013: Merit Medical Systems and Whistleblower

013: Merit Medical Systems and Whistleblower

013: Merit Medical Systems and Whistleblower 013: Merit Medical Systems and Whistleblower

Merit Medical Systems and Whistleblower

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Learning Objectives:

Upon completion of this Case Study, participants should:

  • Understand certain practices with the medical device sales industry,
  • Describe how having a compliance program in place is necessary but not sufficient to protect the company from legal jeopardy,  
  • Explain the role a whistleblower plays in assisting the government with investigations, and  
  • Identify ways in which a company might take greater precautions to avoid lawsuits and investigations. 

State of the Industry

Medical pay-to-play (when companies pay doctors millions of dollars in exchange for their willingness to prescribe medications or purchase medical equipment) turns the practice of paying for patients into an art form. Pharmaceutical and manufacturing companies often spend lavishly on trips, dinners, retreats, and honorarium payments to doctors in an effort to increase business growth and profits. Professionals in the medical community face scrutiny when they make or receive payments that authorities deem unnecessary.

When companies pay doctors to use their products, or when healthcare professionals accept payments from manufacturers, officials may have questions about bribery. Authorities may conclude that such gifts and honorariums constitute thinly veiled bribes, and question whether a legitimate need for the payment existed. Those questions can lead to government investigations.

Background and Analysis

Merit Medical Systems manufactures and markets proprietary, disposable, medical devices. Doctors that specialize in cardiology, radiology, oncology, critical care and endoscopy rely upon Merit’s products. Merit has a history of serving hospitals worldwide, with offices located throughout the United States, Canada, Europe, Asia and South America. The company generates more than $1 billion in annual revenue and employs more than 6.000 people. Another example of the company’s stature is that its shares trade on the Nasdaq. The company spends approximately $60 to $80 million on research annually and complements internal growth with certain strategic acquisitions.

With its history of good citizenship, Merit received a Green Business Award from the Utah Business Magazine for giving back to the local community. The company’s dedicated founder, Fred Lampropoulos, earned accolades for his charity and commitment to the State of Utah. Over the course of his career, he invented or co-invented more devices used for diagnostics and therapeutic treatments of cardiovascular disease. Several large hedge funds have invested in the company. Former Vice President Pence hailed the company as a classic example of the modern-day American success story.  

Merit adopted a Code of Business Conduct and Ethics in 2005 and created a new full-time position of Chief Compliance Officer. A dedicated page on its website highlights this commitment. 

“Every Merit team member is responsible for ensuring that our reputation remains strong. Together we foster a culture in which compliance with the Merit Code of Business Conduct & Ethics and adherence to our core values drives our everyday business activities.

The Merit Code of Business Conduct & Ethics always underpins our approach to operating with the highest integrity. It also provides several avenues for team members to report their concerns without fear of retaliation, encouraging them to speak first to their managers and seek help from Human Resources or our Compliance and Ethics Office.”

Despite such lofty statements, the company failed to invest sufficient resources to support its compliance program. 

The company’s Chief Compliance Officer, Charles Wolf, a non practicing medical doctor and an accredited health care compliance professional, lodged a whistleblower complaint with authorities. Mr. Wolf claimed that Merit induced doctors to buy its products. The company paid consulting fees, writing fees, dinners, trips and cash to persuade doctors to prescribe its medical devices. Wolf reported his concerns about the alleged fraud to Merit’s management during his tenure as its chief compliance officer to no avail. Wolf subsequently resigned and reported his concerns to the DOJ.

Federal and state laws prohibit payments of any kind to physicians, including marketing dollars and consulting fees, to influence physician choice of medical devices. If the government pursues a whistleblower case, and the case results in a monetary fine or settlement of some sort, the whistle blower may receive a percentage of the monetary amount as compensation.

Wolf initiated a whistleblower lawsuit shortly thereafter, under the False Claims Act and Anti-Kickback Statute alleging fraudulent schemes involving illegal kickbacks paid to doctors as incentive to use the company’s devices. 

Twenty-nine state attorneys general joined the original lawsuit, filed in New Jersey. In March of 2020, the U.S. Department of Justice filed a notice to intervene in the case after a four-year investigation.

The lawsuit alleged that Merit paid high-volume users of its medical devices, such as doctors and other medical professionals. Further, the suit accused Merit of paying consulting fees. Such payments occurred over a span of six years. The company disguised millions of dollars in payments as being educational in nature. Yet the lawsuit claimed that, in reality, the payments went to physicians and clinical workers to induce hospitals, and other doctors to purchase additional equipment, supplies and products from Merit.

The lawsuit further claimed that Merit management joked about compliance and came up with a numeric system to discuss how risky a proposal to doctors might be. They rated proposals on a “chili-pepper” scale of 1 to 3 in terms of how much “heartburn” a particular action would give the company with respect to guidance and ethics.     

The company fought allegations for years, burning through millions of dollars in legal fees. When the Department of Justice joined the lawsuit, the company acquiesced. It’s one thing to fight against a whistleblower and state allegations. When the Federal government gets involved, the stakes become much higher. 

To settle the lawsuit, Merit agreed to pay $18 million. The company’s press release indicated that the settlement agreement did not constitute a finding of wrongdoing by Merit or its management, and even expressly recognized that Merit denies the allegations.   

Recommendation

The Department of Justice offers clear guidelines for companies that want to avoid criminal charges. We recommend that company leaders review those guidelines. Understanding the factors that prosecutors will consider should motivate business leaders to create company-specific policies that help businesses avoid problems with the government. 

In this case, Merit had many positive attributes. Yet it failed to generate wide-spread acceptance. The compliance officer became a whistleblower against the company. To minimize future risks for such problems, the company should document team members’ compliance training and thoroughly consider employee recommendations for improvement. When an employee has a concern with anything the company is doing, the employee should have a clear path to report wrongdoing. Company leaders should discuss that pathway and document everything in a transparent manner.

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