Bone Stimulators “Whistleblown”

Are bone stimulating devices reusable and should patients rent or buy them?

Those questions are at the heart of a 2005 whistleblower suit that was unsealed on April 15 in Boston.

The suit was filed by Jeff Bierman, co-owner of a Missouri medical billing service that has been recognized by the government as a "Gold Star Preferred Billing Service."

In amended complaint, Bierman claims that Orthofix, DJO Incorporated, Biomet, and Smith & Nephew sold over $300 million worth of osteogenesis stimulators to Medicare beneficiaries since 1998 in violation of the Federal False Claims Act. He's suing, on behalf of the government, for triple damages and $11, 000 for each false claim made to Medicare.

The same day the suit was unsealed, some of the companies named in the suit announced that they had received subpoenas from the Justice Department in connection with the suit. This indicates that the government is still considering whether or not it will join the suit. The issuance of subpoenas means that the Justice Department is serious.

This whistleblower case doesn't have the juicy details of alleged bribery, payoffs and sales reps behaving badly at strip clubs, but it does have the mundane details of how sales reps from the companies advised their physician and hospital customers how to fill out Medicare claims forms. The reps, claims Bierman, advised providers to fill out CMS forms so that the bone stimulating devices would be claimed as a purchased instead of a rented device.

In 2003 Bierman had a physician client looking to diversify and expand his practice. The physician wanted to look into becoming a supplier of osteogenesis stimulators and other medical equipment prescribed to his patients, and he asked Bierman to look into it.

After talking to EBI (Biomet subsidiary) and Orthofix and being told that their devices were not generally available for sale to suppliers, he got curious because that seemed very unusual to him. He checked with his hospital clients and looked over their CMS claims documents. He determined that the devices should have been billed as rentals instead of purchases.

Bierman then filed suit on behalf of the federal government, 18 states with Medicaid programs, and the cities of New York and Chicago.

Orthofix, DJO, Biomet, S&N Targeted

The defendants in the case are:

Orthofix International N.V.

Orthofix markets the Spinal-Stim, Physio-Stem and Cervical-Stim osteogenesis stimulators. The company received FDA clearance to begin marketing the Cervical-Stim for use in the cervical spine in 2005.

This isn't the first time that Orthofix has been involved with the government over allegations of false claims regarding its stimulation devices.

In September 2003, the government announced that Orthofix agreed to pay a $1.5 million settlement in a whistleblower suit brought by former Orthofix employee Karen Neel. That suit was brought because Orthofix filed claims with the Department of Defense's health care program for use of its device to treat the cervical spine, an off-label use at the time. That use is now approved.

OrthoLogic Corp.

Prior to 2003, OrthoLogic sold the SpinaLogic and OL1000 Bone Growth Stimulators. After 2003, OrthoLogic sold its stimulator business to dj Orthopedics (now DJO Incorporated) for $93 million.

DJO Incorporated

DJO sells the OL1000 and SpinaLogic stimulator through its CMF Bone Growth Stimulators Division. DJO was acquired by Reable Therapeutics in 2007. The Blackstone Group bought Reable in 2006.

Biomet

EBI (and Bioelectron, which EBI bought in 2000) is a wholly owned subsidiary of Biomet and makes the SpinalPak and OrthoPak stimulators.

Smith & Nephew

Smith & Nephew makes the EXOGEN Bone Healing System, an ultrasound stimulator that transmits a low intensity ultrasound signal to the fracture site through coupling gel.

Purchase vs. Rental

Bierman claims that the evidence he presents shows that the devices were rarely used more than a few months and that those devices could be reused. According to Bierman, the companies pursued this "purchase" business model to bolster their profits and offered kickbacks to beneficiaries and physicians in the form of waiving co-pays and offering free devices to physicians to give to their indigent patients.

This case reminds us of the whistleblower suit regarding billing procedures for a Kyphon device, which was settled by Kyphon before it was acquired by Medtronic.

Medicare Coverage

Osteogenesis stimulator devices are lightweight, battery operated devices worn externally by patients for a few hours each day. They promote bone growth and healing by inducing weak electromagnetic fields or ultrasonic waves in the bone. The FDA approved them in 1979 and they are covered by Medicare under codes for long bones and the spine.

The length of time needed to achieve bone healing varies from patient to patient. Bierman cites clinical studies which show that most patients use the devices for periods of between three and six months. After a physician has determined whether or not the device has worked, the use of the device is discontinued. Orthofix and S&N offer money-back guarantees if their devices don't work within six months.

Medicare coverage for stimulators has been going on since 1980 and was originally limited to nonunion of long bone fractures. Coverage was expanded in 1996 to include spine fusion. In 2001 ultrasound treatments were added. In 2005 the cervical area of the spine was added.

Excessive Charges

In the suit, Bierman says the defendants represented that the devices should be paid as purchase items,

When in fact, and to the defendants' knowledge, they should have been billed as rental items.

He further alleges that the devices were sold for periods of time "that were far in excess of the medical needs of the patients, and in the vast majority of cases, the useful lifetime of the devices themselves."

Medicare pays for stimulators on a monthly rental or purchase basis. When Medicare pays on a rental basis, the payments eventually stop. According to Bierman, based on a fee schedule, the purchase price consistently is approximately 10 times more than the rental price. Therefore, a device "would have to be used for a period of 10 months or more for the accrued rental payments to reach the purchase price."

But since the devices are typically used for only three to six months, the rental charges would never reach the purchase price.

The significance of submitting documents to Medicare under a purchase claim is the difference between a $360 per month rental charge and a $3, 600 purchase price.

DJO’s and Biomet's devices contain a computer chip that is programmed to cause the device to automatically deactivate after nine months of regular use. Yet, Bierman says that in the company’s 1979 Premarket Approval Application (PMA), Biomet stated that "routine clinical observations over five years indicate this device causes no known risks."

Bierman claims that 70, 000 new stimulators, which federal state and local governments bought on behalf of patients are now "sitting idle in the homes of those patients or have been thrown out or otherwise disposed of." The suit states that some devices sell on eBay for as little as $50.

Misleading Providers

Orthofix, Biomet and DJO misled physicians and their clerical staff into filling out documents with a code that indicates the devices "are medically necessary for the patient's lifetime or for periods of time that exceed the devices' nine months of useful life.., " alleges the suit. Physicians’ clerical assistants typically rely on the equipment suppliers' representatives for advice on how the reimbursement forms should be completed.

These reps, says Bierman, misled the staffs by instructing them to specify a number of months on the forms that would support payment for the item as a purchase.

The suit says that the defendants "routinely claim that the devices have been designated by the FDA as devices that are disposable and can only be used by one patient." Bierman says that the defendants cite the fact that the devices deactivate after a period of time and cannot be reused. Apparently, says the suit, on that basis the concept of a single-use device is incompatible with rental. 

Bierman claims that an Orthofix rep told him, after Bierman pointed out that Medicare had assigned a rental code to the device, that "nobody honors it."

Single-Use Devices

The FDA parlance for a device that can be used by only one patient is "single-use device" (SUD).

Bierman says the SUD designation is NOT an FDA requirement, but it is applied at the discretion of the device manufacturer and many SUDs are reprocessed for patient use in compliance with FDA rules.

SUDs are frequently misdesignated by manufacturers to boost profits, says the suit. Bierman cites in the suit a June 2000 GAO report that stated:

"Many health care professionals believe that some SUDs can be reused. They told us they distrust the single-use label for some devices because (1) FDA cannot require manufacturers to support the designation of a device as single-use; (2) they perceive that manufacturers have an economic incentive to market devices as single-use that could just as well be sold as reusable; and (3) FDA's approval requirements for SUDs are less extensive than those for reusable devices...."

Bierman alleges that the single-use designation for osteogenesis stimulators is economically, not clinically, motivated. The suit says that the devices are non-sterile, they are worn externally, often over clothing, and any electrodes intended to be attached to the skin are disposable.

The suit cites a 1993 St. Petersburg Times article that stated:

Ron McNeill, sales and marketing director for Bioelectron, said the company doesn't plan to ask the FDA to allow multiple-patient use for two reasons: It is concerned about inappropriate use, and it would lose its profit margin.... ‘We think we're already saving an individual money.

Company Impact

At this point, the financial impact of the suit on the public companies involved is unknown.

Senior Analyst Mike Matson of Wachovia estimates that Orthofix generated around $170 million (33% of total revenues) in sales from its stimulators in 2008. He estimates that Smith & Nephew generated around $120 million (3% of total revenues) in sales from its osteogenesis stimulation devices in 2008.

But, says Matson, since gross margins on these devices are very high (around 90%), the products likely make up a much larger portion of these firms' earnings. Matson thinks that deferred prosecution agreements are one potential outcome of this suit, although it may take years for this to play out.

He downgraded Orthofix on April 17, citing the subpoena overhang as one reason. The company's stock price dropped by 10% that day.

On a related note, the U.S. Attorney in Boston, Michael Sullivan, submitted his resignation the same day the subpoenas were announced. President Obama will appoint a successor. Given the history of health care investigations out of Boston, we think the next U.S. Attorney may be even more aggressive in prosecuting health care fraud.

In the meantime, if you know anyone in need of a bone stimulator, suggest a rental or eBay.