Stryker’s OtisMed Guilty of Fraud
Charlie Chi and his board of directors at OtisMed Corporation were riding the razor’s edge in September 2009 with their cutting guide device, the OtisKnee.
Stryker Corporation was dangling a reported $100 million offer to buy OtisMed, but the FDA was denying OtisMed’s request for clearance to sell the device in the U.S. The deal and the future of the company balanced on that razor’s edge.
The decisions Chi and the company made at that moment ended up with a December 8, 2014 federal criminal and civil agreement costing Stryker $80 million, Chi his reputation and the product a 20 year ban from federal payment programs.
Introduction of the OtisKnee
According to the federal agreement document, here is how it all happened.
Charlie Chi, Ph.D. and others founded the OtisMed in California in 2005 with market introduction of the OtisKnee cutting guide device in 2006. By 2009, the company had grown to over 50 employees. Between May 2006 and September 2009, the company sold more than 18, 000 devices, generating revenue of approximately $27.1 million.
Approximately 75% of the devices were sold in conjunction with sales of Stryker’s Triathlon Total Knee Replacement System, with representatives of both companies marketing the product. The devices were also sold in conjunction with Biomet Orthopedics, LLC’s Vanguard Complete Knee System.
OtisMed had configured its software for use with the Triathlon and Vanguard systems, but not with other knees.
The company claimed that when surgeons used the device, “[the patient] would receive a knee replacement tailor made for [their] own normal (non-diseased) anatomy, and no one elses’s.” The company also claimed that surgeries using the device were accomplished “with less intra-operative decision-making required from the surgeon…the custom fit technology is all that is needed to ensure proper alignment. In addition, less bone cut and all ligaments are spared, preserving the feel of a more ‘natural’ feeling knee based on the patient’s normal knee function.” The company also claimed that surgeries performed with the device were safer than those performed using traditional instruments and resulted in less post-operative pain for patients.
No FDA Clearance
There was just one problem. None of those claims were evaluated or cleared by the FDA before using them in advertisements and promotional material.
On October 2, 2008, two years after selling the first product, OtisMed finally submitted a pre-market notification to the FDA seeking clearance to market the device. According to the federal settlement documents, the company falsely represented to physicians and other potential purchasers that the product was exempt from such pre-market requirements.
FDA: “Not Substantially Equivalent”
Eleven months later, on September 2, 2009, the FDA sent the company a NSE (not substantial equivalent) Letter and denied its clearance request. The FDA said the company had failed to demonstrate the OtisKnee was as safe and effective as other legally marketed devices.
The FDA noted several deficiencies in OtisMed’s data. For instance, insufficient preoperative information regarding patients included in the data, which was “important to identify whether or not there are certain Triathlon patients who would be contraindicated for the OtisKnee or at high risk for poor results, ” and that the missing data regarding follow-up was sufficient “to raise concerns about the failure rate of the Stryker Triathlon when implanted with the OtisKnee Orthopedic Cutting Guides, if some of these missing patients have experienced revisions or failures.”
The agency also said the company did not provide information about “whether and how frequently surgeons judged the cutting angles prescribed by the OtisKnee to be flawed such that the surgeons found it necessary to forgo using the OtisKnee guides during the surgical procedure.”
FDA Warning
Because the FDA classified the device into the Class III (Premarket Approval) category, the agency warned the company that “any commercial distribution prior to approval would be a violation of the Act.”
Illegal Shipments
But on September 9, one week after the denial, the company shipped approximately 218 OtisKnee guides from California to surgeons throughout the U.S.
Between the time of the FDA denial letter and the shipments, Chi and the company received advice from legal and regulatory counsel confirming that, based on the FDA NSE letter, it would be unlawful to continue distributing the device. On September 4, 2009, after a conference call regarding the NSE Letter, the company’s board unanimously decided to stop further shipments of the devices.
Following that meeting, Chi and others at the company, became concerned of the consequences of the FDA letter. Chi feared that suddenly stopping the shipment of the devices would have a negative impact on the brand, image, reputation, and value of the company its devices.
The concern was great because the company was set to be acquired by Stryker Corporation for as much as $100 million (including potential milestone payments) on the condition that FDA cleared OtisMed’s 510(k) submission for the device prior to closing of the acquisition.
So Chi developed a communications plan to reach out to surgeon and hospital customers to tell them that the OtisKnee device would not be available until FDA granted clearance. The plan was to notify surgeon and hospital customers on September 14, 2009.
But Chi was concerned that causing surgeons who had patients scheduled for surgeries within weeks of the NSE Letter to make last minute changes would exacerbate the negative impact of the NSE Letter on the company’s reputation and value.
Planning the Crime
According to the settlement documents, on the afternoon of September 9, 2009, Chi and his board had another conference call. During that call the board discussed the outside counsel’s advice. An hour after that call Chi went into the office of the corporation’s Director of Strategic Financial Planning and Analysis (employee #1) and directed the director to work with the company’s Director of Operations (employee #2) to organize a mass shipment of all OtisKnee devices which had been manufactured but had not yet been shipped due to the hold on shipping placed following the receipt of the NSE Letter.
Circumventing the FDA
Chi suggested that the employees could hide the shipments from the FDA by taking the package to an off-site shipping location instead of having them picked up by Federal Express at OtisMed’s facility or utilizing Chi’s personal Federal Express shipping account. He also suggested hand-writing the Federal Express airbills and backdating the shipment dates to September 4, 2009 or utilizing a temporary employee, rather than regular employees, to hand-write the airbills.
When Chi left the employee’s office, he stated “this conversation did not happen.”
He then sent the employee a Blackberry message that stated: “We are shipping everything out tomorrow. One shot.”
On September 10, the Director of Operations met with Chi and informed him that he or she objected to shipping the devices given the NSE Letter. Chi ordered the employee to carry out the directive. The company then shipped out approximately 218 devices on that day.
Blowing the Whistle
The employees decided not to follow Chi’s advice on avoiding detection suggested by Chi and on October 2, 2009, Richard Adrian, (not identified in the settlement documents) filed a qui tam action in U.S. District Court in New Jersey (U.S. ex rel. Adrian v. OtisMed Corp. et al.)
Admission of Guilt
Charlie Chi admits that he and the company intentionally distributing the device even after their application for marketing clearance had been rejected by the FDA. Chi and the company, now part of Stryker Corp., also agreed to pay more than $80 million to resolve related criminal and civil liability.
Chi and the company also admitted to violating the False Claims Act. Because the company needed data for the creation of OtisKnee, it directed health care providers to submit claims to Medicare, TRICARE, Federal Employees Health Benefits, and Medicaid programs, for MRIs that were not reimbursable because they were not performed for diagnostic use.
Chi and the company pled guilty to two different judges to distributing, with the intent to defraud and mislead, adulterated medical devices into interstate commerce in violation of the Federal Food, Drug, and Cosmetic Act (FD&C Act).
Penalties
The judges fined OtisMed $34.4 million and ordered $5.16 million in criminal forfeiture on December 8, 2014. In a separate civil settlement, OtisMed agreed to pay $40 million plus interest to resolve its civil liability.
OtisMed agreed to be excluded from Medicare, Medicaid and all other Federal health care programs for 20 years.
Stryker agreed to conduct a review and audit regarding whether other marketed devices have the appropriate FDA approvals and share the results of that audit with the government. Stryker also agreed to annual certifications from the president of Stryker’s orthopedics group and from Stryker’s board of directors regarding the effectiveness of the compliance program.
Chi faces a statutory maximum sentence of one year in prison and a $100, 000 fine, or twice the gain or loss from the offense, for each of the three counts of introducing adulterated medical devices in interstate commerce.
“Betrayed Trust”
“It is vital that products like the OtisKnee are subjected to the appropriate level of scrutiny, ” U.S. Attorney Paul J. Fishman said. “Patients seeking medical care are vulnerable; they are often afraid, and in pain. They should be able to trust their doctors. And they should be entitled to trust that the devices their doctors are using are safe, effective, tested, and approved. OtisMed and Charlie Chi betrayed that trust.”
Discussion
This is a fascinating development. In my practice we've seen similar outcomes with the revised protocol. The key differentiator seems to be patient selection criteria. Has anyone else noticed the correlation with BMI thresholds?
Great point. I'd push back slightly on the conclusion, the sample size in the cited study is too small to draw population-level inferences. That said, the directional signal is compelling and worth a larger RCT.
We implemented a similar approach last year. Early results are promising but we're still gathering 12-month follow-up data. Happy to share our protocol if anyone is interested.
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