ArthroCare investigation reveals impropriety; CEO steps down

Michael Baker, the president and CEO of ArthroCare Corp., is departing his post immediately amid revelations that the company engaged in improper behavior in its insurance billing and health care compliance practices associated with its spine business unit.

The company also said Wednesday that it is now under formal investigation by the Securities and Exchange Commission and the subject of investigations by U.S. Attorney’s offices in South Carolina and Florida. Baker remains, for now, on ArthroCare’s board. The company also announced the immediate resignations of Michael Moehring, the vice president and general manager of the spine unit, and Michael Denker, the director of sales development and training.

While the internal review, being conducted with the assistance of outside counsel Latham & Watkins LLP, is not yet complete, the ArthroCare’s audit committee has reviewed evidence that indicates that the company’s spine unit engaged in and may have caused others to engage in improper practices in certain instances by:

  • seeking separate reimbursement from insurers for company products in connection with procedures which were contractually reimbursed on a global basis;
  • making inaccurate statements in claims submitted to insurers regarding the place where particular procedures were performed;
  • providing physicians and insurers with descriptions of company technologies which had the effect of circumventing payor policies that did not cover such technologies;
  • recommending and advocating to physicians the use of a Current Procedural Terminology code to identify its coblation nucleoplasty technology that was not approved by the American Medical Association and may have not properly described the procedure that was performed.

These improper practices identified so far may have occurred since at least 2006.

Investigators were informed that certain sales and marketing personnel within the spine unit provided physicians and their billing staff with merchandise and administrative services at no charge potentially in exchange for their utilization of the company’s products. The audit committee has determined that company personnel at all levels lacked adequate health care compliance training and that company billing personnel lacked adequate training and supervision in insurance reimbursement requirements. In addition to considering and implementing remediation efforts, the committee is undertaking a review of such practices in other business units.

The company is unable to estimate the possible effect of the review on the ongoing restatement of its financial statements for the years 2000 through 2007 and the quarter ended March 31, 2008. ArthroCare also announced that the SEC has issued a formal order of investigation in the previously-disclosed investigation by the SEC’s enforcement division into the company’s restatement of financial results. As a result, the SEC now has the authority to subpoena witnesses and documents.

The company has also been informed by the U.S. Attorney’s office in the Southern District of Florida that the company and its DiscoCare subsidiary are targets of an investigation being conducted by that United States Attorney’s office and have also been informed that the United States Attorney’s office in North Carolina is conducting a separate investigation of the company, which is related to that being conducted in Florida. The company said it’s cooperating with the investigations being conducted by the SEC and the U.S. Attorney’s offices.

ArthroCare’s board has named David Fitzgerald as acting president and CEO. Fitzgerald, age 75, has been a member of the company’s board since 2003.

ArthroCare–mired for months in an ongoing accounting scandal–was pulled from the Nasdaq stock exchange in January. The company hasn’t filed a quarterly financial report since April 2008. ArthroCare first announced last July that it would have to restate earnings due to errors in its sales calculations. In December, the company expanded the scope of the restatement, taking it all the way back to 2000.


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