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 database of payments and gifts to physicians from a variety of medical sources. Now today, we'll focus on the tangled, murky and sometimes conflicting financial relationships between the medical device industry, surgeons and physicians.

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

However, over the past decade, it's 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's 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 three 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'm 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?

VITTER: Thank you very much, Mr. Chairman. I'm going to pass for now and look forward to the testimony.

KOHL: Thank you so much.

Senator Salazar?

SALAZAR: Thank you very much, Chairman Kohl, for holding this hearing on this very important subject. And 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's 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. And I look forward to working to see whether we get to some resolution to this issue.
Thank you, Chairman Kohl.

KOHL: Thank you, Senator Salazar.

Senator Corker?

CORKER: Mr. Chairman, in order to listen to the witnesses, I'll pass and wait to hear the testimony.

KOHL: Thank you so much.

CORKER: Thank you for having the hearing. I appreciate it, yes, sir.

KOHL: Thank you so much.

We're 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's 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'll start with your testimony.

DEMSKE: Good morning, Mr. Chairman, 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 this money and in-kind contributions, but we did learn in our investigation of hip and knee manufacturers over the past few years that over the course of a five- year period, these 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 decision making. 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. And 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 -- 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 five-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're aware of the efforts to increase transparency of industry-physician financial relationships. We will monitor that and are considering imposing transparency requirements in future corporate integrity agreements. Government, industry and physicians need to look at this 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'll be happy to answer any questions.

KOHL: Thank you, Mr. Demske.

Dr. Rosen?

ROSEN: Good morning, I'm 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 of 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 eight 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're writing -- money that might go away if you write a negative paper -- makes the research neither objective nor independent.

I've 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's 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. Firstly, 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's a level playing field.

Secondly, 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 towards academia for the unbiased truth, and this should be the standard.

Thirdly, 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.
Lastly, 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.

KOHL: Thank you very much for being here, Dr. Rosen.

Mr. Hilal?

HILAL: Chairman Kohl, thank you, and Ranking Member Smith and committee for kindly extending an invitation for me to testify. My name is Said Hilal. I represent Applied Medical from Orange County, California. I have been in this field from the time it was health and care and before it became mostly industry. I'm here this morning to outline the serious concerns I and my fellow Applied Medical officials have about conflicts of interest and ethics we've 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's 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. And 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.

And corrupting influences are not really limited just to university hospitals. We hear of large manufacturers approaching hundreds of surgeons with the invitation to become, quote, "consultants," end quote, 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. And 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'd 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, quote, "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. And 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. And 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.

KOHL: Thank you very much, Mr. Hilal.

We turn now to the ranking member in this committee, the senator from Oregon, Gordon Smith.

SMITH: Thank you, Mr. Chairman. In the interest of time, I'll put my statement in the record.

KOHL: Without objection.

SMITH: But 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. And that is the balance I think we all strike here.

But as I've listened to each of your testimonies, I've been struck by the circumstance you describe, and it is alarming. And I guess what I'm 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?

ROSEN: Yes, over the last 20 or 30 years, I think it's become ingrained where it's 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.

SMITH: And so, Mr. Hilal, I assume you're a medical doctor as well, or...

HILAL: No, I'm not.

SMITH: No, Mr. Hilal, then your point is that codes of ethics and conduct and voluntary agreements just aren't providing enough of a break. I think that's the thrust of your testimony.

HILAL: Yes, sir.

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 if -- what I have a conflict in interest in putting in to someone that may be an inferior product -- that that would really give me pause because of the potential malpractice implications of that. But are you saying that that is not a sufficient deterrent to a financial conflict of interest?

ROSEN: No, I don't think that enters the picture really at all. Should it? I think that among...

SMITH: I'm doing a hip replacement, and I've got an inferior product in which I have a financial interest. And the patient as you describe is in pain, and it's just inferior to what else I could have put in. It just seems to me that that is a lawsuit ripe with liability.

ROSEN: Well, most of the implants, whether it's total hips or spine, they're all generically good. I mean, they've all passed 501 -- they've all passed through some type of approval. They're generally the same, and people can make arguments for one product over another based on some aspects of them, but it's rarely one is felt universally inferior to any of the others.

So it doesn't usually take that sort of discussion. It's 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.

SMITH: And 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?

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...

SMITH: How about before the operation they give?

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...

SMITH: And nothing like that happens now?

ROSEN: Oh no, not at all. I mean, most of the time patients -- no, they have no clue. Most of the doctors don't have any clue because -- including me. In some cases I will know because I've heard, but the majority of the time that's obscured effectively.

SMITH: Thank you, Mr. Chairman.

KOHL: 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," unquote.

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?

DEMSKE: OIG is working with the Department of Justice to follow up on investigations in New Jersey and resulting from 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. And it is often difficult -- that means we have to prove the state of mind of the defendant. And absent evidence that the physician made statements such as those reflected in my testimony or we have 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. And you can anticipate in the future that we will be bringing cases.

KOHL: Is it fair to say that we need some additional legislation to root out the problems that we're discussing today?

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.

KOHL: 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?

ROSEN: I don't believe they're being really addressed in any substantive way at all. I think it's 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 at all.

In fact, one of the -- for example, one of the main societies, the North American Spine Society, has said it's 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's $11,000 or $1 million, which can often be the case. So it's sort of piecemeal trying to throw out that we're dealing with the ethics. And no, I don't think it's being really addressed at all.

KOHL: So it's fair to say that you do not believe that voluntary industry guidelines can resolve this problem?

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's possible to change that without something from the outside happening.

KOHL: Mr. Hilal, do you agree with that, that voluntary guidelines are not going to resolve the problem?

HILAL: I wholeheartedly agree. They have not so far. They have simply forced the groups that are practicing these kinds of quid pro quos to just go more covert and more careful. I've 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's not best for free market. What distorts free markets, in my opinion, is the act of the kickback.

KOHL: Thank you.

Senator Corker?

CORKER: Mr. Chairman, thank you, and I want to thank the panelists for great testimony. And I think that the comments by the ranking member about achieving balance is what we all wish to do.

And I know we're 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, you know, people should know. I will tell you, on the other hand, that, you know, 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. And 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'm going to have it anyway. I just wonder if you might respond to that.

ROSEN: I don't think it necessarily will change that much either. In some cases, though, if there's a new procedure that came out and it's a little questionable, and the person's not sure and they see that, well, this person owns 10 percent of the company that brought this public, and he's putting (inaudible) -- 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. And 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's a big difference.

Independent validation is somebody looks at it in an unbiased fashion, and that's they keystone in medicine. And that would be the most valuable thing, because this all happens with products that are not so great, and that's the reason they have to sort of make a pretense that they're independently validated. But as far as the person in the office, maybe some difference, but mostly for other doctors.

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...

ROSEN: Absolutely.

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're 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, you know, will do a better job for the patients involved. And again, I think as Ranking Member Smith mentioned, you know, we do need a balance here. So how do we keep that from being perverted, if you will?

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. And therefore this correlation, this cooperation, between surgeons and companies is very important for the development of products.

Surgeons are the users. They're the champions of the patient. In that term, they really need to be listened to. And they need to be allowed to innovate and help the companies develop new products. That's a far cry from pushing and hawking the product. That's a far cry from getting a kickback to favor a product. I think that's really what the concern is.

And I believe that disclosure is helpful, but I would take the time to differentiate between disclosure and our inadvertent turn it around to the patient and say, "Patient, protect thyself," because patients cannot protect themselves. And 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 best interest. And 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?" And how does that help a free market compete, innovate and continue to be the leading force in the world health endeavor?

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.

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's a bona fide investment at all. We have also been looking at, recently, physician involvement in distributors of medical equipment and group purchasing organizations, because those investments can also be ways for device distributors, manufacturers, to funnel money to physicians which 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.

CORKER: Mr. Chairman, thank you. It's a very good panel, and thank you for your testimony.

KOHL: Thanks, Senator Corker. I want to reiterate what he said. This has been a very, very good panel. You've 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. And in that sense, it's been really good to have you. You made a great contribution, thank you so much.

At this point, we'd 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's 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'll be hearing from Christopher White, who's 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, quote, "advocate for a legal regulatory and economic climate," unquote, on behalf of medical device manufacturers.

Gentlemen, we welcome you here today.

Mr. Lipes, we'll take your testimony.

LIPES: Good morning, Chairman Kohl, Mr. Corker. My name is Ned Lipes. You're not the first one that's made that mistake, sir.

KOHL: Thank you.

LIPES: I'm the executive vice president of Stryker Corporation, and I'd 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 1930s, 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. And 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've 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, New Jersey.

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 1980s, the 1990s 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 1990s, 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.

KOHL: Thank you, Mr. Lipes.

Mr. Phipps?

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, Indiana. 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 benefit 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 excess has 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 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 build upon 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 five-year corporate integrity agreement with 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've made since signing these agreements. We also wish to express our commitment to go beyond their requirements and to set a new industry standard that will meet the needs of both patients and 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 these changes globally across our entire business, which also goes beyond the requirements of our resolution agreements with the government.

Given these commitments, we strongly support the Physician Payments Sunshine Act. Earlier this week, we sent a letter to Chairman Kohl setting out our more detailed views on its provisions, and I ask that our letter also be made part of the hearing record.

KOHL: Without objection.

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.

KOHL: Thanks a lot, Mr. Phipps.

Mr. White?

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'd like to further highlight industry's unique interactions with physicians. Two, I'd like to highlight our commitment to compliance. Three, I would like to provide some thoughts relative to the legislation itself.

First, as you've 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. And 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. And 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 decision making relative to product selection. That is why we developed a code of ethics to help distinguish those interactions that contribute to the advancement of medical technology from those that could be viewed as influencing the medical decision-making 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'll be presenting before medical specialty societies in the very near future, including next week. We've engaged in outreach on a sustained basis over time. It's 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's 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'd 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's 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 database 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've discussed with your staff. They've 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've 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.

KOHL: Thank you very much.

Mr. Lipes, in the agreement Stryker entered into with the Department of Justice it's 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?

LIPES: No, sir, the company was complying, both the spirit and the intent of the AdvaMed guidelines from the time that they were issued.

KOHL: 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?

LIPES: We're confused by that as well, Senator. We've 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's 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've 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'm very surprised at the discrepancy, and I think that further understanding of how different companies have accounted for that will clear up the discrepancy.

KOHL: 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? And, if so, why did you agree to pay $170 million?

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 two-year investigation.

As far as why we settled, it starts with, as a public company, first and foremost what's in the best interest of our shareholders and also what's in the best interest of employees and patients. We deemed that that settlement was in the best interest. 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 that's 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, that 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.

And then the flipside of that is what if we didn't settle? And maybe that's more important when you're 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're 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.
And, finally, the ultimate risk for a company in our position is that if you face prosecution and ultimately do not prevail in your defense, you can be excluded from participation in the federal health care reimbursement system, which is an effective death penalty for a company such as ours. And 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. And I had to take him for his word for that, even though I don't have the facts...

KOHL: All right.

Mr. White, as you've testified, your association created a voluntary list of ethical guidelines to address the questionable practices that we've 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?

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've implemented a number of programs including the code logo program that I've described to you to ensure that the code of ethics has meaning within our member companies and within our industry.

KOHL: Thank you.

Senator Corker? Then Senator McCaskill.

CORKER: Mr. Chairman, again thank you for a great panel. It appears to me that you've 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. And 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. And I'd have to say this has been an excellent hearing.

You know, I'm 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. And that's obviously what we've seen in our credit markets right now. We're seeing a lot of corrections take place throughout our country, and it's 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?

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've seen in the past.

PHIPPS: Yes, we have a unique experience here because we have been posting, as you know, for our deferred prosecution agreement, our hip and knee consulting payments as part of that since October. I think the reaction to that has been mixed, but I think it's a positive. I think most surgeons understand it. We understand it. It's been a good way for us to take a look at our business and where we're spending money and using consultants.

I do think one thing I would suggest, and it's 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 if there's 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. And that's important for us, and we wanted to put on the record as well.

CORKER: And, Mr. Chairman, I'd just like to make a comment. I know that we'll 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've 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'm sure that will happen very quickly.

But it does seem to me that, quote, "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'll be able to work with you in that regard.

And 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. And I want to thank you for addressing that need. Thank you, sir.

KOHL: Thank you very much, Senator Corker.

Senator McCaskill?

MCCASKILL: Thank you, and I meant to tell you, I think one of you all is responsible for something that's in my right knee, and some days -- I'm glad I don't know which one of you it is, because some days I would like to say thank you. Today's a day I would not say thank you to you, so it's 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'm a little incredulous about some of this. And I don't mean to pick on you, Mr. Phipps, but I'm going to talk a little bit about your company. Based on the testimony that you just gave the chairman, what you're basically saying is that your company thought it was a good deal to pay $170 million to the government even though you've done nothing wrong?

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've done our own investigations internally over the years. We have made significant improvements as we've 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 that is an area that's subject to abuse. We put in place a very robust compliance program that was implemented in 2005. This investigation, it's important to note, covers 2002 through 2006. Our compliance program came into place in 2005.

So in the past we think there were excesses, and frankly we've found some of those excesses and addressed them with our program. We're using this settlement phase of our investigation to turn the dial up another couple of notches and to continuously improve. And it's 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 they weren't had their head in the sand, frankly, and it was a problem. We feel like we've addressed it.

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've 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've done something they might go to jail for. And so what you're saying is that you all didn't demand those facts from the U.S. Attorney because you'd done the internal investigation and conceded that there could be potential criminal liability for what you all had done.

PHIPPS: We did respectfully request those facts, both before we settled as well as we've done that since. Because in my position, I would like to know if they found things that may be 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'm not sure if it exists or not, but they have not provided it. But we believe, based on our own reviews that we've done, that there were excesses in the past that we feel that it was important to settle this investigation.

MCCASKILL: I guess it's possible they may be holding their version of what they've 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's kind of like, you know, what we call probation. When somebody robs a bank, they get probation. When it's 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...

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'll see it is very bare bones. There are no facts alleged in that complaint whatsoever, but...

MCCASKILL: OK. Let me ask you this. There's $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?

PHIPPS: Over the course of the 18 months, we do expect to pay tens of millions, yes.

MCCASKILL: And how much do you think -- what have you told your shareholders that you're going to have to pay? And it's 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're going to have to pay former Attorney General Ashcroft for monitoring your company?

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.

MCCASKILL: And I've looked at some of your disclosures for 2007. That seems to me much higher than any of the money you're paying any of the doctors, correct? PHIPPS: That is correct. On an hourly basis, we pay surgeons $500 per hour. I'm not sure what it equates to with our monitor.

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's 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're 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.

And I want to focus for a minute on your disclosures. It seems to me if you have avoided prosecution by saying, "We're going to fully disclose," that it's really incumbent upon you all to decide you are really going to disclose. Now, here's what's confusing to me. I'm looking at the document where you're admirably disclosing and what this law's going to require you to disclose, that for example you paid in 2007 a doctor in Deerfield, Illinois, $1.875 million. Now, I'm assuming that that is for some kind of consulting. That's not for him doing -- he's getting paid for doing the surgeries, too, correct?

PHIPPS: Yes, 75 percent of our disclosure is for royalties that people would 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's being paid by his hospital or anyone else for procedures, if that's your question.

MCCASKILL: So these big numbers are people who have been involved in the development of the product?

PHIPPS: Seventy-five percent of the total. If you tell me a particular doctor's name, I can...

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

 

PHIPPS: Yes, there may be some there that have also done, you know, training, so that would be a standard consulting. But in the aggregate, 75 percent roughly is for royalties.

MCCASKILL: I'd like to focus on the plane flights. What kind of corporate plane do you have?

PHIPPS: We have a Challenger and a Hawker.

MCCASKILL: And they're both jets?

PHIPPS: They are jets. We lease...

MCCASKILL: Now...

PHIPPS: We lease at least one of them, maybe two.

MCCASKILL: OK, we've 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. And so we have now changed that, and now you must pay charter rate. So I'm 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?

PHIPPS: Yes, that's 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 is using the IRS's standards.

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's 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're 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're actually paying as a corporation for the benefit of these doctors? Isn't that the idea behind this disclosure?

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're taking time out of the O.R. to do a service that we need for training or for development, and it's not compensation to them. This is the first time we've disclosed any of that information. It's not 1099-type income to them.

MCCASKILL: I understand -- all the more reason not to use the IRS number. That's what that figure is for. That is an IRS number for purposes of computing income. But this is about public disclosure. And 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's for the benefit of getting their time and expertise.

And the whole purpose of this disclosure and the whole purpose of the law we're proposing is so the public can get a true picture of the kind of money that's being put out in connection with these doctors so they can draw their independent judgment as to whether or not there's 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?

PHIPPS: I will take that back and we will consider. 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.

MCCASKILL: Mr. White?

WHITE: I represent AdvaMed, the Advanced Medical Technology Association, and speaking on behalf of industry, we've communicated our views that it's 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've offered our recommendations to this legislation that would provide the context, so that you're not only looking at a physician name and address and a dollar amount but the context of that payment.

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's going on, all you've 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're talking about today, frankly, it's 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.

And 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?

LIPES: From 1989 till 2003, when I ran the orthopedics business at Stryker, I'm not aware of a single time when we flew a surgeon on a private jet.

MCCASKILL: OK, I think you all understand the point I'm making. If you're 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're paying, who they're paying, how much and for what. And there's nothing we're going to do to stop you.

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

And I thank you, Mr. Phipps, for taking back to your company the fact that I think it's a little disingenuous to call a private flight less than 100 bucks when the cost is many, many, many times that. And I hope your company will consider doing the right thing in that regard.

Thank you, Mr. Chairman.

KOHL: Thank you, Senator McCaskill.

Senator Coleman?

COLEMAN: Thank you, Mr. Chairman. First, let me thank you and Senator Smith for holding this hearing. And 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'm 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's been discussion today that says we've 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're at today?

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've 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's 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 two 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.

COLEMAN: I think it would be extremely helpful to kind of look beyond royalties as one area, but I think that's -- 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? And then how do you actually ensure that members comply with codes of ethics?

WHITE: Well, quite frankly, we're limited in that area. We're a trade association. We're bound by the antitrust laws and other authorities, and so we don't have specific legal authority or we're 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.

COLEMAN: One of the things that I've noticed here is if you don't do it yourself, government may tell you how to do it. And 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. And perhaps this is Mr. Phipps and Mr. Lipes. Are one of the unintended consequences of some of the problems we've 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?

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 in the U.S. Attorney that lays out exactly what our relationships are going to be with our consulting surgeons, how we're 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. And so for the past month and a half, we have had very little activity with surgeons, as we've waited until that needs assessment is done. I'm 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.

COLEMAN: Mr. Phipps?

PHIPPS: Yes, Mr. Lipes is correct that the annual needs assessment is the key. Again, that came from Zimmer in 2005, so we've been doing that for several years now. But really what we're doing is making sure when we consult with health care professionals it's to address one of three things and only one of three things. That's 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's no 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've gotten up to speed with our monitor these last four or five months, there has been a big slow down, but I think we're now starting to get to a point where we're going to get into a groove with our monitor and be able to perform services pursuant to that approved needs assessment.

COLEMAN: And 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. And I think you need to have that in place because clearly it's cloudy today, and clearly there are concerns that are out there. And this has not all been -- we've 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'd 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're trying to gather here of this greater transparency?

Mr. Lipes?

LIPES: Well, I think in the last 10 years, we've seen a dramatic shift in the kinds of information that patients bring into their surgeons' offices. Whereas 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've taken off the Internet. And 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. And 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.

COLEMAN: Mr. Phipps?

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're getting that information provided to them and that there's full disclosure between physician and patient so that the patient can make an informed decision. I think Senator Corker's right, that it's probably not going to change the mind of many patients, but they have a right to know.

COLEMAN: So, White, from an industry perspective?

WHITE: We've given a great deal of thought to that question, Senator, and I think that it comes down to a few things. One, it's 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're looking to deliver clear information to patients, it's better to have it on one federal Web site as I indicated earlier. Also, it's critical to have context. As we described in our testimony, medical device companies have multiple relationships with physicians, and it's 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. And 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.

COLEMAN: Mr. White, I'm 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.

WHITE: Thank you, we'd be happy to help.

COLEMAN: Thank you, Mr. Chairman.

KOHL: Thank you very much, Senator Coleman. It has been a really good hearing. I think that we have shed light on an issue that's really important in our society. I think we all agree, and apparently we all see a path towards affecting some considerable improvement. It's 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's considered to be very important.
This hearing is closed.