Medical device sales: when a rebate becomes a kick back

Medical device manufacturers sometimes engage in unconscionable behaviour to secure sales to private hospitals. Image from Shutterstock.com

Australian public interest regulators usually have a very imperfect picture of how much anti-competitive or fraudulent activity is occurring in areas such as health care. But there’s a better approach in the United States that they could emulate.

A highly successful mechanism for discovering unconscionable activity (in the health-care sector in particular) involves the US False Claims Act. This law rewards informants or whistle-blowers with a percentage of the damages the government obtains when a false claim on the public purse is successfully prosecuted.

The False Claims Act regularly reveals fraudulent and anti-competitive conduct in the pharmaceutical and medical device industries, as well as the corporations running hospitals.

Case study: St Jude Medical

In 2010, for instance, the United States department of justice announced a settlement of an action with St. Jude Medical, a manufacturer of cardiac pacemaker and defibrillator devices; a hospital and a private health insurer.

The case arose because St. Jude was required by Parma Community General Hospital and Norton Healthcare to offer improper rebates on the price of its devices in order to secure their custom. Rebates like these often lead to the government being overcharged by the involved parties.

Rebates on the cost of medical devices are permissible in the United States, but only if they’re agreed to in express terms (and in writing) at the time of the original sale and repeated on every invoice. Failure to fulfil these conditions converts a permissible rebate into a kick back liable for legal action.

The St Jude case emphasises how easily unconscionable kick backs can be created when a private hospital requires a medical device manufacturer to offer a rebate as a condition for invoice payment.

Could it happen here?

Australia lacks an equivalent to the US False Claims Act, so it’s unclear whether such rebate arrangements – unconscionable or not – occur here, despite many of the same companies being present in both jurisdictions. A hypothetical instance, drawn from US examples such as the one above, may involve a private hospital requiring a medical device manufacturer to pay a rebate as a condition of its devices being used, or for becoming a “preferred supplier”.

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A similarly problematic situation would be one where a private hospital refuses to pay an invoice until a medical device manufacturer provides the same rebate that all other such manufacturers in the market are providing.

Indeed, a private hospital might even go so far as to instruct its surgeons not to use the medical devices of any manufacturer refusing to pay the required rebate. And, in cases where it does receive the rebate, the private hospital may bill the relevant private insurer for the full cost of the medical device. This would allow it to save the difference between the cost and the rebate for itself.

Such cases fall within the spectrum of anti-competitive conduct regularly discovered in the United States through use of mechanisms such as the False Claims Act but whose existence in Australia remains conjectural.

Time to kick the self-regulation model?

These sorts of deals can weigh heavily on the public purse because Australian taxpayers subsidise private insurance and some private hospital costs in these settings are charged to Medicare. Yet such conduct, though it potentially constitutes “unconscionable conduct” under various components of the Australian Competition and Consumer Act 2010 may not come to light without an informant incentive scheme, such as the False Claims Act.

In Australia, the amount private insurers pay for medical devices is decided by independent government committees. If the medical device in question is a prosthesis (for knee or hip implant), for instance, then the Prostheses List Advisory Committee (PLAC) advises the minister the appropriate amount payable under the Prostheses List (made under the Private Health Insurance Act 2007 and the Private Health Insurance (Prostheses) Rules).

Lists like these were established to control inflation in private health insurance benefits paid for medical devices. If US-style anti-competitive practices involving private hospitals requiring medical device rebates are occurring here, they directly conflict with such public policy objectives.

But a more wide-ranging question is whether Australian public health is being let down by outdated models of regulatory theory that over-emphasise the importance of broad-based self-regulation. They should, rather, focus on firm and immediate state control of anti-competitive practices through mechanisms such as the False Claims Act.

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