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TheStreet Open House

Arthrocare Device Use Draws More Scrutiny

"This is another milestone in Arthrocare's continued growth, as we continue to bring in-house those capabilities critical to our future," Arthrocare CEO Michael Baker boasted when announcing the transaction this January. "This acquisition will significantly enhance our capabilities to support all of our businesses with a reimbursement service offering" down the road.

By purchasing DiscoCare -- and then expanding its reach -- some feel that Arthrocare has invited serious trouble instead.

"Because of its acquisition of DiscoCare and its prior disclosures regarding marketing 'our DiscoCare model,' Arthrocare has placed itself in the middle of what appears to be a major investigation by the FBI into potential billing fraud," says one Arthrocare investor who has sold the company's stock short in anticipation of a fall. "Investors should now ask themselves this: Is Arthrocare an unintentional facilitator to what may be a multi-hundred-million-dollar insurance fraud, or is it a full accomplice?"

Arthrocare declined to comment for this story. In the past, however, the company has repeatedly proclaimed its innocence and that of DiscoCare.

It has stirred up suspicions, nonetheless.

Even before the FBI started seeking their help, car insurers were scrutinizing the so-called "DiscoCare model." Indeed, one of them had subpoenaed Arthrocare's leading executives -- including its CEO and its spine chief -- in an effort to prove that the DiscoCare model is actually a massive insurance scam.

Those subpoenas came shortly after Arthrocare purchased DiscoCare and officially took control of the company. Since then, Arthrocare has gone on to announce a looming restatement due to improper transactions with DiscoCare and some other firms that seem to resemble it.

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