Hearing Before the
Senate Special Committee on Aging
United States Senate
Examining the Relationship
Between the Medical Device
Industry and Physicians
 
Testimony of
 Gregory E. Demske
Assistant Inspector General 
for Legal Affairs
Office of Inspector General
Department of Health and Human Services
February 27, 2008
10:30 a.m.
628 Dirksen Senate Office Building
Testimony Corrected
      May 22, 2008
Daniel R. Levinson
Inspector General
Department of Health and Human Services Testimony of: 
Gregory E. Demske 
Office of Counsel to the Inspector General 
U.S. Department of Health and Human Services 
________________________________________________________________________ 
 
 
Good morning, Mr. Chairman and members of the committee.  I am Gregory Demske, 
Assistant Inspector General for Legal Affairs in the Office of Inspector General of the 
Department of Health and Human Services.  I appreciate the opportunity to appear before 
you today to discuss the financial relationships that exist between physicians and the 
medical device industry.  These financial relationships can benefit patients and Federal 
health care programs by promoting innovation and improving patient care.  However, 
these relationships also can create conflicts of interest that must be effectively managed 
to safeguard patients and ensure the integrity of the health care system.   
 
In my testimony, I will discuss the risks associated with industry-physician financial 
relationships; highlight some of our recent investigations that illustrate these risks; and 
describe ways to mitigate these risks through enforcement actions, outreach to promote 
compliance, and increased transparency. 
 
Relationships Between the Medical Device Industry and Physicians 
 
Relationships between physicians and the health care industry, including pharmaceutical 
and device manufacturers and suppliers, can advance medical science and benefit 
patients.  In the development of new technologies and products, the interaction between 
device manufacturers and health care professionals can be especially valuable because 
physicians play an essential role in the development, testing, and extensive training 
involved in producing effective and safe medical devices, such as heart valves, 
pacemakers, and medical lasers.  Physicians also provide ideas and feedback, conduct 
research and clinical trials, and share their knowledge through participation in medical 
education programs.  Device companies can legitimately compensate physicians for their 
actual time and intellectual contributions to product innovations and training in the 
appropriate use of devices. 
 
However, in an environment where physicians routinely receive substantial compensation 
from medical device companies through stock options, royalty agreements, consulting 
agreements, research grants, and fellowships, evidence suggests that there is a significant 
risk that such payments will improperly influence medical decisionmaking.  Researchers 
reporting in medical journals, such as the Journal of the American Medical Association 
and the New England Journal of Medicine, have found that such financial industry-
physician relationships are pervasive and that the impulse to reciprocate for even small 
gifts has a powerful influence on behavior.  Although most physicians believe that free 
lunches, subsidized trips, or gifts have no effect on their medical judgment, the research 
has shown that these types of perquisites can affect, often unconsciously, how humans 
 
Senate Special Committee on Aging  
Hearing:  February 27, 2008    Page 1  act.1  For example, physicians who request additions to hospital drug formularies are far 
more likely than their peers to have accepted free meals or travel funds from drug 
manufacturers. 2  Similarly, a device companys largess may influence a physician to 
favor the companys products.  As the American Academy of Orthopaedic Surgeons 
observed, [w]hen an orthopaedic surgeon receives anything of significant value from 
industry, a potential conflict exists which should be disclosed to the patient.3  
 
Physicians play a critical role in deciding which medical devices are used in the treatment 
of their patients.  Complex medical devices are generally implanted or otherwise used in 
a hospital procedure or inpatient stay for which the hospital is reimbursed.  The treating 
physician generally decides or strongly influences the decision regarding which medical 
device should be used in this hospital setting.  Therefore, a device manufacturer has a 
strong financial incentive to persuade treating physicians to use or recommend the 
manufacturers devices.   
 
We do not know how much money device manufacturers pay to physicians.  However, 
the Governments recent investigations of several manufacturers of hip and knee surgical 
implants offer some insight.  In 2005, the orthopedic device market for hips and knees 
witnessed domestic sales in excess of $5.1 billion and worldwide sales of more than  $9.4 
billion.  We found that during the years 2002 through 2006, four manufacturers (which 
controlled almost 75 percent of the hip and knee replacement market) paid physician 
consultants over $800 million under the terms of roughly 6,500 consulting agreements.  
Although many of these payments were for legitimate services, others were not.  The 
Government has found that sometimes industry payments to physicians are not related to 
the actual contributions of the physicians, but instead are kickbacks designed to influence 
the physicians medical decisionmaking.  These abusive practices are sometimes 
disguised as consulting contracts, royalty agreements, or gifts.  The companies and 
physicians who engage in such kickback schemes are subject to criminal, civil, and 
administrative prosecution.   
 
Additionally, physician ownership of medical device manufacturers and related 
businesses appears to be a growing trend in the medical device sector.  These business 
ventures raise substantial concerns that a physicians return on investment from the 
venture may influence the physicians choice of device.  In some cases, physicians could 
receive substantial returns while contributing little to the venture beyond the ability to 
generate business for the venture.  As we cautioned in a widely-disseminated letter to a 
medical device trade association, [g]iven the strong potential for improper inducements 
between and among the physician investors, the entities, device vendors, and device 
                                                 
1 See, e.g., The Scientific Basis of Influence and Reciprocity: A Symposium, Association of American 
Medical Colleges, June 12, 2007; Brennan TA, Rothman DJ, et al. Health Industry Practice that Create 
Conflicts of Interest: A Policy Proposal for Academic Medical Centers.  JAMA 2006;295:429-33. 
2 Chren MM, Landefeld CS.  Physicians Behavior and their Interactions with Drug Companies.  JAMA 
1994;271:684-689. 
3 American Academy of Orthopaedic Surgeons, Standards of Professionalism, Orthopaedist-Industry 
Conflicts of Interest, April 2007. 
 
Senate Special Committee on Aging  
Hearing:  February 27, 2008    Page 2  purchasers, we believe these ventures should be closely scrutinized under the fraud and 
abuse laws. 4 
 
The financial relationships between device manufacturers and physicians merit scrutiny 
under anti-fraud statutes because the relationships raise the types of risks that those 
statutes are designed to address.  The consequences of industry-induced bias include risks 
to patients, health care programs, and scientific research.  When a physicians self-
interest compromises independent judgment, the patient faces the risk that the physician 
is making decisions that are not in the patients best interest.  Additionally, excessive 
payments to physicians increase health care costs and may result in unfair competition.  
When a device manufacturer pays a physician to influence the physicians use or 
recommendation of its products, rather than to advance a legitimate medical interest, the 
additional costs are passed on to the patients, Federal health care programs, and private 
insurers.  Such payments can also distort the marketplace by providing an unfair 
competitive edge to the company making the payments, regardless of the relative 
therapeutic value of the companys products.  Finally, corrupt payments can compromise 
medical research independence and the standards of scientific integrity. 
 
Relevant Federal Anti-Fraud Statutes  
 
Several Federal statutes are relevant to manufacturer-physician payment relationships.  
The False Claims Act is the Federal Governments primary civil enforcement tool for 
addressing fraud.  Under the False Claims Act, the Government may obtain substantial 
penalties against any person who knowingly submits, or causes the submission of, false 
or fraudulent claims to the Federal Government.  (See 31 U.S.C.  3729-3733.)  The 
False Claims Act allows the filing of qui tam lawsuits against individuals or companies 
that have defrauded the Federal Government.  Many people who file qui tam lawsuits 
(called relators) are employees or former employees of companies that committed the 
fraud.  
 
The Federal anti-kickback statute makes it a criminal offense to knowingly and willfully 
offer or pay remuneration to induce the referral of Federal health care program business.  
The statute also criminalizes the knowing and willful solicitation or receipt of 
remuneration in exchange for such referrals.  (See 42 U.S.C.  1320a-7b(b).)  The 
prohibition applies regardless of the nature or form of the arrangement.  If one purpose of 
an arrangement is to induce referrals of Federal health care program business, the statute 
is violated.  Whether a particular arrangement runs afoul of the statute depends on the 
specific facts and circumstances of the arrangement, including the intent of the parties.  
 
The anti-kickback statute and regulations contain certain safe harbors, which describe 
arrangements that do not violate the statute if every condition of the particular safe harbor 
is satisfied.  OIGs regulatory authority extends to promulgating safe harbor regulations 
describing categorical practices that are permissible.  Compliance with a safe harbor is 
voluntary, however, and arrangements that do not fit in a safe harbor are not necessarily 
illegal.  Rather, they must be evaluated under the statute on a case-by-case basis.   
                                                 
4 http://oig.hhs.gov/fraud/docs/alertsandbulletins/GuidanceMedicalDevice%20(2).pdf. 
 
Senate Special Committee on Aging  
Hearing:  February 27, 2008    Page 3   
OIG administrative authorities complement criminal and civil enforcement by providing 
an additional avenue for sanctioning persons who have defrauded Federal health care 
programs.  For instance, OIG has the authority to exclude individuals and entities from 
participation in the Federal health care programs for engaging in a range of abusive 
practices, including false claims and kickbacks.  (See 42 U.S.C.  1320a-7.) 
 
OIG may also pursue violations of the anti-kickback statute under a provision of the Civil 
Monetary Penalties Law.  (See 42 U.S.C.  1320a-7a(a)(7).)  Civil Monetary Penalty 
(CMP) cases can be attractive alternatives to criminal and civil enforcement for several 
reasons.  For example, relative to the False Claims Act, the CMP provides a more direct 
vehicle to address parties to a kickback scheme regardless of whether anyone actually 
submits claims.  This makes the kickback CMP particularly relevant in cases in which a 
device manufacturer is paying a physician to induce the physician to recommend the 
manufacturers device for use in a hospital procedure.  In such a case, the claim is 
submitted by the hospital, which is not a party to the financial arrangement.  CMP 
remedies in kickback cases include monetary penalties of up to $50,000 for each act 
(offer, payment, solicitation, or receipt of remuneration), assessments of up to three times 
the amount of remuneration, and exclusion from participation in Federal health care 
programs. 
 
Recent Enforcement Actions 
 
OIG, together with its Government partners, plays a substantial role in enforcing the 
fraud and abuse laws through criminal, civil, and administrative actions.  In recent years, 
OIG and the Department of Justice (DOJ) have investigated cases involving industry-
physician financial relationships in both the pharmaceutical and medical device areas.  In 
these cases, we have seen medical device manufacturers offering physicians lucrative 
consulting agreements to acquire new business and to maintain physician loyalty.  We 
have also seen instances in which the physicians, in turn, have signaled to the industry 
that their loyalties and business are for sale to the highest bidder.  In some cases, it comes 
down to how much each company is willing to pay for a physicians business, which is 
often being simultaneously solicited by multiple competing companies.   
 
Kickbacks offered to physicians by medical device manufacturers take a variety of forms, 
ranging from free practice management services to all-expense-paid trips and sham 
consulting agreements.  To illustrate these arrangements, I will summarize several 
settlements with device companies and a recent conviction of a physician. 
 
New Jersey Investigation of Hip and Knee Device Manufacturers (2007)  Zimmer, Inc., 
DePuy Orthopaedics, Inc., Biomet Inc., Smith & Nephew, Inc.  
In September 2007, four major medical device manufacturers entered into civil settlement 
agreements with the Government collectively totaling $311 million to resolve allegations 
under the False Claims Act.  The Government alleged that the four companies provided 
financial incentives in the form of consulting agreements, lavish trips, and other perks to 
 
Senate Special Committee on Aging  
Hearing:  February 27, 2008    Page 4  induce physicians to use a particular companys artificial hip and knee reconstruction and 
replacement products.   
 
The investigation found that, although many payments were provided for legitimate 
services, in certain consulting arrangements the companies derived little value beyond the 
acquisition of increased sales of artificial hip and knee implants used by the consulting 
surgeons.  The companies also failed to oversee and audit the work performed by the 
surgeons under the consulting agreements.  For example, the surgeons engaged in work 
activities that involved minimal or no actual work being performed, but created a billable 
event for the consultant, such as the following:  
 
  Consulting agreements required the physicians to report periodically the services 
that they provided to the company to support the consulting fees.  Some 
consulting agreements had only vague requirements for these reports.  When the 
consulting agreements did include specific requirements, these reports often failed 
to include the required information or were drafted by sales representatives rather 
than by the consultants.   
 
  In addition to reports documenting services provided, some companies paid 
consultants a fee, typically $5,000, for each quarterly report that included 
information on market trends, activity in the operating room, and product issues.  
However, these work reports typically included only cursory descriptions and 
were often duplicated from quarter to quarter.  Many of these quarterly reports 
were of little or no value to the companies.   
 
  The companies sponsored consultant panel meetings at resort locations and 
reimbursed the physicians for travel expenses.  These meetings would only be 
held for a few hours each day and physician consultants who presented at these 
meetings typically spoke for a minimal time period, sometimes for as few as 10 
minutes.  Although the remainder of the day was available for recreational 
activities paid for by the company, the consultants were compensated $5,000 for a 
full day of work.    
 
  Consultants billed for training sessions that involved sales representatives 
observing the surgeon while in the operating room.  Some of these training 
sessions were held for experienced sales representatives who, as part of their jobs, 
had been servicing the surgeons in their sales regions for some time.  These sales 
representatives were already required to be present in the operating room with the 
surgeons to assist them with the procedures.  These training sessions lasted for 1 
to 2 hours, but the consultants billed for an 8- to 10- hour workday. 
 
  Some companies entered into product development agreements with consultant 
physicians, offering them royalty payments once the products were launched.  
These agreements provided for annual payments of hundreds of thousands or 
millions of dollars for up to 20 years.  The design teams included up to 20 
physicians, some of whom were added after the projects were more than halfway 
 
Senate Special Committee on Aging  
Hearing:  February 27, 2008    Page 5  completed.  The companies often did not measure the contributions of individual 
physicians and up to half the members of some teams appeared to have performed 
little or no work.  
 
The Government alleged that by offering illegal inducements, the companies violated the 
False Claims Act by causing hospitals to seek and obtain reimbursement from Medicare.  
As a part of the global resolution in these cases, the four companies agreed to certain 
prospective remedies.  To avoid criminal prosecution, the companies each entered into an 
18-month Deferred Prosecution Agreement (DPA) with the United States Attorneys 
Office in New Jersey.  Under the DPAs, the companies agreed to be subject to oversight 
by a Federal monitor appointed by the U.S. Attorney, to disclose any other bad acts, and 
to post on their Web sites the names of company consultants, along with payments made 
to those consultants.  Separate from the DPAs, each of the companies also entered into a 
Corporate Integrity Agreement (CIA) with OIG in exchange for OIG releasing its 
exclusion authority.  Each CIA requires the company to put in place compliance systems, 
be subject to monitoring by an independent review organization and OIG, and make 
periodic reports for a 5-year period.5   
 
Medtronic, Inc. (2006) 
In another case, OIG worked with DOJ to investigate allegations that Medtronic, Inc., a 
medical device manufacturer, paid kickbacks to physicians.  The Government alleged 
that Medtronic offered kickbacks to spine surgeons to induce them to choose devices 
marketed by a Medtronic subsidiary specializing in spinal implant devices.  The 
kickbacks took various forms, including consulting and royalty agreements for which 
little or no work was performed; trips for doctors, their spouses, families, or girlfriends; 
consultant meetings held at lavish venues; and company-sponsored adult entertainment.  
In July 2006, Medtronic agreed to pay $40 million to settle the False Claims Act case and 
enter into a 5-year CIA.6   
 
Advance Neuromodulation Systems, Inc. (2007) 
In July 2007, OIG entered into a kickback CMP settlement with Advanced 
Neuromodulation Systems, Inc. (ANS), a device company specializing in spinal cord 
stimulation.  OIG alleged that ANS engaged in a marketing program in which it paid a 
number of physicians $5,000 for every five new patients tested with an ANS product.  To 
resolve allegations that ANS paid kickbacks, ANS paid $2.95 million in a CMP 
settlement and entered into a 3-year CIA with OIG. 
 
OIG alleged that ANSs program did not provide any significant clinical value but rather 
served as a marketing tool to increase ANSs sales.  The program was developed by 
ANSs Vice President of Sales and Marketing.  The $5,000 data collection fee was not 
                                                 
5 An additional company, Stryker Orthopaedics, Inc., entered into an 18-month Non-Prosecution 
Agreement (NPA) with DOJ.  The NPA requires Stryker to implement all of the reforms imposed on the 
other companies under the DPAs.  Stryker did not enter into any civil settlement with DOJ or OIG and has 
not been given any release from civil or administrative liability. 
6 Although the settlement agreement and CIA have been fully executed, they have not become effective 
because of ongoing litigation involving a qui tam relator. 
 
Senate Special Committee on Aging  
Hearing:  February 27, 2008    Page 6  set through a fair market value analysis of the physicians time, and ANSs clinical 
research department did not use the data collected.  In addition, OIG alleged that ANSs 
sales and marketing personnel provided physicians with sports tickets, trips for 
physicians and their families, dinners, and other gifts.  For instance, the investigation 
found that ANS sponsored 3-day conferences at resort locations (Napa Valley, Alaska, 
Colorado Springs) in which physicians were invited to participate in roundtable 
discussions.  The agendas for these conferences indicated that much of the time at these 
conferences was spent on recreational activities, including wine tasting, skiing, golfing, 
and canoeing.  Further, in many instances, the physicians spouses and children were 
invited to these conferences and participated in recreational activities at the expense of 
ANS.   
 
Dr. Patrick Chan (2008) 
Although criminal prosecutors have historically targeted their limited resources 
on companies paying kickbacks, a physician who accepts a kickback from a 
medical device manufacturer in return for using the companys products can be 
as culpable as the device company that provided the kickback.  In January 2008, 
Dr. Patrick Chan, an Arkansas neurosurgeon, paid a $1.5 million civil settlement 
to resolve allegations that he accepted kickbacks from medical device 
manufacturers in violation of the False Claims Act.  In a parallel criminal 
proceeding, Dr. Chan also pled guilty to one count of soliciting and accepting 
kickbacks from a sales representative selling products on behalf of several 
medical device companies.  The criminal investigation found that Dr. Chan 
agreed to split the commission with the unnamed sales representative on any 
products that Dr. Chan utilized during, and after, his surgeries on patients.  The 
government is continuing to investigate device companies that may have paid 
kickbacks to Dr. Chan and other physicians as part of this scheme. 
 
Mitigating the Risks Inherent in Physician-Industry Financial Relationships   
 
As I have mentioned, physician-industry interactions can provide tangible benefits to 
patients and the advancement of medical science.  These interactions can also create 
conflicts of interest that, if not managed effectively, can pose significant challenges to 
medical professionalism and undermine the integrity of the Nations health care system.  
Criminal, civil, and administrative enforcement is an important facet of an overall 
strategy to discourage financial arrangements that distort physicians professional 
judgment.  However, it would be both inappropriate and impractical to rely solely on 
Government enforcement to address an issue of this complexity.  The health care 
industry, medical community, and the Government must develop and implement 
additional approaches to reduce the risks raised by these arrangements. 
 
For this reason, OIG commits substantial resources to encourage the health care industry 
to adopt voluntary anti-fraud and compliance measures.  OIG promotes these efforts by 
providing a range of comprehensive guidance, including advisory opinions, compliance 
program guidance, and special fraud alerts and bulletins.  All of these resources are 
publicly available on OIGs Web site at www.oig.hhs.gov.  OIG also engages in 
 
Senate Special Committee on Aging  
Hearing:  February 27, 2008    Page 7  extensive industry outreach efforts, including providing speakers at major trade 
association, legal, and compliance conferences.  
   
As reflected in the Governments recent enforcement actions involving the medical 
device industry, the anti-kickback statute plays a central role in addressing excesses in 
physician-industry relationships.  Because the anti-kickback statute is a criminal, intent-
based statute that requires a case-by-case analysis to determine whether the law has been 
violated, OIGs ability to issue general guidance about the statute is limited.  The safe 
harbor regulations issued by OIG immunize certain conduct from prosecution and 
provide guidance on relevant risk factors.  In addition, OIG offers an advisory opinion 
program under which parties can obtain OIGs legal opinion about the application of the 
anti-kickback statute and other OIG fraud and abuse authorities to their existing or 
proposed business arrangements.   
 
Further assistance is available from OIG in the form of compliance program guidance for 
various health care sectors.  OIGs Compliance Program Guidance for Pharmaceutical 
Manufacturers (CPG) (68 FR 23731 (May 5, 2003)) provides detailed information that 
drug manufacturers and medical device manufacturers can consider when establishing 
and operating an effective internal compliance program.  The CPG identifies fraud and 
abuse risk areas, including many of the risks associated with financial relationships 
between medical device manufacturers and physicians.  With respect to kickbacks, for 
example, the guidance discusses risks associated with manufacturers providing discounts, 
product support services, educational grants, research funding, and certain consulting 
arrangements.  Medical device companies and physicians can use this guidance as a tool 
to help identify and manage the risks associated with their own arrangements. 
Another strategy for promoting integrity in industry-physician financial relationships is 
subjecting those relationships to reporting requirements and greater transparency.  For 
example, several states have recently enacted laws that require pharmaceutical companies 
to report payments made to physicians.  Additionally, in the DPAs with the medical 
device manufacturers, the United States Attorney for New Jersey has required that the 
companies maintain on their Web sites the names of the physicians to whom they make 
payments and the amounts paid.  OIG is considering requiring similar disclosure 
requirements in future CIAs with device manufacturers and pharmaceutical companies.   
Academic institutions are also taking steps to manage their relationships with the health 
care industry in response to the growing concern that financial conflicts of interest are 
interfering with physicians professional judgment.  Both the Association of American 
Medical Colleges and the Association of American Universities have promulgated 
recommendations for the protection of human subjects from the effects of conflicts of 
interest on the part of academic investigators and their universities.  In the Journal of the 
American Medical Association, a group of physicians from many of the Nations most 
prestigious academic medical centers has called for more stringent regulation of 
physician-industry relationships.  Alarmed by the adverse impact that financial conflicts 
of interest have on patient welfare and research integrity, they have called for the 
 
Senate Special Committee on Aging  
Hearing:  February 27, 2008    Page 8  elimination or modification of common practices related to gifts, drug samples, 
continuing medical education, speakers bureaus, and consulting and research contracts.7 
A number of academic medical centers and health systems also are taking affirmative 
steps to address the conflicts of interest created by accepting gifts from the 
pharmaceutical and medical device industries.  In addition to barring gifts and free food, 
some medical centers are restricting the distribution of drug samples and limiting sales 
representative access to physicians.  For example, just this month, the University of 
Pittsburgh Medical Center and Schools of the Health Sciences announced a policy that 
bars faculty, staff, and students from accepting any gifts, regardless of value, from the 
pharmaceutical or medical device industries.  The policy also requires that any consulting 
arrangements be reviewed and approved in advance by the University.  Additionally, the 
American Medical Student Association has launched a campaign to encourage medical 
schools and academic medical centers to develop policies that limit the access of 
pharmaceutical company representatives to their campuses and prohibit medical students 
and physicians from accepting gifts of any kind from these representatives.  
 
Conclusion 
 
In conclusion, financial relationships between the medical device industry and physicians 
are pervasive and can create both benefits and risks to patients and health care programs.   
Effectively managing the risks associated with these financial relationships is a challenge 
that warrants a comprehensive strategy by Government, the health care industry, and 
physicians.   
 
OIG will continue to work with DOJ and other partners to investigate and pursue cases 
against device manufacturers and physicians who violate fraud and abuse laws.  At the 
same time, we will continue our outreach to the medical device industry and physicians 
to increase awareness of the compliance risks and the resources available to assist them in 
managing those risks.  OIG is also considering ways to promote increased transparency 
of financial relationships.  Efforts by Congress, industry, physicians, and academia to 
promote awareness of the risks of conflicts of interest, increase the transparency of these 
financial relationships, and implement appropriate policies to manage these risks would 
go a long way to safeguard patients and health care programs. 
 
 
------------ 
 
This concludes my statement.  Thank you for the opportunity to testify today.  I would be 
pleased to answer any questions that you may have. 
                                                 
7 Brennan TA, Rothman DJ, Blank L, et al. Health Industry Practices That Create Conflicts of Interest: A 
Policy Proposal for Academic Medical Centers. JAMA 2006;295:429-433. 
 
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Hearing:  February 27, 2008    Page 9