Reliance Medical Systems: An Ownership Offer for the Surgeon Who Chooses the Implant

The Reliance Medical Systems kickback settlement required the spinal-implant distributor, two owners and two physician-owned distributorships to pay $1 million over allegations that they paid surgeons to use Reliance devices in their own patients. The alleged sales pitch offered surgeons a share of the profits their operations generated. For someone inside device sales, hospital purchasing or distributor accounting, the question is familiar and concrete: what happened to the surgeon’s income when the surgeon chose the implant?

Reliance, headquartered in Bountiful, Utah, settled after the first day of trial, according to the Justice Department’s July 1, 2022 announcement. The company, Apex Medical Technologies and Kronos Spinal Technologies were the corporate parties to the agreement. The government’s complaints describe how the investment offers, hospital purchases and payments allegedly worked together.

How Reliance’s Physician-Owned Distributors Worked

The government alleged that Reliance used physician-owned distributorships to sell spinal implants to hospitals where the physician-investors operated. In that arrangement, a surgeon could choose the device, have the hospital buy it, and then receive money from the business that made the sale. The government’s original complaint announcement describes Reliance’s founders creating more than twelve of these distributorships after founding the company in 2006.

Hospitals bought the products selected for the operation. The device choice and the purchase order came from different sides of the operating room.

That division is central to the industry. HHS-OIG’s 2013 Special Fraud Alert on physician-owned entities describes implantable devices as physician preference items because the surgeon can make or strongly influence both the brand and the type of implant. A physician-owned distributor puts that same surgeon on the selling side.

Reliance described its products as surgeon-designed and surgeon-tested. The government alleged that the company contracted with outside companies to make its implants and that their designs were indistinguishable from generally available products. The commercial question behind the case was what the ownership arrangement paid the surgeon to do.

The amended complaint alleged that 99% of Kronos’s revenue through July 2015 came from physician-investor referrals. In the government’s account, nearly the whole business came from the people who shared its profits.

Recruitment, Profit and Loyalty

The government alleged that Reliance selected potential investors for the business they could bring and tested that business before admitting them. The complaint describes an evaluation period in which a physician used Reliance implants while the company assessed the physician’s hospital, surgical volume and commitment.

According to the original complaint, the owners promised prospective investors their share of profits generated during that evaluation period, before they formally became owners. The recruiting conversation was about the physician’s purchasing influence as well as the product. The complaint quotes a co-owner of Apex and Kronos explaining why some physicians would not be invited:

The amended complaint describes another recorded pitch promising more money than the surgeon’s practice generated, with enough early income to pay for the surgeon’s children’s college education. It also alleges that an owner said the founders knew about the Anti-Kickback Statute and devised a plan around it.

Apex supplied a concrete example of the alleged economics. The government said one surgeon invested $5,000 and received $264,957 during the following eight months. According to the amended complaint, the surgeon had never used Reliance implants before agreeing to invest. It alleged that between April and December 2010, he used them in more than 90% of his spinal fusion surgeries.

The same complaint alleged that Community Memorial Hospital in Ventura paid Apex $1,421,484 for implants used in those surgeries during that period. Apex then shared profits from those device sales with the surgeon.

What Happened When Implant Use Fell

The government alleged that physicians could lose their ownership interests when they stopped producing enough business. According to the amended complaint, Reliance’s written compliance plans said an investor’s interest would not be repurchased for failure to use company devices. The complaint described the opposite practice.

One Kronos physician allegedly had to surrender his shares without compensation because he used too few Reliance implants. Another allegedly lost his shares when he planned to move to a state where Reliance did not sell implants. The original complaint also described pressure on a physician to stop using competitors’ products and increase Reliance’s share of his surgeries.

Those allegations give the ownership papers a practical meaning. In the government’s account, keeping the investment depended on continuing to send business to the distributor. The promised return and the threatened loss of ownership pulled the implant decision in the same direction.

What Hospitals Were Told About Ownership

Reliance allegedly concealed the financial relationships from hospitals buying its implants. The amended complaint describes letters to a Michigan hospital saying that no licensed physicians owned Apex, even though a surgeon on the hospital’s staff held an ownership interest.

It also alleges that Reliance denied a Kronos surgeon had received payments as a consultant or investor when the distributor had already paid him more than $3 million. The hospital’s inquiry and the distributor’s payment history told different stories.

The evaluation period allegedly helped with concealment, too. The original complaint quotes the founders discussing how a physician still evaluating the arrangement could tell hospital staff that he was not an owner. Yet the same complaint alleges that the physician had been promised a share of profits for that period. The absence of a completed ownership transaction was part of the presentation to the hospital.

HHS-OIG’s alert identifies concealed ownership, pressure to buy a distributor’s devices and forced divestiture as features that warrant scrutiny. It also explains why merely disclosing a financial interest to a patient leaves the underlying incentive in place: the physician can still profit from the decision about what goes into that patient’s body.

Concealed control appeared in a separate Colorado settlement involving Nexus Spine and 4D Spine. The government alleged that a neurosurgeon arranged for third parties to serve as the registered owners while he secretly controlled the distributors and their money. That parallel matters to an insider because the name on an ownership form and the person directing the business can be different.

Profit Payments Reappeared as Employment Income

The amended Reliance complaint alleged that the company later bought back physicians’ ownership interests and hired them as employees to avoid disclosing the ownership arrangements. According to the government, the change left the payment incentive intact.

For one Kronos surgeon, Reliance allegedly prescribed how many hours to report each month based on the profits his implant use generated. The complaint said his timesheets overstated the work he performed and that the assigned work largely consisted of short summaries of academic articles. It described repeated assignments to summarize the same article.

The government alleged that the payments continued to follow implant profits rather than time worked. A job title, a timesheet and an article summary gave the payment a new description. The alleged basis for calculating it stayed the same.

How Does Reimbursement Work for Medical Devices?

For the inpatient spinal surgeries described in this case, Medicare’s hospital payment included the expected cost of the implants. The hospital bought the devices and billed Medicare for the hospitalization. Physicians separately billed for their professional services.

The amended complaint explains that Medicare assigned the hospital claim to a diagnosis-related group based on the patient’s condition and treatment. That payment was intended to cover the hospital’s expected costs, including reasonable and necessary spinal implants. The surgeon’s choice therefore affected a hospital purchase inside a broader Medicare payment.

That is why the government’s False Claims Act allegations reached beyond the distributor’s ledger. The complaint alleged that payments induced implant use and caused hospitals and physicians to submit claims connected to that use. It also alleged that some surgeries were unnecessary or more extensive than the patients needed.

A 2020 analysis in the Journal of Forensic and Investigative Accounting, A Forensic Accountant’s Guide to the Most Potent Federal Laws Used Against Healthcare Fraud, explains why investigators have to connect the payment request, its falsity, what the participants knew and the conduct that caused it. In this case, those connections run through ownership records, payments, clinical decisions and hospital bills. Tying them together is the work we do with insiders.

The Anti-Kickback Statute addresses payments intended to induce federally reimbursed business. In the Reliance case, the government alleged that an investment opportunity and the resulting distributions bought influence over device selection. Patients faced the clinical consequences, Medicare paid for the care, and competing suppliers had to win purchases against a product that allegedly paid the surgeon back.

The Civil Settlement at Trial

The United States brought the Reliance case directly in 2014. The settlement announced by the Justice Department covered Reliance, Apex, Kronos and two owners.

The agreement covers the conduct described in the government’s amended complaint. The settlement announcement separately reported more than $9.25 million previously recovered from owners of Reliance distributorships.

The amended complaint alleged that Reliance funneled more than $5.5 million in kickbacks through Apex and Kronos to five referring physicians between 2007 and 2012. The alleged payments reached well beyond the single surgeon’s investment described above.

The Apex Surgeon’s Unnecessary Implants and Surgeries

The Apex surgeon’s treatment decisions also became the subject of a separate False Claims Act case brought by two physicians. The government joined their medical-necessity claims while pursuing its own kickback case against the Reliance defendants.

The government’s complaint in that separate case alleged that the surgeon performed a seven-level laminectomy and fusion on a patient who needed only a two-level discectomy. It also alleged that operative notes described hardware that had not been placed:

The separate criminal case produced admissions about the financial incentive. As the Justice Department’s January 2017 account of his guilty plea reports, the surgeon admitted agreeing to persuade his hospital to buy Apex devices in exchange for the opportunity to invest and share profits. He admitted concealing his involvement from hospitals and surgical centers.

In that guilty plea, he also admitted that Apex’s financial incentives caused him to use more implants than his patients medically needed and, on some occasions, to refer patients for unnecessary or more complex surgery. The same announcement describes his admissions about his Michigan practice: billing for instrumentation he had not provided and dictating operative reports that he knew would support fraudulent insurance claims.

What Evidence Is Needed to Prove Fraud?

For a case involving physician-owned implant distributors, the evidence connects the promised financial return to the device decision, the hospital purchase and the government claim. Reliance’s complaints make those connections concrete: investment terms, recorded recruitment, distributor payments, hospital ownership inquiries, operative notes and claims.

The amended complaint also alleged that Reliance generated daily surgery reports and that its founders reviewed them closely. Emails allegedly celebrated unusually high surgical volume and extensive fusion procedures. Those reports put the company’s knowledge of implant use beside the payments generated by that use.

A distributor accountant may understand how a physician’s payment was calculated. A salesperson may know what the recruitment offer promised. Hospital purchasing staff may know what the vendor said about ownership, while clinical and billing staff see the operation and the claim it produced. Our work with insiders is to connect those views into a case about the decision and the payment behind it.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What the Implant Choice Was Worth

If you saw surgeon payments calculated from implant sales, an ownership interest kept from a hospital or hours invented to justify a distribution, talk with our whistleblower experts. We build the case with you and bring in medical device fraud whistleblower lawyers who understand physician-owned distributors and Medicare claims. We stay beside you as your knowledge of the business becomes the evidence behind the case.