Newsletter for Leaders in the Medical Device Industry – August 2010

02 August 2010 Publication
Authors: Stephen A. Bent David L. Rosen Judith A. Waltz

Legal News: Medical Devices

Providing Reimbursement Advice Has Significant Risks for Manufacturers
By Judith A. Waltz (jwaltz@foley.com)

As part of product support, many device manufactures provide advice to their customers (including hospitals and physicians) as to how products may be billed to federal health care programs, including Medicare and Medicaid. This advice has often included lists of product or procedure codes, tips on medical documentation, template appeal letters, and so forth. Recent federal False Claims Act (FCA) settlements with device manufacturers demonstrate the risk to the manufacturer if the government contends the products are billed improperly to the federal health care programs by the customer as a result of that advice. The FCA also has been used as a basis for alleged liability against a manufacturer when the product is improperly promoted, resulting in claims that the government contends are medically unnecessary or otherwise improper. More recently, the government also has been looking at manufacturer pricing strategies in light of the Medicare requirements relating to discounts. Manufacturers must ensure that any reimbursement advice provided is accurate and complete, and is not designed to or does not result in inappropriately increased costs to the federal health care programs.

The provision of reimbursement advice is recognized and supported (within specified parameters) by the updated AdvaMed Code of Ethics on Interactions with Health Care Professionals. In addition, the Office of Inspector General of the Department of Health and Human Services (OIG) has issued Compliance Guidance for Pharmaceutical Manufacturers — which OIG has stated also should be viewed as guidance for device manufacturers — that recognizes the practice but cautions that providing reimbursement advice, under certain circumstances, could violate the Anti-Kickback Statute (AKS) if coupled with other benefits that might be construed as remuneration (e.g., a guarantee against loss from denied claims). Reimbursement advice also should be carefully scrutinized to be sure that it does not directly or indirectly suggest off-label use or provide support for improper patient inducements or referrals.

Legal Overview
Under the FCA, liability may ensue for any individual or entity that knowingly submits, or causes the submission of, false or fraudulent claims to the federal government. (31 U.S.C. §§ 3729-3733, emphasis added.) The FCA includes qui tam, or whistleblower, provisions that have largely fueled the government’s lucrative anti-fraud efforts by allowing private individuals to share in the government’s recoveries. The AKS makes it a criminal offense to knowingly and willfully offer or pay, or solicit or receive, remuneration to induce the referral of federal health care program business. (42 U.S.C. § 1320a-7b(b).) Recent health care reform amendments to the AKS provide that claims resulting from kickbacks are civil false claims, making it easier for the government to demonstrate damages and liability for conduct that in the government’s view violates the AKS.

Recent settlements involving device manufacturers for the allegedly improper claims of their customers, as described by government press releases, include:

  • Atricure, Inc. (February 2, 2010, $3.76 million) — Allegations that the company marketed its medical devices to treat a trial fibrillation for a use that is not approved by the FDA. As relevant to this discussion, Atricure also allegedly promoted expensive heart surgery using the company’s devices when less-invasive alternatives were appropriate, advised hospitals to up-code surgical procedures using the company’s devices to inflate Medicare reimbursement, and paid kickbacks to health care providers to use its devices. U.S. Dept. of Justice press release, “Atricure to Pay U.S. $3.76 Million to Resolve Medicare Fraud Allegations,” (February 2, 2010) (emphasis added).
  • Quest Diagnostics (April 2009, $302 million) — Allegations that a subsidiary manufactured, marketed, and sold testing kits that produced results that were materially inaccurate and unreliable, thereby causing some clinical laboratories that purchased and used the test kits to submit false claims, and some medical providers to submit false claims for reimbursement to federal health programs for unnecessarily prescribed treatments. Press release from the U.S. Attorney’s Office for the E.D. New York, “Quest Diagnostics Incorporated to Pay $302 Million to Resolve Allegations That a Subsidiary Sold Misbranded Test Kits,” (April 15, 2009).
  • Kyphoplasty (May 2010, $9.4 million against hospitals; May 2008, $75 million against manufacturer) — Allegations that the health care facilities overcharged Medicare when performing kyphoplasty, a minimally invasive procedure used to treat certain spinal fractures, by performing the procedures on a more costly inpatient basis rather than as out-patient procedures. The settlement with these facilities follows earlier settlements in May and September 2009 with nine other hospitals as well as the government’s May 2008 settlement with Medtronic Spine LLC, corporate successor to Kyphon Inc. Medtronic Spine, for $75 million to settle allegations that the company defrauded Medicare by counseling hospital providers to perform kyphoplasty procedures as an in-patient procedure. U.S. Dept. of Justice press release, “Nine Hospitals in Seven States to Pay U.S. More Than $9.4 Million to Resolve False Claims Act Allegations Related to Kyphoplasty,” (May 17, 2010) (emphasis added).

Pricing Strategies
Manufacturers also should consider the implications of their pricing strategies for federal health care programs. The AKS specifically references rebates as “remuneration,” along with bribes and kickbacks. There is, however, a Medicare “safe harbor” for discounts, which may include appropriately structured rebates, if all the specified requirements are adequately met. (See 42 C.F.R. § 1001.952(h).) A settlement announced in June 2010 against a device manufacturer, St. Jude Medical, Inc., and its hospital customers reflects the risks associated with pricing strategies that are alleged to be noncompliant. As described in the Department of Justice press release, the kickbacks included alleged rebates that were "retroactive" and paid based on a hospital's previous purchases of St. Jude heart device equipment and rebates that St. Jude paid for purchases of heart device equipment sold by its competitors to induce purchases of similar equipment from St. Jude in the future. Under the terms of the settlement, St. Jude, headquartered in St. Paul, Minnesota will pay $3,725,000. Parma Community General Hospital, located in Parma, Ohio is paying $40,000, and Norton Healthcare in Louisville, Kentucky is paying $133,300. The government asserted that Parma and Norton were recipients of improper rebates from St. Jude. U.S. Dept. of Justice press release, “Heart Device Manufacturer in Minnesota and Hospitals in Ohio & Kentucky to Pay Nearly $4 Million to Resolve Fraud Allegations.” (June 4, 2010).

Steps for Manufacturers to Take Now
Health care enforcement activity is dramatically increasing under the Obama administration, with increased funding and a high-profile cross-departmental focus by the Department of Justice and the Department of Health and Human Services (see the comprehensive Web site, http://stopmedicarefraud.gov/). Manufacturers should review the settlements discussed above, along with corresponding corporate integrity agreements (CIAs), and consider whether further scrutiny of their product support services and pricing strategies may be warranted.


FDA’s 510(k) Process Currently Under Review — Time for an “Extreme Makeover”?
By Joyce E. Gresko (jgresko@foley.com) and David L. Rosen (drosen@foley.com)

The FDA is in the midst of a multi-year review of its 510(k) process, and this review will likely have a significant impact on the medical device industry. The 510(k) clearance system for devices has been under increasing scrutiny by Congress, consumer groups, and the medical device industry. Many question whether the current 510(k) review and clearance process is adequate to protect patients and anticipate the risks posed by devices that incorporate new and sophisticated technological changes from predicate devices. Others wonder whether FDA’s system for reviewing 510(k) notifications actually hinders innovation due to its unpredictability. Most agree, however, that the 510(k) review and clearance system that has been in place at FDA for two decades is due for an extreme makeover in order to meet the demands of a dynamic, technologically evolving global medical device marketplace. Device companies would be well-served to pay close attention to the changes that are likely to come in the near future.

In September 2009, FDA commissioned the Institute of Medicine (IOM) to undertake a two-year, $1.3 million study of the strengths and weaknesses of its premarket notification program. At the same time the IOM study is proceeding, the Center for Devices and Radiological Health within FDA has convened an internal working group to evaluate and improve the consistency of FDA’s decision-making in the 510(k) process. Congress has been considering the efficacy of the 510(k) process as well. The House Energy and Commerce Committee Health Subcommittee held a hearing in June 2009 in part to discuss a Government Accountability Office (GAO) study that found that many Class III devices get to market with 510(k) clearance by claiming that the device is substantially equivalent to a predicate device on the market in 1976, rather than undergo a more stringent review under the pre-market approval regime.

The 510(k) process was last amended in 1990, when Congress passed the Safe Medical Device Act, P. L. 101-629, which, among other things, codified FDA’s 510(k) process, required device manufacturers to conduct post-market surveillance of devices first marketed beginning in 1991, and gave FDA the authority to recall devices that can cause serious health consequences or death. If and when the premarket notification system is revamped, Congress and FDA will have to balance concerns about patient safety with concerns about hampering innovation.

The GAO study highlighted the fact that FDA does not scrutinize many Class III devices the way Congress intended and it may be compromising patient safety. Between 2003 and 2007, FDA cleared 228 Class III devices through the 510(k) process instead of requiring those devices to be subject to premarket approval. These included devices such as artificial hip joints, external defibrillators, and implantable blood access devices. In these cases, manufacturers claimed that the devices are substantially equivalent to devices on the market prior to May 28, 1976, at least three decades earlier. GAO recommended that FDA issue regulations that would reclassify to Class I or Class II those devices that do not pose a great risk to patient health, and that would affirm that a certain subset of devices remain Class III devices and must undergo pre-market approval.

Device makers have their own concerns about the predictability of the 510(k) process and the qualifications of those who review pre-market notifications. Though many device manufacturers like FDA’s flexibility in being able to grant market clearance for some devices that do not pose a significant risk to users, there is widespread concern that FDA needs to provide clear and predictable pathways to market clearance. Under the current regime, a device maker oftentimes is unable to know what the data requirements will be, how long it will take for FDA to grant marketing clearance, and what additional regulatory hurdles FDA will impose along the way. Furthermore, some have been concerned that FDA staff reviewing 510(k) applications have been inadequately trained or are unequal to the task.

The IOM review is scheduled to be concluded by the summer of 2011, and its report is to contain recommendations for legislative, regulatory, and administrative changes that would optimize the functioning of the 510(k) to protect patients and foster innovation and investments in medical device technology. With the reauthorization of the Medical Device User Fee and Modernization Act to be debated by Congress before its expiration in 2012, those with a stake in the medical device industry should expect significant changes in the way FDA clears, approves, and monitors medical devices in the future. Until such an “extreme makeover” is enacted by Congress and implemented by FDA, we suggest that companies carefully monitor the progress of this FDA review, continue to review the predicate devices that have been cleared by the agency, and seek guidance on the current and potentially changing regulatory requirements for the specific product under development.


En Banc Federal Circuit Confirms the Written Description Requirement Is Separate and Distinct From Enablement
By Debra D. Nye (dnye@foley.com)

Securing strong patents in the medical device area may well be greatly influenced by a very recent and important Federal Circuit decision. In one of its most significant decisions this year, the en banc Federal Circuit in Ariad Pharmaceuticals, Inc. et al. v. Eli Lilly & Co., 598 F.3d 1136 (Fed. Cir. 2010), affirmed that 35 U.S.C. § 112, ¶ 1 contains a written description requirement that is separate from the enablement requirement.

The en banc review arose after a Federal Circuit panel ruled last year that the claims of a patent Ariad had asserted against Eli Lilly's Evista® and Xigris® products were invalid for lack of written description. The Federal Circuit vacated that decision and granted Ariad's petition for rehearing en banc. The Court asked the parties to file new briefs addressing whether §112, ¶ 1 contains a written description requirement separate from the enablement requirement and, if so, the scope and purpose of that requirement.

The claims at issue in the case were broadly directed to methods for reducing activity of a particular transcription factor; however, the specification only provided functional descriptions and desired outcomes, rather than specific examples of compounds and how to make and use them to modulate the transcription factor's activity. Interest in the case was high because of a perception that the Court's opinion could have implications for a patent applicant's ability to obtain broad generic claim scope based upon a narrow disclosure.

In the en banc decision, the Court held that a patent's specification must satisfy two separate description requirements. First, the specification must have a written description of the invention itself. Second, the specification must have a written description of the manner and process for making and using the invention. The second requirement is commonly referred to as the “enablement requirement.”

Regarding the first requirement, which was specifically at issue in the case, the Court found that a written description of the invention was dictated by the statutory language of 35 U.S.C. § 112, Supreme Court precedent interpreting previous versions of the patent statute, the Federal Circuit's precedent, and stare decisis. See Ariad, 598 F.3d at 1347. The Court stated that a separate written description requirement

has been the law for over forty years … and to change course now would disrupt the settled expectations of the inventing community, which has relied on it in drafting and prosecuting patents, concluding licensing agreements, and rendering validity and infringement opinions.

Id.

Moreover, the Court explained that

[a] description of the claimed invention allows the United States Patent and Trademark Office … to examine applications effectively; courts to understand the invention, determine compliance with the statute, and to construe the claims; and the public to understand and improve upon the invention and to avoid the claimed boundaries of the patentee's exclusive rights.

The Court reaffirmed that the test for sufficiency of the written description requires a determination of “whether the disclosure of the application relied upon reasonably conveys to those skilled in the art that the inventor had possession of the claimed subject matter as of the filing date.” Id. at 1351. The Court explained that the test requires an objective inquiry into the four corners of the specification to determine if a person of ordinary skill in the art would understand the invention and whether the specification shows that the inventor actually invented the invention claimed. Id. The Court stated that the written description inquiry is fact-specific and that the details of the analysis will vary from case to case “depending on the nature and scope of the claims and on the complexity and predictability of the relevant technology.” Id.

The Court also confirmed that the written description requirement is not limited to determining priority and that “[a]lthough many original claims will satisfy the written description requirement, certain claims may not.” Id. Specifically, the Court explained that a generic claim must be supported by disclosure of a sufficient number of species in the specification.

Applying those principles to the case at hand, the Court held that the claims at issue were functional genus claims and were “far broader” than the disclosure in the specification. The specification only described some molecular structures along with hypotheses and failed to describe that those molecules could be used to reduce the activity of the transcription factor at issue. As a result, the Court held that the claims at issue were invalid.

Even though this case arose in a pharmaceutical context, the Court's holding has implications for all technologies, including medical device. The Federal Circuit merely affirmed its own precedent to reinforce the incentives that already exist for patent applicants to write detailed specifications. Accordingly, it behooves all patent applicants to provide as much disclosure as possible in the specification in order to properly teach what is claimed. The Court's holding reinforces the importance of the timing of an applicant's decision to file a patent application during the course of its research. Specifically, filing too early in the research process may limit the number of examples available to support a broad generic claim and risks a finding that the application lacks sufficient written description. However, filing the patent application too late in the research process creates a risk that the applicant will lose a priority battle with a competitor. Finding the right balance will be important. In a litigation context, the Court's decision continues to provide alleged infringers with ammunition to challenge the broadest claims in issued patents for failure to meet the written description requirement.


Supreme Court to Patent Applicants: “Get Real!” – In re Bilski, Medical Device Industry Take Heed
By Stephen A. Bent (sbent@foley.com) and Robert Silverman (rsilverman@foley.com)

The U.S. Supreme Court does not speak too often on patent issues, but when it does everyone takes note. In this area, a Supreme Court pronouncement can bring sudden, significant, and enduring change in the economic value of patents. But the Court’s latest patent opinion, Bilski v. Kappos (June 28, 2010), is notable for what it did not change regarding what is and is not eligible for patent protection.

The patent law says that a patent may be obtained for a “process, machine, manufacture, or composition of matter.” An evolving case law has qualified this broad principle of patent-eligibility by excluding “laws of nature,” “physical phenomena” and “abstract ideas.”

In Bilski, the Supreme Court upheld a USPTO rejection of proposed claims to a method of hedging risks related to price fluctuations in commodity markets. The Court’s rationale was squarely in the time-honored “abstract idea” genre, thus breaking no new ground in that aspect of the decision. But, in reaffirming its traditional test, the Supreme Court rejected the narrower definitions of patent-eligible subject matter that had been introduced by the U.S. Court of Appeals for the Federal Circuit, in particular that the lower court’s requirement that patentable subject matter must be tied to a particular machine or apparatus or must transform an article into a different state or thing.

The Supreme Court ruled that this “machine-or-transformation” (MOT) inquiry may be a factor but cannot be the exclusive test for patent eligibility. Significantly, the Supreme Court carefully avoided making any categorical pronouncements about the patent-eligibility of software, algorithms, diagnostic tests, and so-called “business methods.” Although the patentability of these areas has been debated, Bilski precludes none of them from the realm of patent-worthy subject matter.

The courts now will have the task of fleshing out a post-Bilski framework for patent eligibility. A near-term opportunity in this regard is Prometheus Laboratories, Inc. v. Mayo Collaborative Services, which the Supreme Court returned to the Federal Circuit to “rethink” in light of the Bilski decision. The patent claims in Prometheus focus on a treatment method that entails (1) a health care provider’s administering 6-thioguanine to a patient and then (2) determining a blood level of that drug in the patient against a fixed concentration, thereby to inform a decision on raising or lowering subsequent dosages.

In Prometheus (I), the Federal Circuit applied the MOT test to find the claimed method patent-eligible because “the human body necessarily undergoes a transformation” by virtue of “administration” step (1). Since step (1) and step (2) are anything but abstractions, a Federal Circuit affirmation of patent-eligible status, should that come in Prometheus (II), could at least be consistent with Bilski. Yet, the disputed method claims do not explicitly require a “step (3)” of altering a 6-thioguanine dosage. This leaves an opening to urge, as the trial court did below, that the claims merely recite data-gathering steps that are prerequisite to the all-important prognostic correlation, itself an abstract mental step by the health care provider.

While the post-Bilski case law takes shape, inventors, businesses, and patent attorneys must take guidance from the longstanding and undeniably imprecise prohibitions on patenting “laws of nature,” “physical phenomena” and “abstract ideas.” Determining where any of these forbidden areas end and where the territory of legitimately patentable technology begins pose fundamental questions concerning the objects and function of the patent system and its relationship to the national and global economies. But it also is an issue that most patent owners – and patent applicants – would rather avoid. Venturing near the metaphysical quicksand of uncertain patentable subject matter creates risks regarding the ability to obtain or to enforce such patent rights.

In practical terms, avoiding this risk requires careful attention, during the patenting process, to what really matters in a particular invention, from a business perspective. Staying away from suspect subject matter generally involves crafting patent claims that reflect the real-world, actually implemented use of the invention. Indeed, it may make more sense to seek patent protection for several discrete embodiments of an invention, for example, as opposed to trying to gain overarching claims that transcend particular operational platforms. Obtaining a patent with broad coverage certainly has advantages in the marketplace. But a prudent backup plan is to protect the technological investment with patents of less expansive scope, in case the broader claims come under scrutiny for broaching questionable subject matter.

For the biomedical sector, the Bilski decision means that patenting strategies should be firmly grounded in claims that relate to tangible assay formats and diagnostic platforms. Potential subject-matter issues also should be kept in mind when dealing with patents for inventions that involve software-controlled medical devices or biomedical imaging equipment. Attention to the hardware and real-world biological, chemical, or physical interactions and operation of such inventions appears to be a good strategy.

Thus, for a biomedical invention that turns on the use of information, a suitable patent claim could relate, in concrete terms, the transformation of that information via a computer-implemented algorithm from one form (say, as digital signals encoding x-ray exposure results) to another form that is accessible, e.g., through direct visualization, to instruct a particular diagnostic or treatment procedure. With these elements, such a claim should be less prone to the criticisms leveled, for instance, from various quarters in Prometheus (I).

It will be important to monitor legal developments, as the first wave of post-Bilski cases reach the courts. Along with the greater flexibility that Bilski affords the patent drafter, in other words, comes greater responsibility to avoid abstractions.

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