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
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
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
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
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