Citron Research exposes yet another secret subsidiary operating in the shadows at Arthrocare.


“Oh What a Tangled Web We Weave When First We Practice To Deceive”
Sir Walter Scott

In our last report, Citron Research presented a historical record of the Arthrocare CEO pulling the wool over investors’ eyes.

On January 18th, 2007 Arthrocare held a conference call with Bear Stearns with the intention of clearing up the issues surrounding the Discocare acquisition. We now observe history repeating itself – Mr. Baker is up to his old tricks again.

The noise surrounding Arthrocare has been deafening.  On one hand you have the bears, who believe there is a serious problem in the Arthrocare spine division as exhibited in the shenanigans at Discocare.  On the other hand you have … management. 

The greatest line in the conference call came from Mr. Baker, who states, “We keep scratching our head wondering what the next improbable story will be.”  Well, Mr. Baker, you lobbed it right to us.

Introducing Device Reimbursement Services

To the head-in-the-sand analysts who believe that Arthrocare’s purchase of Discocare “put the genie back in the bottle” Citron says:  grab your magic wands … somebody’s going to have a lot of explaining to do.

Here we have yet another surgical device “billing solution” company.  This one is interesting because it attempts to maintain anonymity – nowhere does the website state who owns or operates this service.  No management team page with bios and photos, not even a contact name … hmmmm.  Is this supposed to inspire the confidence of legitimate medical practitioners?

DRS appears to be offering the same billing / coding facilitation for the Sports Medicine Division that Discocare is to the spine division.  There is only one catch….DRS was incorporated by Arthrocare.  Even though “Arthrocare, Inc.” is unstated anywhere on their website, all we have to do is look at the Florida Corporate Registry:

The officer is John Raffle, Arthrocare’s VP of Strategic Business Units, and the mailing address on the corporate registry is that of the Arthrocare headquarters.  Funny, there has been no prior disclosure of Device Reimbursement Services in any prior Arthrocare filings or conference calls.
What is most strange about the Device Reimbursement Services is the following:

  1. Arthrocare never discusses this business entity in any conference call or filing
  2. Arthrocare stated on their prior conference call that they attempted to start a billing company and were not successful.  Why did they not discuss DRS?
  3. Why on the DRS website does it not say Arthrocare anywhere?
  4. What transactions is the company hiding in this division?  And who do they think they are hiding it from?

Knowing that DRS is owned by Arthrocare, is it only Citron that believes it is strange that both DRS and Discocare :

… share the same fax number ? (yes this is way prior to the merger) 866-478-0925

… share almost identical disclaimers on their websites?

On the “about us” page you would think it would say Arthrocare somewhere…nope.  It starts off by saying “Based in Sanford, Florida”  That is another lie … they are based in Austin Texas — in the Arthrocare offices.  Well Mr. Baker, if Discoare is door #1 and DRS is door #2….wait till we show you door #3 that we will reveal to the investing public.  In the next week, Citron will post marketing materials and price lists that will prove that Arthrocare is lying to Wall Street.

Information Please

Someone should tell management that before you pull a scam, you have to let all your people in on it.  (Like the time we called Arthrocare last month – before the Discocare acquisition — and asked for Michael Denker, who was supposed to be working at Discocare and the receptionist put us right through to his voicemail.)

Just yesterday, we called the phone number for Device Reimbursment Services and spoke to Becky.  When asked who her boss was she said “Maggie” and gave us the phone number for Maggie at Discocare….hmmmm.  We then asked how long Maggie has been her boss even though she works for Discocare and Becky responded, “ever since I started working here in September”.

In the Company’s Own Words

The conference call was ostensibly staged with Bear Stearns to clear up all the questions and concerns about Arthrocare’s reliance on the troubling practices of these billing providers – so why the secrecy, Mr. Baker?

Instead of clearing anything up, the story just became more confusing.  In sharp contrast to customary acquisition disclosure practice, management did not disclose and would not discuss Discocare’s revenues, employees, or earnings – after ostensibly spending half the company’s cash to fund the acquisition.  For that matter, management could not even offer a straight answer as to how much the PDD product costs.  Rather, the call was filled with innuendo and lies; we will highlight just a few.

Mr. Baker repeatedly stated that the concerns surrounding the company amount to a negative rumor mill.  Someone should teach Mr. Baker the difference between a rumor and a fact.  The fact that Mark Izydore was convicted of fraud and went to jail is a fact.  The fact that Gary Carrol was charged with insurance fraud is also a fact.  The history of these two individuals in the founding of Discocare is troubling enough; isn’t the company’s unwillingness to disclose which employees are coming over to Arthrocare in the acquisition an obvious topic for disclosure?  Citron’s facts might not be friendly to Arthrocare, but that does not give the company license to reclassify them as rumor or innuendo.

How Much is the Device And Who Buys It?

So if Arthrocare will not answer anything about Discocare on the call, they could at least answer a simple question….how much does the PPD device cost?

On the same call this is what management told us, and we are just supposed to blindly take their word for it:

“ASP for the PPD device is about $1 thousand but not above $2 thousand”. 

Great, so they narrow it down to a 100% spread for the investment community.  Then they state :

“$7,500 that is the US list price for the PDD wand.”

Then Baker corrects:

“That is what we bill insurance companies”

… and then a few minutes later it gets mentioned,

“The attorney is actually the payer.”

The truth to these statements, that Arthrocare wants to double talk around, is that Discocare bills attorneys $7,500, which they receive under a letter of protection issuing from a Personal injury lawsuit, all part of the scheme.

When discussing what we discovered through court testimony, Baker mentioned that the testimony given was not even used in that trial and therefore we should ignore it.  What?  Just because it wasn’t used in that particular trial, the testimony by Arthrocare and Discocare employees was the first “key” to understanding the scheme.

When asked about why physicians would needlessly do the surgery, Baker answered:

“Clinicians won’t make any more money…there is nothing to that.  Discocare is careful about the surgeons they work with. “

Maybe Baker should have read this horror tale first:

On the call Baker states:

“We don’t do coding for doctors and we don’t advise doctors on coding”.

Citron is calling this a complete lie and Baker is committing fraud by saying this.  We have documents which clearly detail how Arthrocare coaches doctors on how to code for the procedures.  If Arthrocare sues us, we will show these documents in court.  Until then, we will not reprint them here in order to protect the confidentially of the doctors who were solicited by Discocare, and provided them.

Lastly, and most important to the unknowing patients, when asked if there is a conflict between the doctors and Discocare because of ownership Baker answers that no conflict exists because Dr. Cutler owns Discocaore and he is a podiatrist.  HELLO? 

Dr. Cutler also owns the Palm Beach Lakes Surgical Center, by far the largest provider of PDD procedures for Arthrocare.  The surgical center generates large surgical fees and Cutler is partners with the doctors who perform the procedures.  For that matter, Discocare is based out of those same offices.  That is clear conflict of interest.

The bottom line for Discocare – Arthrocare has transformed a poorly selling $1,200 product into a $7,500 receivable to a PI attorney, paid for under a letter of protection, as part of a system to upcharge minor recoverable injuries from auto accidents.

They’ve accomplished this by controlling a shadowy supply chain – from the injured, who gets more money in the settlement, to the PI attorney, to the collaborating health care providers to the billers to the insurance company – all without proven clinical evidence that the procedure benefits the patient.  It remains the opinion of Citron that Discocare was intentionally set up by Arthrocare as an “unrelated third party” to do the “dirty work” of lining up a stream of customers for spinal procedures to be billed to insurance companies through PI attorneys.

Citron believes the entire business is highly questionable from a legal standpoint.   The lack of disclosure of the related parties and their problematic pasts with the insurance industry, and the lack of clinical data supporting the procedure, point to an unsustainable business model.  


It is no surprise to anyone that the principal of Citron Research holds a short position in Arthrocare.  When we first started to look at Arthrocare, backing out the spine business, which we still believe to be a sham, we believed the stock should trade at $30 a share.  Now that we see that management can not help itself but lie and deceive and that even the sports medicine division has to use an anonymous “front” organization to mask undisclosed billing and coding practices on which it depends for its revenue growth, who knows what the true value of this company is?�
Management has lost all credibility in its efforts to hide material facts from the investing public.

Cautious Investing To All.