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US: Medtronic Settles a Civil Lawsuit on Allegations of Medicare Fraud

by MARY WILLIAMS WALSHThe New York Times
May 23rd, 2008

A unit of Medtronic defrauded Medicare of hundreds of millions of dollars, according to a civil lawsuit that was unsealed Thursday and simultaneously settled with the Justice Department.
Two insiders had said Kyphon, which Medtronic acquired in 2007, improperly persuaded hospitals to keep people overnight for a simple outpatient procedure to repair small fissures of the spine. Medicare then reimbursed the hospitals much more generously than it otherwise would have for the procedure, which was developed as a noninvasive approach that could usually be done in about an hour.

By marketing its products this way, Kyphon was able to artificially drive up demand among hospitals, bolstering its revenue and driving up its stock price. Medtronic subsequently bought the company, its competitor, for $3.9 billion, greatly enriching Kyphon's senior executives.

The settlement requires Medtronic to pay the federal government $75 million plus interest, and to enter into a "corporate integrity agreement" with the Office of Inspector General of the Department of Health and Human Services. The agreement will require the company to give correct advice to customers about how to apply for Medicare reimbursements. The company will also have to set up internal procedures to make sure it complies with the law.

The lawsuit, by two former Kyphon employees, was filed under the False Claims Act, a federal statute that allows private citizens to sue companies they believe to be cheating the government. The act was originally passed to fight profiteering during the Civil War, but in recent years it has been used to bring allegations of Medicare fraud.

The medical device business is filled with small start-up companies trying to generate excitement about their new products and technologies, hoping to build market share and to attract deep-pocketed buyout offers. It has been fraught with allegations of bribes, exaggerated claims, and other unethical behavior.

The acting assistant attorney general of the Justice Department's civil division, Gregory G. Katsas, said the settlement with Medtronic showed that the government was determined "to ensure that the Medicare Trust Fund is used to pay for necessary medical care, and is not depleted as a result of aggressive marketing schemes."

The scheme at Kyphon was based on Medicare's practice of reimbursing hospitals more for complex inpatient back surgery than for outpatient care. The two whistle-blowers, Charles M. Bates and Craig Patrick, said Kyphon had deliberately urged doctors to admit patients overnight, knowing the admissions were unnecessary.

Hospitals saw the overnight admissions as a way to raise revenue, the two said, and bought Kyphon's products, even though they were expensive, starting at $3,500 to repair one spinal fissure. The hospitals could recover the cost through the improper reimbursements for overnight stays.

Kyphon sold so much equipment this way that at one point it enjoyed a 90 percent profit margin, according to the two insiders, both of whom worked in sales positions.

The former employees said the scheme began in 1999, when Kyphon's products first came to the market. Kyphon's rapid sales growth and profitability eventually gave rise to a patent dispute with Medtronic, which was dropped when Medtronic acquired it. The acquisition richly rewarded Kyphon's shareholders, particularly its top executives. The company said its top 15 executives stood to receive about $145 million by cashing in their options and restricted stock.

A spokeswoman for Medtronic, Marybeth Thorsgaard, said the company had known Kyphon was under investigation when it made the acquisition. She said it knew that Kyphon's marketing strategy was being challenged, and took the risk of litigation into account. "There were no surprises," she said.

Kyphon was formed in 1994 to develop a new way of repairing small fractures of the spine, which are common in patients with osteoporosis. If not treated, such small breaks can have serious complications, including severe back pain, additional fractures and the physical deformity known as dowager's hump.

A balloon is inserted through a tiny incision and inflated to open a space at the point of the fissure. A special cement is then injected into the space, repairing the crack. The cement takes about 10 to 20 minutes to dry.

Mary Louise Cohen, a lawyer representing the whistle-blowers, said patients typically walk away after the procedure and need hospitalization only in unusual cases.

By 2005, when Mr. Bates and Mr. Patrick filed their complaint in Federal District Court in Buffalo, there were more than 4,500 doctors in the United States treating spinal fractures with Kyphon's products. More than 150,000 patients worldwide had undergone the procedure, called a kyphoplasty. The vast majority were handled on an inpatient basis.

Mr. Bates, of Birmingham, Ala., joined Kyphon in 2001 as a sales representative and enjoyed success at first. By showing doctors and hospitals the most lucrative ways to bill Medicare, he was able to increase Kyphon's sales in his territory from $16,000 a month to more than $200,000 a month in less than a year, according to the lawsuit. The company gave him awards and promotions.
Mr. Patrick, of Hudson, Wis., was a reimbursement manager for Kyphon, whose job was to find ways to increase insurance coverage of Kyphon's treatment, and make sure government programs like Medicare paid for it at the maximum rate.




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