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Medtronic unit will pay $75 million to settle whistleblower Medicare fraud case

Spinal medical device company Kyphon misled hospitals

May 22, 2008 -- Medtronic Spine LLC, formerly known as Kyphon Inc., has agreed to pay $75,000,000 to the federal government to settle a whistleblower lawsuit that exposed the spinal medical device company's sales and pricing strategy to increase its profits by defrauding Medicare.

The "qui tam" (whistleblower) lawsuit, which the government joined, was kept under seal and so was not publicly known until today, when the settlement was announced.

Kyphon, based in Sunnyvale, Calif., and recently acquired by Medtronic Inc., sells costly equipment and medical devices, including bone cement, for use in spinal procedures known as "kyphoplasty."

Kyphon's phenomenal sales growth was funded, in large part, by its successful efforts to sell kyphoplasty as an inpatient procedure. The minimally invasive procedure can be performed safely in about an hour on an outpatient basis. But Kyphon persuaded 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.

Because Kyphon was able to convince healthcare providers to perform kyphoplasty as an inpatient procedure, the company was able to price its products so that its profit margin exceeded 80 percent.

"A big, inpatient price tag allowed Kyphon to make thousands of dollars each time it sold a kyphoplasty kit," said Mary Louise Cohen, a Washington, D.C., attorney whose firm, Phillips & Cohen LLP, represented the whistleblowers in their qui tam case. "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.

"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."

Kyphoplasty is performed to treat vertebral compression fractures, which commonly occur in the thoracic (middle) and lumbar (lower) spine. A balloon device attempts to pump up the compressed vertebra to restore the spine's original height. Then it is removed and bone cement is injected into the cavity that the balloon created.

Elderly women are susceptible to vertebral fractures due to osteoporosis, a disease that causes bones to become brittle and break. If left untreated, a compression fracture can lead to many other health problems.

Phillips & Cohen filed the qui tam lawsuit in 2005 in federal district court in Buffalo on behalf of Patrick and Bates. Patrick, of Hudson, Wis., was a reimbursement manager for Kyphon, and Bates was a regional sales manager in Birmingham, Ala. Patrick left Kyphon after complaints he made about its sales strategy went unheeded.

The U.S. Attorney's Office (USAO) in Buffalo took the lead for the government on the case. "The successful outcome was due in large part to the work of the U.S. Attorney's Office and investigators from the Department of Health and Human Services," said attorney Cohen. "They did an impressive job in all aspects of the case."

In particular, Cohen recognized the work of Assistant U.S. Attorney Robert Trusiak, USAO investigator Peggy McFarland, USAO auditor Theresa Tetlow as well as Cindy Pangallo and Peggy Glynn, who are Department of Health and Human Services special agents.

Phillips & Cohen specializes in representing whistleblowers in qui tam lawsuits. Under the False Claims Act, private individuals can sue companies defrauding the government and recover funds on the government's behalf. Whistleblowers, known as "relators," are entitled to 15 percent to 25 percent of the amount recovered as a result of the lawsuit. For more information about Phillips & Cohen and qui tam lawsuits, see http://www.phillipsandcohen.com/.

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Case citation: U.S. ex rel. Bates and Patrick v. Kyphon, Inc., et al. 05-CV-6568 CJS(f)

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