A Medical Device Daily

The spinal unit of Medtronic (Minneapolis) will pay $75 million to settle a whistleblower lawsuit alleging that it defrauded Medicare by telling doctors they could bill for an inpatient stay when a cheaper outpatient visit would have sufficed.

The allegations were originally made against Kyphon (Sunnyvale, California), which Medtronic bought in November for $4.2 billion.

According to law firm Phillips & Cohen, which represented the whistleblowers in the case, the lawsuit, which the government joined, was kept under seal and was not publicly known until Thursday when the settlement was reported.

The Department of Justice charged that Kyphon, before the acquisition, fraudulently caused hospitals to file inflated reimbursement claims with Medicare for back surgery known as kyphoplasty. Federal prosecutors maintained that the company wrongfully marketed the procedure.

Medtronic said Thursday that the settlement agreement reflects its assertion that neither Kyphon nor its employees engaged in any wrongdoing or illegal activity. The company will sign a corporate integrity agreement (CIA) with the Office of Inspector General for the Department of Health and Human Services, as part of the deal. The CIA focuses on training about appropriate reimbursement advice to customers, and also requires maintenance and implementation of standard compliance processes.

Medtronic said the settlement sum had already been set aside before the companies' merger closed, and therefore no additional charge will be recorded. It also said that the case had been publicly disclosed in Kyphon's pre-acquisition filings with the Securities and Exchange Commission.

Kyphon sold a kit for surgery to treat spinal compression fractures caused by osteoporosis, cancer, or lesions. Washington attorney Mary Louise Cohen of Phillips & Cohen said Kyphon charged $3,500 to $5,500 for each kit. It was able to keep prices that high by persuading doctors and hospitals to keep patients overnight, which allowed hospitals to charge Medicare up to $10,000 per procedure – even though the patients typically had fully recovered within a few hours, she said. Cohen also said Kyphon would only train doctors who had admitting privileges at their hospitals.

"A big, inpatient price tag allowed Kyphon to make thousands of dollars each time it sold a kyphoplasty kit," Cohen said. "Because of the company's scheme, the Medicare program paid many millions of dollars more than it needed to pay."

Tens of thousands of kyphoplasty procedures were done as one-day inpatient stays as a result of Kyphon's marketing and sales strategy, according to Phillips & Cohen.

The lawsuit was brought under the federal False Claims Act, which allows whistleblowers to sue on the government's behalf.

Phillips & Cohen said it filed the whistleblower lawsuit in 2005 in federal district court in Buffalo on behalf of Craig Patrick and Chuck Bates. Patrick, of Hudson, Wisconsin, was a reimbursement manager for Kyphon, and Bates was a regional sales manager in Birmingham, Alabama. Patrick left Kyphon after complaints he made about its sales strategy went unheeded, the firm said.

According to an Associated Press report, Patrick went to a Medicare fraud conference in the Twin Cities in 2005. He said he recognized Kyphon's practices in what he saw at that conference.

"At that moment it just became very clear to me: What we've been doing the whole time was Medicare fraud," he said.

Patrick said he presented the situation to Kyphon's VP of reimbursement and general counsel and was told he was not a team player. He eventually took a different job, with a sharp pay cut.

"The government was unaware of the fraud until Craig Patrick and Chuck Bates courageously came forward," said attorney Matthew Smith of Phillips & Cohen. "They also provided crucial assistance to the government in its investigation and pursuit of the case."

The DoJ said Patrick and Bates would share $14.9 million.