Over the last several years, relationships between orthopedic surgeons and medical device companies have come under increasing scrutiny. According to published reports, at least five orthopedic manufacturers have received subpoenas from the U.S. Department of Justice (“DOJ”) in a Federal investigation of contracts between makers of orthopedic devices and surgeons who implant and use their devices. At issue in many of the investigations, were consulting arrangements and professional service agreements in which physicians receive excessive remuneration for limited services in exchange for purchasing and recommending company products. According to a September 2005 report in The New York Times, Federal prosecutors have begun to investigate some device makers’ deals with doctors, trying to determine if these arrangements amount to payoffs and bribes. Chief Counsel to the OIG, Lewis Morris, has remarked that “the question for investigators is whether the companies and the doctors have crossed a line from legitimate compensation for valuable services rendered in the development of the devices to unethical payoffs for securing competitive advantage in a crowded marketplace.” Both physicians and medical device companies are under scrutiny by State and Federal prosecutors. In a recent case, an assistant professor at LSU Health Sciences Center paid $10,000 in fines after investigators determined that his consulting arrangements with Sulzer Medical were an improper conflict of interest under the state ethics code. Medtronic, one of the country’s largest medical device manufacturers, has also come under investigation. In a whistle-blower suit which was unsealed last year, Medtronic is accused of giving surgeons “excessive remuneration, unlawful perquisites and bribes in other forms for purchasing goods and medical devices.” Documents filed as part of the suit show that the company spent at least $50 million on payments to doctors over approximately four years. As noted in a January 2006 report in The New York Times, some of this money went to a prominent surgeon in Wisconsin who was paid $400,000 a year by Medtronic for a consulting contract requiring him to work just eight days. Another physician in Virginia received nearly $700,000 in consulting fees from the company for services rendered over only nine months in 2005. The U.S. Department of Justice announced recently that Medtronic has agreed to pay $40 million to settle claims that it paid doctors illegal kickbacks -- however, this settlement has recently been challenged in court. Even groups like the prestigious Cleveland Clinic have not escaped unscathed. A December 2005 story in the Wall Street Journal reported that the Clinic and several of its physicians failed to disclose to patients financial ties with AtriCure, Inc., a device manufacturer of equipment used to correct atrial fibrillation — including patients on whom it performed certain AtriCure-related procedures. The financial ties in question ranged from the Clinic owning stock in AtriCure valued at about $7 million to Clinic-physicians being paid between $10,000 and $24,000 for consulting work for the company, as well as being granted AtriCure stock options and receiving royalties for devices which they helped to develop with the company. As expected, the intense governmental and media scrutiny on relationships between orthopedic practices and medical device manufacturers has generated much discussion and concern within the health care industry. As noted in a recent two-part article published in The American Journal of Orthopedics, “in this climate, orthopedic surgeons need to know that recent legal developments, particularly enforcement trends, pose substantial additional risk. Previously accepted common practices are questionable in today’s legal environment.” Accordingly, physicians should consider the recent regulatory and enforcement environment before entering into arrangements with orthopedic device manufacturers. Some of the more pertinent laws relating to such arrangements include the Anti-Kickback Statute and the prohibition against physician self referrals. The Anti-Kickback Statute makes it a Federal crime for anyone to knowingly and willfully solicit, receive, offer, or pay remuneration of any kind (e.g., money, goods, services) for: (1) the referral of an individual to another for the purpose of supplying items or services that are covered by a Federal health care program (including Medicare and Medicaid); or (2) purchasing, leasing, ordering, or arranging for any good, facility, service, or item that is covered by a Federal health care program (including Medicare and Medicaid). The penalty for unlawful conduct under the Anti-Kickback Statute may include the imposition of a fine up to $25,0000, imprisonment of up to five years, or both. In addition, a provider can be excluded from participation in Federal health care programs. The federal prohibition against physician self-referrals for healthcare services, commonly known as the Stark Law, prohibits a practitioner (including a physician, dentist or podiatrist) from referring patients for certain “designated health services” to an entity with which the practitioner (or an immediate family member) has a financial relationship (either an ownership/investment or compensation arrangement) if those services are paid in whole or in part by Medicare or Medicaid, unless a Stark Law exception applies. The Stark Law also prohibits the entity from seeking payment from Medicare or Medicaid for services rendered pursuant to a prohibited referral. If an entity is paid for services rendered pursuant to a prohibited referral, it may incur civil penalties of up to $15,000 per prohibited claim and may be excluded from participating in the Medicare and/or Medicaid programs. Designated health services include: clinical laboratory services; physical therapy services; occupational therapy services; speech-language pathology services; radiology services, including magnetic resonance imaging, computerized axial tomography scans and ultrasound services; radiation therapy service and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics, and prosthetic devices and supplies; home health services; outpatient prescription services; and inpatient and outpatient hospital services. An “immediate family member of a practitioner” is defined as a husband or wife; birth or adoptive parent, child or sibling; stepparent, stepchild, stepbrother or stepsister; father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law; grandparent or grandchild; and spouse of grandparent or grandchild. In addition to the Anti-Kickback and Stark laws, another consideration for surgeon owners in a medical device company is the American Academy of Orthopaedic Surgeons Ethical Guidelines. The Guidelines set forth terms of principle disclosure that encourage transparency. Physicians who invest in companies whose products the physician uses should disclose their ownership to their patients when recommending that the patient be treated using such a product. Jim Hoover is a partner with Burr & Forman LLP and practices exclusively within the firm’s Health Care Practice Group.