In the starkest news to date that the “Discocare model” is rupturing, the first insurance company defense in a “Discocare model” auto accident case rendered its verdict last week on February 15 in the case of Sosa vs. Freedman.

In what can only be seen as a stunning rebuke for the Letter of Protection scheme at the heart of the “Discocare model”, a Broward County jury awarded the plaintiff a damage claim of only $10,000 in a $1.4m “Discocare model” suit.

This time the insurance company was no less than AIG.  So now we have State Farm, Progressive Insurance, and AIG all stepping up to confront this scheme.

This verdict just handed down Friday is the harshest blow to Arthrocare who planned on building their spine business through networks of lawyers.  Knowing that they can only get rewarded a total judgment of $10,000 the following questions loom:

•         Does Discocare now have to write off all of that receivable that was booked on this and future cases that might get litigated?
•         Will personal injury attorneys so readily take these cases on contingency?
•         Will insurance companies continue to routinely settle these cases without trial?
•         Will Doctors act so quickly to bill against letters of protection
•         Will plaintiffs so readily accept surgery deemed experimental if there is no cash payout?
•         How long until insurance regulators red flag this as an abuse of the reimbursement system?
•         How can Arthrocare justify 40% growth in its spine business?
•         How much of Arthrocare’s projected 40% growth in its spine products division is predicated on the “Discocare model” vs bill and hold accounting?

Note that this case started in 2006, before Citron had ever heard of the name Arthrocare.  It also makes you wonder how much of the Discocare receivable is tied up in litigation and might never get paid.

Extra Credit Question-  On today’s conference call Citron would like to ask Baker a plethora of questions but if we could only do 1 I guess this would be it.

“How can you explain to your investors that Arthrocare shared a fax # with a company who was your largest customer for spine products before being acquired on the last day of the year and if this bill and hold transaction was in fact with Discocare than how have you been advised by your auditors and your defense attorneys.”…..ok it’s a two part question.  This will separate the men from the boys (or the women from the girls) in the analyst community to see who will ask the difficult questions vs. who will cheerlead blindly.

Cautious Investing To All