Lombardi was conducting a clinical trial for Biomet, he also has
financial ties to the company. He was a consultant and received royalties from Biomet, according
to a 2004 disclosure statement. The foundation for a new hospital that he helped start owned
$318,000 in Biomet stock, the foundation's 2003 public filing showed.

The case was settled; Dr. Lombardi, the hospital, company and distributor all declined to
comment.

There is another central figure helping cement the company-doctor relationship: the sales
representative. Because hospitals cannot afford to purchase the devices ahead of time, the
representatives are often present during operations, sometimes helping the surgeon decide which
implant to use.

Many hospital executives see that operating-room role as a potential conflict of interest, since the
representative has every incentive to push the most sophisticated, and expensive, device. The
representatives work on commission - as much as 10 to 20 percent - and can make as much, if
not more, from an operation than the surgeon, industry consultants say. Representatives
frequently make several hundred thousand dollars a year.

One former salesman said that to encourage a surgeon's loyalty, he used to pay the doctor's
assistant $200 a case. "It was a bonus they didn't have to pay with their money," said the
representative, who insisted on not being identified because he still works in the industry and
fears retribution.

The Justice Department's investigation is seeking to determine if some of the companies'
agreements violate federal laws barring doctors from being paid directly by device makers for
using a certain implant. People in the industry said they believed that prosecutors were assessing
whether doctors who were paid most under these arrangements were also the heaviest users of a
company's implants.

Federal authorities had already been looking into sales practices at Medtronic's Sofamor Danek
unit, which sells spinal implants. Now the inquiry has broadened to much of the
orthopedic-implant industry, with the subpoenas to Stryker, Johnson & Johnson's DePuy unit,
Zimmer, Biomet and Smith & Nephew. The companies say they are cooperating.

A Rebellion Develops

A rebellion has begun on several fronts.

Some hospitals are trying to align their interests more closely with those of their doctors. Some
have begun meeting with doctors to decide which devices to buy. Others are discussing sharing
savings from more efficient purchasing; HCA, the nation's largest for-profit hospital chain, is
seeking federal approval for a plan to give its orthopedic surgeons 10 percent to 20 percent of
such savings.

The device companies oppose this kind of arrangement, saying it could present an improper
financial incentive to choose a certain device. "I want to know my doctor is my advocate," said
Mr. Childs, the trade association executive.

The hospital industry says that one essential factor for ending the cost spiral is the free exchange
of information about prices. Some hospitals are relying on consultants like Amerinet and
MedAssets, which provide information about what other hospitals are paying.

"These are life-saving devices; America needs them," said John A. Bardis, MedAssets' chief
executive. "But we don't need the business practices, which prevent transparency and true price
competition."

These efforts at transparency are drawing fierce resistance. A major device maker, Guidant, has
sued two consultants, including a unit of MedAssets, accusing them of sharing confidential price
information. MedAssets countersued, saying Guidant has tried to buy doctors' loyalty through
consulting agreements and other inducements.

Each has denied the other's charges. The suit against the second consultant, Byrne Healthcare,
has been settled.

With the Justice Department's inquiry looming, some people in the industry say change is
inevitable. "It's a broken system," said DeNene Cofield, the administrator who oversees surgical
services for Medical Center East in Birmingham, Ala. "And at some point, it will fall apart."

Walt Bogdanich contributed reporting for this article.