COMPANY AND CEO PLEAD GUILTY TO DISTRIBUTING FDA-REJECTED MEDICAL DEVICE

FROM:  U.S. JUSTICE DEPARTMENT 

Monday, December 8, 2014

OtisMed Corporation and Former CEO Plead Guilty to Distributing FDA-Rejected Cutting Guides for Knee Replacement Surgeries

OtisMed Corp. and its former chief executive officer (CEO) admitted today to intentionally distributing knee replacement surgery cutting guides after their application for marketing clearance had been rejected by the Food and Drug Administration (FDA), and the corporation agreed to pay more than $80 million to resolve its related criminal and civil liability, the Justice Department announced today.

OtisMed and its CEO, Charlie Chi, 45, of San Francisco, pleaded guilty in federal court in Newark, New Jersey.  OtisMed pleaded guilty before U.S. District Judge Claire C. Cecchi to an information charging it with distributing, with the intent to defraud and mislead, adulterated medical devices into interstate commerce in violation of the Food, Drug, and Cosmetic Act (FDCA).  Judge Cecchi also sentenced the company today, fining OtisMed $34.4 million and ordering $5.16 million in criminal forfeiture.  In a separate civil settlement, OtisMed agreed to pay $40 million plus interest to resolve its civil liability.  Chi pleaded guilty before U.S. Magistrate Judge Mark Falk to three counts of introducing adulterated medical devices in interstate commerce.  Chi will be sentenced by Judge Cecchi on March 18, 2015.

“Americans must be able to trust that they are treated with medical devices that have been shown to be safe and effective,” said Deputy Assistant Attorney General Jonathan Olin for the Justice Department’s Civil Division.  “The Department of Justice will not tolerate companies and individuals that cut corners when it comes to the public’s health.”

“It is vital that products like the OtisKnee are subjected to the appropriate level of scrutiny,” said U.S. Attorney Paul J. Fishman for the District of New Jersey.  “Patients seeking medical care are vulnerable; they are often afraid, and in pain.  They should be able to trust their doctors.  And they should be entitled to trust that the devices their doctors are using are safe, effective, tested and approved.  OtisMed and Charlie Chi betrayed that trust.”

The civil settlement resolves claims filed under the whistleblower provisions of the False Claims Act, which permit private parties to file suit on behalf of the United States and obtain a portion of the government’s recovery.  The civil lawsuit was filed in the District of New Jersey and is captioned U.S. ex rel. Adrian v. OtisMed Corp., et al.

OtisMed was a privately held company when OtisMed and Chi committed the criminal conduct, and was later acquired by Stryker Corp., a medical technology company based in Michigan, in November 2009.  At the time the shipments were made in September 2009, Stryker executives were not aware that OtisMed and Chi had shipped cutting guides after the FDA had rejected the company’s application for marketing clearance for the device.  Stryker, OtisMed’s parent corporation, cooperated with the government with regard to Otismed’s pre-acquisition conduct throughout the investigation.  In addition to the criminal pleas and civil resolution, OtisMed also agreed to be excluded from participating in all federal health care programs for a period of 20 years and Stryker separately agreed to a series of compliance measures aimed at preventing future misconduct.

According to documents filed in this case and statements made in court:

Chi was among the founders of OtisMed in August 2005, and conceived of the OtisKnee orthopedic cutting guide, its primary product.  Chi acted as OtisMed’s president, CEO and board of directors’ chairman until OtisMed was acquired by Stryker in November 2009.  The OtisKnee was used by surgeons during total knee arthroplasty (TKA), commonly known as knee replacement surgery.  The surgical procedure requires a surgeon to remove the ends of the leg bones and to reshape the remaining bone to accommodate the implantation of an artificial knee prosthesis.  The cuts to the bone must be made at precise angles because they are critical to the clinical result; failure to achieve the correct angle in TKA procedures can result in failure of the bones and/or the implanted prosthetic joint.

OtisMed marketed the OtisKnee cutting guide as a tool to assist surgeons in making accurate bone cuts specific to individual patients’ anatomy based on magnetic resonance imaging (MRI) performed prior to surgery.  None of OtisMed’s claims regarding the OtisKnee device were evaluated by the FDA before the company used them in advertisements and promotional material.

Between May 2006 and September 2009, OtisMed sold more than 18,000 OtisKnee devices, generating revenue of approximately $27.1 million.

On Oct. 2, 2008, OtisMed submitted a pre-market notification to the FDA seeking clearance to market the OtisKnee.  The company had not previously sought the FDA’s clearance or approval and had been falsely representing to physicians and other potential purchasers that the product was exempt from such pre-market requirements.

On Sept. 2, 2009, the FDA sent OtisMed a notice that its submission had been denied, noting that the company had failed to demonstrate that the OtisKnee was as safe and effective as other legally marketed devices.  The letter warned OtisMed that distribution of the OtisKnee prior to approval would be an FDCA violation, and indicated the FDA viewed the product as a “significant risk device system,” which is defined as presenting a potential for serious risk to the health, safety or welfare of a subject.  Chi and others at OtisMed received advice from legal and regulatory counsel confirming it would be unlawful for OtisMed to continue distributing the OtisKnee.

Though the board of directors unanimously decided to stop further shipments of the devices, Chi and others at OtisMed were concerned that inconveniencing surgeons planning to use the OtisKnee in scheduled surgeries would exacerbate the negative impact of the FDA letter on the reputation of OtisMed and the device.  Chi directed OtisMed employees to organize a mass shipment of all OtisKnee devices that had been manufactured but had not yet been shipped and suggested ways for the employees to hide the shipments from FDA regulators.

At Chi’s direction, OtisMed shipped approximately 218 OtisKnee guides from California to surgeons throughout the United States, including 16 to surgeons in New Jersey.  Both Chi and OtisMed admitted that Chi ordered the distribution a week after the FDA denied OtisMed’s request for clearance.

“Companies and individuals put the public health at risk by not complying with FDA regulatory requirements for the pre-market review of medical devices,” said Acting Director Philip J. Walsky for the FDA’s Office of Criminal Investigations.  “We will continue to assure consumer confidence in FDA-regulated products by investigating and bringing to justice those who endanger patient safety by distributing unapproved surgical devices.” “When OtisMed and its CEO, Charlie Chi, distributed medical devices that were not FDA-approved, they violated the trust that patients extend to health care professionals,” said Special Agent in Charge Thomas O’Donnell of the New York Regional Office of the U.S. Department of Health and Human Services Office of Inspector General (HHS-OIG).  “This outrageous behavior triggered our agency to exclude OtisMed from participating in Medicare and Medicaid for 20 years.  We will continue to work with our law enforcement partners to protect federally funded health care programs and the patients who rely on those programs.”

The civil settlement resolves allegations arising from the marketing and distribution of the OtisKnee without receiving approval or clearance from the FDA for the device.  Specifically, the settlement alleged that in May 2006, OtisMed, through co-promotion activities with Stryker Corporation, began commercially distributing the OtisKnee without having received clearance or approval from the FDA for the device.  OtisMed continued to distribute the device while its application was pending and even after the FDA informed OtisMed that the product could not be lawfully distributed until FDA approved the device.

The settlement also alleged that OtisMed encouraged health care providers to submit claims for MRIs that were not reimbursable because they were not performed for diagnostic use, but rather solely to provide data for the creation of the OtisKnee.  Except as admitted in the plea agreement, the claims settled by the civil settlement agreement are allegations only, and there has been no determination of liability as to those claims.

The company will pay approximately $41.2 million, including interest, to resolve its civil liability for submitting false claims to the Medicare, TRICARE, Federal Employees Health Benefits and Medicaid programs.  Of that amount, approximately $41 million will be paid to the federal government.  Medicaid is funded jointly by the states and the federal government and participating Medicaid states will receive approximately $376,700 of the settlement amount.  As part of today’s resolution, the relator will receive approximately $7 million.

In addition to agreeing to continue to cooperate with the government’s investigation and maintain a compliance program, Stryker agreed to conduct a review and audit regarding whether other marketed devices have the appropriate FDA approvals and share the results of that audit with the government.  Stryker also agreed to annual certifications from the president of Stryker’s orthopedics group and from Stryker’s board of directors regarding the effectiveness of the compliance program.

Chi faces a statutory maximum sentence of one year in prison and a $100,000 fine, or twice the gain or loss from the offense, for each of the three counts of introducing adulterated medical devices in interstate commerce.

The guilty pleas and civil settlement are the culmination of a long-term investigation conducted jointly by the FDA’s Office of Criminal Investigations, under the direction of Special Agent in Charge Antoinette V. Henry, and HHS-OIG, under the direction of Special Agent in Charge O’Donnell.  Counsel to the HHS-OIG and FDA’s Office of Chief Counsel to the FDA also assisted.  The National Association of Medicaid Fraud Control Units, along with the Medicaid Fraud Control Unit of the Massachusetts Attorney General’s Office, assisted in coordinating the settlements with the various states.

Additional assistance was provided by the Defense Health Agency and the Office of Personnel Management–Office of the Inspector General.

This resolution illustrates the government’s emphasis on combating health care fraud and marks another achievement for the Health Care Fraud Prevention and Enforcement Action Team (HEAT) initiative, which was announced in May 2009 by the Attorney General and the Secretary of Health and Human Services.  The partnership between the two departments has focused efforts to reduce and prevent Medicare and Medicaid financial fraud through enhanced cooperation.  One of the most powerful tools in this effort is the False Claims Act.  Since January 2009, the Justice Department has recovered a total of more than $23.2 billion through False Claims Act cases, with more than $14.9 billion of that amount recovered in cases involving fraud against federal health care programs.

The government is represented in the criminal case by Chief Jacob T. Elberg of the U.S. Attorney’s Office Health Care and Government Fraud Unit and Trial Attorney Ross S. Goldstein of the Civil Division’s Consumer Protection Branch, and in the civil settlement by Assistant U.S. Attorney Charles Graybow of the District of New Jersey’s Health Care and Government Fraud Unit and Trial Attorney Charles Biro of the Civil Division.

U.S. Attorney Fishman reorganized the health care fraud practice at the U.S. Attorney’s Office for the District of New Jersey shortly after taking office, including creating the stand-alone Health Care and Government Fraud Unit to handle both criminal and civil investigations and prosecutions of health care fraud offenses.  Since 2010, the office has recovered more than $620 million in health care fraud and government fraud settlements, judgments, fines, restitution and forfeiture under the False Claims Act, the FDCA and other statutes.

OtisMed Documents

DOL ANNOUNCES RECOVERY OF $4.5 MILLIN IN BACK WAGES FOR UNPAID OVERTIME IN NATURAL GAS EXTRACTION BUSINESS

FROM:  U.S. LABOR DEPARTMENT 

US Labor Department helps more than 5,300 Pennsylvania and West Virginia 

oil and gas workers recover $4.5M in back wages for unpaid overtime

Multi-year initiative finds widespread and significant violations

PHILADELPHIA — Thousands of workers employed by contractors engaged in natural gas extraction in the Marcellus Shale region of Pennsylvania and West Virginia are putting in a fair day's work but not receiving a fair day's pay. An ongoing multiyear enforcement initiative conducted by the U.S. Department of Labor's Wage and Hour Division offices in Wilkes-Barre and Pittsburgh from 2012 to 2014 found significant violations of the Fair Labor Standards Act which resulted in employers agreeing to pay $4,498,547 in back wages to 5,310 employees. Wage and Hour Division investigators attribute the labor violations in part to the industry's structure.

"The Department of Labor is committed to protecting working families who bear the greatest burden when labor standards are violated," said U.S. Secretary of Labor Thomas E. Perez. "Recovering wages for these workers will help them pay the rent, buy food for the table and clothing for their children. And it will help ensure that employers who play by the rules and pay their employees the wages they have earned are not undercut by those who gain advantage by cheating the system and their workers."

"The oil and gas industry is one of the most fissured industries. Job sites that used to be run by a single company can now have dozens of smaller contractors performing work, which can create downward economic pressure on lower level subcontractors," said Dr. David Weil, administrator of the Wage and Hour Division. "Given the fissured landscape, this is an industry ripe for noncompliance."

The majority of violations were due to improper payment of overtime. In some cases, employees' production bonuses were not included in the regular rate of pay to determine the correct overtime rate of pay. Under the FLSA, all pay received by employees during the workweek must be factored in when determining the overtime premium to be paid. Investigators also found that some salaried employees were misclassified as exempt from the FLSA overtime provision, and were not paid an overtime premium regardless of the number of hours they worked.

Large energy providers such as Chesapeake Energy, Citrus Energy and Anadarko Petroleum are engaged in site exploration and production in the Marcellus Shale region. These companies own the mineral rights and secure the technical and specialized workforce needed to identify natural gas well extraction sites, develop well sites, complete drilling and bring wells on-line for production. The providers then use subcontractors for the majority of the work performed on the extraction, or "well" site. The subcontractors include drilling and geological services, land leasing and acquisition service, and oilfield support services companies.

Secondary subcontractors are often hired for more specialized work and ancillary support services like welding, laboratory services, landscaping, pipeline maintenance, safety and traffic control, and water treatment. Frequently, this level of services does not take place directly at the well sites.

"The more fractured an industry is, the more likely there will be significant labor law violations," said Mark Watson, regional administrator for the Northeast. "Companies further down the contracting chain feel pressured to provide services at a competitive and often cut-rate price point. They are also more likely to cut corners and offer a low bid to secure a business opportunity."

The ongoing enforcement initiative began in 2012. In addition to investigations in Pennsylvania and West Virginia, the agency is examining potential wage and hour violations like these in other parts of the country.

The FLSA requires that covered employees be paid at least the federal minimum wage of $7.25 per hour, as well as time and one-half their regular rates for every hour they work beyond 40 per week. The law also requires employers to maintain accurate records of employees' wages, hours and other conditions of employment, and prohibits employers from retaliating against employees who exercise their rights under the law. The FLSA provides that employers that violate the law are, as a general rule, liable to employees for back wages and liquidated damages payable to the workers.

MEDICAL BILLING PROVIDER SETTLE WITH FTC OVER CONSUMER PERSONAL HEALTH DATA COLLECTION

Medical Billing Provider and its Former CEO Settle FTC Charges That They Misled Consumers About Collection of Personal Health Data

Respondents Failed to Inform Consumers They Would Seek Detailed Info From Pharmacies, Insurance Companies and Laboratories

An Atlanta-based health billing company and its former CEO have settled Federal Trade Commission charges they misled thousands of consumers who signed up for an online billing portal by failing to adequately inform them that the company would seek highly detailed medical information from pharmacies, medical labs and insurance companies.

In a pair of complaints, the FTC charges that PaymentsMD, LLC, and its former CEO, Michael C. Hughes, used the sign-up process for a “Patient Portal” -- where consumers could view their billing history -- as a pathway to deceptively seek consumers’ consent to obtain detailed medical information about the consumers.

“Consumers’ health information is as sensitive as it gets,” said Jessica Rich, director of the FTC’s Bureau of Consumer Protection. “Using deceptive tactics to gain consumers’ ‘permission’ to collect their full health history is contrary to the most basic privacy principles.”
According to the complaints, PaymentsMD operated a website where consumers could pay their medical bills. In 2012, the company and a third party began developing a separate service known as Patient Health Report, designed to provide consumers with comprehensive online medical records. In order to populate the medical records, though, the company first needed to acquire consumers’ medical information. The complaints allege that the company altered the registration process for the billing portal to include permission for the company and its partners to contact healthcare providers to obtain their medical information.

According to the complaints, consumers consented to the collection of their health information by signing off on four authorizations that were presented in small windows on the webpage, displaying only six lines of the extensive text at a time, and could be accepted by clicking one box to agree to all four authorizations at once. Consumers registering for the Patient Portal billing service would have reasonably believed that the authorizations were to be used for just that – billing, according to the complaint.

The complaint alleges that PaymentsMD used the consumers’ registrations to gather sensitive health information from pharmacies, medical testing companies and insurance companies to create a patient health report. The information requested included the prescriptions, procedures, medical diagnoses, lab tests performed and the results of the tests, and more. The complaints allege the company contacted pharmacies located near the consumers, without knowing whether the consumers in question were customers of the particular pharmacy.
According to the complaints, in all but one case, the healthcare companies contacted for data refused to comply with the requests, as they included requests for information about minors, as well for individuals who were not customers of the healthcare company contacted. Once PaymentsMD began informing customers that it was attempting to collect consumers’ health information, the company received numerous complaints from consumers angered because they believed they had signed up only for a billing portal and not an online health record.

Under the terms of the settlements, PaymentsMD and its former CEO, Hughes, must destroy any information collected related to the Patient Health Report service. In addition, the respondents are banned from deceiving consumers about the way they collect and use information, including how information they collect might be shared with or collected from a third party, and they must obtain consumers’ affirmative express consent before collecting health information about a consumer from a third party.

The Commission vote to issue the complaint and accept the proposed consent order for public comment was 5-0. The FTC will publish a description of the consent agreement package in the Federal Register shortly. The agreement will be subject to public comment for 30 days, beginning today and continuing through Jan. 2, 2015, after which the Commission will decide whether to make the proposed consent order final. Interested parties can submit comments electronically (PaymentsMD, LLC | Michael C. Hughes) by following the instructions in the “Invitation To Comment” part of the “Supplementary Information” section.

NOTE: The Commission issues an administrative complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of up to $16,000.