State Farm Settles Lawsuit Against Fla. Surgery Center

Feb. 26--An insurance giant's fight against a local orthopedic surgery center, its doctors and administrators over accusations that they wrongly drove up their costs has ended with a settlement in the tens of millions, according to sources close to the case.

State Farm's lawsuit against the Palm Beach Lakes Surgery Center and several others was supposed to have headed to a federal trial this month after U.S. District Judge Daniel T.K. Hurley rejected a request from the defendants' attorneys to have the civil racketeering case against them tossed. But days after their court-ordered mediation seemed to get them nowhere in November, State Farm attorneys informed Hurley in December that they were able to work out a settlement "on or about Dec. 5" after all, according to court documents.

The details of the settlement are confidential, and no attorneys on either side of the case would comment. But a source close to the case who did not want to be identified estimated that State Farm could receive as much as "$20 million" collectively from the surgery center, Drs. Jeffrey Kugler, Heldo Gomez and Jane Bistline, former center manager Gary Carroll and employee Mark Izydore.

This group is among a number of people and companies whose names have landed in court records nationwide over disputes surrounding ArthroCare's medical device, SpineWand. Many insurers claim the device was used on accident victims as part of a cooperative plan between accident injury lawyers, doctor offices and ArthroCare to drive up the costs of insurance settlements unnecessarily, and to bring themselves more money.

The relationship between the lawyers, doctors and SpineWand makers thrived using business practices called known as the "DiscoCare model." (DiscoCare Inc. was a subsidiary of ArthroCare.)

According to the lawsuits, the DiscoCare model worked like this: An accident victim would visit a personal injury firm to seek help on getting compensated for damages. The lawyers would then refer the victim to places such as the Palm Beach Lakes Surgery Center, where doctors would conduct diagnostic tests and offer a plan for treatment.

State Farm attorneys argued in the insurer's Jan. 2011 lawsuit that it appeared to be a foregone conclusion that the accident victims such places saw would require a procedure called a percutaneous discectomy -- a minimally invasive treatment to relieve pressure from compressed discs in the spine.

At the Palm Beach Lakes Surgery Center, Bistline would most often conduct the diagnostic test. State Farm lawyers said she rarely found a patient that she felt failed to meet the criteria for the procedure. Kugler and Gomez would then perform the procedure, charging as much as $35,000 for the surgery that usually lasted less than 20 minutes. They used ArthroCare's SpineWand each time.

Under the DiscoCare model, accident victims would receive letters of protection from their attorneys. These letters absolved them of any responsibility to pay the costs of their medical procedures if their accident lawyers failed to recover money from the insurance companies. If the accident attorneys prevailed, then the doctor and lawyers would take their fees from the victims' settlement.

Doctors would receive the SpineWand devices for free, and ArthroCare and DiscoCare would make profits from the settled accident claims.

Because operating the DiscoCare model took some coordination, State Farm officials alleged, go-betweens were necessary. That's where Gary Carroll and Mark Izydore came in. Izydore, who in the 1990s served time in federal prison for looting from a company he was hired to save from bankruptcy, is credited with helping to create the DiscoCare model. Carroll was once the manager for the surgery center.

Carroll and Izydore in court records have denied any wrongdoing. In a legal pleading filed in August, Carroll's attorneys Steven Robbins and Bruce Greene say Carroll didn't know DiscoCare even existed until 2008 -- when he saw his name in an article about ArthroCare on TheStreet.com -- an online financial publication he later sued for defamation. By then, Carroll said, he was no longer the manager at the surgery center.

Carroll, through his attorneys, said neither he nor Izydore ever had any dealings with State Farm.

"Gary Carroll and Mark Izydore never met to 'hatch' a scheme to defraud State Farm or any other insurance company," Greene wrote.

Still, Carroll and Izydore's names came up when the seemingly lucrative business model began to fall apart and ArthroCare shareholders turned their anger towards the company's leaders. They spilled details of the DiscoCare model in a lawsuit claiming that the company's leaders unjustly inflated their profit margins with DiscoCare revenues.

In 2009, ArthroCare officials announced that an internal investigation had uncovered some improper practices, such as encouraging physicians to use billing codes that "may have not properly described the procedure that was performed," as well as inaccurate reporting of DiscoCare's revenues.

ArthroCare President and CEO Michael Baker stepped down in the company shakeup. Then came the settlements.

By mid-2010, ArthroCare had paid nearly $7 million in settlements to insurance giants such as State Farm and Geico, according to filings with the U.S. Securities and Exchange Commission. And it didn't stop there. As late as December 2011, the SEC reported ArthroCare had to pay another $450,000 to insurance giant GMAC for SpineWand-related claims.

Though no law firms were defendants in State Farm's case, the insurance company took interest in the local mega-firm Steinger, Iscoe and Greene, according court records. Firm founder Michael Steinger's brother-in-law, Marc Nathanson, worked at the surgery center as late as 2010. And Matthew Iscoe, brother of firm founder Gary Iscoe, once worked as a regional manager for DiscoCare. The firm's leaders, through their attorneys, have long denied any wrongdoing.

Michael Steinger last year fought State Farm's requests to subpoena correspondence between him, Kuglerand others, calling the communication part of a "joint-defense" strategy. Hurley denied the request and ordered Steinger to turn over all such communications involving DiscoCare on which he was voluntarily copied.

Those emails could have been part of State Farm's case had the matter gone to trial.

The settlement however, is not final for Gomez. Since the lawsuit, he has filed for bankruptcy. That means his settlement with State Farm will have to be approved by the bankruptcy court, State Farm attorneys wrote in a letter telling Hurley they had reached a settlement.

If the bankruptcy court rejects the Gomez settlement, State Farm lawyers said, they will ask the judge to set his part of the case for a trial.

ArthroCare insurance settlements

Since 2009, ArthroCare has paid back more than $7 million to insurance companies that objected to billing practices of its DiscoCare subsidiary, which sells and promotes the SpineWand. ArthroCare admitted no wrongdoing.

June 1, 2009 -- $2.5 million to State Farm.

Dec. 8, 2009 -- $995,000 to Geico.

Feb. 23, 2010 -- $1.7 million to Allstate.

March 4, 2010 -- $1.5 million to Nationwide Mutual.

December 2011 -- $450,000 to GMAC.

Source: ArthroCare filings with the U.S. Securities and Exchange Commission.

The SpineWand case

The Palm Beach Lakes Surgery Center, and several of its former doctors and employees have fought a legal battle over their use of the SpineWand, a medical device whose manufacturers have paid insurance companies millions in settlements over alleged bad claims.

In December, according to court records, the doctors and surgery center owners settled a civil racketeering lawsuit in federal court with insurance giant State

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