Over the past two months, Citron Research has published numerous articles detailing Arthrocare’s toxic relationship with its billing subsidiary Discocare. Citron has received an incredible amount of unsolicited feedback from the medical community expressing outrage at the business practices of Arthrocare. Furthermore, these reports, reinforced with Arthrocare’s own documentation, have proven that:
Discocare had an insider relationship to Arthrocare from its inception.
Discocare doesn’t operate a mysterious and highly technical “algorithm” as claimed by CEO Baker.
In fact, it organizes a network of personal injury attorneys and high-volume surgery centers to create a stream of high-priced spine procedures executed primarily for financial rather than medical reasons.
These procedures are compensated based on a Letter of Protection executed with a personal injury attorney of an injured client.
It explicitly advocates doctors to “upcode” those procedures into an “open” surgical procedure, with dubious medical benefit, but a higher value in an injury lawsuit
Although Spine Products is their fastest growing division with the highest margins, it is also their smallest in terms of revenue. The largest division is sports medicine. Simple logic dictates that if the sports medicine business was so robustly healthy, Arthrocare would not risk “playing games” in their spine business. But instead, the same symptoms of deception are now showing up in their own flagship – the sports medicine business. Something is really wrong here, let’s look under the hood.
Playing “Hide the Acorn” with Device Reimbursement Services (DRS).
By Arthrocare’s own admission, as described by company presentations at numerous investment conferences, the most important driver of growth and margin is their new billing “model”. Yet, why is it that no one had even heard of Device Reimbursement Services until Mr. Baker mentioned it in passing during a single recent conference call? (Even then, only by its acronym “DRS” ?) . DRS has become the billing company for Arthrocare sports medicine. To anyone applying critical thought to this situation, it is obvious that something isn’t kosher.
On a recent conference call CEO Mike Baker lost his footing when trying to explain DRS to a caller. When asked why Device Reimbursement Services (a subsidiary of Arthrocare) and Discocare (purportedly an independent company at the time) could possible have shared the same fax number for 6 months prior to its “acquisition”, Baker answered that it was a mistake made by the web developer.
Feb 19, 2008 Earnings Conference call excerpt:
Mike Baker “Yeah, then people developed their website for DRS they developed a website for this picture, I think they just put the wrong fax number on it. As soon as someone pointed out, we corrected it.”
Caller And it could be six months to notice that you had the different — the wrong numbers.
Mike Baker The DRS subsidiary to be clear was the people are located here in Austin, the subsidiary was established in a different place than DiscoCare. So do you have another question or is that it?
Caller Yeah. But you didn’t answer this question yet. It also says it’s located in Sanford [Device Reimbursement,] is it located in Sanford?
Mike Baker That’s where it’s incorporated, yes.
Mike Baker We have a facility in Sanford and that’s where that’s located just like…
It is the opinion of Citron that Arthrocare has done everything they can to hide the true ownership of Device Reimbursement Services so the insurance companies do not know it is a division of Arthrocare. Just look at the website.
There is no reason why the first line of the “About Us” page should begin with “based in Sanford, Florida”. Nothing related to Device Reimbursement is based in Sanford. It became too much for Mike Baker to handle when he stumbled on his words and said: “well, that is where it is incorporated, yes…”
Here are photos of this “office” in Sanford. Certainly no billing company here. Actually according to Arthrocare’s 10k filing from last year, “Also in the United States, we lease approximately 2,000 square feet in Sanford, Florida, which is used to house and distribute trade show booths and other promotional materials.”
Baker explains the Sanford reference by saying that the company is incorporated there.
Unfortunately, that is untrue! …In fact, DRS is incorporated in Nevada.
To make matters worse, in order to hide ownership of Device Reimbursement it is not incorporated by Arthrocare, but rather to a few senior executives. If you look at the above attachment you will see that in October the company removed the officers and directors of Arthrocare, replacing them with mid-level Arthrocare employees. What are they trying to hide?
Arthrocare has many subsidiaries and they all have their websites rolled into http://www.arthrocare.com/. Even Discocare, only one week after its announced acquisition, changed their website to reflect ownership by Arthrocare. Furthermore, every single page of every Arthrocare website displays Arthrocare’s copyright information. Yet, Device Reimbursement seems to live in a world by itself — not a single mention of Arthrocare on the entire DRS website.
The purpose of DRS is to engineer reimbursements from insurance companies — that is the actual intended target of the deception.
The deception continues to the promotional material. In the “Frequently Asked Questions” section of DRS’s marketing materials for physicians, the #1 question is: “Is this legal?” DRS reassuring answer states “DRS has more than 10 years as a national provider.” That statement is a lie. They were established in 2007…Why lie?
Compare the legal disclaimers for DRS and Discocare. Will the analysts be able to keep a straight face when Baker is forced to claim the webmaster just inserted paragraph after paragraph of legal disclaimers – an entire page — for a wholly-owned subsidiary of a billion dollar Nasdaq company, just copied verbatim from another client?
Will analysts also be able to keep a straight face while explaining to Wall St. how Arthrocare was developing Device Reimbursement Services and Discocare was establishing “DRS Solutions” ( www.drssolutions.net ) at the same time? And that the similarities in name are just a coincidence?
This is critical is for two reasons. First, if Discocare was in fact controlled by Arthrocare prior to its hastily completed acquisition, then Arthrocare has been committing fraud on the medical, insurance, and securities industries. Second, if we can’t believe management on a simple thing like a fax number or a website’s content or its ownership, then how are we supposed to believe anything management tells us? How many more lies have to be exposed before it becomes obvious this is a business in major trouble?
Just because Arthrocare has slowing growth and has masqueraded by committing fraud does not mean there is no value to this company. There should be no shame in operating a legitimate $500 million company. However, when ego gets in the way of medical, insurance, and securities regulations, as well as shareholder interests, a bad brew is stewing in the pot. This story now requires maintaining too many lies fabricated by management, and the job of juggling them is becoming increasingly burdensome. For now, we sit back and watch it unravel.