St. Jude Medical: Warranty Credits Promised, Device Returns Blocked

In the St. Jude Medical warranty credits settlement, the company agreed to pay $3.65 million to resolve allegations that it inflated replacement pacemaker and defibrillator costs by withholding credits owed to the Department of Veterans Affairs and the Department of Defense. The government alleged that St. Jude used the warranty promise to sell its devices, then failed to honor it when covered devices needed replacement. For someone who knows the returns or billing, the revealing part is where the credit could disappear before it ever reached the federal buyer’s invoice.

The Justice Department announced the civil False Claims Act settlement on May 31, 2012. St. Jude Medical, based in St. Paul, Minnesota, manufactured and distributed cardiovascular devices. Here, the government was a customer: Department of Veterans Affairs hospitals and Department of Defense military treatment facilities bought replacement implants from the company.

The Warranty Promise Helped Sell the Implant

St. Jude allegedly used device longevity and generous warranty credits to persuade physicians to choose its pacemakers and defibrillators over a competitor’s products. The Massachusetts U.S. Attorney’s account connects the promise to the product choice. A device was supposed to last, and the advertised credit offered financial protection if it failed while still covered.

That promise crossed the usual divide in implant purchasing. Physicians can make or strongly influence the choice of device, while the hospital is the institutional buyer. The physician hearing the sales pitch and the staff handling the replacement bill therefore see different parts of the same purchase.

According to the government, St. Jude knew it had failed to grant appropriate credits in a large number of covered replacements. The United States alleged that the company’s invoices consequently overstated what VA hospitals and military treatment facilities owed for the replacement devices.

The warranty helped make the product attractive when the physician was choosing an implant. When the buyer needed the benefit, the bill allegedly left it out. The alleged overcharges fell on taxpayers funding care for veterans, military members and their families.

A Blocked Return Could Stop the Credit

The Massachusetts announcement describes how St. Jude representatives allegedly kept failed devices from being returned:

The broader implant business helps explain why a representative’s role can extend beyond making the sale. A June 2011 Senate Finance Committee staff report describes manufacturers and their representatives providing hospitals with ordering, delivery, stocking, instrumentation and assistance in the operating room. Those services put representatives close to both the product and the institution using it.

The Federal Buyer Received the Replacement Bill

The alleged false claims were St. Jude’s overstated invoices to federal facilities. The warranty terms, the removed device and the replacement purchase all matter because they explain the amount the company asked the government to pay.

That is a different payment path from Medicare’s hospital device-credit rules. Medicare generally includes an implanted device’s cost in its payment for a hospital procedure or stay. Its replacement-device rules reduce certain hospital payments when a device is supplied free or carries a qualifying credit. Here, the Department of Veterans Affairs and the Department of Defense bought the replacement devices. The government alleged that the manufacturer charged those purchasers more than they owed after the warranty credit.

What Evidence Is Needed to Prove Fraud?

For a warranty-credit allegation like this one, the evidence connects the credit the buyer was entitled to receive, what happened to the failed device, what the manufacturer knew and what it billed. Our work with an insider follows those connections through the particular purchase.

The sales materials and warranty terms would show what the buyer was promised. Return instructions could explain why a failed device never reached the manufacturer. The replacement invoice and any credit memo would show whether the promised reduction reached the account. We connect those records with the insider’s account of who made the decisions, rather than treating a missing credit as an isolated billing entry.

Someone in sales may know the warranty pitch and the return instructions. Someone handling purchasing or accounts payable may know the replacement price and whether a credit appeared. Neither role necessarily sees the entire transaction. Our whistleblower experts work with you to connect the sales promise, the handling of the failed implant and the bill that followed it.

Two Whistleblowers Brought the Case

Two whistleblowers brought the allegations in federal court in the District of Massachusetts under the False Claims Act’s qui tam provisions. The Justice Department announced that they would receive a share of the recovery.

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

Guidant’s Separate Warranty-Credit Settlement

Guidant’s warranty-credit case produced a separate $9.25 million settlement announced on September 26, 2011. The government alleged that the Boston Scientific subsidiary withheld warranty credits or rebates on pacemakers and defibrillators removed while covered by warranty, inflating replacement costs to federal programs.

The parallel is the credit withheld by the manufacturer. Both cases connect the replacement of a covered device to an allegedly inflated cost. In St. Jude’s case, the government specifically alleged that sales representatives interfered with returns and identified invoices sent to Department of Veterans Affairs hospitals and Department of Defense military treatment facilities.

You Know Where the Credit Stopped

If you saw return instructions defeat a promised warranty credit or a federal facility billed without the credit it was owed, speak to one of our whistleblower experts about where the credit went missing. We build your strongest medical device whistleblower case with you around the device, the purchasing terms and the bill, and bring in medical device fraud whistleblower lawyers who understand federal purchasing. We stay beside you through the case, from your account of the missing credit to the pursuit of the government’s recovery.