Medical Device Daily

Cause and affect is fairly predictable when a device produces serious adverse events: a recall, then lawsuits.

A class action lawsuit has been filed in the U.S. District Court for the District of Minnesota on behalf of all purchasers of securities of Medtronic (Minneapolis) from June 25, 2007 through Oct. 15, 2007, according to the law firm Schiffrin Barroway Topaz & Kessler (Radnor, Pennsylvania), the suit related to the company's recall last month of its Fidelis leads.

The complaint charges Medtronic and certain officers and directors of the company with failure to disclose, and misrepresentation of, adverse events known to them or disregarded by them, including:

  • that the company received "a substantial and increased number" of reports of death and serious injuries caused by fractures in its Sprint Fidelis defibrillator leads;
  • that the company failed to suspend distribution of these defibrillator leads in the face of these mounting safety concerns;
  • that as these safety concerns were revealed, Medtronic would be forced to suspend distribution of these defibrillator leads;
  • that the FDA would consider this "removal action" to be a "medical device recall";
  • that the recall would have a significant financial impact on the company in subsequent quarters;
  • that the company lacked adequate internal and financial controls;
  • and that due to the recall the company's statements about its financial well-being and business prospects, when made, lacked a reasonable basis.

On Oct. 15, Medtronic disclosed that it had received a number of adverse reports about its Sprint Fidelis defibrillator leads, attributable to manufacturing defects, these reports identifying significant safety concerns. The company acknowledged that it had identified hundreds of malfunctions, serious injuries, and five patient deaths where a Sprint Fidelis lead fracture "may have been a possible or likely contributing factor."

Medtronic also reported that it had stopped distribution of the Sprint Fidelis leads and instructed physicians to stop implanting the leads and return all unused products. The FDA then issued a notice saying that it considered this "removal action" to be a "medical device recall," terming it "an action taken when a medical device is defective, when it could be a risk to health, or when it is both defective and a risk to health."

In other legal activity: HealthSouth (Birmingham, Alabama) and two physicians have agreed to pay the U.S. a total of $14.9 million to settle allegations that HealthSouth submitted false claims to the government and paid kickbacks to physicians who referred patients for care in some of its hospitals, outpatient rehabilitation clinics and ambulatory surgery centers.

In the current action, HealthSouth will pay $14.2 million and the physicians will pay a total of $700,000, under separate settlements.

The settlement results from disclosures made by HealthSouth in 2004 and 2005 to the U.S. Attorney for the Northern District of Alabama, Alice Martin, and the Department of Health and Human Services' Office of Inspector General, after a change in management and an internal investigation.

The Department of Justice (DpJ) says that the settlement resolves claims made by HealthSouth to Medicare and Medicaid for services provided to patients referred by orthopedic surgeons James Andrews, MD, and Lawrence Lemak, MD, of Birmingham, when HealthSouth had financial relationships with these physicians, their former partnership, the Alabama Sports Medicine and Orthopaedic Clinic, and their research and training foundation, the American Sports Medicine Institute. These relationships violated CMS anti-kickback rules and a provision of the Social Security Act known as the Stark Law.

Martin said that her office has entered into a $450,000 settlement with Andrews and a $250,000 settlement with Lemak, resolving the government's claims.

The HealthSouth settlement also resolves allegations that the company paid kickbacks to, and entered into improper financial relationships with, other physicians, including a group in Los Angeles, in an attempt to induce the referral of patients.

The government said that its investigation of certain of the other physicians is continuing.

"Hidden financial agreements between healthcare providers and physicians may influence where patients receive treatment and what treatment is received," said Jeffrey Bucholtz, acting assistant attorney General for the DoJ's Civil Division. "Medicare beneficiaries deserve their physicians' unbiased judgment regarding their treatment, free of improper financial influences. Today's settlement sends a loud message to healthcare providers that we will strongly enforce the Anti-Kickback Statute and the Stark Law ... ."

Martin added, "Former HealthSouth management's improper financial relationships were made known to us through self-disclosures by new management. To preserve the independence of healthcare providers it is critical that business relationships not violate the Anti-Kickback Statute, the Stark law, and the False Claims Act."

Thomas O'Brien, U.S. attorney for the Central District of California, said, "Medicare providers seeking federal funds must play by the rules. Providing sweet deals to physician groups to insure a steady stream of referrals runs afoul of those rules and will not be tolerated."

As a condition of participation in government healthcare programs, the Office of Inspector General of HHS required HealthSouth to amend its existing corporate integrity agreement to address kickback issues.

HealthSouth has also signed an agreement with the DoJ on behalf of the Office of Inspector General of the HHS to resolve issues associated with various practices under the company's previous management team.

Earlier this year, HealthSouth founder Richard Scrushy settled an SEC lawsuit for $81 million as a penalty for the organization's $2.6 billion accounting fraud while he headed the company. Without admitting or denying the allegations, Scrushy agreed to pay $77.5 million that the government claimed he profited from in the HealthSouth fraud and another $3.5 million in civil penalties.

The first settlement related to HealthSouth's financial reporting troubles brought in a class action suit against the organization and certain former directors and officers yielded payment of HealthSouth stock and warrants valued at $215 million and cash payments of $230 million.

HealthSouth was one of the largest providers of outpatient rehabilitation services, ambulatory surgery services, and diagnostic imaging services until it sold those lines of business earlier this year.