Under a recently agreed upon settlement, Medical device maker Medtronic Inc. will pay $75 million to settle fraud allegations with the federal government. The Department of Justice charged that spinal catheter maker Kyphon, before its November 2007 acquisition by Medtronic, 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 and defrauded Medicare of hundreds of millions of dollars. Medtronic will sign a corporate integrity agreement with the Office of Inspector General for the Department of Health and Human Services, as part of the settlement. The company reports that the amount required to be paid under the settlement had already been set aside before the companies’ merger was complete.

It was alleged that 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 at a much higher cost 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, increasing its revenue and driving up its stock price. Medtronic subsequently bought the company, its competitor, for $3.9 billion, making Kyphon’s senior executives very rich.

Since we have seen so many cases of corporations cheating the government, I am going into more detail on how this fraudulent scheme works.

The scheme at Kyphon was based on Medicare’s practice of reimbursing hospitals more for complex inpatient back surgery than for outpatient care. It was alleged that Kyphon had deliberately urged doctors to admit patients overnight, knowing the admissions were unnecessary. Hospitals, seeing the overnight admissions as a way to raise revenue, 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% profit margin, according to allegations in the lawsuit. 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 conveniently dropped when Medtronic acquired the company. The acquisition richly rewarded Kyphon’s shareholders, particularly its top executives. The company admits its top 15 executives stood to receive about $145 million by cashing in their options and restricted stock.

This scheme involving Kyphon is just another example of a corporation cheating the government – knowing that the government has had difficulty detecting fraud because of the nature of the activities engaged in – and eventually getting caught. When that happens the guilty party simply paying money – thereby settling the matter – and continues to cheat the government. This sort of thing can’t be tolerated.

Source: Associated Press

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