Medtronic To Pay $75 Million Lawsuit - www.jlbreport.com - Aug. 7 2008

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