Arthrocare Unit's Revenue Razzle-Dazzle

OKLAHOMA CITY -- No wonder Arthrocare (ARTC Quote) has been reporting explosive demand for its sports medicine devices.

"Basically, we provide the devices to them (customers) at no charge," Arthrocare Vice President David Applegate told TheStreet.com in a recent interview.

While Arthrocare CEO Michael Baker rushed to deny this activity, which could inflate reported sales, Applegate should know best. After all, Applegate oversees DRS -- the very billing division that's in charge of the alleged giveaway program.

Through this program, Arthrocare appears to be booking revenue that it hopes to recover from health insurers down the road. "Our revenue recognition procedures for sales generated by DRS are very straightforward," Arthrocare stated in a recent email to TheStreet.com. "When a surgeon orders a device through DRS, we agree on a contracted sales price. We recognize revenue at that contracted sales price when the device is shipped to the surgery center."

But Arthrocare never mentions actual money changing hands. Rather, the company implies that DRS simply earns the right to pursue reimbursement from health insurers instead. However, with insurers known to demand steep discounts -- and even reject entire claims -- the company may never see some of that money at all.

In fact, Arthrocare could face stiffer resistance than most. Critics say the company is seeking "carve-out" payments for devices that are normally covered under global surgery fees paid to physicians instead. Moreover, they add, Arthrocare is using DRS as a well-disguised front to request jacked-up rates for its supplies.