DOJ Intervenes in FCA Suit Against Spinal Device Manufacturer and Senior Executives that Allegedly Paid Kickbacks to Surgeons
In a complaint filed on July 22, 2019, the U.S. Attorney’s Office for the Southern District of New York (DOJ) intervened in a qui tam False Claims Act (FCA) suit against Life Spine Inc. (Life Spine), and senior executives of Life Spine. DOJ alleges that the company – a maker of spinal implants, devices and equipment – offered and paid kickbacks in the form of consulting fees, royalties, and intellectual property acquisition fees to surgeons to induce the use of its products in violation of the Anti-Kickback Statute (AKS). DOJ further alleges that Life Spine’s President and Chief Executive Officer (who is also its founder and majority shareholder), as well as its Vice President of Business Development, had knowledge of and participated in the alleged kickback arrangements, and named the individuals as co-defendants. DOJ claims that by paying the alleged kickbacks to physicians in order to induce the use of Life Spine products, Life Spine “caused false claims to be submitted to Medicare and Medicaid.”
Under the FCA it is unlawful to submit (or cause to be submitted) false or fraudulent claims for reimbursement to federal health care programs. The AKS is a criminal statute that prohibits individuals from knowingly and willfully offering or paying any remuneration to induce or reward referrals of goods, services or items payable by a federal health care program. Pursuant to the Affordable Care Act, any claim that includes items or services resulting from a violation of the AKS constitutes a false or fraudulent claim under the FCA.
In this case, DOJ alleges that Life Spine targeted surgeons in a position to use high volumes of Life Spine products, and entered into various types of agreements with such individuals “as a vehicle to pay surgeons illegal kickbacks in the form of consulting fees, royalties, and intellectual property acquisition payments, in order to induce surgeons’ usage of Life Spine Products.” Specifically, DOJ alleges that Life Spine entered into medical education consulting agreements for certain training or educational services, product development agreements for providing input on Life Spine’s development of new products (for which surgeons were then paid royalties upon market entry), and intellectual property agreements. According to DOJ, under the intellectual property agreements, surgeons would sell or license intellectual property in the form of patents and patent applications to Life Spine in exchange for up-front payments, royalties on sales, and commitments toward the development and marketing of products. Life Spine also allegedly granted warrants convertible to company shares to certain surgeons. DOJ claims that payment under these arrangements – and continued devotion of resources to bringing products to market – was directly tied to the usage of Life Spine products. In its complaint, DOJ alleges that surgeons were expected by Life Spine to commit to using certain amounts of Life Spine products in exchange for the payments, and DOJ notes that the payments were not fully disclosed to the government as required under the Physician Payments Sunshine Act.
According to DOJ, approximately half of Life Spine’s domestic sales of spinal products during the applicable period were attributable to surgeries performed by surgeons involved in remuneration arrangements with Life Spine, and DOJ alleges that Life Spine (including its executives named in this suit) closely tracked use of their products by the surgeons to ensure they generated sufficient business. DOJ alleges that Life Spine utilized spreadsheets tracking monthly usage by the surgeons, and at least once calculated the company’s return on investment of its payments to each surgeon. In the event usage figures ebbed for a particular surgeon, senior management of Life Spine (including its President and Chief Executive Officer) allegedly reached out to surgeons to “remind them of their commitment and to pressure them to increase their use of Life Spine Products” per DOJ’s complaint.
The complaint reviews specific examples of surgeons who allegedly received illegal remuneration from Life Spine, and takes the position that claims for surgeries performed by those surgeons that were then submitted to Medicare and Medicaid “were false because they were tainted by illegal kickbacks and thus were ineligible for reimbursement.”
DOJ’s intervention in this case serves as a stark reminder of the government’s continued scrutiny of compensation arrangements between device companies and health care providers, even amidst a slowdown in other types of white collar enforcement. The government’s linkage of payments by a device manufacturer under intellectual property sale and licensing agreements to surgeons, and the resulting use of the manufacturer’s products by those surgeons, indicates a focused approach to investigating and pursuing evolving kickback arrangements. Health care providers and device companies would be well-advised to review their policies, procedures and compensation arrangements for AKS risk.