Medtronic 2015 Annual Report Download - page 24

the Chinese and Russian governments have not yet issued guidance on how they will apply or enforce them. The restrictions
may complicate our operations in those countries, adding complexity and additional management and oversight needs. We will
continue our efforts to comply with those requirements and to adapt our business processes to applicable laws.
Cost Containment Initiatives
Government and private sector initiatives to limit the growth of health care costs, including price regulation, competitive
pricing, bidding and tender mechanics, coverage and payment policies, comparative effectiveness of therapies, technology
assessments, and managed-care arrangements, are continuing in many countries where we do business, including the U.S. These
changes are causing the marketplace to put increased emphasis on the delivery of more cost-effective medical devices and
therapies. Government programs, including Medicare and Medicaid, private health care insurance, and managed-care plans have
attempted to control costs by limiting the amount of reimbursement they will pay for particular procedures or treatments, tying
reimbursement to outcomes, shifting to population health management, and other mechanisms designed to constrain utilization
and contain costs. Hospitals, which purchase implants, are also seeking to reduce costs through a variety of mechanisms,
including, for example, creating centralized purchasing functions that set pricing and in some cases limiting the number of
vendors that can participate in the purchasing program. Hospitals are also aligning interests with physicians through
employment and other arrangements, such as gainsharing, where a hospital agrees with physicians to share any realized cost
savings resulting from the physicians’ collective change in practice patterns such as standardization of devices where medically
appropriate. This has created an increasing level of price sensitivity among customers for our products.
Some third-party payers must also approve coverage and set reimbursement levels for new or innovative devices or therapies
before they will reimburse health care providers who use the medical devices or therapies. Even though a new medical device
may have been cleared for commercial distribution, we may find limited demand for the device until coverage and sufficient
reimbursement levels have been obtained from governmental and private third-party payers. In addition, some private third-
party payers require that certain procedures or that the use of certain products be authorized in advance as a condition of
reimbursement. International examples of cost containment initiatives and health care reforms in markets significant to
Medtronic’s business include Japan, where the government reviews reimbursement rate benchmarks every two years, which
may significantly reduce reimbursement for procedures using our medical devices or deny coverage for those procedures. As a
result of our manufacturing efficiencies, cost controls and other cost-savings initiatives, we believe we are well-positioned to
respond to changes resulting from the worldwide trend toward cost-containment; however, uncertainty remains as to the nature
of any future legislation, new or changed coverage and reimbursement government or private payor policies or decisions, or
other reforms, making it difficult for us to predict the potential impact of cost-containment trends on future operating results.
Regulations Governing Reimbursement
The delivery of our devices is subject to regulation by HHS and comparable state and non-U.S. agencies responsible for
reimbursement and regulation of health care items and services. U.S. laws and regulations are imposed primarily in connection
with the Medicare and Medicaid programs, as well as the government’s interest in regulating the quality and cost of health care.
Foreign governments also impose regulations in connection with their health care reimbursement programs and the delivery of
health care items and services.
U.S. federal health care laws apply when we or customers submit claims for items or services that are reimbursed under
Medicare, Medicaid, or other federally-funded health care programs. The principal U.S. federal laws include: (1) the Anti-
kickback Statute, which prohibits offers to pay or receive remuneration of any kind for the purpose of purchasing, ordering,
recommending making referrals to items or services reimbursable by a federal health care program; (2) the False Claims Act
which prohibits the submission of false or otherwise improper claims for payment to a federally-funded health care program,
including claims resulting from a violation of the Anti-kickback Statute; (3) the Stark law, which prohibits physicians from
referring Medicare or Medicaid patients to a provider that bills these programs for the provision of certain designated health
services if the physician (or a member of the physician’s immediate family) has a financial relationship with that provider; and
(4) health care fraud statutes that prohibit false statements and improper claims to any third-party payer. There are often similar
state false claims, anti-kickback, and anti-self-referral and insurance laws that apply to state-funded Medicaid and other health
care programs and private third-party payers. Insurance companies can also bring a private cause of action for treble damages
against a manufacturer for a pattern of causing false claims to be filed under the federal Racketeer Influenced and Corrupt
Organizations Act, or RICO. In addition, the U.S. Foreign Corrupt Practices Act (FCPA) can be used to prosecute companies in
the U.S. for arrangements with physicians, or other parties outside the U.S. if the physician or party is a government official of
another country and the arrangement violates the law of that country.
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