Over the past year, the Federal Trade Commission (FTC) successfully challenged acquisitions by Boston Scientific and Medtronic, reaffirmed its jurisdiction to regulate healthcare product advertising, and aggressively expanded its data collection and storage enforcement oversight efforts. Not to be outdone, the US Department of Justice (DOJ) Antitrust Division withdrew three decades of healthcare policy statements and inked an agreement to join forces with the Department of Health and Human Services Office of Inspector General in its investigations and enforcement actions. Meanwhile, Applied Medical Resources filed litigation challenging Medtronic’s pricing practices and group purchasing organization contracts. These recent events offer important lessons about how medical device manufacturers should manage their compliance risk while operating in markets where customers increasingly leverage their purchasing power.
Be bold in cross-market bundling discounts but not reckless
Product bundling dates back centuries and rarely poses a compliance risk. Bundling benefits customers, who receive price discounts and reduced transaction costs. Manufacturers benefit by promoting cross-market sales. However, when manufacturers use cross-market bundling to limit market access or force customers to purchase unwanted products, antitrust laws kick in. In the pharmaceutical industry, regulators are increasingly concerned with manufacturers leveraging blockbuster drug portfolios to secure exclusive or preferred formulary placement for other medications in different product markets. The strategy, according to regulators, has the effect of disadvantaging existing rivals and discouraging new ones from emerging, depriving patients, doctors, and payers of the benefits of innovation. Regulators are now extending their concerns to device manufacturers. For example, in its lawsuit against Medtronic, Applied Medical alleges that Medtronic is using product bundling discounts and exclusive agreements with group purchasing organizations and hospitals to exclude Applied Medical from the market for advanced bipolar devices. The FTC recently weighed into the litigation, arguing that Applied Medical should be allowed to proceed with its case. While product bundling poses little risk to fragmented markets, leveraging product success should be undertaken judiciously, particularly in highly concentrated markets. To mitigate antitrust risk, cross-market discounts and bundling strategies should not expressly target smaller rivals or prohibit customers from purchasing products unbundled. The magnitude of the discounts and other contract terms, such as exclusivity and duration, also should be tailored to the risk profile of the market.
Proactively manage your data exchanges and competitive intelligence
Data collection and high-quality, competitive intelligence are critical factors in the success of all medical device manufacturers. Historically, regulators viewed data aggregated by third-party data collectors as benign competitive intelligence unlikely to harm competition. This was particularly true in highly fragmented markets where the structure of the market itself made it less susceptible to coordination. This thinking changed on February 2, 2023, when DOJ withdrew “safety zones” established in the 1990s to identify the circumstances under which DOJ would exercise its prosecutorial discretion not to challenge healthcare companies engaged in information exchanges.
Now, aggregation and other mechanisms traditionally employed to avoid allegations of collusion may no longer be sufficient to avoid scrutiny. Even joint conduct in fragmented markets is subject to scrutiny. Several studies have shown that artificial intelligence technology used to automate transaction terms and discounts can lead to tacit or express collusion in the marketplace, and regulators are increasingly focused on competitors that adopt similar pricing algorithms. Regulators also have successfully challenged exchanges of information among competitors concerning wages, benefits, and spot advertising rates. In light of this evolving regulatory enforcement, medical device manufacturers should be reviewing their competitive intelligence collection practices to confirm that they conform to current thinking about data collection and competitive intelligence more generally. In this context, data collection and competitive intelligence are not limited to sales-side pricing. Exchanges of wage and benefits information and other types of buyer pricing data are equally susceptible to challenge under the antitrust laws. Such exchanges are not always treated as a purely civil matter. For example, over the past year, DOJ has brought to trial several criminal cases against individuals, including in healthcare, based on exchanges of wage information among competing employers. With the current administration prioritizing labor markets, the frequency with which these types of cases are brought is likely only to increase in the years ahead.
Truth in advertising and data privacy should be ongoing compliance priorities
Buoyed by a successful response to pandemic-related scams, the FTC expects to increase its truth-in-advertising enforcement; unlike the US Food and Drug Administration, the FTC makes no bright-line distinctions between categories of health-related products or claims in its regulation of advertising. As relations with China continue to deteriorate, many of these enforcement efforts likely will be directed to enforcement actions against false “Made in the USA” claims. Under regulations adopted in 2021, manufacturers cannot advertise or promote their medical devices as having been “Made in the USA” unless the final assembly of the product occurs in the United States, all significant processing that goes into the product occurs in the United States, and all or virtually all the components of the device are made and sourced in the United States. Recent consumer enforcement actions have seen the FTC target “Made in the USA” claims by manufacturers of personal protective equipment, oral film strips, and other over-the-counter devices.
App developers, particularly, will face scrutiny in the years ahead. Efficacy representations without substantiation, unlawful self-endorsements, and data collection practices have all been targeted by regulators. In 2021, the FTC issued a policy statement clarifying that appeals that collect consumer health information are covered by the Health Breach Notification Rule (HBNR). This rule requires vendors of personal health records and related entities to notify consumers, the FTC, and, in some cases, the media when that data is disclosed or acquired without the consumers’ authorization. On May 18, 2023, the FTC issued proposed changes to expand the reach of the HBNR. This proposed expansion came a day after the Commission entered into a settlement with the developer of the fertility app Premom based on allegations that Premom deceived users by sharing their sensitive personal information with third parties, including two China-based firms; disclosed users’ sensitive health data to AppsFlyer and Google; and failed to notify consumers of these unauthorized disclosures in violation of the HBNR.
Strong compliance mitigates future mergers and acquisitions transaction risk
Empirical evidence indicates that mergers and acquisitions lead manufacturers to delay or terminate overlapping projects and reduce research and development expenditures, patent output, and research productivity. As a result, regulators are now frequently challenging proposed acquisitions when they believe the acquisition will stifle innovation. While merger analysis is largely driven by the competitive landscape in which the parties operate, device manufacturers can mitigate their risk in future long-horizon transactions by implementing strong compliance programs now. Merging parties face an uphill battle in convincing regulators not to challenge a merger when the firms at issue have a history of anti-competitive practices or have shown a lack of sensitivity to antitrust compliance. Prioritizing compliance now means that parties are more likely to come to regulators with a clean slate, which could be the difference for regulators faced with a close call.
Editor’s Note: Mr. Cunningham is the co-team leader of the corporate compliance and white-collar criminal defense team at Jones Walker LLP, where he provides strategic advice to healthcare clients on competition and trade issues and represents their interests when dealing with law enforcement and federal and state regulators.
