Second of two parts

Horace P. Goodrich was an oilman from a small town in central Texas near Waco. The son of a farmer, "H.P." started working in the oil fields in 1949. Over the next 30-plus years, he looked after rigs for Pennzoil and invested in the business until retiring at age 65. Then, he went looking for a new field to tap. What he found was a novel idea: the reconditioning of single-use medical devices.

"I was looking for some investment, maybe increase my income," he said.

Goodrich had no medical experience, no background in health care. "Nothing, zero," he said. "I knew that bandages came in a box, gauze came in a roll."

Many who followed Goodrich into this fertile field knew little more. The refurbishing of single-use devices -- called reprocessing -- is now a multimillion-dollar industry. The companies clean and sterilize millions of devices annually that are used in medical procedures covering almost every part of a patient's body, from catheters that weave into the heart to biopsy forceps that delve into the abdomen.

Device makers, which are in competition with reprocessors, say they cannot vouch for the safety of their single-use devices when they are reconditioned, but the Food and Drug Administration allows many one-time-use devices to be reused. The FDA said it has made good progress in regulating the business, although it acknowledges that there are shortcomings in its oversight of the industry and those who are in it. The industry has attracted several entrepreneurs, including some who have run afoul of federal authorities.

The largest U.S. reprocessor, Alliance Medical Corp., said it does not have any surgeons or physicians on its senior executive team. It said it has no clinical advisory board, although it did say it has unpaid relationships with surgeons whom it calls for advice. Alliance plans to merge with Vanguard Medical Concepts Inc., another major reprocessor, which said that it does not have any surgeons or physicians among its senior executives but that it retains physicians on an as-needed basis. SterilMed Inc., the other major reprocessor, said that it does have an advisory board of physicians and that its vice president of research and development has a doctorate in biochemistry.

The work of reprocessors does not "primarily call on the expertise of physicians," said Naomi Halpern, an attorney for the Association of Medical Device Reprocessors. What is needed -- and what reprocessors have on staff -- are engineers and biologists, she said. When medical questions come up, the reprocessors will call on various specialists. For example, Vanguard said it employs 19 engineers and microbiologists in its research and development department.

In contrast, the major medical device manufacturers say it is important to have medical expertise on staff and typically retain many doctors and nurses; for example, device maker Tyco Healthcare said it has more than 140 clinicians, including doctors and nurses, from entry-level employees to the senior ranks of management.

Hospitals, looking to cut costs without compromising patient care, have given substantial business to reprocessors. While hospitals do some of their own resterilizing of single-use devices, a recent change in FDA rules that requires more paperwork for reprocessing has prompted many medical facilities to hand over their used devices to outside companies for reconditioning.

Over the past several years, the FDA has occasionally found those reprocessors in violation of good manufacturing practices. But after the FDA barred some reprocessors from the field after repeated violations, the federal regulator was unaware that some of those same players have reentered the business, records and interviews show.

The FDA requires reprocessors to register with it, and the companies must get FDA clearance for each type of device they want to reprocess. The clearance means that the federal agency considers the reprocessed device to be "substantially equivalent" to the new single-use device.

But FDA officials say they are not sure whether they know of all the reprocessors operating today. When asked for a list of reprocessors, the FDA first said it did not keep such a list. In response to a Freedom of Information Act request, the FDA later released one, but it did not include some firms identified by The Washington Post. That is in part because smaller reprocessors are difficult to identify if they do not register with the FDA.

'Salvaging' Waste

Around 1987, Goodrich took money out of his retirement savings to create Sterile Reprocessing Services Inc. in a Houston office of about 500 square feet. There, Goodrich began resterilizing opened but unused sutures by hand, an idea he said he got from a friend of a friend, a former salesman for a company that made sutures.

Until then, hospitals had been reprocessing medical devices through in-house sterilization departments. Medical instruments were made mostly of glass, rubber or metal, which were designed to be reused. But in the 1970s and 1980s, manufacturers increasingly turned to plastics, making smaller, more malleable and complex devices and giving rise to the proliferation of the single-use label, which is believed to be at least a $3 billion U.S. market, a small fraction of the $80 billion medical devices market.

Goodrich decided to expand his business in the early 1990s while standing by his Chevy van in the loading dock behind a hospital in town. He was waiting to pick up some sterilization equipment when he noticed hospital orderlies hauling big bags to a garbage bin. When he asked what was in them, they told him it was just a bunch of used disposable medical devices. And Goodrich thought, "There should be some way of salvaging some of it." So he started reprocessing them, too.

Along the way, he approached FDA officials. But, he said, the industry was so new, "they had no idea what we were talking about." By 1997, the FDA had a better idea. It issued Goodrich's company a warning letter for violating several good manufacturing practices, citing, for example, "no documented evidence that the surgical devices can tolerate resterilization without adverse effects" and instances in which reprocessed device "labeling is false and misleading."

Goodrich dismissed the problems, saying his firm did a good job reprocessing devices while saving hospitals money. "We had a few complaints," he said, but "none that we ever considered serious."

None stopped his company's merger in 1998 with two other reprocessors, Orris Inc. and Applied Medical Technologies Inc., to create Phoenix-based Alliance.

An Opportunity

Mark W. Aldana had a little more experience in health care. He was pre-med in college and worked for medical device companies in Minneapolis and Houston before he was approached by an engineer with an idea in the early 1990s: sharpening used surgical saw blades. "I just had an opportunity," he said.

Aldana started a company in 1993 out of his Lubbock, Tex., home called Adven Medical Inc. The business grew to reprocess catheters and biopsy forceps, among other single-use medical devices, but from 1999 to 2002, Aldana's company was hit by dozens of manufacturing violations by the Texas Department of Health and the FDA, which cited his firm for failing to validate its sterilization process, provide employee training or follow procedures for handling complaints.

Aldana said: "It didn't matter what kind of quality program we had. It wasn't going to be acceptable, period."

In August 2003, Aldana signed a Justice Department consent decree of permanent injunction, and by that October, he closed Adven Medical, selling the business to another reprocessor, ClearMedical Inc. of Bellevue, Wash.

Two months later, public records show and Aldana confirmed, he reemerged as a consultant, which was not prohibited by the FDA. He submitted at least two applications to reprocess surgical cutters, staplers and appliers to the FDA on behalf of Vanguard of Lakeland, Fla., one of the big three reprocessors. Vanguard said it had bought Aldana's proprietary information about how his firm cleaned those devices.

The FDA cleared both applications that same month.

Aldana also said ClearMedical was paying for his services until March, nearly two years after the FDA had barred him from the reprocessing business. Incorporation records in Minnesota show that his Adven Medical firm is still an active business. Aldana said he has kept it active in case he decides to do more reprocessing consulting.

Larry Spears, the FDA's deputy director for regulatory affairs in the Office of Compliance in the Center for Devices and Radiological Health, said he was unaware that Aldana was advising reprocessors. "We don't regulate consultants," he said.

Serial Entrepreneur

Aldana also consulted for Ronald E. Eames, an entrepreneur who has had his own trouble with authorities.

The avuncular inventor from St. George, Utah, started a company in the early 1980s that supposedly created a cheaper, more efficient fuel additive for use in gasoline. In court records, automakers at the time said his product created pollution, and in 1986, the Environmental Protection Agency put a stop to his fuel additive.

He jumped into the medical reprocessing business in the early 1990s when a surgeon friend asked him whether he thought he could refurbish medical devices. Eames said he had no medical background but was a voracious reader of technical journals.

In 1993, he co-founded a reprocessing company called Applied Medical Technologies Inc. in Nevada, which later merged into Alliance, now one of the nation's big three.

After a falling-out with his business partners, tax problems and a plunge into bankruptcy, Eames went on to found another reprocessor, Medical Device Services Inc., in 1996 with $100. He worked out of the garage at his St. George home. Over the next several years, the company grew to have annual revenue of more than $1 million and about 20 employees as Eames expanded his list of reprocessed devices to include orthopedic devices and cardiovascular instruments. By 2000, Eames saw a threat posed by reprocessors that were beginning to refurbish what he considered higher-risk instruments, such as angioplasty balloon catheters.

In a letter to the FDA then, Eames wrote: "The greed and stupidity of a certain segment of our industry may destroy us all. Between some time in the future . . . and the 'here and now,' some patient is likely to be seriously injured or even killed in a procedure using a reprocessed instrument."

A year later, in 2001, the FDA found 27 violations of good manufacturing practices at Eames's firm and issued a warning letter. A year later, the FDA found 42 violations. In 2003, it found 46.

"They were technical violations," Eames said.

The Justice Department found the issues to be more serious. Last year, it sued Eames and his reprocessing firm, seeking a permanent injunction to stop him from reprocessing. Eames sold his business to SterilMed, one of the big three reprocessors, but he said he continues to do reprocessing consulting work on the side.

Asked about Eames, the FDA's Spears said he was not aware that the reprocessor had reentered the business as a consultant.

The Big Three

The FDA is much more familiar with the nation's big three reprocessing companies, which dominate the industry. They have in common executives who come largely from unrelated business backgrounds, which reprocessors say is supplemented by hiring people with the appropriate expertise.

Alliance President Ricardo M. Ferreira was a banker in Canada who entered the medical field when he hatched a business idea with one of his clients, Rocco C. "Rocky" LoFranco, an aggressive and flamboyant personal-injury attorney. In the early 1990s, they created a set of rehabilitation clinics that took advantage of a change in law, providing more rehab services to people injured in car accidents.

As the business expanded, questions of conflicts of interest cropped up. LoFranco was criticized for sending some of his legal clients to the rehab center. LoFranco did not respond to several telephone calls seeking an interview. And when Ferreira sold a controlling interest in the business a few years later to an insurer, some questioned the arrangement because it put the insurer in the position of deciding how much treatment patients in the rehab center received. But Ferreira was quick to note that despite the insurer's control, it had no say in patients' insurance benefits.

Ferreira said he left his post as president of the company around March 1996, a few months before it was so saddled with debt that it was unable to pay its bank loans and was sold. Ferreira said he had not been serving in an operating capacity since the year before.

In 1997, Ferreira joined Alliance as head of one of its subsidiaries; he has been the reprocessor's president since 1998. Since then, the firm has thrived. As a privately held company, it does not disclose its finances publicly, but its officials said revenue has quadrupled in the past five years.

Over that period, FDA inspectors have occasionally taken the company to task. In 2001, for example, Ferreira received a warning letter about Alliance's facility in Spartanburg, S.C. The FDA cited such problems as a failure "to perform risk assessments and design reviews when new devices were selected for reprocessing." Alliance said it inherited the problems when it bought another reprocessor's book of business.

Vanguard has also received an FDA warning letter, citing "serious regulatory problems" with its reprocessing of biopsy forceps. Vanguard said it fixed the problems. Charles A. Masek Jr., Vanguard's president and chief executive, earned a master's degree in clinical microbiology and started his career in medical sales before founding Vanguard.

Brian F. Sullivan, the president and chief executive of SterilMed, the other major reprocessor, started further afield of the medical industry. A Maryland native, he bought the rights to a water-desalination device and in 1986 founded a water-purifying business, Recovery Engineering Inc.

The business did well but in 1998, the attorneys general of Florida, Massachusetts, Michigan, New York and North Carolina accused Recovery Engineering of deceptive marketing practices, saying it charged more for its premium filter product even though it was no different than its regular version.

His company "charged $10 more for a bigger box," New York's attorney general said then.

Sullivan denied wrongdoing but agreed to pay the states' investigative costs and compensate consumers who had paid the higher price. He said the charges were politically motivated. "It was extortion," he said.

The settlement did not seem to shake the company. A year later, Sullivan sold Recovery Engineering to Procter & Gamble Co. for about $265 million, and he said he is proud of the safety record he has established at SterilMed.

'Imperfect System'

Until recently, the FDA acknowledged, it did little to monitor reprocessors other than conduct periodic inspections of their facilities. But then Congress's investigative arm looked into the growing practice. Its 2000 report concluded that there was little evidence of harm from reuse, but it suggested that the FDA provide more oversight. "Reprocessing is not invariably safe, and relatively little is known about the practice of [single-use device] reprocessing in health care institutions," the report said.

That year, the FDA took its first concrete action, offering industry guidelines calling on reprocessors to demonstrate the safety and effectiveness of their reconditioned instruments. In 2002, reprocessors were required to submit data that showed their work produced safe and sterile devices.

That requirement gave reprocessors a boost. Many hospitals, concerned about the additional FDA paperwork, decided to get out of the business of reprocessing, shuttering their own in-house sterilization departments and handing the refurbishing work over to the reprocessors, which say that on average they save hospitals half the cost of a new device.

The FDA acknowledges that issues of oversight remain. The federal agency said it relies on doctors to voluntarily report problems with faulty medical devices. Medical facilities are required to report to the FDA deaths but not device malfunctions. And the FDA did not ask whether device problems involved reprocessing until it changed its complaint form in 2003, and it gave firms until last year to modify their reporting practices.

Even when medical professionals do report problems with reprocessing, in many cases the information does not include names, dates, locations and other basic data, FDA documents show. Until a change in law in August, refurbished single-use devices did not typically carry the name of the reprocessor on the instrument itself; it was usually on only the outside packaging, which was frequently discarded by the time the device ended up on the operating-room table. That meant doctors and nurses often did not know that the device in question had been reprocessed.

In addition, the FDA said in a written response to questions that there is "no routine or standard inspection schedule" but that it will examine a reprocessor based in part on whether it hears of complaints or injuries associated with its devices. The federal agency said there is no set number of inspectors assigned to reprocessors.

"It is an imperfect system," said Spears of the FDA.

Still, he said, the federal agency has made great strides in the past several years, adding that additional regulation or oversight is unnecessary. The reprocessors say they already face as much -- or more -- regulatory scrutiny than the device makers. The reprocessors' trade group said it has adopted a strict "Commitment to Patient Safety" that "requires its members to meet or exceed all federal standards for safety."

Some think more oversight is needed. Massachusetts has introduced a bill that would require hospitals in that state to obtain permission from patients before using a refurbished single-use device on them. U.S. hospitals are not required to obtain such patient consent. The Massachusetts Medical Device Industry Council said not enough has been done to "protect patients from potential contamination and injury from reprocessed" single-use devices. The trade group said the savings hospitals accrue from reprocessing "may come at the price of jeopardizing patient safety."

Staff researcher Richard Drezen contributed to this report.

At Alliance, workers inspect medical devices before sterilization. Alliance is one of the three biggest reprocessors in the United States.

SterilMed chief executive Brian F. Sullivan said he is proud of the firm's safety record. Before joining the company, Sullivan founded a water-purifying company that he sold to Procter & Gamble after settling charges that the company deceived customers.

Horace P. Goodrich was an oilman who started a business reprocessing medical devices. His company merged with two others to create Alliance.

A worker cleans a device at Alliance, one of the three big reprocessors. Alliance says it has unpaid relationships with surgeons whom it calls for advice.

Many medical devices are marked to be used once. Manufacturers say they can't vouch for the safety of reprocessed devices.