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Legal & Regulatory Feature

Courtesy of Federal Police of Brazil and ABRAIDI

The Case of Brazil’s “Prosthetic Mafia”

Walter Eisner • Mon, April 3rd, 2017

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On a 2015 January Sunday night, over 10 million Brazilians tuned into their favorite and top-rated Sunday night news program called, Fantastico.

Courtesy of The Fantastico

The 60 Minutes-style news show took aim at the country's orthopedic and implant device distributors. The Fantastico report included undercover testimony from participants in medical device bribery schemes who alleged extensive bribery, kickbacks and fraud in the sale of certain medical devices.

During the television program, Brazilian medical device distributors were shown offering secret 20-30% cash commissions to an undercover reporter posing as a Brazilian surgeon.

The allegations included accusations that certain device distributors paid monthly commissions of $37,000 to surgeons who prescribed their products and often performed unnecessary replacement surgeries. U.S. device makers were publicly tied to the practice as the broadcast showed Brazilian distributors of U.S. medical devices offering secret cash payments to doctors.

The Brazilian federales at the Justice Ministry wasted no time announcing an investigation of surgeons and Brazilian distributors suspected of overcharging the public health care system for implants.

“War on This Mafia”

"The government declares war against this mafia that steals money from the public coffers and steals the health of the people," Justice Minister Jose Eduardo Cardozo said in a post on the ministry's website.

In subsequent private lawsuits, it was disclosed that the president of ABRAIDI (Associação Brasileira de Importadores e Distribuidores de Implantes), the trade association representing Brazilian medical device distributors, made a public presentation in which he acknowledged that medical device distributors regularly paid commissions ("chocolates, bribes or however you wish to describe them") to physicians and hospitals, and that these commissions resulted in increased prices for medical devices (namely they are "very high to the point of greatly affecting our industry").

These improper commissions and financial incentives, charges the Associação Brasileira de Medicina de Grupo dba Abramge, a private group that claims to represent private Brazilian insurers, were not disclosed to either patients or third party payers, but rather were concealed to avoid detection.

U.S. Settlements

In January 2017, two years after the Brazilian newscast, Stryker Corporation, Zimmer Biomet Holdings, Inc. and Orthofix International announced a conclusion with the U.S Department of Justice and the Securities and Exchange Commission over allegations of violating the Foreign Corruption Act and securities laws. The companies paid fines, but few, if any details of the specific violations were provided.

But paying fines in the U.S. wasn't good enough for Abramge, which claims that its members ended up footing the bill for the “chocolates.” Abramge filed private lawsuits in U.S. courts at the end of 2016 against Abbott Laboratories, Inc., Boston Scientific, Arthrex, Inc., Zimmer Biomet, Orthofix and Stryker. Those lawsuits are now providing details of the alleged corrupt actions of the device distributors.

Brazilian Investigations

Back in Brazil after the Fantastico expose, Brazil's internal revenue service and antitrust agency, the Federal Police and the Administrative Council for Economic Defense (CADE), the antitrust agency, announced an investigation of the "irregular prescription of orthopedic prosthesis."

CADE sought to determine if device manufacturers formed a cartel to defraud the public health care system while the internal revenue service investigated possible fiscal frauds. CADE searched the facilities of companies that made implantable orthotic and prosthetic devices in eight cities across Brazil.

The investigation stemmed from CADE's own analysis of data it had collected on public bids. The agency said its review indicated that the bidders may have colluded and that it had received complaints from government purchasers and information from private buyers.

Analysis from the Federal Court of Accounts, a Brazilian legislative agency that helps lawmakers oversee the executive branch, also contributed to CADE's investigation.

CADE said it named the operation "Merchant of Venice" after the Shakespeare play in which a loan shark charges his debtors by claiming a pound of their flesh.

Brazilian Insurance

In the private lawsuits in U.S. courts, Abramge claims Brazil has the second-largest private health insurance market by population in the world after the U.S. That system compliments Brazil's publicly funded health system, the Sistema Unico de Saude (SUS). The SUS is a universal system of healthcare that is entirely free of any cost for any person. It serves about 75% of the Brazilian population.

Recently, claims the association, private health insurance spending in Brazil has surpassed the amount of money spent each year by the U.S.

Brazilian law mandates that insurers pay for medical devices, which are implanted based solely on a doctor's decision during the hospital stay.

In Brazil, the private payers pay the Brazilian distributors or the device manufacturer for medical implants directly. In other cases, however, these insurers pay hospitals for the medical devices that are implanted, and those hospitals in turn pay the distributor or device manufacturer.

Abramge Sues U.S. Companies

In November 2016, Abramge began filing U.S. federal lawsuits against the U.S. manufacturers, accusing the companies of fraud and conspiracy through alleged kickbacks in Brazil that led to unnecessary surgeries.

The group claims that the allegations are part of a pattern of corruption in the medical device industry, which has become known as the “Prosthetic Mafia” in Brazil.

The U.S. companies are accused by Abramge of working through their Brazilian subsidiaries and distributors, "to bribe doctors” to use more products. The U.S. companies then allegedly inflated the price of the products in their bills to Brazilian insurance companies, giving between 20% and 40% of the sales price back to the doctors.

This arrangement, claims the group, led to unnecessary surgeries and implants in order to increase the amount of products purchased and the amount of money they earned under this arrangement.

Abramge further alleges that once the medical device industry’s payment of “improper, secret commissions and financial incentives to physicians came to light,” price disparities diminished, and the number of procedures to install medical devices was reduced, at least temporarily.

“A prominent São Paulo hospital studied the difference in certain medical procedures before and after the public disclosure of the medical device scandal and found a 30% reduction in those procedures.”

In the lawsuits, Abramge alleges that surgeons sometimes performed completely unnecessary surgeries in order to use the products. Other times, multiple devices and products were implanted or used when cheaper alternatives would have been equally or more effective.

Abramge claims the companies would invoice devices to doctors at prices that exceeded what those devices should have cost. This allowed them to recoup the cost of the illicit payments, forcing the insurers to finance the scheme.

The amounts allegedly run into millions of dollars.

“The improper payments and kickbacks the defendants made were part of an organized scheme, planned in and run from [U.S. corporate headquarters], to increase their sales in Brazil,” the complaints state.

“The scheme not only caused and continues to cause significant losses to insurers and the Brazilian public health system, but also has resulted in injury to patients throughout the country.”

Compensatory and Punitive Damages

Abramge is seeking compensatory and punitive damages for fraud, conspiracy, tortious interference and unjust enrichment, and claims the bribes violated the laws of certain U.S. states, the United States, Brazil, and Brazilian medical ethics codes.

Companies Respond

In various responses to the lawsuit, the companies are asking the courts to throw out the case.

Stryker, for instance, argues that Abramge’s complaint should be dismissed for four reasons.

First, it should be dismissed under the doctrine of “forum non conveniens” because Abramge is a Brazilian organization and is seeking a remedy for conduct that allegedly occurred in Brazil. “Almost all of the relevant witnesses and documents are in Brazil, and all of the alleged harm occurred in Brazil…. This is an inherently Brazilian dispute about Brazilian conduct by Brazilian actors. It should be litigated in Brazil.”

Second, Stryker argues that Abramge lacks standing.

“Abramge does not seek to recover for its own injuries; rather, Abramge seeks damages and an injunction on behalf of its members. Although associations sometimes may bring claims on behalf of their members, they may not do so when the members have individualized claims or damages. Here, the members’ injuries vary, and some members may not have been harmed at all. Because each member has individualized claims and damages, Abramge lacks representational standing.”

Third, argues Stryker, Abramge fails to plead its fraud and fraud-based claims “with particularity,” as required by federal statute. “Abramge does not plead with particularity any fraudulent statements or omissions; does not identify who made the alleged fraudulent statements or omissions; does not identify when or where those alleged statements were made; and does not identify to whom they were made.”

Fourth, Stryker says most of Abramge’s counts fail to state a claim for fraud by non-disclosure; fail to state a claim for tortious interference; fail to state a claim for civil conspiracy; fail to state a claim for vicarious liability and, finally, Abramge fails to state a claim for injunctive relief.

The Case of Brazil’s Prosthetic Mafia offers lessons and insights for U.S. manufacturers seeking to do business in Brazil. The primary lesson—when things go wrong the injured parties will reach for the biggest pockets for restitution.

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