Medical Designs and Sicage: The Surgeon Was Also the Seller

Medical Designs and Sicage joined their physician-owner in a $4.4 million settlement over alleged implant kickbacks and medically unnecessary surgeries. The government alleged that the surgeon selected implants, hospitals bought them from his companies, and the profits came back to him. The companies also settled allegations that they failed to report his ownership and payments to the government’s Open Payments program. For someone inside a device distributor, this case follows the sale all the way back to the person who chose the product.

The Department of Justice announced the settlement on May 3, 2021. The Sioux Falls, South Dakota businesses were medical-device distributorships owned by a neurosurgeon. Their alleged business included selling their own devices and, for Medical Designs, reselling spinal devices made by other manufacturers. Both routes allegedly rewarded the owner’s implant choices.

Physician Ownership Put the Chooser Inside the Seller

A physician-owned distributorship earns money from implants its physician-owner orders for use in the owner’s patients. The hospital buys the device, but the surgeon can determine which product the hospital buys. The Department of Health and Human Services Office of Inspector General’s alert on physician-owned entities explains why that arrangement matters for implants: physicians can strongly influence both the brand and the type of device.

According to the government’s complaint, the surgeon and his wife owned Medical Designs, which derived most of its revenue from devices sold for his use at Sanford Medical Center and Sioux Falls Specialty Hospital. The complaint described him as Sicage’s sole owner and alleged that all its revenue came from sales to Sanford Health for his use. It described the companies sharing employees and operating from neighboring suites at the same street address.

The complaint’s account of Medical Designs’ Bullet Cage business shows how concentrated the sales were. It alleged that over 90% of its Bullet Cage sales from 2012 to 2018 were to the hospitals for its owner’s use. The government alleged that profit distributions rewarded those purchases. On the government’s account, the surgeon’s clinical decision was also a sales decision for a business he owned.

How Medical Designs Allegedly Resold Other Makers’ Implants

Medical Designs allegedly earned a second stream of profits by buying other manufacturers’ spinal devices and reselling them to hospitals for its owner’s surgeries. The complaint described purchases made as needed, at a fraction of the resale price, followed by hospital sales and profit distributions to the owner.

The government drew a sharp distinction between Medical Designs’ resale profits and making the products:

Those manufacturers supplied the products, while Medical Designs allegedly took part of the sales profit because its physician-owner used them.

The complaint’s account of Amendia makes the link between profit and product choice unusually concrete. Medical Designs allegedly resold Amendia’s screws, rods and cervical hardware during a short distribution arrangement. The complaint said the owner often used those products while his company could profit from them, but rarely used them before and after the arrangement. As the complaint tells it, the product choice moved with the opportunity to earn the resale margin.

Life Spine allegedly agreed to another resale arrangement. The complaint alleged that Medical Designs bought its cervical plates, screws and other spinal products, marked them up and shared the resulting profits with the surgeon. According to the complaint, Sanford eventually told Medical Designs it would not buy Life Spine products resold by the physician-owned distributor.

How Sicage Allegedly Put a New Company on the Invoice

Sicage allegedly gave the same surgeon another way to profit from sacroiliac implants sold to Sanford. The complaint said the surgeon and Medical Designs employees created the company to conceal the nature of the arrangement from Sanford and Orthofix.

The complaint described Orthofix as the exclusive license holder for making and distributing the Samba sacroiliac device. It alleged that Medical Designs sought payment based on its owner’s use or permission to sell the device for his surgeries. After Orthofix rejected those requests, Medical Designs allegedly sold Samba devices to Sioux Falls Specialty Hospital and concealed those sales from Orthofix.

For Sanford, the complaint alleged a different route: Sicage sold a substantially equivalent screw system under the new company’s name. In that account, its customer was Sanford, its implanting surgeon was its owner, and its offered profit distributions depended on his use. The allegation was a new name on the invoice with the same physician profiting from the sale.

How Does Reimbursement Work for Medical Devices?

As the complaint explains, for these inpatient spinal procedures Medicare’s hospital payment included the implanted devices within payment for the hospital stay. The hospital bought the implants from the distributor and billed for inpatient care. The surgeon billed separately for professional services.

The complaint follows those separate payments through particular surgeries. In one Sicage example, it alleged that Sanford received more than $25,250 from Medicare for inpatient services and paid Sicage more than $12,200 for the products used in the surgery. It separately identified the surgeon’s professional billing.

The government alleged that the kickback arrangements caused claims to Medicare, Medicaid and TRICARE. It also alleged that the surgeon continued performing medically unnecessary procedures despite warnings from physician colleagues. In the government’s account, patients underwent unnecessary operations and taxpayers paid through public health care programs, while the surgeon profited from the implants he chose.

The hospital’s separate settlement was larger than the companies’ joint settlement with their owner. Sanford Health agreed to pay $20.25 million in its settlement over kickbacks and unnecessary spinal surgeries. The government alleged that Sanford continued billing despite warnings about the surgeon’s financial interests and unnecessary procedures.

Open Payments Reporting the Companies Allegedly Skipped

Medical Designs and Sicage agreed to pay an additional $100,000 in Open Payments penalties for allegedly failing to report physician ownership and payments. That was the companies’ separate reporting resolution, alongside the joint False Claims Act settlement with their owner.

Open Payments required disclosure of physician ownership interests and certain payments or transfers of value. In its complaint, the government identified the information it said should have been reported: the physician receiving a payment, its amount, date and nature, and the value and terms of the physician’s ownership interest. It alleged that both companies held FDA clearances and title to devices they distributed, bringing them within the reporting requirements.

The alleged omissions covered Medical Designs’ reporting for 2013 through 2018 and Sicage’s reporting for 2017 and 2018.

The complaint quoted an employee who asked an outside vendor for examples of forms used to track physician payments:

According to the complaint, employees drafted a reporting procedure that required the physician-owner’s approval, but he did not approve it.

After the Justice Department demanded information about ownership and payments, Medical Designs allegedly reported some ownership information but still omitted payments to its owner. The government’s account was of employees asking how to report payments while the owner’s approval never came.

The Profit Route Matters More Than Its Label

The same settlement covered another alleged payment route involving Medtronic: benefits through a restaurant the surgeon owned. The Justice Department alleged that Medtronic paid for meals and alcohol at Carnaval Brazilian Grill to induce the surgeon to use its SynchroMed II infusion pumps. The company distributions and the restaurant spending were different ways the government alleged that device selection enriched the surgeon.

Medtronic separately agreed to a $9.21 million False Claims Act and Open Payments settlement. Across the related matters involving the surgeon, his companies, Sanford Health and Medtronic, the Justice Department reported more than $33 million recovered.

A parallel appeared in the DS Medical case, where the government alleged that implant-manufacturer commissions rewarded arrangements for a surgeon to use the products in his operations. The government’s complaint there described a distributor with essentially no other significant physician customers. In both accounts, the distributor’s income depended on the implant choices of a particular surgeon.

What Evidence Is Needed to Prove Fraud?

We help insiders connect what they saw to the payments and claims a whistleblower case turns on. In this complaint, the government connected ownership and profit distributions to device selection, hospital purchases and government claims. Its examples included resale arrangements, changes in product use, hospital purchasing restrictions and communications about reporting payments to the owner.

The Companies Agreed to Federal-Program Exclusion

Medical Designs and Sicage each agreed to six years of exclusion from federal healthcare programs, as did their physician-owner. The Inspector General dates that agreement to April 30, 2021.

Two surgeons brought the whistleblower case, and the United States joined it. Their allocated whistleblower reward was a 20% share of the settlement proceeds. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know Who Profited From the Implant

If you saw device choices tied to an owner’s profits or physician payments left out of reporting, tell our whistleblower experts what happened inside the business. We build your case with you, bring in medical-device fraud whistleblower lawyers who understand physician-owned distributors, and stay beside you through the pursuit of a recovery.