Medtronic 2014 Annual Report Download - page 26

We concluded that the intrusion did not breach any of the databases where we store patient data. We received inquiries from
some State Attorneys General regarding whether notification to patients was necessary, and provided them information about
our analysis and conclusions that patient data was not affected.
We are also impacted by the privacy requirements of countries outside the U.S. Privacy standards in Europe and Asia are
becoming increasingly strict. Enforcement action and financial penalties related to privacy in the EU are growing, and new laws
and restrictions are being passed. The management of cross border transfers of information among and outside of EU member
countries is becoming more complex, which may complicate our clinical research activities, as well as product offerings that
involve transmission or use of clinical data. We will continue our efforts to comply with those requirements and to adapt our
business processes to the standards.
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 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 including or rewarding
referrals of 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. In addition, the U.S. Foreign Corrupt Practices Act (FCPA) can be used to prosecute companies in the
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