[Senate Hearing 110-578]
[From the U.S. Government Publishing Office]



                                                        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


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                       SPECIAL COMMITTEE ON AGING

                     HERB KOHL, Wisconsin, Chairman
RON WYDEN, Oregon                    GORDON H. SMITH, Oregon
BLANCHE L. LINCOLN, Arkansas         RICHARD SHELBY, Alabama
EVAN BAYH, Indiana                   SUSAN COLLINS, Maine
THOMAS R. CARPER, Delaware           MEL MARTINEZ, Florida
BILL NELSON, Florida                 LARRY E. CRAIG, Idaho
HILLARY RODHAM CLINTON, New York     ELIZABETH DOLE, North Carolina
KEN SALAZAR, Colorado                NORM COLEMAN, Minnesota
ROBERT P. CASEY, Jr., Pennsylvania   DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           BOB CORKER, Tennessee
SHELDON WHITEHOUSE, Rhode Island     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)

  


  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 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, Kennedy 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.

            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 in-kind 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 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 because 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.
    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 so-called 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.
    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.
    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. Because 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 no-brainer. 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 if my physician told me that they had a major 
financial relationship 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 patients 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 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 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 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 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 
relatively 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 need for health care professionals to render 
independent decisionmaking 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.
    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 stakeholders. 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 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.
    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 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 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 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.
    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 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 
non-prosecution 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 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 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.]


                            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.
    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?
    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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