Credibility is like virginity; once you lose it, you can never get it back.

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Arthrocare like you’ve never seen it before:  A business model exposed by its own documents.

Under a cloud of gathering suspicion about the actual nature of its business, Arthrocare has had 3 opportunities over the last three weeks to get their story straight.  The first was the Jan 3 conference call dealing with the acquisition of Discocare; the next was the Jan 8 Needham Growth Stock Conference, and most recently the Jan 18 Bear Stearns conference call.  In each case, management has outright lied to investors and analysts about key topics relating to the company’s core business model and its future business prospects.  Something is disturbingly wrong here and it extends way beyond the spine business.

Citron Research has reviewed hundreds of pages of documents relating to Arthrocare / Discocare / Device Reimbursement Services (DRS).  We have decided to forward the entire package of documents to the Florida State Insurance Board along with the Attorney General.  But for your viewing pleasure, we exhibit a collection of documents that Arthrocare wishes you never saw.

As promised, Citron delivers the goods.  This is not just brief sound bites of propaganda, these are the techniques for manipulating the insurance reimbursement system – the “how-to” manual for a business model predicated on deception.  At first we thought the concerns of the company were limited to its fast growing spine business, but now we see that the problems extend into the sports medicine business via the mysterious DRS subsidiary.

DRS

Until yesterday shareholders of Arthrocare had never heard of DRS.   Interesting that we still don’t know if it is owned by Athrocare or not … either way it is devastating.  Nowhere on the website or any of the promotional material does it ever say that DRS is owned by Arthrocare.  To the contrary, their written materials go out of their way to attempt to disassociate themselves from Arthrocare by saying that they are based in Sanford, Florida … which is a lie.

DRS The Reimbursement Training Manual

DRS Training Manual (PDF)
Notice that nowhere on this document does it say that it is owned by Arthrocare.  Rather it tells the doctors that they will bill for the Arthrocare devices.  In line with the “Discocare Model”, doctors will charge more money for the same device by letting DRS submit the billing for the device.  After all, DRS is just an independent third party biller … or are they?

We especially like the page where it says:

  • DRS TARGETS ‘LOW HANGING FRUIT’
  • ARTC HIGH VOLUME SURGERY CENTERS

Frequently asked questions page for Device Reimbursement Services.
FAQ on DRS (PDF)

Question # 1 on the document says it all: “Is This Legal?”.  Whenever the first question you have to ask about something is “Is This Legal”… you know you have problems.  The answer goes on to state that DRS has over 10 years experience (funny for a company that was established in 2007).  The answer continues, stating that DRS is a private company … is it really?  To the best of our knowledge they are a subsidiary of Arthrocare.  If in fact they are a private company than someone should note that the officers of Arthrocare are operating an off balance sheet subsidiary out of the Arthrocare offices, and fully disclose all the related party transactions as such.

The last question on the FAQ is the most telling.  “We do not charge for this service.”   Why would a third party biller not look to make a profit?  Especially when it is rebating to the Doctor for the full price of the device!  (See question 6)

Product Price and Margin Manipulation

Arthrocare Pricelists (PDF)
We have already seen through numerous testimonies and documents that Arthrocare has increased the price of their PDD wand from around $1200 to around $7500.  All the time, their salesperson Jackie Marsh knew of no reason for the significant price increase.

We are seeing the same thing happen in the sports medicine business.  The two price lists above are for identical items just two months apart — notice the change of date (from Jan 2007 to March 2007) on the bottom of the page.  While some items remain unchanged, Arthrocare has increased prices on wand components by as much as 100% in only two months.

What Citron believes is going on here is the following:  Much like the “Discocare model”, if you control the reimbursement, than why not raise the price?  This has allowed Arthrocare to sell fewer products and raise revenues.  Furthermore, the doctor gets a rebate back at the higher sales price.  Hence the first question:  “Is this legal?”

If Arthrorcare had nothing to hide, then why would DRS not simply be called “Arthrocare Billing Solutions” and simply be a part of the Arthrocare website?  Arthrocare appears to be using DRS to manipulate their product margins, then providing quarterly “rebates” to doctors that is undisclosed on Arthrocare’s financials.  We can’t wait to hear whether Arthrocare claims it owns DRS or disavows ownership.  The company has a huge (Citron believes irreconcilable) problem either way.

A slideshow at Arthrocare Sales Meeting of Americas

ARTC Sales Presentation (PDF)
The past and future of Arthrocare is described in their own words at their annual sales meeting.  As we see the past was riddled with no reimbursement and case denial while the present has Discocare saving the day and getting doctors higher fees and more reimbursements.  What we found to be most interesting was this line

‘Personal Injury- A life-changing win for practices that “Get It” ‘

Please explain:  Is “get it” a euphemism for the willingness to manipulate the insurance system?

How to Sell Spine Prodcucts by Nikki Bryant — Territory Manager and Sales Trainer at Arthrocare.

Nikki Bryant Training (PDF)

This document makes the following points explicitly clear :

  1. Arthrocare does teach doctors how to code – in direct contradiction of CEO Baker’s vehement assertions to the contrary.
  2. The coding scheme (CEO Baker misleadingly calls it an “algorithm”) was established by the esteemed Palm Beach Surgical Center.
  3. The costs associated are so high that the sales rep actually has to carry around a WC authorization because physicians are incredulous at how high the fees are.
  4. They stress the importance of relationships with Personal Injury attorneys.

And so on and so on … a truly entertaining read.

Letter from medical practice to law firm as supplied by Arthrocare

ARTC Form Letter (PDF)

Notice that Arthrocare is coaching physicians on how to solicit attorneys.  Notice page 2 item 5 where Arthrocare mentions that the disc decompression surgery ranges from $44,000 to $60,000.  This pricing stands in stark contrast to Mr. Baker’s statement that he could not see any economic advantage of a doctor abusing the system.  Also, look how it throws the doctor in a place they should not be as the form letter states, “We will negotiate with you our fees when the case has been settled, but we need to be informed of your anticipated settlement offer for discussion.”  WHAT?  Are they supposed to be doctors or just cogs in a scheme to defraud.

Standard Law Firm Protocol For Plasma Disc Decompression Procedures

Law Firm Form (PDF)

In these pages we see that Arthrocare actually coaches the doctors on how to deal with law firms, and coaches law firms as to what the treatment will be. 

“The Law Firm identifies those clients whose injury and medical symptoms indicate that they may be candidates for the PDD procedure.”

Notice that is states again that the law firm is the one paying the bills (thanks to the auto insurance companies).

PI Checklist

Here is the convenient PI Checklist to make sure all the bases are covered.  Notice is states that Discocare’s letter of protection will be faxed to the Arthrocare Representative.  Why is that?  Why should a medical device manufacture care if the patient is paying by LOP or insurance, or for that matter cash?  Citron suggests that the only logical way to explain this requirement is if Arthrocare and Discocare were always related parties.

PI Checklist (PDF)

Please read this and ask yourself – in this process, who is diagnosing and directing the treatment for the patient, a doctor or a Personal Injury lawyer?

FAX GATE

Yesterday, Citron pointed out that the fax number on the Device Reimbursement Systems (DRS) recruiting page is the same number as Discocare’s fax number… and has been, for months prior to the completion of Arthrocare’s 12/31 acquisition of Discocare.

If you are following this saga, we defy you to concoct a reasonable explanation for this fact that is consistent with Arthrocare’s disclosures about Discocare.

It was obviously such a hot button point for Arthrocare, that within hours of this info appearing on Citron Research’s website, the fax number for DRS was changed.  Now that’s fast customer service!  It is now on this page:

Today:
http://www.devicereimbursement.com/careers.aspx    512-391-3990
Yesterday:
http://209.85.173.104/search?q=cache:XXui1py0S-cJ:www.devicereimbursement.com/careers.aspx+device+reimbursement+and+careers&hl=en&ct=clnk&cd=6&gl=us     866-478-0925

Before the merger, when Discocare was supposedly an independent company and didn’t disclose its “special” relationship with Arthrocare, its employment page looked like this:

http://209.85.173.104/search?q=cache:K7WcdweWlHcJ:www.discocare.net/employment.html+Discocare+478-0925&hl=en&ct=clnk&cd=1&gl=us    866-478-0925    OOPS!

Which lie would Arthrocare like you to believe?   That the recently “acquired” Discocare wasn’t really a separate company after all?  Or that DRS and Discocare are both independent of Arthrocare, and just happen to be in the same shadowy business of manipulating insurance claims for fun and profit ?

Conclusion

The documents all have one common theme.  Arthrocare has now come to the realization that if they can control the billing, than they can control the pricing.  All of this comes at the expense of insurance companies, who might be slow to act, but when they do the blow is forceful and at times lethal.  Management of Arthrocare is running like a headless chicken as they change websites and hold conference calls spewing out lies after lies.  Citron has no doubt that the power of the truth and fairness will soon take its toll on Arthrocare and its band of merry liars.

Cautious investing to all.  And if your back is tweaked in a fender bender, get diagnosed by your own independent doctor, not a PI lawyer!