Industry Insights from Paul Meade, M. Sc, MPH
In a December 20, 2010 article, the Wall Street Journal addressed the royalties paid to back surgeons by a medical device manufacturer. The article highlights a group of five senior spine surgeons that received over $7 million from Medtronics in royalties and consulting fees. The article also goes on to suggest that the number of procedures involving spinal fusions performed by these physicians may have exceeded those in the general population of Medicare patients. However, it was noted that these surgeons did not receive royalties from procedures performed in their hospital using devices from the manufacturer in question, since this would have been an ethical violation and a conflict of interest. So where’s the problem here?
The issue at hand may be defining fair and reasonable compensation. It could also be the level of influence these surgeons may have on other spine surgeons to use devices in which they have a royalty payment from the manufacturer. And lastly, it could be argued that these consulting and royalty payments could amount to surrogate “kickback” payments to use and influence the use of certain devices. All of these issues are fraught with ethical dilemmas and moral challenges.
If I am the inventor in new technology to enhance televisions, and I sell this technology to a television manufacturer, I can ask for an up-front, lump-sum payment or a royalty payment that gives me a percentage on all sales of my invention. Which way would you ask to be paid? Well, it depends on whether you are a risk taker or not. If you thought your invention was only marginally advantageous in the marketplace and had a limited life of utility, you might take the money up front in a lump-sum payment. But if you thought you had invented a major breakthrough that would be found in all televisions from a particular manufacturer, and that manufacturer would gain competitive advantage in the marketplace as a result of your invention, you might ask for royalty payments.
Of course, on the other side of the fence, what would the manufacturer want to do? They would likely want to just give you a one-time payment and be done with you, as they fully exploit their newly acquired patent. But if they were uncertain of its utility and staying power, they just might offer you a royalty payment option. A lot depends on who is asking for what, and who is offering what.
The Wall Street Journal fails to disclose the contractual agreements between the surgeons, who may have either invented or contributed to the invention, and the manufacturer. Did the physicians ask for a one-time payment from their intellectual property contributions and the manufacturer offered a royalty payment scheme instead? Or did the surgeons ask for royalty payments and the manufacturer felt they had little option to refuse such a compensation plan. We simply don’t have the appropriate information on the financial agreements, and how the negotiations transpired between interested parties to make any judgment calls.
If the intellectual property contributions by the five spine surgeons were significant enough to result in a major competitive advantage for Medtronics, and the manufacturer stood to make billions of dollars on the sale of this device, then what may seem excessive to you and me, may in fact be very reasonable compensation for their contributions. The WSJ article purports that Medtronics made $3.5 billion from its spine business last year, and if these five spine surgeons were paid $7 million in royalties, this would only represent 0.2 percent. I, personally, would be very unhappy if all I received from my intellectual property contributions to a significant invention was only 0.2% in royalties. And that is 0.2 percent divided among five surgeons! But $7 million sure sounds like a big number, even for a surgeon. So, is this fair and reasonable compensation for intellectual property contributions? It would seem so, with the information we have about this financial agreement. In fact, it might seem a little low to me. I myself would expect a royalty payment of 2-3% of gross sales from a significant invention I sold to a global manufacturer.
Were these surgeons in a position to influence the market place? Well, it is entirely possible that these five surgeons went around the country telling all other spine surgeons about this wonderful device. They could have written several journal articles, gone to the media to talk about their inventions, attended all scientific conferences to present their research findings, and even spend a considerable amount of time talking directly to patients about the device. But if they had done this, then they couldn’t possibly have performed as many procedures as the article stated. To be sure, these spine surgeons could have had some influence on the acceptance of this device among their colleagues, but, realistically speaking, it is unlikely that their efforts alone could have resulted in billions of dollars in sales for Medtronics. Influential, yes. Capable of creating and shaping an entire market for a device, not likely.
And lastly, with regard to “kickbacks,” these surgeons were not paid royalties for any devices they used in their hospital. So where is the kickback? If I personally use a device and then receive some from of payment for using said device, this can be construed as a kickback. If I am not compensated in any way for using a device, then can this be a kickback?
So the ethics of inventions can present a slippery slope for people in a position to influence its use, especially when there is a third party paying for its use. Were these spine surgeons unfairly compensated? Not really, but, if so, maybe too little; we need more facts surrounding the financial agreements between interested parties to make a definitive call. Did these surgeons breach ethical boundaries by influencing the use of a device where they may have had a conflict of interest? Perhaps, but was the real magnitude of this influence significant enough to impact the overall sales of the device? And was there a conflict of interest with these royalty payments being disguised as kickbacks? Since they were not directly compensated for using the device within their hospital, and they offered full disclosure to their patients of their financial interests with the device manufacturer, it is unlikely they violated any ethics rules.
So where’s the problem? It seems some people at the Wall Street Journal may have a problem with physicians being compensated for intellectual property contributions to a manufacturer. Were the ethics of invention violated in this situation? I can’t see any straight-forward arguments to render a guilty verdict.