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$75m settles allegation of Medicare fraud

Suit involves firm Medtronic bought

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Bloomberg News / May 23, 2008

WASHINGTON - Medtronic Inc. has agreed to pay $75 million to settle allegations that a company it purchased defrauded the Medicare program.

The civil case alleged that Kyphon Inc., which Medtronic bought in November, carried out a seven-year scheme that inflated Medicare bills, the US Justice Department said yesterday. Kyphon persuaded hospitals to bill Medicare for a spine operation at inpatient rates rather than for less costly outpatient treatment, the government said.

The alleged fraud involved kyphoplasty, in which spinal gaps are filled with bone cement. By keeping patients overnight, hospitals could pump up bills to Medicare by $10,000 per operation, while Kyphon could charge more for its spinal equipment, said Mary Louise Cohen, a Washington lawyer representing two Kyphon employees who reported the allegations.

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

One former worker, Craig Patrick, said bosses ignored his warnings in 2005 that the practice amounted to fraud.

"It's my opinion that this was a very organized strategy from the beginning to make these inpatient cases, so facilities could afford the expensive kits and Kyphon could be very profitable," he said in an interview.

Kyphon set aside money for the settlement last year before its sale, Medtronic spokeswoman Marybeth Thorsgaard said. Minneapolis-based Medtronic won't have to take an accounting charge for the payment, she said.

The allegations covered a period before Medtronic bought Kyphon, Thorsgaard said. Medtronic, a leading maker of heart stents and defibrillators, spinal discs, and other medical devices, won't release or discipline any employees or change policies as a result of the case.

The settlement "reflects the company's assertion that Kyphon and its employees had not engaged in any wrongdoing or illegal activity," Thorsgaard said.

As part of the agreement, Sunnyvale, Calif.-based Kyphon agreed to offer training for employees on Medicare rules and to implement new compliance standards, the Justice Department said. Medicare is the government's healthcare program for the elderly and disabled.

"Today's settlement demonstrates our commitment 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 intended to increase sales of unnecessary devices or procedures," said Gregory G. Katsas, an acting assistant attorney general.

Patrick and Chuck Bates, a former Kyphon salesman, will collect $14.9 million from the settlement, under a provision that allows whistle-blowers to sue for fraud on behalf of the government and share in the amount recovered.

Patrick, a former reimbursement manager, said he realized the company had a problem in early 2005, after an industry seminar on Medicare fraud. "A light bulb just came on," he said. "I realized immediately that our company was doing a lot of these things."

After he warned supervisors at Kyphon, he was denied a promotion and told he "wasn't a team player," Patrick said. He left the company in 2005, after filing the suit, and now works for another medical device maker.

"The whole thing played out like a cliched movie you'd see about a whistle-blower," he said. With the settlement, "I feel like a weight has been lifted off my shoulders."

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