Part two of this two-part series (see part one) discusses the Medtronic settlement with the Department of Justice and the Office of Inspector General and the remedial measures that Medtronic will be required to undertake as part of its Corporate Integrity Agreement with the Office of Inspector General.

III. The Settlement and Corporate Integrity Agreement

In settling the allegations against Kyphon, Medtronic agreed to pay a $75 million fine and enter into a Corporate Integrity Agreement with the OIG. The CIA requires Kyphon to implement certain policies and procedures, engage in training of its employees, and submit to ongoing monitoring by an independent review organization. The CIA requires Medtronic to promulgate policies and procedures applicable to the provision of reimbursement consulting to customers. These policies and procedures must include the following:

1. The Federal health care programs’ use of reimbursement codes in identifying reimbursable items;
2. A process for addressing questions from Kyphon’s customers or physician users regarding Federal health care program reimbursement for reimbursable items;
3. How to disseminate information regarding reimbursement for reimbursable items; and
4. Use of current resources of official guidance from Medicare contractors and the Centers for Medicare and Medicaid Services regarding reimbursement questions related to reimbursable items.

The CIA also requires Medtronic to provide certain specific reimbursable items training to all employees. The training must include a discussion of the following topics:

1. Appropriate methods to legally promote and sell Kyphon’s products;
2. The personal obligation of each employee to comply with all applicable health care program requirements; and
3. The personal obligation of each person involved in customer relations, reimbursement, sales, and marketing to comply with the law and to ensure the accurate provision of information regarding Kyphon’s products and payer resources.

In addition to reimbursement training, Kyphon is required to provide Anti-Kickback training which must include a discussion of:

1. Arrangements that potentially implicate the federal Anti-Kickback Statute and other relevant regulations and guidance;
2. Kyphon’s policies, procedures, and other requirements relating to proper arrangements;
3. The personal obligation of each “arrangements covered person” to know the applicable legal requirements and company procedures;
4. The legal sanctions under the federal Anti-Kickback Statute; and
5. Examples of how the Anti-Kickback Statute can be violated.

Beyond these training procedures, Kyphon is required to implement a compliance program which involves tracking and monitoring all relationships with Kyphon referral sources, including physicians and facilities.

The requirements of the CIA demonstrate steps that all medical device manufacturers should consider to attempt to prevent the conduct alleged in the Medtronic settlement. These policies and training should be particularly considered by medical device companies that provide any form of reimbursement consulting to customers. Implementing policies and procedures on reimbursement consulting and reimbursement information dissemination may decrease the risk of False Claims Act violations. The training of sales personnel and all staff on the implications of the Anti-Kickback Statute and the False Claims Act is equally important. These types of prophylactic steps may prevent a potential government investigation or, in the event that an investigation is commenced, demonstrate a company’s attempted compliance with applicable laws and regulations and mitigate potential fines or penalties.

This is a two-part series of articles discussing the risks involved in the provision of reimbursement consulting by medical device manufacturers and reviewing a recent settlement by Medtronic related to these activities.

On May 21, 2008, Medtronic Spine, LLC (“Medtronic”), a subsidiary of Medtronic Inc., announced that it will settle a qui tam suit alleging violations of the federal False Claims Act. The initial cause of action was originally filed against Medtronic’s recently acquired subsidiary, Kyphon, Inc. (“Kyphon”). Under the terms of the settlement, Medtronic will pay damages totaling $75 million plus interest and enter into a five-year Corporate Integrity Agreement (“CIA”) with the Office of Inspector General (“OIG”). The allegations surround the promotion of Kyphon’s products and its Kyphoplasty procedure. In the qui tam complaint, two former Kyphon employees claimed the company improperly promoted Kyphoplasty as an inpatient procedure and promoted a variety of schemes to maximize government reimbursement paid to hospitals and physicians for procedures using the Kyphon products. This settlement demonstrates the significant risks that medical device manufacturers face when providing reimbursement consulting to customers.

I. The Qui Tam Allegations

The amended qui tam complaint claimed that Kyphon’s promotion of the Kyphoplasty procedure was improper because it encouraged physicians and hospitals to claim reimbursement for the procedure by unnecessarily treating it as an inpatient service. Kyphoplasty is a treatment for vertebral compression fractures caused by osteoporosis. The Kyphoplasty procedure can treat a collapsed bone in the spine, frequently occurring in the spine’s lower vertebrae. Vertebral compression fractures can be treated with either Vertebroplasty or Kyphoplasty. Both procedures involve the injection of bone cement into the partially collapsed vertebrae utilizing fluoroscopic guidance. The Kyphoplasty procedure uses a proprietary method of making this injection and addressing the compression fracture. According to the complaint, both procedures can be safely performed in an outpatient setting. Unless certain co-morbidities exist in a patient, the complaint alleges that it is generally unnecessary for patients to be admitted to an inpatient facility or have a multi-night stay at the hospital.

Kyphon pioneered and marketed the proprietary system designed to perform Kyphoplasty. Medicare coverage for this procedure varied widely because there was no national coverage determination (“NCD”) that directed how Medicare carriers would reimburse for the procedure. Therefore, coverage for Kyphoplasty was left up to Medicare carriers which issued local coverage determinations. Outpatient reimbursement to hospitals for Kyphoplasty varied from between less than $500 up to $2,000. However, inpatient reimbursement for the same procedure ranged between $6,000 and $10,000. According to the complaint’s allegations, the approximate price of the Kyphon Kyphoplasty kit was $3,400. Because of the cost of the kit, the complaint alleges that Kyphon utilized a variety of schemes to encourage physicians and hospitals to perform Kyphoplasty as an inpatient procedure.

The first amended complaint filed against Kyphon alleged that there were two primary activities Kyphon allegedly engaged in. First, Kyphon provided reimbursement advice to hospitals and physicians which encouraged them to admit patients for unnecessary inpatient hospital stays and/or perform unnecessary procedures. For example, Kyphon reimbursement specialists persuaded physicians to order unnecessary biopsies to justify hospitalization. Kyphon’s specialists also encouraged hospital coders to “upcode” procedures and submit reimbursement claims to Medicare under billing codes providing higher reimbursement. Second, the complaint alleges that Kyphon provided inducements to physicians in order to convince them to utilize and promote Kyphoplasty. The alleged inducements ranged from paid speaking engagements to a referral program which retained surgeons to promote the Kyphoplasty procedure to other surgeons.

II. Applicable Law

The Medtronic-Kyphon settlement demonstrates the risk of providing reimbursement consulting to customers and the importance of ensuring that sales techniques do not involve the payment of kickbacks or referral fees to physicians. These activities can lead to violations of the False Claims Act and/or the Anti-Kickback Statute.

A. The False Claims Act Allegations

The False Claims Act provides that any person who presents or causes to be presented, false or fraudulent claims for payment or approval to the U.S. government or knowingly makes, uses or causes to be made or used, false records and statements to induce the government to pay or approve false and fraudulent claims, is liable for a civil penalty of between $5,500 and $11,000 per claim, plus three times the amount of the damages sustained by the federal government. 31 U.S.C. § 3729. Under the False Claims Act, a defendant can be held liable if it “knowingly presents, or causes to be presented . . . a false or fraudulent claim for payment or approval.” 31 U.S.C. § 3729(a)(1).

The phrase “causes to be presented” has been interpreted by courts to apply to medical device manufacturers if the manufacturer “created and pursued a marketing scheme that it knew would “cause the submission of improper claims and cost reports to the Medicare program. U.S. ex rel. Schmidt v. Zimmer, Inc., 386 F.3d 235 (3d Cir. 2004); see also U.S., California, Florida, ex rel. Fry v. Guidant Corp., No. 3-03-0842, 2006 WL 2633740 (M.D. Tenn. 2006). In the Kyphon case, the qui tam realtors and the government claimed that Kyphon violated the False Claims Act by knowingly providing reimbursement consulting that encouraged surgeons and hospitals to submit unnecessary inpatient claims to the Medicare program.

B. The Anti-Kickback Statute Allegations

The Anti-Kickback Statute prohibits any person or entity from making or accepting payment to induce or reward any person for referring, recommending or arranging for the purchase of any item for which payment may be made under a federally funded health care program. 42 U.S.C. § 1320a-7b(b). The Anti-Kickback Statute has been interpreted to prohibit medical device manufacturers from offering inducements to customers to cause the purchase of medical devices that will be reimbursed by the Medicare or Medicaid program. See, e.g., U.S. ex rel. Schmidt v. Zimmer, Inc., 386 F.3d 385 (3d Cir. 2004) (holding that a physician’s claim, accusing a medical device manufacturer of a kick-back scheme when the manufacturer provided payments to physicians who helped increase a product’s market share, stated a claim under the Anti-Kickback Statute).

Medtronic-Kyphon allegedly violated the Anti-kickback Statute by providing non-fair market value speaker fees and referral fees to surgeons that used Kyphon’s products. These payments allegedly induced surgeons and hospitals to purchase Kyphon products that were reimbursed by the Medicare or Medicaid program.

The Medtronic-Kyphon settlement follows on a broad settlement involving hip and knee implant manufacturers for similar anti-kickback allegations. In the hip and knee implant settlements, the manufacturers allegedly engaged in above fair market value consulting agreements with physician referral sources in order to induce these physicians to use the manufacturer’s product. See Deferred Prosecution Agreements between U.S. Attorney and Biomet, DuPuy, Smith & Nephew, and Zimmer, published on Sept. 27, 2007 (available on the The United States Attorney’s Office website).

Our analysis is continued in Part II.