Medtronic's Medical Device Legal Troubles far from Over

July 31, 2006, 12:00AM. By Evelyn Pringle

Minneapolis based Medtronic, Inc. is one of the nation's largest medical device makers.

In mid-July 2006, the company agreed to pay a $40 million fine to settle charges that its Sofamor Danek division paid kickbacks to doctors to get them to use the company's spinal products, which accounted for 20% of the company's $11.3 billion in sales in 2005.

On July 19, 2006 the US Department of Justice issued a press release announcing the settlement. The DOJ alleged that, between 1998 and 2003, Medtronic paid kickbacks in a number of ways, including sham consulting agreements, sham royalty agreements and lavish trips to desirable locations and that these kickbacks violated the Anti-Kickback Statute and the False Claims Act.

"Kickbacks to physicians are incompatible with a properly functioning health care system," said Peter Keisler, Assistant Attorney General for the DOJ's Civil Division. "They corrupt physicians' medical judgment and they cause overutilization and misallocation of vital health care resources."

"Today's settlement," he added, "reflects the progress we are making in the ongoing fight against abusive and illegal practices in the healthcare industry."

The DOJ's investigation was triggered by whistleblower qui tam lawsuits filed under the False Claims Act. The FCA allows private parties to file lawsuits on behalf of the US government and collect a share of any money recovered. The FCA prohibits any corporation or citizen from defrauding the government and the allegations against Medtronic in this instance involve the Medicare program.

"The settlement," said David Kustoff, the US Attorney for the Western District of Tennessee in the press release, "demonstrates that schemes involving submissions of false or fraudulent claims by health care companies and health care providers to federal health care programs will be vigorously and energetically pursued."

"This agreement," he noted, "should serve as a deterrent to those entities that attempt to defraud or deceive the taxpayers."

In addition to the fine, Medtronic entered into a 5-year corporate integrity agreement with the Office of the Inspector General of the US Department of Health and Human Services. The agreement requires the company to file regular reports with the Inspector General and track all non-sales related customer transactions.

The company must also set up an outside review organization, improve training and employee screening practices, and make a compliance officer a member of senior management, who reports directly to the chief executive and has access to the company's board of directors

The two whistleblower lawsuits filed by former employees claim Medtronic paid millions of dollars in kickbacks. For instance, Dr Thomas Zdeblick, a Wisconsin surgeon who is listed as a defendant in one of the lawsuits, signed a 10-year consulting contract with the company in 1998, that only required him to consult with Medtronic for eight days a year for $400,000.

A Virginia physician received close to $700,000 in consulting fees for the first 9 months of 2005, and received $1.39 million between 2001 and May 2005, according to the lawsuit.

Internal Medtronic documents filed as part of the lawsuit in the US District Court in Memphis, reveal the details of the rigorous campaigns that Medtronic set up to influence doctors. The documents show the company made payments of at least $50 million to doctors over a four years period through June 2005.

In the lawsuit unsealed in January 2006, the plaintiff, Jacqueline Poteet, a former senior manager of travel services for Medtronic until 2003, says she handled the travel arrangements for doctors to attend medical conferences and is familiar with the company's efforts to win the doctors' favor.

She alleges that the company gave spine surgeons "excessive remuneration, unlawful perquisites and bribes in other forms for purchasing goods and medical devices."

Spinal implants are used in a procedure known as spinal fusion, to make a patient's spine more stable. The cost of a devices used in this type of surgery is about $13,000, according to Orthopedic Network News, an industry newsletter.

In a subsequent amended complaint, Ms Poteet, accuses the company of continuing the improper payments to doctors in 2004 and 2005, leading them to perform unnecessary spinal surgeries.

With billions of dollars up for grabs, in addition to consultant fees, Medtronic used other creative methods to induce physicians to use its products. According to the lawsuit, Medtronic hosted medical conferences where the "principal objective" was to "induce the physician, through any financial means necessary" to use its devices.

Company spreadsheets show that after a conference, Medtronic went to great lengths to track the use of its devices by each doctor who attended. A spreadsheet for a June 2003 conference in California, lists over 200 doctors and includes an estimate of the dollar amount of the devices each doctor uses in surgery. One surgeon is described as "a 100 percent compliant M.S.D. customer" (Medtronic Sofamor Danek), and other doctors are marked as needing "special attention."

According to Ms Poteet, Medtronic zeroed in on surgeons while they were still in training, and the company paid for doctors to attend any of 200 professional meetings a year. If the doctors wanted to play golf or go snorkeling, she alleges, Medtronic paid for the outings. When doctors visited Memphis, she says, company employees would take them to the "Platinum Plus" strip club, and then write off the expense as an evening at the ballet.

In 2003, a company document reveals that Medtronic attorney, Todd Sheldon, questioned whether the company should be paying for all the excursions. "When we are sending scores of doctors to a nice resort like this under the guise of training and education on our products," Mr Sheldon wrote in an email, "I think we need to be more careful and stick to the limits of our rules as best we can."

Medtronic claims the company has scaled back payments to doctors, but not so, says Ms Poteet. Her amended complaint alleges that any changes made by Medtronic were merely temporary. Its "bribery program," she alleges, "has not only failed to cease, but continues unabated with increased payments made to many physicians."

She points out that while payments to some doctors were lowered in 2004, when the company first came under investigation, the payments went back up last year. For instance, Dr Hallett Mathews, of Virginia, was paid $300,000 in consulting fees in 2003, but only $75,000 in 2004. But then in 2005, he was paid nearly $700,000 in consulting fees in the first 9 months.

Had Medtronic not entered into a settlement agreement with the DOJ, the company could have been hit with a triple damages award if it lost in court, under a key provision of the FCA. As it is, the $40 million fine is the second financial penalty for Medtronic's spinal division in a year. In 2005 the company paid $1.35 billion to settle a patent infringement lawsuit and cover the costs of additional patents from Los Angeles surgeon and inventor, Dr Gary Michelson.

Over the past couple years, the financial relationships between device makers and doctors have caught the attention of several law enforcement agencies. In 2005, US attorneys in Boston and Newark issued subpoenas to Medtronic, along with just about every other major medical device maker, as part of a far reaching investigation into the financial entanglements between physicians and the industry as a whole.

Therefore, legal experts say Medtronic is probably not breathing much easier these days. Three of the subpoenas issued last fall went to the top cardiac-rhythm-management companies, Medtronic, Guidant and St Jude Medical, and seek information on their marketing practices related to pacemakers and defibrillators.

And Medtronic already had plenty of legal problems with its defibrillator division. In February 2005, the company told 87,000 patients that their defibrillators might fail.

However, company documents filed in the California lawsuit, Randall v Medtronic, No C-05-3707-JW, in the US District Court for the North District of California, show the company knew about the flaw back in 2003, and continued to sell the faulty devices for two more years.

"Medtronic has been taking products they know are not quite right and putting them into people rather than take the loss," according to Hunter Shkolnik, a New York attorney, who said in a February 13, 2006, interview with Bloomberg News, that he represents more than 200 people whose Medtronic devices were recalled.

"If you know there's a problem with a component," he said, "you don't put it out and sell it to people."

Since the recall, 19,000 people have had replacement surgery, Medtronic spokesman, Rob Clark, told Bloomberg News.

Critics say Medtronic refuses to acknowledge that undergoing replacement surgery is risky and constitutes an injury in itself. According to Bloomberg, based on Medtronic's estimate of a 2 to 5% post-implantation infection rate, 380 to 950 patients may have developed infections after replacement of their devices.

Spokesman Clark told Bloomberg that Medtronic does not keep track of deaths, disabilities or extra medical costs resulting from such complications.

When announcing the recall last year, Medtronic said it would provide a new defibrillator to patients and up to $2,500 for out of pocket expenses. But the company expects taxpayers, through programs like Medicare, and insurance companies, to pick up the tab for the hospital and doctor bills incurred during the replacement surgery.

However, the company is now facing scores of lawsuits claiming that patients should not be expected to bear any of the costs for having the devices replaced. About 200 lawsuits from states all over the country are seeking class-action status and have been consolidated in US District Court in Minneapolis before Judge James Rosenbaum.

Last month, Medtronic asked the Judge to dismiss the lawsuits, arguing that FDA regulations for medical devices preempt lawsuits in state courts and that the FDA has special authority over lifesaving or life-sustaining medical devices, such as defibrillators. "Any warning has to be regulated by the FDA," Medtronic attorney, Michael Brown, said.

But attorneys for the plaintiffs said Medtronic "glossed over" the problem in an October 2003, filing with the FDA that sought approval of a new defibrillator model, according to a July 11, 2006, article by the Associated Press.

Judge Rosenbaum is expected to issue a decision on Medtronic's motion in early fall.

Six months after the first recall in 2005, the company was in hot water with the FDA again over another group of devices. In a June 9, 2005 letter, the FDA said that Medtronic failed to correct manufacturing problems and investigate its LifePak 12 external defibrillators and cited damaged cable connectors and failures to follow through with preventive action after inspections of the company's Redmond, Washington plant.

The LifePak 12 external defibrillators, used in hospitals to shock the heart back to a normal rhythm, are similar to the LifePak 500 devices the company recalled. Medtronic's cardiac rhythm management business, which also includes pacemakers and implantable defibrillators, accounted for 46% of its $2.78 billion in sales in its latest quarter, according to Bloomberg News on June 22, 2005.

At the time, about 60,000 LifePak 12 external defibrillators were in use worldwide, Mr Clark said.

In the warning letter, the FDA said Medtronic did not investigate all complaints about defibrillator malfunctions, including one involving a patient's death. Problems were linked to broken or bent pins in the cable connectors, possibly because the company did not have adequate inspection procedures, the agency said. Failure to correct the problems may result in legal and civil penalties, the FDA warned.

Finally, in another turn of events that could have a negative impact on the financial future of the company, Medtronic is awaiting the final word on a Medicare proposal that would decrease reimbursement for procedures that are considered excessively profitable such as implanting heart devices.

Under the pending proposal, the Medicare reimbursement for implants would be cut from $31,833 to $23,755, or a loss of $8,078 for each procedure.