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45–089 PDF 2008

S. HRG. 110–578 

SURGEONS FOR SALE: 

CONFLICTS AND CONSULTANT PAYMENT IN THE 

MEDICAL DEVICE INDUSTRY 

HEARING 

BEFORE THE

SPECIAL COMMITTEE ON AGING 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

WASHINGTON, DC 

FEBRUARY 27, 2008 

Serial No. 110–22 

Printed for the use of the Special Committee on Aging 

( 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html 

SPECIAL COMMITTEE ON AGING 

HERB KOHL, Wisconsin, Chairman 

RON WYDEN, Oregon 

BLANCHE L. LINCOLN, Arkansas 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

BILL NELSON, Florida 

HILLARY RODHAM CLINTON, New York 

KEN SALAZAR, Colorado 

ROBERT P. CASEY, Jr., Pennsylvania 

CLAIRE McCASKILL, Missouri 

SHELDON WHITEHOUSE, Rhode Island 

GORDON H. SMITH, Oregon 

RICHARD SHELBY, Alabama 

SUSAN COLLINS, Maine 

MEL MARTINEZ, Florida 

LARRY E. CRAIG, Idaho 

ELIZABETH DOLE, North Carolina 

NORM COLEMAN, Minnesota 

DAVID VITTER, Louisiana 

BOB CORKER, Tennessee 

ARLEN SPECTER, Pennsylvania 

DEBRA WHITMAN, Majority Staff Director 

CATHERINE FINLEY, Ranking Member Staff Director 

(II) 

C O N T E N T S 

Page 

Opening Statement of Senator Herb Kohl ............................................................. 1 

Opening Statement of Senator David Vitter ......................................................... 3 

Opening Statement of Senator Senator Ken Salazar ........................................... 3 

Opening Statement of Senator Bob Corker ........................................................... 4 

Opening Statement of Senator Gordon Smith ....................................................... 32 

PANEL I 

Greg Demske, assistant inspector for Legal Affairs, Office of Inspector General, U.S. Department of Health and Human Services, Washington, DC ....... 4 

Charles Rosen, clinical professor, University of California, Irvine, CA; president, Association for Ethics in Spine Surgery ................................................... 16 

Said Hilal, president/CEO, Applied Medical Resources Corporation, Rancho 

Santa Margarita, CA ........................................................................................... 24 

PANEL II 

Edward Lipes, executive vice president, Stryker Corporation, Mahwah, NJ ..... 37 

Chad Phipps, senior vice president, general counsel and secretary, Zimmer 

Holdings, Inc., Warsaw, IN ................................................................................. 45 

Christopher White, executive vice president, general counsel and assistant 

secretary, AdvaMed, Washington, DC ................................................................ 57 

APPENDIX 

Questions from Senator Clinton for Gregory Demske .......................................... 77 

Questions from Senator Clinton for Charles Rosen .............................................. 77 

Questions from Senator Clinton for Edward Lipes ............................................... 78 

Questions from Senator Clinton for Christopher White ....................................... 78 

Letter from Gregory Demske .................................................................................. 80 

Letter from Stephen M. Kuperberg, Hogan & Hartson, regarding Blackstone 

Medical, Inc., ........................................................................................................ 81 

Copy of Change of Plea proceedings and Indictment against Dr. Chan ............. 83 

Letter from the North American Spine Society .................................................... 103 

(III) 

(1) 

SURGEONS FOR SALE: CONFLICTS AND CONSULTANT PAYMENT IN THE MEDICAL 

DEVICE INDUSTRY 

WEDNESDAY, FEBRUARY 27, 2008 

U.S. SENATE, 

SPECIAL COMMITTEE ON AGING, 

Washington, D.C. 

The Committee met, pursuant to notice, at 10:36 a.m., in room 

SD–628, Dirksen Senate Office Building, Hon. Herb Kohl (chairman of the committee) presiding. 

Present: Senators Kohl, Salazar, McCaskill, Smith, Coleman, 

Vitter, and Corker. 

OPENING STATEMENT OF SENATOR HERB KOHL, CHAIRMAN 

The CHAIRMAN. This hearing will come to order. We welcome all 

of you who are here today, and we welcome our witnesses for taking time to be with us. 

Last June, I chaired a Special Committee on Aging hearing that 

examined the financial and gift-giving relationships that exist between the pharmaceutical industry and physicians. What we 

learned then is that there is a need for more disclosure relating to 

doctors accepting gifts from drug companies. 

Following that hearing, Senator Chuck Grassley and I introduced 

the Physician Payments Sunshine Act, which would create a national data base of payments and gifts to physicians from a variety 

of medical sources. Now today, we will focus on the tangled, murky 

and sometimes conflicting financial relationships between the medical device industry, surgeons and physicians. 

It is important to note that these relationships can play an important role in product innovation. In areas where these relationships are legitimate and productive, we do not wish to disturb 

them. 

However, over the past decade, it has become clear that interactions between medical device companies and surgeons often involve substantial payments, taking the form of consultant fees, 

educational grants, royalties, funding for clinical trials, travel and 

gifts. Some of these payments have been alleged to be grossly excessive, illegitimate and often not properly documented. It is not 

hard to see that these financial relationships can create conflicts of 

interest and can exert inappropriate influence over medical decisions. In some documented cases, they do break the law. 

We will hear testimony today that these types of frequently unethical payments are not anecdotal but rather have been pervasive 

2 

and industry-wide for too long. We will hear that both the medical 

device industry and the physicians who take their money are equal 

participants and are equally culpable. 

One witness will relate that some physicians make it known to 

these companies that they will be loyal to the highest bidder. If 

these physicians are essentially putting their medical judgment up 

for sale, then where does the patient’s well-being fit into the equation? 

Over the past several months, Committee staff has interviewed 

dozens of surgeons and medical device industry sales representatives to learn more about the conditions surrounding these payments. Disturbingly, some physicians related that they felt 

shunned when they declined to take part in financial relationships 

with the industry. One surgeon provided a written statement to the 

Committee concerning payment offers explicitly intended to induce 

her to use particular medical device products. To speak to this, we 

have with us today a clinical professor of surgery and an industry 

executive to offer their perspectives on the problems raised by 

these types of payments. 

We will also hear from HHS Office of the Inspector General. The 

Justice Department and OIG have been examining in depth these 

troubling and widespread conflicts for at least 3 years. In September of last year, the Justice Department reached settlement 

agreements with the top five orthopedic device makers which dominate their industry. According to Committee staff’s calculations, the 

five orthopedic companies which settled agreements with the Justice Department last fall spent the combined total of at least $230 

million on these consultant and other payments. While these companies have admitted no wrongdoing, they collectively paid the government more than $310 million in settlement fines related to their 

handling of these types of payments. 

Officials from two of these companies, Stryker and Zimmer, are 

here today. I would like to thank their representatives for agreeing 

to testify before the Committee, and I want to emphasize that the 

concerns we raise today pertain to the entire range of firms that 

dominate the industry and not just to these two manufacturers. 

A witness from AdvaMed will also speak on behalf of the medical 

device industry today. In fairness, this investigation has also 

shown that surgeon-owned medical device companies also have potentially serious conflicts of interest as we will hear from the Inspector General’s Office. 

The Committee has sent detailed questions and document requests to a number of these firms asking for the same type of information and disclosure that we required from the larger medical device companies. Most have responded, and we intend to continue 

this line of inquiry to ensure that the entire industry is accountable 

in these conflict-of-interest matters. 

In closing, I am well aware that the medical device associations 

and physician groups have written voluntary ethical guidelines addressing these areas, but the issue before us today is whether they 

have been or are being followed. There will be ample evidence presented today indicating that they are not. We look forward to working with cosponsors, Senators Grassley, McCaskill, Klobuchar, KenVerDate Aug 31 2005 10:21 Nov 05, 2008 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 H:\DOCS\45089.TXT SAG PsN: JOYCE
3 

nedy and Schumer, along with my colleagues in the Senate to get 

our important disclosure legislation passed. 

So once again, we thank everyone for their participation and now 

we turn to other senators who are with us today who may wish to 

make a statement. 

Senator Vitter. 

OPENING STATEMENT OF SENATOR DAVID VITTER 

Senator VITTER. Thank you very much, Mr. Chairman. I am 

going to pass for now and look forward to the testimony. 

The CHAIRMAN. Thank you so much. 

Senator Salazar. 

OPENING STATEMENT OF SENATOR KEN SALAZAR 

Senator SALAZAR. Thank you very much, Chairman Kohl, for 

holding this hearing on this very important subject. I want to 

thank the witnesses from both the government and the companies 

for being here and sharing their expertise with us. 

Patients place a great deal of trust in their doctors. The integrity 

of our health care system is grounded in this trust relationship. 

But today we are here to examine some troubling allegations that 

the relationship between medical device manufacturing companies 

and surgeons have created conflicts of interest. Some media reports 

show that surgeons choose to use certain medical devices in exchange for consulting fees, royalties or other gifts. These are serious charges. Companies spend millions of dollars a year in providing these monies to physicians in so-called in-kind payments, 

much of which are not disclosed to the public. 

I understand that surgeons and medical device companies maintain close relationships due to the complex nature of the devices 

that are produced. However, it is critical that the doctor-patient 

trust never be compromised and that the relationship is carried out 

in compliance with a strict code of ethics. 

I agree with many of my colleagues, that increasing transparency 

with regards to payments to physicians is essential. Transparency 

will enable patients to be more informed and disclose potential conflicts of interest. 

At the same time, we should consider a disclosure system that 

is uniform, that is easy to understand and accessible. As we move 

forward in this process, we must keep this balance in mind. I want 

to thank Chairman Kohl again for his leadership on this issue. I 

look forward to learning more about the issues that are at stake 

in this very important issue of life and death and—sometimes can 

involve the important issue of life and death. I look forward to 

working to see whether we get to some resolution to this issue. 

Thank you, Chairman Kohl. 

The CHAIRMAN. Thank you, Senator Salazar. 

Senator Corker. 

4 

OPENING STATEMENT OF SENATOR BOB CORKER 

Senator CORKER. Mr. Chairman, in order to listen to the witnesses, I will pass and wait to hear the testimony. 

The CHAIRMAN. Thank you so much. 

Senator CORKER. Thank you for having the hearing. I appreciate 

it, yes, sir. 

The CHAIRMAN. Thank you so much. 

We are pleased at this time to welcome our first panel. Our first 

witness will be Gregory Demske, assistant inspector for Legal Affairs in the Office of Health and Human Services Inspector General. Mr. Demske is responsible for administrative health care 

fraud actions on behalf of the HHS/OIG. He has worked at the OIG 

counsel’s office for the past 17 years and also served as a special 

assistant United States attorney in the District of Columbia. 

Our next witness will be Dr. Charles Rosen, who is the president 

and founder of the Association for Ethics in Spine Surgery and also 

a clinical professor at the University of California, Irvine. The stated purpose of AESS is to promote patient care and evidence-based 

medicine and to provide increased public awareness of the detrimental and pervasive influence—the financial influence—of industry on many health care providers and patients. Dr. Rosen has 

been in practice for more than 17 years. He is a specialist in spinal 

disorders. 

Then we will have Said Hilal, president and CEO of Applied 

Medical Resources Corporation. Mr. Hilal will testify to his perspectives on the attitudes and practices of larger orthopedic device 

companies in regard to conflicts of interest and also paying surgeons. 

We welcome you all here today, and Mr. Demske, we will start 

with your testimony. 

STATEMENT OF GREG DEMSKE, ASSISTANT INSPECTOR GENERAL FOR LEGAL AFFAIRS, OFFICE OF INSPECTOR GENERAL, US DEPARTMENT OF HEALTH AND HUMAN SERVICES, 

WASHINGTON, D.C. 

Mr. DEMSKE. Good morning, Mr. Chairman and members of the 

Committee. I appreciate the opportunity to appear before you this 

morning. Relationships between the medical device industry and 

physicians can benefit patients and Federal health care programs 

by providing for innovations and improved patient care. However, 

these relationships can also lead to conflicts, which must be managed to safeguard the interests of patients and the integrity of our 

health care system. 

Physicians receive substantial compensation from medical device 

companies in the form of grants, fellowships, royalties and various 

types of consulting agreements. These companies also provide physicians with a variety of non-cash benefits, such as travel, meals 

and gifts. We do not know the amount of these monetary and inkind benefits, but we did learn in our investigation of hip and knee 

manufacturers that over the course of a 5-year period, four manufacturing companies paid physicians over $800 million in consulting fees related to the hip and knee devices alone. 

There is a significant risk that such payments will improperly influence medical decisionmaking. A substantial body of research 

5 

shows that money and gifts influence the behavior of people in general and physicians in particular. Industry-induced bias presents 

risks to patients and the health care system. When a physician’s 

self-interest compromises independent judgment, the patient faces 

risks that the physician will make decisions that are not in that 

patient’s best interests. 

Payments by companies also can create an uneven playing field 

and give an unfair competitive advantage to the company making 

the payments. Finally, excessive payments to physicians increase 

the total costs to our health care system. Some financial relationships that raise these risks also violate the law. 

In September of last year, the government entered into settlements with four manufacturers of hip and knee reconstruction and 

replacement devices. The government alleged that these four companies offered inducements to surgeons to entice them to use the 

particular company’s products. We found that, for example, in the 

largest types of consulting agreements involving the most money— 

product development agreements—physicians could be paid up to 

millions of dollars a year in royalties. 

Despite the amount of money involved in these agreements, we 

found that some of the companies did very little to monitor the actual contribution of individual physicians. We also found that it appeared that members of some of these product development teams 

did little or no work in contributing to the development of products. 

To resolve these cases, the four companies paid a total of over $310 

million. They entered into deferred prosecution agreements with 

the U.S. Attorney, and they entered into 5-year corporate integrity 

agreements with OIG. 

This type of enforcement is an important facet of an overall 

strategy to discourage financial arrangements that distort physicians’ professional judgment. However, it would be both impractical 

and inappropriate to rely solely on government enforcement actions 

to address this complex issue. The health care industry, medical 

community and government must develop and implement additional approaches to reduce the risks raised by these arrangements. 

OIG, for its part, provides guidance to the health care community 

about how to comply with laws and implement voluntary compliance programs. We publish safe harbor regulations, advisory opinions, compliance program guidance, fraud alerts and bulletins, and 

we reach out to stakeholders in the industry. At the same time, 

many academic medical centers are implementing policies designed 

to limit the financial influence of the industry at their institutions. 

Finally, we are aware of the efforts to increase transparency of 

industry-physician financial relationships. We will monitor these 

efforts and are considering imposing transparency requirements in 

future corporate integrity agreements. Government, industry and 

physicians need to look at this type of requirement and other 

means to address the risks raised by financial relationships between the device industry and physicians. 

Thank you for the opportunity to testify today. I will be happy 

to answer any questions. 

[The prepared statement of Mr. Demske follows.] 

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The CHAIRMAN. Thank you, Mr. Demske. 

Dr. Rosen. 

STATEMENT OF CHARLES ROSEN, CLINICAL PROFESSOR, UNIVERSITY OF CALIFORNIA, IRVINE, CA; PRESIDENT, ASSOCIATION FOR ETHICS IN SPINE SURGERY 

Dr. ROSEN. Good morning, I am Dr. Charles Rosen, a clinical professor of orthopedic surgery at the University of California, Irvine, 

School of Medicine. My expertise is in spinal surgery. I have been 

asked to testify today as president of the Association for Ethics in 

Spine Surgery. 

My tale is of the influence medical device makers exert to sell 

their product and how this hinges on a small minority of highly 

paid spine surgeons who have become nothing more than marketing men disguised as independent researchers. This all began in 

2005 when I was shocked after reviewing the FDA approval of an 

artificial lumbar disk replacement made by a major device manufacturer. The FDA approved a study that was small in number, 

short in follow-up and actually eliminated the first 26 percent of 

patients receiving the replacement. 

The disk replacement operation needs to be at least as good as 

the control operation it was compared to in order to gain approval. 

This control operation had a 60 percent failure rate, not a high bar 

to exceed by any standard. At the end of the study, two-thirds of 

the disk replacement patients, namely the majority, were still on 

daily narcotics for pain but still rated as successes due to the questionable design of the study. 

Now in wondering how this was allowed, I noted that some members of the FDA voting panel had conflicts of interest, and many 

authors of the paper itself were paid consultants of the device manufacturer. As an aside, it was this last conflict of interest among 

authors of another disk replacement that recently became the focus 

of a Department of Justice probe. I was similarly concerned about 

the data and the cozy relationships with the first disk replacement, 

so I contacted the FDA as well as my own professional societies, 

including the North American Spine Society. I was politely rebuffed 

by all. 

Then unfortunately in 2005, my prediction of disk replacement 

failures came true. I began seeing patients in a horrible type of 

pain that I had never seen before in all my years of practice, pain 

that often led to their loss of employment, marriage, family life and 

sometimes prompted thoughts of suicide. Getting no response from 

organized medicine nor the FDA, I voiced my concerns to the Wall 

Street Journal in June 2005 in an article that appeared on the 

front page. 

I also felt compelled to start the Association for Ethics in Spine 

Surgery to help expose this unseemly influence of industry, which 

resulted in profits over patients, not to mention the huge waste of 

the health care dollar. Thinking that I might be the only member, 

I find quite surprisingly that now, a year and a half later, we have 

over 250 spine surgeon members and members-to-be requesting enrollment, all of whom were required to sign an affidavit stating 

that they do not have any financial ties to industry. This sudden 

groundswell of grassroots support by surgeons is accelerating beVerDate Aug 31 2005 10:21 Nov 05, 2008 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 H:\DOCS\45089.TXT SAG PsN: JOYCE
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cause I believe the association has tapped into the pent-up frustration of the silent majority of our profession who refuse to violate 

the Hippocratic oath and sacred trust of their patients for the sake 

of their pocketbook. 

Unfortunately, this is in stark contrast to many of those on industry’s payroll who then began to attack me however they could. 

For example, after 8 years of being continually promoted in good 

standing at the University of California, I suddenly received a bad 

evaluation from the department chairman and was told that I 

would probably be fired shortly. It was later revealed to me that 

he was a paid consultant of a major device manufacturer and was 

even on a 1998 FDA Committee to evaluate disk replacements. 

Since then, and fortunately for me, he left the department under 

a cloud of controversy to be replaced by a new and highly ethical 

chairman without industry ties. However, even the new chairman 

is approached repeatedly by professors and chairmen from all parts 

of the country as well as my own university to have me fired. Little 

reason is given. Not surprisingly, all seem to be paid consultants 

of industry. 

Attacks on me have reached into the Internet chat rooms and 

Web sites, many of which are covertly sponsored by industry to 

lure in new patients and mold public thinking. Unfortunately, industry consultants infiltrate the boards of medical journals and 

professional societies which control the flow of medical information. 

I have even speculated that maybe this accounted in part for their 

rejection of my papers on failed disk replacements, as well as my 

opinions on ethics in industry. 

High-profile industry physicians also influence the nature of obscure disclosure rules that reveal little of industry reimbursement, 

lest the research lose the enormously valuable appearance of having independent validation. I believe that getting enormous sums 

of money from a company about whose product you are writing— 

money that might go away if you write a negative paper—makes 

the research neither objective nor independent. 

I have heard repeatedly from physicians on industry’s payroll 

that those millions don’t affect one’s judgment. Nevertheless, the 

details shouldn’t be revealed because that is private, though the 

sales pitches are very public. A recent front-page New York Times 

article about financial ties in a particular spine study is a perfect 

example of this rampant practice in the spine surgery world of 

which few outside are aware. 

Before finishing, I would like to make a few recommendations. 

First, disclosure of complete financial compensation should be 

made in the case of authors publishing public papers about medical 

devices, in the case of the governing bodies of all 501(c)(3) medical 

societies and all paid medical consultants of both big and small device companies so it is a level playing field. 

Second, industry money going to individual physicians at universities must be more tightly regulated, particularly public universities, such as the University of California, where I believe the regents know little of the undeclared financial violations of policy. 

The public, as do I, look toward academia for the unbiased truth, 

and this should be the standard. 

18 

Third, I will mention briefly device distributorships owned by 

surgeons. Here, profit is garnered by all the surgeon owners agreeing to only implant their distributorship’s devices. Patients usually 

don’t know this conflict, which leads frequently to unnecessary implants and surgery, and it should be stopped. 

Last, the FDA should not have any paid consultants on its voting 

panels. To say this is impossible is a dubious claim of the FDA 

since there are many honorable and willing spine surgeons out 

there. I personally answered an FDA call for volunteers, yet my letter wasn’t even acknowledged. 

Thank you for the privilege and honor of addressing this Committee. 

[The prepared statement of Dr. Rosen follows:] 

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The CHAIRMAN. Thank you very much for being here, Dr. Rosen. 

Mr. Hilal. 

STATEMENT OF SAID HILAL, PRESIDENT/CEO, APPLIED MEDICAL RESOURCES CORPORATION, RANCHO SANTA MARGARITA, CA 

Mr. HILAL. Chairman Kohl, thank you, and Ranking Member 

Smith and the Committee for kindly extending an invitation for me 

to testify. My name is Said Hilal. I represent Applied Medical from 

Orange County, CA. I have been in this field from the time it was 

health and care and before it became mostly industry. I am here 

this morning to outline the serious concerns I, and my fellow Applied Medical officials, have about conflicts of interest and ethics 

we have observed in America’s health care system. 

Applied Medical has supplied enhanced clinical outcomes, although not in orthopedics, coupled with value since its founding in 

1987. We offer advances in minimally invasive procedures that reduce recovery time, pain and complications and typically does that 

for less. I mention this because it is both important and possible. 

In the interest of full disclosure, Applied has pursued litigation 

related to antitrust and intellectual properties against many organizations. I have previously had the honor of testifying about antitrust issues before the Senate Judiciary Antitrust Subcommittee. 

While those issues harm upcoming companies, U.S. companies, 

they do not compare to the damage caused by unethical practices 

and quid pro quo. 

Because Applied and its products are used by surgeons, we sell 

to hospitals. We, therefore, are directly affected by how business is 

done in hospitals. Because we pioneer new modalities and techniques, we support surgeon training and peer-reviewed scientific 

studies. Therefore, university hospitals and thought leaders are exceptionally important to us. 

Additionally and in my opinion, medical device companies have 

an obligation to support research and education, but this must be 

accomplished with no strings attached. Sadly, support has mutated 

into a quid pro quo instrument. We believe the correlation between 

payments and purchases is astoundingly and embarrassingly high. 

We believe this clandestine correlation has a significant impact on 

market economics. 

We also believe some surgeons and other medical personnel have 

become inextricably beholden to device companies. Enticements in 

such situations go past corrupt to become corrupting. Some clinical 

personnel become gatekeepers for manufacturers. 

Corrupting influences are not really limited just to university 

hospitals. We hear of large manufacturers approaching hundreds of 

surgeons with the invitation to become ‘‘consultants,’’ an extension 

of the sales divisions, it turns out, of these large companies. 

Years may go by without any follow-up activity until a new competitor shows up at the gate of a hospital. It is then that the socalled consultants are activated and paid to lecture, proctor and 

consult. As the money flows, these consultants become ardent opponents of change that impacts their sponsors, often adopting ‘‘sponsor-designed’’ lists of objections to challenge the new supplier. 

25 

With some hope, we watched large companies adopt codes of ethics to address interactions with surgeons and others. But our hopes 

have actually evaporated. 

I would like to share with you a firsthand experience here. We 

got invited to a meeting where large device companies put on a 

presentation to leading surgeons, allegedly to educate the audience 

on new AdvaMed guidelines and ethics codes for receiving grants 

and other payments from these companies. The presentation was 

entitled, ‘‘Is the Party Over?’’ The title alone is alarming in my 

opinion, and I believe encapsulates the impropriety of this situation. 

According to the presenters, the party is far from over. Surgeons 

were coached on how to act in a safe manner and continue to receive lucrative payments. Amazingly, surgeons were reminded that 

the grants are ‘‘all about ROI, the return on investment’’ for the 

granting company. I ask: How are these companies planning to 

capture that ROI and what strings are attached? 

To a large extent in these United States, our surgeons and medical organizations remain the most respected around the world, but 

we see corrupting influences every day. This is precisely why Applied continues to enthusiastically support the efforts of this Subcommittee to keep the corrupting influences from undermining the 

well-earned respect. 

Unfortunately, voluntary codes from industry have not sufficed. 

Gentle, slap-on-the-wrist settlements and penalties have not been 

effective. Many large device companies hide behind credos, skirt 

the edge and break promises of ethical conduct. As long as the penalty for making billions of unethical dollars for years is a few million dollars every few years, these corrupting behaviors are not 

going to recede. 

We welcome legislation and enforcement that can get us past this 

unhealthy situation. There is little that ethical companies can do 

alone. We hope and trust these unethical practices will get the necessary scrutiny. This great nation’s health care deserves the best, 

and it is our duty to aim for the best. 

I thank you very much. 

[The prepared statement of Mr. Hilal follows:] 

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The CHAIRMAN. Thank you very much, Mr. Hilal. 

We turn now to the Ranking Member in this Committee, the senator from Oregon, Gordon Smith. 

OPENING STATEMENT OF SENATOR GORDON SMITH, 

RANKING MEMBER 

Senator SMITH. Thank you, Mr. Chairman. In the interest of 

time, I will put my statement in the record. 

The CHAIRMAN. Without objection. 

Senator SMITH. The thrust of that statement relates to balance, 

and this hearing is in the great tradition, the bipartisan tradition, 

of the Aging Committee, which tries to put light and heat on bad 

practices while at the same time not in any way wanting to restrain or stifle innovation or impede good practices. That is the balance I think we all strike here. 

But as I have listened to each of your testimonies, I have been 

struck by the circumstance you describe, and it is alarming. I guess 

what I am hearing from you is that these aren’t exceptional circumstances, that this is becoming so pervasive as to become alarming. 

Is that your judgment, Dr. Rosen? 

Dr. ROSEN. Yes, over the last 20 or 30 years, I think it has become ingrained where it is OK. The leaders in the field that are 

heading the societies, editing the journals are probably for the most 

part the biggest offenders, which sends the message that this is 

OK. So yes. 

Senator SMITH. So, Mr. Hilal, I assume you are a medical doctor 

as well? 

Mr. HILAL. No, I am not. 

Senator Smith. No, Mr. Hilal, then your point is that codes of 

ethics and conduct and voluntary agreements just aren’t providing 

enough protections? I think that is the thrust of your testimony. 

Mr. HILAL. Yes, sir. 

Senator SMITH. Dr. Rosen, it would seem to me, were I a physician, and I have a relationship with a manufacturer of some surgical product, that I would have in the back of my mind the potential that I may have a conflict in interest in putting in to someone 

that may be an inferior product—this would really give me pause 

because of the potential malpractice implications. But are you saying that that is not a sufficient deterrent to a financial conflict of 

interest? 

Dr. ROSEN. No, I don’t think that enters the picture really at all. 

Should it? I think that among—— 

Senator SMITH. Let’s say, I am doing a hip replacement, and I 

have got an inferior product in which I have a financial interest. 

The patient as you describe is in pain, and it is just inferior to 

what else I could have put in. It just seems to me that that is a 

lawsuit ripe with liability. 

Dr. ROSEN. Well, most of the implants, whether it is total hips 

or spine, they are all generically good. I mean, they have all passed 

501—they have all passed through some type of approval. They are 

generally the same, and people can make arguments for one product over another based on some aspects of them, but it is rarely one 

is felt universally inferior to any of the others. 

33 

So it doesn’t usually take that sort of discussion. It is usually 

about the particular aspects of one versus the other, and you can 

justify using most any of the products out there in some fashion. 

Senator SMITH. So the current circumstance just doesn’t work 

sufficiently to protect patients or to sever the conflict-of-interest relationship between a manufacturer and a physician. Is there any 

other marketing model that would protect older Americans and all 

Americans? 

Dr. ROSEN. I think that disclosing the exact amounts that someone gets from a company, precisely, in the papers they write, in the 

presentations they give—— 

Senator SMITH. How about before the operation they give? 

Dr. ROSEN. Well, I think as well as that to the patient, that there 

should be signed consent that they acknowledge the doctor has this 

amount of compensation from this company. So—— 

Senator SMITH. Nothing like that happens now? 

Dr. ROSEN. Oh no, not at all. I mean, most of the time patients— 

have no clue. Most of the doctors don’t have any clue because—including me. In some cases I will know because I have heard, but 

the majority of the time that is obscured effectively. 

Senator SMITH. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much. 

Mr. Demske, in your written testimony, you state that we have 

seen instances in which physicians, in turn, have signaled to the 

industry that their loyalties are for sale to the highest bidder. ‘‘In 

some cases it comes down to how much each company is willing to 

pay for a physician’s business, which is often being simultaneously 

solicited by multiple competing companies,’’. 

So what you make clear is that there are two groups of players 

here in this unethical conduct, the companies as well as the doctors. What is the OIG office doing to detect and address wrongdoing on the part of surgeons and physicians? 

Mr. DEMSKE. OIG is working with the Department of Justice to 

follow up on the investigations in New Jersey and other cases to 

identify whether we can pursue criminal, civil or administrative 

cases against physicians who are in this situation where they have 

demanded payments in exchange for their patients. One of the difficulties that we face in prosecuting these cases is that our primary 

tool is the Federal anti-kickback statute, and that statute requires 

knowing and willful conduct on behalf of the defendant in order for 

the government to get a conviction. This is often difficult—it means 

we have to prove the state of mind of the defendant. Absent evidence that the physician made statements such as those reflected 

in my testimony or the existence of witnesses that can make statements as to that physician’s intent, these cases are very difficult 

to prove. 

But we are working with the U.S. Attorney’s Office to identify 

cases in New Jersey and elsewhere in the country against physicians as part of that case. You can anticipate in the future that we 

will be bringing additional cases against physicians. 

The CHAIRMAN. Is it fair to say that we need some additional legislation to root out the problems that we are discussing today? 

Mr. DEMSKE. I would say that the anti-kickback statute itself is 

insufficient to address the influence of money in this industry. BeVerDate Aug 31 2005 10:21 Nov 05, 2008 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 H:\DOCS\45089.TXT SAG PsN: JOYCE
34 

cause of the high burden of proof that the government must meet, 

it cannot reach many of the arrangements that can influence medical judgment in an inappropriate way. 

The CHAIRMAN. Thank you. 

Dr. Rosen, we expect to hear from witnesses on the second panel 

that many of these questionable and unethical payments to physicians and surgeons have been identified and are being addressed. 

Do you believe that that is correct? To your knowledge, what is the 

state of the problem today? 

Dr. ROSEN. I don’t believe they are being really addressed in any 

substantive way at all. I think it is mostly been a reactive action 

taken by many of the medical societies and organizations, such as 

AdvaMed, to give lip service to ethics and the concerns just to the 

point where it sort of satisfies the public. But really as far as disclosing the amounts of money, stock, royalty options that people 

get, I don’t think it happens at all. 

In fact, one of the—for example, one of the main societies, the 

North American Spine Society, has said it is pioneered ethics, and 

yet the highest level of disclosure on a five ’A’ through ’E’ is letter 

’E,’ which means someone gets over $10,000 from a company or 

owns more than 5 percent of a company. Now that doesn’t tell you 

whether it is $11,000 or $1 million, which can often be the case. 

So it is sort of piecemeal trying to throw out that we are dealing 

with the ethics. No, I don’t think it is being really addressed at all. 

The CHAIRMAN. So it is fair to say that you do not believe that 

voluntary industry guidelines can resolve this problem? 

Dr. ROSEN. Embarrassingly, I don’t believe the medical societies 

are capable of doing it nor industry. As in the previous question, 

it is so embedded now among most of the people that are running 

these societies, including educational foundations, that I don’t 

think it is possible to change that without something from the outside happening. 

The CHAIRMAN. Mr. Hilal, do you agree with that, that voluntary 

guidelines are not going to resolve the problem? 

Mr. HILAL. I wholeheartedly agree. They have not so far. They 

have simply forced the groups that are practicing their quid pro 

quos to just go more covert and more careful. I have seen it with 

my own eyes where they were coached on that. 

I just don’t see it going away. It doesn’t kick in where the product is best and the value is fair. It kicks in when the product is 

marginal and the value is high. For the competition, that is not 

best for free markets. What distorts free markets, in my opinion, 

is the act of the kickback. 

The CHAIRMAN. Thank you. 

Senator Corker. 

Senator CORKER. Mr. Chairman, thank you, and I want to thank 

the panelists for great testimony. I think that the comments by the 

Ranking Member about achieving balance is what we all wish to 

do. 

I know we are going to hear from some other panelists in just 

a moment, but it does seem to me that disclosure would be a nobrainer. I mean, I think that people should know. I will tell you, 

on the other hand, that all of us see physicians, and I think even 

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ship regarding a particular procedure, I don’t know if it really 

would affect me that much. I just wonder if you would expand on 

that a little. But I mean, just honestly, I go to these little specialty 

facilities, and I know the doctors are making money off of those, 

and yet if they tell me I need a procedure, then I suppose I am 

going to have it anyway. I just wonder if you might respond to 

that. 

Dr. ROSEN. I don’t think it necessarily will change that much either. In some cases, though, if there is a new procedure that came 

out and it is a little questionable, and the person is not sure and 

they see that, well, this doctor owns 10 percent of the company 

that brought this public, and he is suggesting the device in putting—I think that might affect them. For the most part, probably 

not, but I think the patient would be and the doctor would be better off protected as well, if the patient knew. Certainly with things 

like distributorships, though, where the money is made by putting 

in implants, I think the patients should know that there is really 

a close correlation between the profit and putting in the implants 

versus not using them, because many operations can be done without them. 

The main thing, really, is for papers and presentations that the 

rest of the doctors in this country read. I really believe 95 percent 

of the spine surgeons in this country have really nothing to do with 

industry. They just want to do the best for their patient, but they 

rely on the 5 or 10 percent of high-profile people that are writing 

papers to decide what to do. If they knew that these people had a 

million dollars in salary from so-and-so company, when they read 

a paper that proposes using a certain device, they will realize this 

is not an independently validated paper, and that is a big difference. 

Independent validation is when somebody looks at it in an unbiased fashion, and that is the keystone goal in medicine. That would 

be the most valuable thing, because this all happens with products 

that are not so great, and that is the reason they have to sort of 

make a pretense that they are independently validated. But as far 

as the person in the office, maybe some difference, but mostly for 

other doctors. 

Senator CORKER. I would imagine it might affect the utilization 

rate in many cases, but more than—you know, you talked about 

that products were actually, in some cases, very comparable, but I 

would think that just from the standpoint of utilization, that could 

be driven up greatly by having the financial relationship. I know 

it applies in most other business, but—— 

Dr. ROSEN. Absolutely. 

Senator CORKER. OK. 

Mr. Hilal, the issue, on the other hand, it seems to me that physicians who are using products—I know some physicians that are 

inventor-types, if you will, and they have an imagination, and they 

are able to figure out ways that products can provide a better service, and so they do work with companies, you know, to make those 

products better. Could you talk just a little bit about that? 

I think, at the end of the day, we all want innovation to take 

place, and we want to make sure that the products that are sold 

are products that physicians know will do a better job for the paVerDate Aug 31 2005 10:21 Nov 05, 2008 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 H:\DOCS\45089.TXT SAG PsN: JOYCE
36 

tients involved. Again, I think as Ranking Member Smith mentioned we do need a balance here. So how do we keep that from 

being perverted, if you will? 

Mr. HILAL. Absolutely, I truly believe that the best innovation is 

the innovation that starts from the clinical need itself. As a matter 

of fact, we at Applied would argue that 80 percent of the solution 

may be in the proper definition of the need or the problem. Therefore this correlation, this cooperation, between surgeons and companies is very important for the development of products. 

Surgeons are the users. They are the champions of the patient. 

In that term, they really need to be listened to. They need to be 

allowed to innovate and help the companies develop new products. 

That is a far cry from pushing and hawking the product. That is 

a far cry from getting a kickback to favor a product. I think that 

is really what the concern is. 

I believe that disclosure is helpful, but I would take the time to 

differentiate between ‘‘disclosure’’ and inadvertently turning it 

around to the patient and saying, ‘‘Patient, protect thyself,’’ because patients cannot protect themselves. I agree with you. A patient is not going to look at the financial statement of his or her 

doctor and decide whether that doctor is acting in the patient’s best 

interest. This is why I delved a little bit on what I call the corrupting influence. 

I agree with Dr. Rosen. Most surgeons dedicate their lives to taking care of patients, to doing the right thing. Why tempt them? 

Why walk up to them and say, ‘‘You can make an extra buck if you 

use this product?’’ How does that help a free market compete, innovate and continue to be the leading force in the world health endeavor? 

Senator CORKER. Mr. Demske, what are your specific concerns 

about the physician-owned facilities? I know you mentioned that 

just in passing in your testimony. I wonder if you would expand on 

that particular issue. 

Mr. DEMSKE. Certainly. The OIG has for many years given guidance about the risks that are inherent when health care providers 

enter into joint ventures with physicians, because there is a risk 

that the physicians are being brought in as investors as a way to 

funnel profits back to the physicians to induce them to send their 

business to a facility. So physician ownership raises those sort of 

risks. 

One has to look at how those investors are selected, whether they 

are a major source of business for the entity and whether it is a 

bona fide investment at all. We have recently been looking at physician involvement in distributors of medical equipment and group 

purchasing organizations. Those types of investments can be additional ways device manufacturers can funnel money to physicians. 

These payments may not be for the service that a GPO or distributor would usually provide but is essentially money being paid 

to influence the physician’s choice of devices. 

Senator CORKER. Mr. Chairman, thank you. It is a very good 

panel, and thank you for your testimony. 

The CHAIRMAN. Thanks, Senator Corker. I want to reiterate what 

he said. This has been a very, very good panel. You have really 

shed light on some of the issues and the problems that we face and 

37 

given some indication as to the direction in which you believe we 

need to go. In that sense, it has been really good to have you. You 

made a great contribution, thank you so much. 

At this point, we would like to call the second panel. Our first 

witness on the second panel will be Ned Lipes, who is the executive 

vice president of Stryker Corporation. Mr. Lipes has worked at 

Stryker for nearly 20 years, and he will discuss how his company 

is now addressing conflicts of interest and potential violations of 

law by its employees. 

Then we will hear from Chad Phipps, who is the senior vice 

president and general counsel at Zimmer Holdings, Incorporated, 

one of the largest medical device companies in the industry. Mr. 

Phipps’ global responsibility for Zimmer’s legal affairs, and he also 

serves as secretary to the board of directors. 

Finally, we will be hearing from Christopher White, who is the 

executive vice president and general counsel at AdvaMed. 

AdvaMed’s member companies produce nearly 90 percent of the 

health care technology purchased annually in the United States, 

and its mission is to, ‘‘advocate for a legal regulatory and economic 

climate,’’ on behalf of medical device manufacturers. 

Gentlemen, we welcome you here today. 

Mr. Lipes, we will take your testimony. 

STATEMENT OF EDWARD LIPES, EXECUTIVE VICE PRESIDENT, 

STRYKER CORPORATION, MAHWAH, NJ 

Mr. LIPES. Good morning, Chairman Kohl, and Senator Corker. 

My name is Ned Lipes. You are not the first one that has made 

that mistake, sir. 

The CHAIRMAN. Thank you. 

Mr. LIPES. I am the executive vice president of Stryker Corporation, and I would like to take this opportunity to thank you for the 

invitation to appear here on behalf of Stryker Corporation in connection with the committee’s efforts to explore the relationship between medical device companies like Stryker and physicians. 

As you may know, Stryker is one of the world’s leading medical 

technology companies, with the most broadly based range of products in orthopedics and a significant presence in other medical device areas or medical specialties. Our corporate headquarters and 

the majority of our manufacturing operations are headquartered 

right here in the United States. Stryker has grown into a Fortune 

500 company based on our offering of an unparalleled variety of 

high quality products and services as well as the dedication of each 

of the company’s more than 15,000 employees around the world. 

In the late 1930’s, Dr. Homer Stryker, who was a resident in orthopedic surgery at the University of Michigan, found that certain 

medical products were not meeting his needs or the needs of his 

patients. He put his inventive mind to work and created new products to solve real clinical problems that he faced with his patients. 

Some of his inventions included the walking heel for leg casts, the 

turning frame for immobile patients and the oscillating saw to remove casts for broken bones. 

Dr. Stryker’s devices gained attention of other medical professionals, and in 1941, the demand for the products grew so large 

that Dr. Stryker founded the company to make those products. The 

38 

company became Stryker Corporation when Dr. Stryker retired 

from his medical practice in 1964. Dr. Stryker was a great example 

of the role that surgeons can play in the development of new products to meet the challenges and needs of patients. 

Since its founding, Stryker has focused its attention on continuing to meet and surpass the needs of medical professionals and 

patients. Working with the medical professionals who use our products, we have continued to improve the quality of care available to 

patients by solving real clinical problems and finding better ways 

to make products that will last longer and perform at higher levels. 

In the past year, 2007, Stryker’s sales were over $6 billion. 

As for me, I started working at Stryker in 1988. In 1989, I became president of Osteonics Corporation, which was the orthopedic 

implant division of Stryker Corporation. In 1998, Stryker purchased Howmedica Corporation from Pfizer and became 

Howmedica Osteonics Corporation, which is now known as Stryker 

Orthopaedics, based in Mahwah, NJ. 

Early in my career with Stryker Orthopaedics, I recognized that 

one of the keys to success was to have close interactions with a select and small number of thought-leader surgeons who have good 

ideas about how to better treat their patients. Throughout the 

1980’s, the 1990’s and continuing to today, Stryker has had consulting contracts with a select group of orthopedic surgeons. For example, surgeons from Indiana and Pennsylvania assisted Stryker 

in developing a new hip implant system designed to secure initial 

fixation in the implanted patients. These same surgeons have been 

involved in following the clinical results of this product in their patients to demonstrate that our design goal has actually been 

achieved. Another orthopedic surgeon from California helped 

Stryker design a new knee implant system to give patients a greater range of motion with their new knee. 

Because these surgeons contributed their time and their ideas to 

Stryker, we paid them for their efforts. How much did Stryker pay? 

We paid what we believed to be fair market value for the services 

that they provided. 

Stryker has other types of contractual relationships with surgeons as well. For example, some surgeons are great teachers. One 

surgeon from Massachusetts has a very strong interest and understanding of ceramic technology. He uses that knowledge and that 

expertise to help other surgeons understand when that technology 

may be appropriate for their patients. Another surgeon from Georgia helped Stryker teach Japanese surgeons about the benefits of 

a new knee design that can help patients kneel and squat more 

easily. 

Finally, other surgeons are outstanding peer-to-peer teachers of 

implant techniques. One surgeon from Michigan regularly teaches 

his peers—in sawbones, cadaver laboratories and in his operating 

room—by demonstrating the proper use of our newly developed 

computer navigation technology for hip and knee replacement surgery, all with the goal of enhancing outcomes for patients. 

We retain these consultant services because they help us teach 

the proper use of our products, and this helps our business grow. 

In the late 1990’s, our industry began to change and certain abuses 

emerged as the use of consultants became more of a marketing 

39 

tool. Stryker did not change its business model and instead adhered to the traditional approach to contracting with surgeons. We 

required our business leaders—excuse me—to have clearly defined 

procedures, systems and controls in place to ensure compliance 

with our business model. 

In March 2005, the United States Attorney for New Jersey 

issued subpoenas to five orthopedic companies, including Stryker, 

as it began its investigation into the relationship between these 

companies and surgeons. The September 2007 settlements related 

to this investigation have provided our industry with a level playing field so that each company will play by the same set of rules 

regarding contracting with health care professionals. 

Surgeons who are absolutely crucial to product design, development and clinical studies will be paid fair market value for their 

services. Other surgeons who are great teachers will be paid fair 

market value to train their fellow health care professionals about 

the features and benefits of the products that we sell. Stryker firmly believes that all the competitors in our industry can and should 

compete on a level playing field. The recent settlements with the 

U.S. Attorney provide a strong framework to ensure that this occurs, and Stryker intends to honor its commitments to the U.S. Attorney in both spirit and principle. 

In the years ahead, we look forward to competing on the basis 

of how our products and services meet the demands of surgeons 

and patients. We look forward to continuing to interact with consulting surgeons who have so much to offer in terms of enhancements to treatments for patients everywhere. These collaborations 

will continue to bring innovation and improvements in patient care. 

Thank you for the opportunity to express Stryker’s views, and I 

look forward to any questions that you may have. 

[The prepared statement of Mr. Lipes follows:] 

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The Chairman. Thank you, Mr. Lipes. 

Mr. Phipps. 

STATEMENT OF CHAD PHIPPS, SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, ZIMMER HOLDINGS, INC., 

WARSAW, IN 

Mr. PHIPPS. Mr. Chairman and members of the Committee, my 

name is Chad Phipps, and I am senior vice president and general 

counsel of Zimmer Holdings, based in Warsaw, IN. I am pleased to 

testify today on behalf of our company. Your Committee has taken 

a real leadership role on this important issue, and it is a privilege 

to be able to provide our insights and to describe our strong support for the chairman’s legislation. I will make brief, summary 

comments in this oral statement and ask that my written testimony be included in the record. 

We at Zimmer are proud of our 80-year record as a worldwide 

leader in providing orthopedic and other medical devices. We serve 

millions of patients who suffer from debilitating conditions, and we 

contribute to health care systems in over 100 countries. 

The subject of this hearing—the relationships between physicians and the medical device industry—warrants some historical 

context. 

The industry has transformed patients’ lives through a combination of clinical knowledge and engineering. This combination brings 

the insights of highly skilled physicians who work directly with patients together with the technical knowledge of engineers who design and build safe and effective devices. Surgeon training on the 

use of products has also been central to the significant benefits 

that patients have experienced with these devices. 

Over the years, as devices and procedures expanded in number, 

complexity and impact, so too did the industry’s investment in the 

collaboration that made them possible. Despite what were then regarded by industry as appropriate programs to manage these circumstances, with hindsight it now appears that as industry expanded to meet patient needs, the use of consultants may have 

been excessive at times. Such excesses fostered a degree of mistrust 

and invited the understandable scrutiny of the government and 

other stakeholders. 

The historical model for collaborative relationships requires 

change to inspire confidence and trust, while preserving the best 

of the collaboration that drives innovation. 

Zimmer’s continuous consideration of our own compliance standards, combined with measures taken beginning in 2003 by the HHS 

I.G. and AdvaMed, prompted Zimmer that year to reevaluate our 

model for the management of conflicts of interest and led to the implementation of our enhanced 2005 corporate compliance program. 

Now, as we buildupon that foundation, we are applying further discipline to ensure we align collaboration strictly with necessity. 

In September 2007, Zimmer and four other orthopedic companies 

signed agreements with the Federal Government to resolve a DOJ 

investigation that began in March 2005 pertaining to past consulting relationships with health care professionals. 

Under the resolution, Zimmer entered into a deferred prosecution 

agreement, without admitting any liability. We agreed to pay a 

46 

civil monetary sum and to be subject to oversight for 18 months by 

a federally appointed monitor. The U.S. Attorney’s Office acknowledged that the agreement does not allege that our company’s conduct adversely affected patient health or patient care. As part of 

the settlement, Zimmer also entered into a 5-year corporate integrity agreement with the HHS I.G. We are taking our obligations 

under these resolution agreements extremely seriously, and they 

are a top priority for our company. 

Zimmer welcomes the opportunity to outline the additional 

progress we have made since signing these agreements. We also 

wish to express our commitment to go beyond their requirements, 

to set a new industry standard that will meet the needs of both patients and the health care system. 

Our broader commitment includes fundamental changes in product development, marketing, surgeon training, educational and research funding, and transparency. Let me share just a few examples of the changes we are putting in place while we continue to 

define the full scope of Zimmer’s program. 

First, our sales and distribution teams, and individuals with 

daily responsibility for sales support, will have no involvement with 

physician consultants concerning agreements, services and payments. 

Second, we are reviewing our existing royalty-bearing hip and 

knee development agreements to ensure that they are consistent 

with the fair market value principles of our corporate compliance 

program. 

Third, with respect to Zimmer’s future funding of medical fellowships, residencies and general educational programs, we plan to 

make cash donations to independent, third-party institutions. They 

will choose the programs that will receive Zimmer funding globally, 

and we will have no influence over the selection of the recipients. 

Fourth, Zimmer’s future charitable activities will include product 

donations to independent, third-party charitable institutions. They 

will distribute the donated products in areas of the world with 

great medical need. Again, Zimmer will have no control over their 

distribution and no influence over who receives them. 

Finally, while the industry code of ethics currently allows certain 

educational, practice-related or branded company gifts to health 

care professionals, Zimmer restricted such gifts as part of our 2005 

compliance program, and we will now move to prohibit them altogether. 

As we continually improve our compliance program, we will implement the changes globally across our entire business, which also 

goes beyond the requirements of our resolution agreements with 

the government. 

Mr. PHIPPS. In closing, we acknowledge that initiating change is 

often difficult. Nevertheless, we will carry these initiatives forward 

because it is the right thing to do for patients, our company and 

the industry as a whole. 

Mr. Chairman, we appreciate the committee’s consideration of 

our views, and I look forward to your questions. 

[The prepared statement of Mr. Phipps follows.] 

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The CHAIRMAN. Thanks a lot, Mr. Phipps. 

Mr. White. 

STATEMENT OF CHRISTOPHER WHITE, EXECUTIVE VICE 

PRESIDENT, GENERAL COUNSEL AND ASSISTANT SECRETARY, ADVAMED, WASHINGTON, DC 

Mr. WHITE. Thank you very much, Mr. Chairman. My name 

again is Christopher White. I am the executive vice president, general counsel and secretary of AdvaMed, the Advanced Medical 

Technology Association. AdvaMed represents more than 1,600 of 

the world’s leading medical technology innovators and manufacturers. These are companies that together produce the most advanced 

technologies, improving health outcomes across the entire continuum of care, from wound care to diagnostics to orthopedics, cardiovascular and beyond. 

However, over 70 percent of our member companies are rel- atively small, with annual sales of less than $30 million per year. 

But taken together, our member companies’ constant innovation in 

the United States leads the world in cutting-edge medical technologies. 

Mr. Chairman, I wish to be clear. AdvaMed supports the appropriate disclosure of relationships between medical technology companies and physicians. We recognize that strong ethical standards 

are critical to ensuring the valuable collaboration between the medical device industry and health care professionals. We have been 

very pleased to work with you, Mr. Chairman, your staff, Senator 

Grassley and the Physician Payments Sunshine Act, and we thank 

you very much for your openness to our recommendations. 

This morning, I would like to highlight three points specific to 

the legislation and its relation to the medical device industry. One, 

I would like to further highlight industry’s unique interactions with 

physicians. Two, I would like to highlight our commitment to compliance. Three, I would like to provide some thoughts relative to 

the legislation itself. 

First, as you have heard today and on the earlier panel, medical 

device companies develop ongoing relationships with physicians. 

These relationships are essential to developing new treatments and 

ensuring medical technology can be used safely and effectively. In 

short, physicians are inventors of new medical technologies. They 

are skilled advisers to medical device companies in improving existing technologies. They are researchers. They are trainers of other 

health care professionals. They are trainees themselves by companies who develop new, breakthrough technologies requiring sophisticated deployment or activation. 

Of course, physicians are also our member companies’ customers. 

In short, physicians play a central role in our health care delivery 

system. They wear many hats in their interactions with medical 

device companies. As the Congress examines these relationships, 

we urge the Committee to approach the matter with surgical precision to avoid any inadvertent harm to the many beneficial collaborations detailed further in my written testimony. 

Second, while the close and ongoing collaboration is necessary to 

develop new medical technologies, we recognize and respect the 

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58 

making relative to product selection. That is why we developed a 

code of ethics to help distinguish those interactions that contribute 

to the advancement of medical technology from those that could be 

viewed as influencing the medical decisionmaking process inappropriately. 

Let me assure you that this is not merely lip service. Our industry’s commitment does not stop with the code of ethics itself. We 

have taken aggressive steps to educate the health care industry 

about the code. We will be presenting before medical specialty societies in the very near future, including next week. We have engaged in outreach on a sustained basis over time. It is a continued 

priority as we move ahead on this issue and in this area. 

Sometimes we present alongside enforcement agencies to underscore that adherence to the code of ethics is beneficial to all stakeholders. Recently, our industry has adopted a code logo program to 

ensure that the code of ethics is not merely words on paper but 

rather to ensure that companies institute effective and lively compliance controls to implement the code of ethics. This is consistent 

with guidance from the OIG and its compliance effectiveness documents. In short, compliance is an ongoing process. It is a priority 

for our association, for our industry and for our member companies. 

Finally, Mr. Chairman, we understand and we appreciate your 

desire to increase public understanding of industry relationships 

with physicians, and we, too, wish to ensure that patients get clear 

and meaningful information about how these relationships improve 

patient care. 

In closing, I would like to highlight our four top priorities as we 

move forward. 

First, we believe that the legislation should specifically preempt 

State laws requiring disclosure of relationships with physicians. 

Simply put, a patchwork of 50 laws all with different standards, 

different definitions of payments, different details, different contexts required in different formats on different systems on different 

Web sites will only cloud the transparency we all seek to promote. 

Instead, we support one comprehensive Federal standard so that 

patients will have clear information available on reportable payments from one source. 

Preemption in the case of a new, strong Federal reporting standard, such as the one envisioned by this legislation, makes eminent 

sense, and it is not new. In fact, it is consistent with the preemptive effect of a similar national requirement to report the results 

of clinical trials overwhelmingly approved by the Congress last 

year in the FDA Act amendments. 

Second, we are concerned, Mr. Chairman, that your legislation 

requires disclosure only from companies that exceed $100 million 

in annual revenues. We believe the goals of your legislation would 

be better served by adopting a threshold tied to a company’s annual level of physician payments, regardless of company size. We 

advocate a metric requiring companies making $250,000 in reportable physician payments annually to participate in the disclosure 

program. This would provide an important level of transparency 

while still meeting your goal of exempting smaller companies that 

make relatively few payments to physicians. 

59 

Third, as outlined in our correspondence to the Office of the Inspector General and as discussed in the earlier panel, the emergence of physician-owned entities raises very important legal and 

policy questions regarding the potential effect on clinical decisions 

by physicians. As opposed to the collaborations addressed in our 

testimony among physicians and industry, which yield important 

advances in medical technology, these arrangements simply seek 

instead to leverage device purchasing into income-generating opportunities for physicians. The Office of the Inspector General, as 

you heard last year, in correspondence to AdvaMed stated that 

these arrangements should be closely scrutinized under the fraud 

and abuse laws, and the disclosure program proposed in your legislation should apply to these physician-owned entities as well, regardless of their size. 

Finally, Mr. Chairman, I described the many hats that physicians wear in their interactions with medical device companies. We 

think that any legislation creating a public data base should give 

companies the opportunity to provide the context of those payments. If Sunshine is going to work, then patients need to understand what they are looking at and what it means. The absence of 

any context could serve as a disincentive for physicians to participate in the development and improvement of medical technology. 

We believe that these recommendations together—creating an alternative threshold, including physician-owned entities, providing 

context to patients and preempting State laws to create a strong, 

central, Federal reporting standard—are all essential ingredients 

that must be included if the disclosure program is to meet the 

needs of patients and to be one that the medical technology industry can support. In addition, we have provided a number of more 

technical suggestions to the Committee that we have discussed 

with your staff. They have been attached to my written testimony 

and submitted for inclusion in the record. 

Mr. Chairman, AdvaMed and our member companies want to 

stress again that we support appropriate disclosure of relationships 

between medical technology companies and physicians. We believe 

that the positions and recommendations set out in our testimony 

are constructive, reasonable and designed to make a Federal disclosure program work well for patients, for industry and to protect the 

essential collaboration that you have heard this morning. 

Thank you very much for your openness to our recommendations. 

We look forward to continuing to work with you, your staff and 

Senator Grassley as this legislation moves ahead. 

[The prepared statement of Mr. White follows:] 

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The CHAIRMAN. Thank you very much. 

Mr. Lipes, in the agreement Stryker entered into with the Department of Justice it is mandated that your company adhere to 

the AdvaMed code of ethics on interactions with health care professionals, as you know. Was the company not complying with this 

code prior to entering into its non-prosecution agreement? 

Mr. LIPES. No, sir, the company was complying, both the spirit 

and the intent of the AdvaMed guidelines from the time that they 

were issued. 

The CHAIRMAN. Based on information Stryker provided to the 

Committee, it appears that your company provides very large payments for clinical trials. In fact, you reported $3.4 million in total 

clinical trial payments on your Web site. This is quite disproportionate to what other companies provide for clinical trials. One of 

your competitors only spends roughly $127,000 on clinical trial payments. Can you explain to us the discrepancy between your large 

payments for clinical trials and what appears to be typical industry 

practice? 

Mr. LIPES. We are confused by that as well, Senator. We have 

asked the U.S. Attorney’s Office to help us understand how other 

companies may have accounted for their clinical studies. Because 

for us, clinical studies are a vital part of us determining how well 

our products are performing. We are required to do clinical studies 

for the approval of some of our products, whether it is through a 

510(k) or through the PMA process. The PMA requires that we continue to follow those patients after the product has been approved. 

We make every effort to perform some type of clinical study on 

all of the products that we have developed so that we have some 

context for understanding how well that product is performing in 

patients and whether or not we have achieved the clinical or the 

design goals that we set out. So I am very surprised at the discrepancy, and I think that further understanding of how different companies have accounted for that will clear up the discrepancy. 

The CHAIRMAN. Good. 

Mr. Phipps, in its written statement, the HHS OIG outlined a 

wide variety of specific violations of law and unethical practices it 

uncovered prior to the settlements entered into by your company 

with the Department of Justice. Throughout an interview with 

Committee staff, you maintained that Zimmer had little if any specific knowledge of the evidence or charges that the U.S. Attorney 

might bring against your company. So I find it surprising that Zimmer still agreed to pay the government $170 million in its deferred 

prosecution agreement. Is it still your view that you were largely 

unaware of what specific wrongdoing had been discovered? If so, 

why did you agree to pay $170 million? 

Mr. PHIPPS. Yes, Mr. Chairman, that is true that we did not receive any facts from Mr. Christie’s investigation at the time of the 

settlement or since. He has never provided any facts to our company as to what they uncovered in the course of their 2-year investigation. 

As far as why we settled, it starts with, as a public company, 

first and foremost what is in the best interest of our shareholders 

and also what is in the best interest of employees and patients. We 

deemed that the settlement was in the best interest of these stakeVerDate Aug 31 2005 10:21 Nov 05, 2008 Jkt 000000 PO 00000 Frm 00070 Fmt 6633 Sfmt 6633 H:\DOCS\45089.TXT SAG PsN: JOYCE
67 

holders. We negotiated a settlement that allows us to continuously 

strengthen our compliance practices while still allowing us to move 

forward with necessary and appropriate collaboration, and we felt 

that it is important that we have the ability to continue to do that 

in a proper manner. 

The resolution agreement also incorporates many of the features 

of Zimmer’s corporate compliance program, which was important to 

us, and the U.S. Attorney imposed requirements of Zimmer’s program across our industry through these agreements. The fact that 

we were able to settle without admitting to any wrongdoing—and 

if we comply with the DPA for 18 months, then we will have a Federal release. Those are all important factors. 

Then the flipside of that is what if we didn’t settle? Maybe that 

is even more important when you are in our shoes at that point. 

It would have been a long, drawn-out investigation taking multiple 

years most likely. We would not want to be in a situation where 

we are the only company of the five that did not settle. There 

would be a cloud of uncertainty hanging over our company and our 

stock for a long period of time. 

The ultimate risk for a company in our position is that if you face 

prosecution and ultimately do not prevail in your defense, you may 

be excluded from participation in the Federal health care reimbursement system, which is in effect a death penalty for a company 

such as ours. Then finally, the U.S. Attorney looked me in the eye 

and said, I have a case that I can prove against your company beyond a reasonable doubt. I had to take him for his word on that, 

even though I don’t have their facts—— 

The CHAIRMAN. All right. 

Mr. White, as you have testified, your association created a voluntary list of ethical guidelines to address the questionable practices that we have been discussing today. As part of its settlement 

with five of the orthopedic device manufacturers, Justice Department mandated that companies follow the AdvaMed code of ethics. 

Why would it take the government’s legal intervention to force 

compliance with your code by some of the industry’s largest companies? 

Mr. WHITE. The AdvaMed code of ethics is a voluntary code, however it does have meaning in our industry. It has been replicated 

internationally by other trade associations abroad. It has been borrowed from and adopted by medical trade associations. 

As a voluntary trade association, we lack the resources and don’t 

have the ability to enforce the code itself. However, we do have a 

sustained outreach and a real commitment to bring the words to 

life within organizations, and we have implemented a number of 

programs including the code logo program that I have described to 

you to ensure that the code of ethics has meaning within our member companies and within our industry. 

The CHAIRMAN. Thank you. 

Senator Corker. Then Senator McCaskill. 

Senator CORKER. Mr. Chairman, again thank you for a great 

panel. It appears to me that you have created a piece of legislation 

that is addressing a need. It appears to me that people on both 

sides of the equation agree generally with it. It appears to me that 

Mr. White in his four points has addressed some things we might 

68 

want to look at in making the legislation even better. I would have 

to say this has been an excellent hearing. 

You know, I am aware that we live in a world that if you can 

make a little money doing something a little bit, you can make a 

whole lot more doing something a whole lot. That is obviously what 

we have seen in our credit markets right now. We are seeing a lot 

of corrections take place throughout our country, and it is going to 

take some time for that to settle out. 

I guess, you know, seeing that both industry and those proponents of stronger ethics agree on this legislation, I just would 

like to ask the two industry folks who are here, will this legislation, in your opinion, truly be time tested and will it, in fact, solve 

the problem of over-utilization and zealous sales, if you will, as it 

relates to consulting arrangements? Do you think this will adequately address the problem for the long term, or are there other 

things we ought to look at in this regard? 

Mr. LIPES. Senator, I believe that the proposed legislation, with 

the amendments Mr. White spoke about in combination with the 

AdvaMed guidelines and in combination with the changes that all 

the companies have made in the orthopedics industry as a result 

of this Department of Justice investigation, will result in a significant reduction if not elimination of the kinds of abuses that we 

have seen in the past. 

Mr. PHIPPS. Yes, we have a unique experience here because we 

have been posting, as you know, under our deferred prosecution 

agreement, our hip and knee consulting payments as part of that 

agreement since October. I think the reaction to that has been 

mixed, but I think it is a positive. I think most surgeons understand it. We understand it. It has been a good way for us to take 

a look at our business and where we are spending money and using 

consultants. 

I do think one thing I would suggest, and it is in our letter, Mr. 

Chairman, to you, that we think is important is that there not be 

exemptions for companies that are smaller. We think that if there 

is going to be transparency, it needs to be across the board. There 

should not be an exemption, we don’t think, for companies based 

on not having large revenues or not using consultants as much. It 

should be fully transparent across the industry. That is important 

for us, and we wanted to put that on the record as well. 

Senator CORKER. Mr. Chairman, I would just like to make a comment. I know that we will be able to work with your staff privately 

in this regard, but I would have to agree. I think one of the comments yesterday in just going through your legislation, which it 

seems to me that truly you have done something here that needs 

to be done, and it looks like something that we ought to pass 

through with unanimous consent in the Senate. I am sure that will 

happen very quickly. 

But it does seem to me that, ‘‘being able to abuse your way to 

a certain level and then have to comply in a different way doesn’t 

make a lot of sense.’’ 

It seems to me that we ought to have transparency at all levels, 

and that does make a lot of sense to me, and I hope that we will 

be able to work with you in that regard. 

69 

I want to thank you again for what I think has been an excellent 

hearing that has vetted your piece of legislation, which it seems to 

me is most needed. I want to thank you for addressing that need. 

Thank you, sir. 

The CHAIRMAN. Thank you very much, Senator Corker. 

Senator McCaskill. 

Senator MCCASKILL. Thank you, and I meant to tell you, I think 

one of you all is responsible for something that is in my right knee, 

and some days—I am glad I don’t know which one of you it is, because some days I would like to say thank you. Today is a day I 

would not say thank you to you, so it is a good thing that I don’t 

know which one of you is responsible for the device that was my 

complete knee replacement that I had about a year ago. 

I am a little incredulous about some of this. I don’t mean to pick 

on you, Mr. Phipps, but I am going to talk a little bit about your 

company. Based on the testimony that you just gave the chairman, 

what you are basically saying is that your company thought it was 

a good deal to pay $170 million to the government even though you 

have done nothing wrong? 

Mr. PHIPPS. Senator McCaskill, I did not say we did nothing 

wrong. What I said in response to the question was that the U.S. 

Attorney never provided us any facts for what they uncovered 

under their investigation. We have done our own reviews and investigations internally over the years. We have made significant 

improvements as we have had experiences and learned more information. 

In 2003, for example, we learned that these inherent conflicts of 

interest, where you have customer, vendor—consultant being the 

same people, that this is an area that is subject to abuse. We put 

in place a very robust compliance program that was implemented 

in 2005. This investigation, it is important to note, covered 2002 

through 2006. Our compliance program came into place in 2005. 

So in the past we think there were excesses, and frankly, we 

have found some of those excesses and addressed them with our 

program. We are using this settlement phase of our investigation 

to turn the dial up another couple of notches and to continuously 

improve. It has been an evolution. 

But there were excesses in the past; there were abuses in the 

past, not unique to Zimmer, but across our industry. I believe all 

companies that face that inherent conflict of interest are subject to 

the same problems, and I think people that say that there weren’t 

excess have had their head in the sand, frankly, and it was a problem. We feel like we have addressed it. 

Senator MCCASKILL. So the issue wasn’t that there weren’t facts 

there. The issue was that you all found the facts yourself that indicated that prosecution was a real problem, and somebody could 

maybe go to jail, and therefore it wasn’t necessary for your company to demand the facts? Because, I mean, I have spent a lot of 

time as a prosecutor in my life. I can’t imagine getting a defendant 

to pay $170 million without producing anything to convince them 

that they have done something they might go to jail for. So what 

you are saying is that you all didn’t demand those facts from the 

U.S. Attorney because you had done the internal investigation and 

70 

conceded that there could be potential criminal liability for what 

you all had done. 

Mr. PHIPPS. We did respectfully request those facts, both before 

we settled as well as we have done that since. Because in my position, I would like to know if they found things that may involve individuals still with our company or relationships with doctors that 

we still have; I would want to know that. 

They have declined in each instance to provide that statement of 

facts. I am not sure if it exists or not, but they have not provided 

it. But we believe, based on our own reviews that we have done, 

that there were excesses in the past and we feel that it was important to settle this investigation. 

Senator MCCASKILL. I guess it is possible they may be holding 

their version of what they have found because this is a deferred 

prosecution agreement. There has been no agreement; there has 

been no dismissal with prejudice of any criminal charges. This is 

merely agreement that says—it is kind of like, you know, what we 

call probation. When somebody robs a bank, they get probation. 

When it is sometimes a big company, they get deferred prosecution, 

as opposed to actually having to establish that you have to plead 

guilty to something. Is that a fair—— 

Mr. PHIPPS. That is fair. There were three other companies. All 

four of us had a criminal complaint filed against us. If you look at 

that complaint, you will see it is very bare bones. There are no 

facts alleged in that complaint whatsoever, but—— Senator McCaskill. OK. Let me ask you this. There is $170 million that you are paying out of your company, and I know your 

stockholders are aware of that. Aren’t you also paying tens of millions of dollars to former Attorney General Ashcroft for monitoring 

this? 

Mr. PHIPPS. Over the course of the 18 months, we do expect to 

pay tens of millions, yes. 

Senator McCaskill. How much do you think—what have you told 

your shareholders that you are going to have to pay? It is my understanding this was not a competitively bid contract, and that 

your company is on the hook for it. What are you estimating that 

you are going to have to pay former Attorney General Ashcroft for 

monitoring your company? 

Mr. PHIPPS. Based on the estimates that they provided to us, which is $1.55 million to $2.9 million per month, that ends up 

being in the range of $28 million to $52 million over the course of 

18 months. 

Senator McCaskill. I have looked at some of your disclosures for 

2007. That seems to me much higher than any of the money you 

are paying any of the doctors, correct? 

Mr. PHIPPS. That is correct. On an hourly basis, we pay surgeons 

$500 per hour. I am not sure what it equates to with our monitor. 

Senator McCaskill. You know, the reason that this is obviously 

a concern to us is because we deal with constituents all the time 

that can’t get health insurance, that can’t afford health insurance, 

and we know that Medicare is one of the most incredible train 

wrecks that is coming in terms of our entitlements in our Federal 

budget, that Medicare costs are escalating, and obviously the taxpayers are on the line for that. I understand that this $170 million 

71 

and between $30 and $50 million you are going to pay Attorney 

General Ashcroft for a year and a half is not taxpayer money, but 

it all ends up getting into the mix because obviously the costs of 

your company are passed on, in terms of the cost of what you sell 

to the people that are performing these surgeries. 

I want to focus for a minute on your disclosures. It seems to me 

if you have avoided prosecution by saying, ‘‘We are going to fully 

disclose,’’ that it is really incumbent upon you all to decide you are 

really going to disclose. Now, here is what is confusing to me. I am 

looking at the document where you are admirably disclosing and 

what this law is going to require you to disclose, that for example 

you paid in 2007 a doctor in Deerfield, IL, $1.875 million. Now, I 

am assuming that that is for some kind of consulting. That is not 

for him doing—he is getting paid for doing the surgeries, too, correct? 

Mr. PHIPPS. Yes, 75 percent of our disclosure is for royalties that 

people receive from being a developer of a product. So when you 

see our posting, about 75 percent in the aggregate is royalties. We 

have nothing to do with what he is being paid by his hospital or 

anyone else for procedures, if that is your question. 

Senator MCCASKILL. So these big numbers are people who have 

been involved in the development of the product? 

Mr. PHIPPS. Seventy-five percent of the total. If you tell me a 

particular doctor’s name, I can—— 

Senator MCCASKILL. Well, like all the ones that are over a million and a half dollars? 

Mr. PHIPPS. Yes, there may be some there that have also done, 

you know, training, so that would be a standard consulting fee. But 

in the aggregate, 75 percent roughly is for royalties. 

Senator MCCASKILL. I would like to focus on the plane flights. 

What kind of corporate plane do you have? 

Mr. PHIPPS. We have a Challenger and a Hawker. 

Senator MCCASKILL. They are both jets? 

Mr. PHIPPS. They are jets. We lease—— 

Senator MCCASKILL. Now—— 

Mr. PHIPPS. We lease at least one of them, maybe both. 

Senator MCCASKILL. OK, we have spent a lot of time talking 

about the cost of private corporate jet travel around here as we 

passed the ethics bill, because some of us who just got here were 

really frustrated that some folks used to be able to hop on one of 

these corporate jets and travel around for pennies on the dollar as 

United States Senators and as Members of Congress. So we have 

now changed that, and now you must pay charter rate. So I am 

aware what it costs to fly one of these. Could you explain to me 

how a jet flight, a private jet flight, from San Diego to Indiana, is 

disclosed at $138? 

Mr. PHIPPS. Yes, that is based on the IRS’s standard industry 

fare level or the SIFL rate. I do not know anything about that area 

other than that is the normal way to calculate those rates using 

the IRS’s standards. 

Senator MCCASKILL. Well, you know, I don’t get the word normal. I mean, to me that ought to be in quotes. This is about full 

disclosure. This is about the public understanding. I mean, if this 

72 

is your idea of full disclosure—there is no requirement that you 

disclose the IRS rate. It seems to me you ought to let people know. 

You can’t park a jet at an airport for $138, much less fly it across 

country. We are talking about tens and thousands of dollars per 

flight. I bet that flight from Indiana to San Diego cost between 

$20,000 and $30,000 easily. You know, wouldn’t you want to fully 

disclose what you are actually paying as a corporation for the benefit of these doctors? Isn’t that the idea behind this disclosure? 

Mr. PHIPPS. Yes, none of those flights are for the doctors’ benefit. 

Those are all for the company’s benefit. They perform services on 

our behalf. They are taking time out of the O.R. to do a service that 

we need for training or for development, and it is not compensation 

to them. This is the first time we have disclosed any of that information. It is not 1099-type income to them. 

Senator MCCASKILL. I understand—all the more reason not to 

use the IRS number. That is what that figure is for. That is an IRS 

number for purposes of computing income. But this is about public 

disclosure. I understand—you can make the argument that every 

single thing you pay to these doctors is not for the benefit of the 

doctors but rather it is for the benefit of getting their time and expertise. 

The whole purpose of this disclosure and the whole purpose of 

the law we are proposing is so the public can get a true picture of 

the kind of money that is being put out in connection with these 

doctors so they can draw their independent judgment as to whether 

or not there is a conflict of interest. Will you all make a commitment that you will begin disclosing the actual costs of private jet 

flights for these doctors in the future? 

Mr. PHIPPS. I will take that back and we will consider it. I personally am not an expert in that area, but I will take that under 

advisement and go back and talk to our people, yes. 

Senator MCCASKILL. Mr. White. 

Mr. WHITE. I represent AdvaMed, the Advanced Medical Technology Association, and speaking on behalf of industry, we have 

communicated our views that it is critical to have the context surrounding these disclosures described. The companies are in the 

best position to provide that description, and for that reason we 

have offered our recommendations to this legislation that would 

provide the context, so that you are not only looking at a physician 

name and address and a dollar amount but the context of that payment. 

Senator MCCASKILL. You know, nothing is keeping any of your 

members from disclosing a whole lot right now. I mean, if you really want the public to understand what is going on, all you have got 

to do is tell them. It doesn’t take an act of Congress, candidly. It 

shouldn’t take a threatening criminal prosecution. 

I mean, the disclosure that we are talking about today, frankly, 

it is kind of discouraging that we even have to get government involved. It ought to be something that you ought to see as the right 

thing to do in terms of the public fully understanding this relationship because of the allegations that are naturally going to rise up 

from this kind of relationship. 

73 

What about your company, Stryker, are they willing to disclose 

the actual cost to the company of these jet flights that these doctors 

are taking? 

Mr. LIPES. From 1989 till 2003, when I ran the orthopedics business at Stryker, I am not aware of a single time when we flew a 

surgeon on a private jet. 

Senator McCaskill. OK, I think you all understand the point I 

am making. If you are worried about context, you know, they can 

context right now to their hearts’ content. They can get on their 

Web site and they can start telling the public exactly what they are 

paying, who they are paying, how much and for what. There is 

nothing we are going to do to stop you. 

So I think it is kind of ironic that you are worried about this legislation not having context. You can provide context without a government mandate, and we would hope that you would. 

I thank you, Mr. Phipps, for taking back to your company the 

fact that I think it is a little disingenuous to call a private flight 

less than 100 bucks when the cost is many, many, many times 

that. I hope your company will consider doing the right thing in 

that regard. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator McCaskill. 

Senator Coleman. 

Senator COLEMAN. Thank you, Mr. Chairman. 

First, let me thank you and Senator Smith for holding this hearing. Let me also thank you for your leadership on this issue. I 

think as a Ranking Member on the Permanent Subcommittee on 

Investigations, we have focused on rooting out waste, fraud and 

abuse in our health care system. We have a hearing coming up on 

Medicare fraud in a very short period of time. So I just want to personally thank the chairman for his leadership here. 

I am a firm believer that sunshine transparency is the best disinfectant, and certainly this hearing is about that. Today, the Physician Payments Sunshine Act may be a good place to start but 

should be improved in ways that will actually provide greater 

transparency and greater oversight. So I look forward to working 

with you and my other colleagues, Mr. Chairman, on this issue. 

In terms of transparency, Mr. White, AdvaMed has a code of ethics, but clearly there has been discussion today that says we have 

got to go beyond that. As you reflect on the code of ethics, are there 

areas now where you think you may want to kind of push further 

than where you are at today? 

Mr. WHITE. Absolutely, I agree with the comments expressed earlier that the code of ethics needs to be more than words on paper, 

and we share the concerns and will rise to the challenge of ensuring that the code of ethics is more than words on paper. I think 

in the context of the deferred prosecution agreements, we have 

seen those agreements break new ground on the legal front. There 

are arrangements that are addressed in those agreements that are 

not addressed in any other legal authority, specifically royalties, 

and I think that is an area that is potentially ripe for inclusion in 

the AdvaMed code of ethics. 

As I indicated earlier, we have a dedication to the code of ethics. 

We have a three-part infrastructure within our association that 

74 

brings together CEOs, lawyers and compliance officers within 2 

weeks of the deferred prosecution agreements. We convene meetings of our compliance officers to discuss seriously next steps in 

this area, and we would look forward to advising you, your staff 

and the Committee as we move forward. 

Senator COLEMAN. I think it would be extremely helpful to kind 

of look beyond royalties as one area, but I think that is—you may 

have stated this before; I may have missed it—but in terms of adherence to code of ethics or enforcement of code of ethics, what sort 

of powers do you have there? Then how do you actually ensure that 

members comply with codes of ethics? 

Mr. WHITE. Well, quite frankly, we are limited in that area. We 

are a trade association. We are bound by the antitrust laws and 

other authorities, and so we don’t have specific legal authority or 

we are not deputized as an enforcement agency to undertake specific enforcement actions. Instead, we educate, we provide outreach 

and we have implemented the code logo program to ensure that 

there is a commitment of the top-level executives of our member 

companies to the code of ethics to ensure that there is robust training and education, auditing and monitoring and so forth. 

So we believe that the code of ethics together with these other 

procedures to make it come to life within organizations is an important step forward. Can we do more? We can, and we pledge to work 

with you. 

Senator COLEMAN. One of the things that I have noticed here is 

if you don’t do it yourself, government may tell you how to do it. 

So it becomes critically important to make sure that there is a very 

robust and broad code of ethics with transparency, including many 

of the issues that have been raised today, or certainly we may find 

the need to require that, and then it becomes a whole different 

process. 

There is no question, though, that collaboration is important, as 

my concern on so many of the things is you get a few bad actors 

and then you have a reaction to that—doctors reluctant to collaborate with device manufacturers to improve product and patient 

care. My State medical device industry is one of the giants. We 

pride ourselves on being the center of medical technology, and a lot 

of the tremendous enhancements in quality of life have come about 

because of innovation. 

Talk to me a little bit about the other side. Perhaps this is Mr. 

Phipps and Mr. Lipes. Are one of the unintended consequences of 

some of the problems we have been raising now and the concerns 

being raised—are we looking at a decrease in critical collaboration? 

Are we seeing any impact to that, Mr. Lipes? 

Mr. LIPES. Well, one of the requirements we have in our nonprosecution agreement going forward is that we establish a formal 

comprehensive needs assessment each year that is approved by our 

compliance officer and approved by our monitor and the U.S. Attorney that lays out exactly what our relationships are going to be 

with our consulting surgeons, how we are going to use them, and 

then all payments that will be made will be compared against that 

needs assessment. 

Our needs assessment has just been approved this week. So for 

the past month and a half, we have had very little activity with 

75 

surgeons, as we have waited until that needs assessment is done. 

I am optimistic that the needs assessment reflects what our business requirements are for input from consulting surgeons, and it 

will continue to be a very, very productive and fruitful relationship. 

Senator COLEMAN. Mr. Phipps. 

Mr. PHIPPS. Yes, Mr. Lipes is correct that the annual needs assessment is the key. Again, that came from Zimmer in 2005, so we 

have been doing that for several years now. But really what we are 

doing is making sure that when we consult with health care professionals, it is to address one of three things and only one of three 

things. That is, patient safety, improved outcomes and addressing 

unmet clinical needs. 

So we define that needs assessment at the beginning of the year, 

and it needs to be very buttoned down, as far as there is little room 

for adding things throughout the year. So I think those excesses 

that we talked about before will no longer be an issue. But, as we 

have gotten up to speed with our monitor these last 4 or 5 months, 

there has been a big slow down, but I think we are now starting 

to get to a point where we are going to get into a groove with our 

monitor and be able to perform services pursuant to that approved 

needs assessment. 

Senator COLEMAN. I think if there were clear codes of ethics, 

clear understanding compliance with what would hopefully be a 

Physician Payments Sunshine Act, that you would have more clarity of mind in terms of physicians and others understanding how 

they can operate without fear of action against them. I think you 

need to have that in place because clearly it is cloudy today, and 

clearly there are concerns that are out there. This has not all 

been—we have not played this out to the final step. 

Just one last question. Assuming, then, we enact the Physician 

Sunshine Payments Act and we gather data, I would be interested 

in your assessment of how the public would actually use this data 

when shopping around for health care services? Is there something 

in place or a sense that in fact it could be usable? Does it have to 

be in a certain form to be usable? How would folks actually make 

use of what we are trying to gather here of this greater transparency? 

Mr. Lipes. 

Mr. LIPES. Well, I think in the last 10 years, we have seen a dramatic shift in the kinds of information that patients bring into 

their surgeons’ offices. Where as before they came in basically because the surgeon had been recommended to them, now they come 

in on average with stacks of information that they have taken off 

the Internet. So they do extensive amounts of research in advance 

before they go in to talk to that surgeon, asking about different 

types of procedures and technologies. I believe that if this information is available on the Internet, it will be another piece of information that that patient will have at their disposal when they walk 

in to the surgeon asking for some relief to the pain that they have. 

Senator COLEMAN. Mr. Phipps. 

Mr. PHIPPS. I think the onus should be on the surgeon and on 

his institution or practice to make sure that when those patients 

come in that they are getting that information provided to them 

and that there is full disclosure between physician and patient so 

76 

that the patient can make an informed decision. I think Senator 

Corker’s right, that it is probably not going to change the mind of 

many patients, but they have a right to know. 

Senator COLEMAN. So, White, from an industry perspective? 

Mr. WHITE. We have given a great deal of thought to that question, Senator, and I think that it comes down to a few things. One, 

it is critical that we have preemption. We have one Federal Web 

site where patients can access this information rather than a series 

of company-specific or State-specific Web sites. That will only further cloud this question. If we are looking to deliver clear information to patients, it is better to have it on one Federal Web site as 

I indicated earlier. 

Also, it is critical to have context. As we described in our testimony, medical device companies have multiple relationships with 

physicians, and it is important to provide the context for each of 

those patients so that there can be no misunderstanding that 

might diminish collaboration or diminish some of these important 

relationships. Finally, we think the full range of relevant relationships should be reported on the Web site, including equity investments by physicians and M.D.-owned entities. 

Senator COLEMAN. Mr. White, I am a great believer in public-private partnership, and this should be an area where we should be 

collaborating so we can move the chairman’s legislation forward. 

This is an area where I would welcome the collaboration of the industry and of AdvaMed. We have a good relationship that would 

be helpful in making sure we do it the right way. 

Mr. WHITE. Thank you, we would be happy to help. 

Senator COLEMAN. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much, Senator Coleman. It has 

been a really good hearing. I think that we have shed light on an 

issue that is really important in our society. I think we all agree, 

and apparently we all see a path toward affecting some considerable improvement. It is something that doesn’t occur at every hearing around here. So we thank you for being here with us, and 

thank you for helping us really advance the cause of something 

that is considered to be very important. 

This hearing is closed. 

[Whereupon, at 12:16 p.m., the Committee was adjourned.] 

(77) 

A P P E N D I X 

SENATOR CLINTON’S QUESTIONS FOR GREGORY DEMSKE

Question. Of those OIG’s inspections of the medical device industry wherein you 

found industry payments to be kickbacks designed to influence the physicians’ medical decision making, how frequently do physicians made payment claims for these 

devices to private insurance, and how many make claims to the federal government? 

Answer. In general, a high proportion of medical device usage and billing is related to Medicare patients. In the New Jersey investigation of 5 manufacturers of 

hip and knee reconstruction and replacement devices, physicians we interviewed reported that often 80% or more of their patients receiving the devices were Medicare 

beneficiaries. It is important to note that most medical devices are reimbursed by 

Medicare (and, for private patients, by their insurers) through payments to hospitals 

for the procedures in which the devices are implanted. Therefore, the physician is 

usually not submitting a claim directly for the device. We have found, however, that 

the hospital almost always uses the device that the physician recommends. Therefore, with respect to Medicare patients, there is a potential kickback violation because of the physician’s ability to influence the use of a particular manufacturer’s 

device. 

Question. What steps can the government take to address concerns regarding 

claims made to both public and private insurance? 

Answer. With respect to Federal health care programs, OIG addresses concerns 

about financial relationships between the medical device industry and physicians 

through enforcement, guidance, and outreach to stakeholders. Working with the Department of Justice, OIG investigates device manufacturers and physicians for possible violations of the Federal anti-kickback statute and False Claims Act. Criminal, 

civil, and administrative sanctions can provide a meaningful deterrent to illegal conduct. In addition to enforcement, OIG provides guidance to industry and physicians 

through compliance program guidance, fraud alerts, and widely distributed correspondence relevant to physician-industry financial relationships. Furthermore, 

OIG has reached out to stakeholders through presentations at conferences sponsored by non-profit groups such as AdvaMed and the American Academy of Orthopedic Surgeons. 

The anti-kickback statute, which is the primary basis for government enforcement 

in this area, only applies to conduct related to Federal health care programs, including Medicare and Medicaid. Therefore, payments intended to induce the referral of 

privatee insurance business does not violate this statute. Similarly, the False 

Claims Act, the government’s primary civil enforcement tool to combat fraud, only 

addresses fraud on the Federal Government and is therefore not implicated by improper claims to private insurance companies. Although kickbacks related to private 

insurance may raise antitrust concerns or potentially violate state laws, OIG does 

not have jurisdiction to investigate such matters. 

SENATOR CLINTON’S QUESTIONS FOR CHARLES ROSEN

Question.You recommend that the exact dollar amount of any type of industry 

compensation from all companies to surgeons, particularly those who are writing papers and running professional organizations, should be available for all to see. Who, 

in your opinion, should be responsible for obtaining, monitoring and publicizing this 

information? 

Answer. There could be a number of entities responsible for obtaining, monitoring, 

and publicizing complete financial disclosures of doctors receiving industrial compensation. 

The companies themselves should have the legally mandated responsibility to obtain and disclose on their website in a readily available way the information every 

quarter. There should be significant penalties for non-compliance. 

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The FDA should require that this information be submitted to them so that it can 

be in one location on their website and encompass all the companies involved. The 

non-profit organization of the Association for Ethics in Spine Surgery as a watchdog 

group could also serve this role since it is the only such organization without industrial ties and is dedicated to full disclosure for the public good. The actions of both 

the FDA and AESS would go towards both monitoring and publicizing. 

Perhaps the appropriate national medical societies could be required to put the 

information on their website. 

Finally, intermittent and random auditing by the OIG should also be part of the 

monitoring and enforcement process. 

Question. How many professional organizations exist that are similar to yours, in 

requiring that their members do not accept compensation from industry? 

Answer. I know of no other professional organizations such as the Association for 

Ethics in Spine Surgery that requires their members to not have any compensation 

from industry. 

SENATOR CLINTON’S QUESTION FOR EDWARD LIPES

Question. As a condition of your settlement with the federal government, you are 

participating in 18 months of federal supervision, which you claim helps to ‘‘level 

the playing field’’ in the medical device industry. Given that voluntary compliance 

mechanisms were not sufficient in your particular case, how do you suggest that industry improve its ethical standards without federal oversight like that you are currently receiving? 

Answer. From the time I became President of Stryker Orthopedics in 1989, we 

have required our business leaders to follow certain procedures, systems, and controls to guard against abuse. Stryker has paid relatively low per diem rates to its 

surgeon consultants; had only a small number of royalty relationships; required its 

consultants to document their interaction with and on behalf of the company; and 

refused to engage more surgeon consultants than the company needs. 

Post-settlement, the majority of our business practices have not changed because 

we were already complying with the terms of the settlement when actions were voluntary. I expect such practices to continue when the monitor’s term ends. 

The voluntary guidelines of the AdvaMed Code of Ethics and the terms of the settlement agreements signed by the five major competitors in our industry provide 

very strong standards that we believe will ensure a level playing field where all 

companies are working with surgeon consultants in a legal and ethical fashion. 

Additionally, we are committed to work to seek reforms to put better controls in 

place across industry as necessary. 

SENATOR CLINTON’S QUESTIONS FOR CHRISTOPHER WHITE

Question. How are you working with physician groups to improve cooperation with 

your new ethical standards? Why do you think some physician groups have adopted 

this Code but not others? 

Answer. Even prior to our revised Code’s effective date of January 1, 2004, 

AdvaMed engaged in extensive outreach activities, both to individual physicians and 

to physician specialty societies. We’ve been able to communicate the importance of 

the Code through individual letters to physician society executives, articles in medical journals, and presentations to physicians societies, among other outreach activities. We remain committed to working with physicians to foster widespread awareness and adoption of the Code. I speak about the Code regularly at society meetings—including, most recently, at the annual meeting of the American Academy of 

Orthopedic Surgeons in early March. On March 13, we formally shared, through 

verbal and written testimony, our perspectives on ethical interactions between industry and physicians with the Institute of Medicine’s Committee on Conflicts of Interest in Medical Research, Education, and Practice. While we cannot control whether a particular physician group will officially adopt our Code, we are encouraged by 

the progress made both in industry and among health care professionals since the 

Code became effective. 

Question. You suggest that any public database that reports payments to physicians should give companies the opportunity to provide context of those payments. 

Allowing companies to describe the nature of these relationships, however, has the 

potential to unethically construe and obfuscate the ethical shortcomings. Can you 

please expand on what type of context you mean, and how you would suggest maintaining consistent standards for payment reporting? 

79 

Answer. It is important to ensure that patients receive useful information and do 

not mistakenly form the opinion that all payments to physicians are suspect. This 

risk exists when there is no opportunity for a reporting company to give meaningful 

context to the reason for a reportable ‘‘transfer of value.’’ For example, companies 

should be allowed to specify that payments are made for education and training— 

that is, to ensure that physicians are able to use medical technology safely and effectively. Simply listing a physician’s name next to a payment amount does not give 

patients the opportunity to make informed decisions about the nature of the payment. 

Moreover, to create and maintain consistent reporting standards, the legislation 

should authorize sufficient appropriations to create and maintain a centralized database and disclosure program, and should only require the disclosure of certain enumerated types of payments. This will standardize both the disclosure of payments 

by companies and the reporting of date to patients. 

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