Device-Maker Medtronic Weighed Down With Lawsuits

On July 31, 2006, Jacqueline Kay Poteet, a whistleblower in a lawsuit against the giant medical device maker, Medtronic, filed a motion in a Memphis federal court to oppose the US Justice Department’s plan to settle her case, along with another whistleblower’s case, for $40 million.

Critics point out that the identity of the other whistleblower remains a secret and question why it has never been made public.

Ms Poteet’s motion alleges that “this case has not been adequately investigated”” by the government, and that the $40 million amount is “woefully inadequate.”

Her attorney, Andrew Carr Jr, also claims that one of the lawyers involved in the case from the DOJ, had an undisclosed relationship with an attorney for one of the defendants.

On July 18, 2006, the Medtronic announced that it had reached a settlement agreement with the DOJ which requires the government to seek dismissal of the two qui tam civil suits. And on July 19, 2006, the DOJ issued a press release announcing the settlement in which the company agreed to pay $40 million to settle charges that it paid kickbacks to doctors to increase the sales of its products.

Medtronic was also required to sign a 5-year corporate integrity agreement which 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 will report directly to the chief executive and have access to the company’s board of directors

In discussing the terms of the settlement, the Assistant Attorney General for the Civil Division of the DOJ, Peter Keisler, stated in the press release, "Today’s settlement reflects the progress we are making in the ongoing fight against abusive and illegal practices in the healthcare industry.”

“Kickbacks to physicians are incompatible with a properly functioning health care system," he wrote. “They corrupt physicians’ medical judgment and they cause overutilization and misallocation of vital health care resources."

The $40 million settlement agreement comes on the heels of a $1.35 billion settlement in 2005, to settle charges in a patent infringement action filed by Dr Gary Michelson, a Los Angeles inventor and surgeon.

According to Medtronic’s latest SEC filings, the company first became aware of the DOJ’s investigation on September 4, 2003, when it was informed that the government was investigating allegations that certain payments and other services provided to physicians constituted improper inducements under the Anti-Kickback Statute. The allegations were made as part of a civil qui tam complaint brought pursuant to the federal False Claims Act.

A year later, on September 2, 2004, Medtronic received a copy of Ms Poteet’s qui tam complaint asserting similar allegations under the FCA. "The Company," the SEC filing states, "views the second complaint as having arisen out of essentially similar facts and circumstances as the first qui tam complaint."

The lawsuit allege that Medtronic violated the Anti-Kickback Statute between 1998 and 2003, by paying kickbacks through sham consulting and royalty agreements and sponsoring all-expense-paid trips for doctors to exotic locations.

Ms Poteet now contends that the government’s motion to dismiss her lawsuit is an attempt to keep the terms of the settlement secret and to avoid having to pay her or any other whistleblower a percentage of the settlement, in the case titled United States of America, ex rel Jacqueline Kay Poteet v Medtronic, Inc, No 03-2979, WD Tenn, W Div.

Her lawsuit charges Medtronic with violating the FCA which prohibits the submission of false claims to the federal government, and imposes liability on any person who "knowingly presents, or causes to be presented, … a false or fraudulent claim for payment or approval," or who "knowingly makes, uses, or causes to be made or used, a false record or statements to get a false or fraudulent claim paid or approved by the Government."

The fundamental element of a FCA violation, is the existence of an actual false claim that has been presented to the government. The FCA authorizes private individuals to bring qui tam actions on behalf of the US government.

FCA recoveries over the past two decades total more than $17 billion, with most of that amount coming from the pharmaceutical industry, according to the Washington DC based policy group, Taxpayers Against Fraud.

If a qui tam lawsuit is successful, under the FCA, the private plaintiff is entitled to a percentage of any financial award and, in some cases, to reimbursement for expenses and attorneys’ fees.

The basic policy underlying the qui tam provisions is based on what Congress perceived to be a necessity for enlisting private individuals to assist in discovering and prosecuting frauds against the government and encouraging private citizens to come forward.

In 1986, Congress set out to encourage more private actions. To that end, through 1986 amendments to the FCA, Congress increased financial awards to plaintiffs, lowered a plaintiff’s burden of proof, and allowed a private plaintiff to participate in actions in which the government chooses to intervene.

Under the rules of the FCA, the private plaintiff must serve a copy of the complaint and disclose all evidence in the plaintiff’s possession to the federal government. The government then investigates the claim and decides whether to intervene and prosecute the case. If the government chooses not to intervene, the private plaintiff still has the right to prosecute the action on behalf of the government.

With the 1986 amendments, Congress attempted to strike a balance between encouraging private individuals to disclose information and prohibiting "parasitic" actions where an opportunistic plaintiff takes advantage of information already in the public domain.

However, qui tam actions that contain similar allegations, or even identical allegations to publicly disclosed information are not necessarily parasitic. Actions are parasitic only when the plaintiff’s allegations are actually derived from the public disclosure.

In the amendments, Congress also repealed the limitation which barred all lawsuits based on information already in the government’s possession, noting that simply because the government possesses information regarding fraud does not mean that the government is in a position to prosecute those claims. When enacting the amendments, Congress affirmatively determined information "that the government ‘has,’ but that was never publicly disclosed does not bar a qui tam suit."

The text of the FCA requires only that an original source: (1) have independent knowledge of the fraud alleged in the complaint; (2) have direct knowledge of that fraud; and (3) have disclosed his information to the government before filing suit.

Under the FCA, an original source is defined as "an individual who has direct and independent knowledge of the information on which the allegations are based and has voluntarily provided the information to the Government before filing an action under this section which is based on the information."

A plaintiff’s knowledge is considered "direct" when the plaintiff acquires it through the plaintiff’s own efforts without an intervening agency, and "independent" if it is not dependent upon information contained in any public disclosures.

Experts say the traditional "original source" is an inside whistleblower, whose knowledge derives from his or her own investigation conducted prior to any public disclosure of information.

In this case, Ms Poteet qualifies as an original source because through her position at Medtronic, she personally uncovered evidence of unlawful conduct and presented it with her complaint, and therefore, her knowledge is both direct and independent.

According to the lawsuit, Ms Poteet, was a former senior manager of travel services for Medtronic until 2003, responsible for setting up travel arrangements for doctors to attend conferences, and is familiar with the efforts to curry favor with the doctors.

In an amended complaint, Ms Poteet, alleges the company continued to make the improper payments to doctors in 2004 and 2005, leading them to perform unnecessary spinal surgeries.

She charges that any changes made in scaling back payments to doctors were 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 although some payments to doctors were lowered in 2004, when the investigation began, the payments went back up in 2005. For instance, in 2003, Dr Hallett Mathews, was paid $300,000 in consulting fees, but in 2004, he was only paid $75,000. But then the next year, in the first 9 months of 2005, he was paid nearly $700,000 in consulting fees.

Her lawsuit alleges that Medtronic paid doctors at least $50 million in kickbacks over a 4-year period. Internal company documents filed with the lawsuit, provide indepth details of the company’s campaign to influence doctors. Wisconsin physician, Dr Thomas Zdeblick, listed as a defendant in the action, in 1998 signed a 10-year $400,000 consultant contract with Medtronic that only required him to "consult" for eight days each year.

The complaint alleges that Medtronic hosted medical conferences where the "principal objective" was to "induce the physician, through any financial means necessary" to use its devices. According to Ms Poteet, Medtronic targeted surgeons while they were still in training, and paid for doctors to attend any of 200 professional meetings a year.

When doctors would visit Memphis, she says, they were sometimes taken to the "Platinum Plus" strip club, and the expenses for the outing were recorded as an evening at the ballet.

According to an industry newsletter, Orthopedic Network, the cost of the spinal implant device is around $13,000. Because the devices are so profitable, the money spent by Medtronic on doctors "is peanuts," a former employee who still works in the industry, said in the January 24, 2006, Ledger. Sales representatives earn generous commissions, he said, so they will work hard to satisfy the doctors’ demands.

"You’re going to make sure you do whatever he wants, whatever it is," he told the Ledger.

Critics say the device makers have become a primary source of income for surgeons, and many come to rely on it. "The amount of money is astronomical," says Dr James Herndon, a former president of the American Academy of Orthopedic Surgeons, in the Ledger.

The device makers "know the volumes these surgeons have," he noted. "They seek them out, and they seek relationships with them."

Critics within the industry say doctors gravitate to the company with the highest paying consulting contracts in exchange for using the company’s product. According to court filings, many doctors were paid consulting fees far higher than the $3,000 a day that a surgeon might expect to earn.

A former employee of several device makers, including Medtronic, who declined to be identified because he still works in the industry, says "it is very difficult to compete legitimately, to get a doctor to look at ones product when there are so many bought physicians in the industry."

While working for one company, he says, it was decided prior to the American Academy of Orthopedic Surgeons meeting in Chicago, that the goal would be to write 25 consulting contracts with doctors. He said, several doctors asked what project they would be working on, and the answer was always "we’ll find something."

In his position, he was responsible for documenting the doctor’s work product each month, and says that it was a real struggle to come up with 8 hours of valid work product for these physicians. But even though some never had work product, he noted, "their consulting check was always mailed."

Each month the industry employee said, he received spreadsheets that showed how much business each doctor did with the company, and then it was discussed whether the doctor’s consulting contract would continue based on the amount of business that was generated.

Internal company documents filed with Ms Poteet’s lawsuit prove that Medtronic tracked the use of its devices by each doctor who attended the conferences the company paid for.

A June 2003 spreadsheet for a 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 were described as needing "special attention."

For Dr K Daniel Riew, also named as a defendant in the lawsuit, it was noted on the spreadsheet that he was using a substantial amount of competing devices. "He will be designing a new plate with M.S.D.," the document says, "so all of his business will gravitate our way in the near future."

The industry employee also echoed allegations of perks similar to those made in the Poteet lawsuit. "The owners of the company were very well known for frequenting strip clubs," he said, "and prostitutes were known for being at the national sales meeting to be in the owners rooms for the late night meetings."

Experts agree that industry employees like this guy have good reason to be afraid of speaking publicly. Attorney, Mark Cohen, works with the Government Accountability Project which assists whistleblowers. People who come forward he says, do so at great personal risk. "Speaking up puts their current job in jeopardy and it threatens to brand them as trouble-makers with other employers."

This is especially true for those who go up against the Pharmaceutical industry, says attorney, Jason Zuckerman, of the Washington DC Law Office of Jason M. Zuckerman. "Whistleblowers in the pharmaceutical industry," he warns, "really face an uphill battle, a David versus Goliath struggle."

In fact, experts say whistleblowers who interfere with the highly profitable Medicate fraud often find themselves out of work permanently. "My clients whose only infraction was committing the truth," Mr Zuckerman states, "have found themselves unemployed and suffer permanent damage to career and reputation."

Medtronic no doubt will try hard to settle the Poteet lawsuit before it goes to trial, because under a key provision of the FCA, a jury can order the company to pay a triple damage award.

But in any event, Medtronic’s entanglements with law enforcement officials are not limited to the Poteet case. According to its latest SEC filing, Medtronic received a subpoena from the Office of the US Attorney for the District of Massachusetts issued under the Health Insurance Portability & Accountability Act of 1996, on October 24, 2005, requesting documents relating to pacemakers and defibrillators; monitoring equipment and services; benefits to persons in a position to recommend purchases of such devices; and the company’s training and compliance materials relating to the fraud and abuse and federal Anti-Kickback statutes.

"The Company intends to fully cooperate with the Office of the United States Attorney for the District of Massachusetts," the filing states, "with respect to this subpoena."

In addition to the lawsuit filed by Ms Poteet and the various investigations by government agencies, the company is also facing a wide range of other lawsuits related to its products.

On February 11, 2005, Medtronic began advising doctors about a potential battery shorting that may occur in implantable cardioverter defibrillators (ICDs) and cardiac resynchronization therapy defibrillators (CRT-Ds), including certain of the Marquis VR/DR and Maximo VR/DR ICDs and certain of the InSync I/II/III Marquis and InSync III CRT-D devices.

The company provided physicians with a list of potentially affected patients and recommended that physicians communicate with those patients so they could manage the issue in a manner they felt was appropriate for their patients.

Subsequently, the FDA classified the recall a Class II Recall, and a large number of lawsuits were filed against Medtronic by either individuals claiming personal injury or third party payors seeking reimbursement of costs associated with the recall, including a claim by an individual acting on behalf of the Center for Medicare & Medicaid Services.

The company waited until February 2005, to tell patients that their defibrillators might fail. However, company documents filed in the California lawsuit, Randall v Medtronic, No C-05-3707-JW, show Medtronic 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."

Another batch of devices came under scrutiny six months after the first recall. In a June 9, 2005 letter, the FDA told Medtronic that it had failed to correct manufacturing problems and investigate its LifePak 12 external defibrillators and failed to follow through with preventive action after inspections of the company’s Redmond, Washington plant.

The LifePak 12 defibrillators, used to shock the heart back to a normal rhythm, are similar to the LifePak 500 devices that the company had recalled. At the time, about 60,000 LifePak 12 defibrillators were in use worldwide, company spokesman Rob Clark said.

In the warning letter, the FDA said Medtronic did not investigate all complaints related to the malfunctions, including one involving a patient’s death, and warned that failure to correct the problems could result in legal and civil penalties.

According to the company’s description of current lawsuits filed against Medtronic in its latest SEC filing, the "personal injury complaints generally alleged strict liability, negligence, warranty and other common law and/or statutory claims; and seek compensatory as well as punitive damages."

The cases filed in federal court have been consolidated and assigned to one federal judge under a Multidistrict Litigation process. According to Medtronic, there are currently approximately "240 federal cases," most of which have been consolidated in the MDL and the company expects that all federal cases will be transferred to the MDL.

There are also approximately 30 state court cases that are not part of the MDL, and five putative class actions filed in Canada, according to filings with the SEC.

Medtronic attorneys note that separate master complaints were filed in the MDL for the personal injury and third party payor claims and that the third party payor complaint contains class allegations and lawyers for the plaintiffs have informed Medtronic that they will request permission to amend the personal injury complaint to add class allegations which were omitted.

The company says it intends to challenge any attempt at class certification because it believes individual issues far outweigh any common issues in the various cases.

In attempt to get rid of many of the lawsuits, Medtronic has filed a summary judgment motion to dismiss the personal injury claims, based upon in part, the legal theory of federal preemption.

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

But attorneys for the plaintiffs claim 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.

The motion was heard on July 10, 2006 and a decision by the court is expected this fall.

There is also a pending a motion to dismiss the third party payor cases that was filed by Medtronic in March 2006.

On an interesting note, according to its SEC filing, Medtronic has not recorded an expense related to damages in connection with the various Marquis related lawsuits because potential losses are not currently probable or reasonably estimable.

At this point, Medtronic has provided patients with new devices for free and agreed to give them up to $2,500 for out-of-pocket expenses related to replacement surgery. But the company does not pick up the hospital and doctor bills and therefore, public health care plans like Medicare and Medicaid, and private insurers are stuck with the tab.

Medtronic told the New York Times on February 18, 2006, that the medical costs of a replacement surgery were effectively offset by its provision of a free device and the out-of-pocket payments.

The total cost of the operations is unknown but experts say the amount could run as high as hundreds of millions of dollars.

On February 18, 2006, the New York Times, reported that the cases filed appear to mark the first time that plaintiffs’ lawyers have filed so-called private attorney general actions against device makers to recoup expenses paid by Medicare on behalf of its beneficiaries.

CMS officials told the Times, "that they were aware of only three settlements over the last two decades in which the agency had recovered more than $1 million from manufacturers, the largest being $30 million from makers of silicone breast implants."

But the CMS may be ahead of the game with Medtronic. Jerry Walters, director of the financial services group at the CMS, told the Times that the government and Medtronic "were looking at where the responsibility and liability for payment lies."

In addition to the cost of surgery, according to Bloomberg News, on February 16, 2006, based on "Medtronic’s estimate of a 2 percent to 5 percent post-implantation infection rate, 380 to 950 patients may have developed infections after replacement of their devices."

According to Bloomberg, the cost of the defibrillator replacement at a Des Moines hospital and post-operative complications reached $100,000, for Jim Strasko, an unemployed 45-year-old father of six, who was uninsured and disabled when Medtronic sent him a letter about replacing his defibrillator.

Indebtedness drove him to the "humiliation" of bankruptcy and problems in his new marriage, Mr Strasko told Bloomberg in an interview.

Apparently uninterested, Medtronic spokesman, Rob Clark, told Bloomberg that the company doesn’t keep track of deaths, disabilities or extra medical costs resulting from such complications.


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