Kronos Spinal Technologies: Recruiting a Surgeon With Referral-Linked Profits

In the Kronos Spinal Technologies settlement, Reliance Medical Systems, two owners and two physician-owned distributorships agreed to pay $1 million to resolve allegations of kickbacks tied to spinal implant use. The government alleged that the owners offered a surgeon a share of the profits he generated after he proved his loyalty. For someone inside the device business, the question is concrete: did the surgeon’s payment follow an investment, work performed, or the implants used on patients?

The Justice Department announced the collective agreement on July 1, 2022. Kronos distributed Reliance spinal implants in Southern California. Apex Medical Technologies was another Reliance distributor in the same civil case.

How Does Reimbursement Work for Medical Devices?

Medicare generally includes an implanted device’s cost in its payment for the hospital stay or procedure. The hospital purchases the implant and bills for care, while the surgeon may strongly influence which product the hospital buys.

The HHS Office of Inspector General explains in its alert on physician-owned entities that physicians may influence both the brand and the type of implant. A physician-owned distributorship places that decision-maker on the selling side as well: the business earns revenue from devices its physician-owners order for procedures on their own patients.

The government’s original complaint alleged that Kronos bought Reliance implants at cost and resold them to hospitals at a substantial markup for use in its physician-investors’ surgeries. It also alleged that Reliance contracted with outside manufacturers to make implants whose designs were indistinguishable from those already commercially available. The distributor earned its margin on the implants its own physician-investors chose.

The government alleged that Kronos used those profits to reward surgeons for choosing Reliance implants. A surgeon selected the devices, the hospital bought them, and physicians and hospitals submitted claims to Medicare for the surgery and associated care. The alleged kickback reached taxpayers through those claims.

The Surgeon Had to Produce Before Joining

The Kronos recruitment pitch allegedly made product use a condition of joining. In the government’s amended complaint, Reliance’s owners required prospective physician-investors to go through an evaluation period using Reliance implants in their surgeries. The company wanted to see eight to ten cases before signing, and an owner said a surgeon had been passed over because he was not busy.

The government’s original complaint quotes a distributor owner’s recorded explanation of why some physicians were not invited to invest:

The proposed investor was testing the implants while the company tested how much business the surgeon could bring. The complaint alleged that the expected loyalty continued after the evaluation and meant regularly using Reliance implants in the surgeon’s own operations.

One prospective Kronos investor never joined because she had financial ties to other spine-device companies. Even so, the government alleged, the owners promised and paid her a share of the profits she generated during her evaluation month. The payment followed her product use even though the investment never happened.

The complaint also alleged consequences for surgeons whose business stopped meeting the owners’ expectations. One Kronos physician had to surrender his shares without compensation for failing to use enough Reliance implants. Another had to give up his interest after announcing plans to move to Washington State, where Reliance did not sell implants. The ability to keep an investment allegedly depended on continuing to supply the business.

Money Back in the Month of the Investment

Kronos’s alleged investment terms show how little capital could stand between a surgeon and the profits. The complaint says the owners formed Kronos in February 2007 and offered investments to two physicians. One paid nothing for his ownership interest. He had never used Reliance implants before April 2007, but used them in approximately 70% of his spinal fusion surgeries between 2007 and 2012.

For a period when that surgeon was Kronos’s only physician-investor, the government alleged that the company’s profitability depended entirely on his use of Reliance devices. His distributions varied directly with that use. The hospital’s purchases for his own patients generated the profits paid back to him.

For a later investor, the paperwork showed a $100,000 contribution for an ownership interest. The complaint alleged that Kronos paid him $79,000 one week before the contribution and $69,400 one week afterward. It said his capital was returned in full that same month, with more money on top.

On paper, the surgeon was putting money into the business. The alleged payment dates showed money going the other way before his investment had even arrived.

The Job Changed, but the Payments Still Followed Implant Use

The government alleged that Reliance later repurchased physician ownership interests and hired the former investors as employees to avoid disclosure of the financial relationships. Kronos made its principal physician-investor vice president of cervical products. The amended complaint says his job description focused on improving the clinical safety of Reliance’s cervical products.

His base pay was $600 an hour. According to the complaint, Reliance told him how much time to report. In the first half of 2013, his timesheets claimed an average of 75.25 hours a month for Reliance distributorships, including Kronos. The complaint contrasted that with his deposition estimate that he spent no more than ten hours a month on Reliance activities.

The work itself supplied another comparison. The government alleged that nearly all his claimed work consisted of short summaries of academic articles selected by Reliance. He summarized the same article four times in four consecutive months. Other physician-employees received duplicative assignments too.

The complaint then connected the timekeeping to the money. Reliance allegedly calculated his hours from his share of earlier implant profits and told him which articles to claim he had reviewed. The paperwork made the payment look like compensation for work, while the underlying calculation still followed the implants used in his surgeries.

The 2020 Journal of Forensic and Investigative Accounting paper A Forensic Accountant’s Guide to the Most Potent Federal Laws Used Against Healthcare Fraud examines indirect payments and benefits in kind exchanged for purchases paid by Medicare or Medicaid. The Kronos allegations show the same focus on what the payment bought. Its label changed from investment returns to wages, but the government alleged that compensation still followed the surgeon’s implant use.

Hospital Pressure and the Medicare Claims

The government alleged that Reliance’s owners pressed physician-investors to make hospitals buy its implants, including by threatening to move scheduled surgeries elsewhere. Hospital purchasing staff faced the prospect of losing the surgeon’s cases along with the implant order.

The amended complaint also alleged concealment. In response to a California hospital’s inquiry, Reliance denied that the Kronos physician had received payments as a consultant or investor. The government said Kronos had already paid him more than $3 million when the letter was signed.

The complaint identified 21 Medicare claims for instrumented fusion procedures that this physician performed at Pomona Valley Memorial Hospital using Reliance implants between January 2010 and April 2014. It alleged that the financial relationship caused false claims for both the physician’s services and hospital care.

One Kronos example concerned a Medicare patient whose surgeon diagnosed progressive scoliosis. The government alleged that her scoliosis was stable, that the surgeon was a Kronos employee, and that he used Reliance implants in surgery more extensive than necessary. The complaint said decompression without fusion was indicated and described Medicare payments to both the surgeon and hospital.

That is where the alleged incentive reached beyond a sales dispute. The government’s case connected the payments to decisions about patients’ operations and the resulting public health care bill.

What Are Some Examples of Kickbacks in Healthcare?

Device kickback cases have involved consulting fees, royalties and other payments connected to surgeons’ product use. The comparison that matters here is how a company measures what it gets back from a paid physician.

Life Spine admitted conduct that included management reports comparing surgeon payments with product use and a return-on-investment calculation. In the SpineFrontier case, a surgeon admitted estimating consulting hours from how often he used the company’s products instead of tracking actual consulting time.

A former sales director’s complaint against Innovasis alleged that separate spreadsheets compared surgeon purchases with compensation. When purchase volume fell too low, the company allegedly demanded more product use under threat of canceling the contract, or terminated it. That is the same commercial pressure alleged in Kronos’s forced surrender of physician shares: continued payment depended on continued business.

The Civil Settlement and Whistleblower Opportunity

The United States brought the Reliance kickback case directly. The collective settlement covered Reliance, two owners and two of its distributorships. The Justice Department separately reported that it had previously recovered more than $9.25 million from owners of Reliance distributorships.

For an insider who knows of similar arrangements, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What the Surgeon Was Paid For

If you saw physician profits calculated from implant use, hours assigned to fit a payment, or hospital questions answered with a false denial, speak to one of our whistleblower experts about what you saw. We work alongside you to build the medical device fraud case and bring in medical device whistleblower lawyers who understand physician-owned distributorships and the hospital claims they generate. We stay with you from the first conversation through the pursuit of a recovery.