Whistle Blown On Medicare Scam

For people with osteoporosis, a painful bone disease, a simple medical device can help. Doctors use it to inject bone filler and repair tiny fractures.

The procedure, called kyphoplasty, can be done in about an hour without putting the patient to sleep.

But Kyphon, the company that made the device, stood to make a lot more money if patients were admitted to the hospital for expensive overnight stays, reports CBS News correspondent Sharyl Attkisson.

"Were you aware that patients could get up sometimes an hour later and walk out?" Attkisson asks Chuck Bates, who was a top sales manager for Kyphon.

"I was aware of that," Bates says. " … the sales people were going out to hospitals and to surgeons saying, 'You need to do this as inpatient.'"

"Which was unnecessary?" Attkisson asks.

"Which was unnecessary," Bates says.

As an outpatient procedure, Medicare would pay about $1,000 for kyphoplasty. But as an inpatient procedure, Medicare paid up to $10,000 -- your tax dollars.

Kyphon's net sales skyrocketed. The sales force was rolling in dough.

"As a salesman, you were making a lot of money," Attkisson says.

"The average sales rep made $220,000 a year," Bates says.

But the good times came crashing down when Bates found out through a hospital consultant that it's improper under Medicare to admit patients for what should be outpatient surgery. He felt he had to act.

"I mean, as a sales person, you love to make money, but you want to make money ethically," Bates says.

Around the same time, in an entirely different division of Kyphon, Craig Patrick was also raising red flags internally. One day, while briefing his superiors, Patrick says a top Kyphon official cut him off.

"In the middle of the presentation, the general counsel stopped and says, 'It's not your job to police the sales force,'" Patrick says.

"So the head lawyer of the company was telling you this?" Attkisson asks.

"Absolutely. I told him I understood what my job was, but we were breaking the law every day, and we needed to fix it," Patrick says.

Though the two men never met, they both ended up taking their stories to the Justice Department, which began a fraud investigation.

Kyphon recently settled the case, admitting no wrongdoing, but paying taxpayers back $75 million. Under whistleblower law, Bates and Patrick get to split $14 million.

A company called Metronic bought Kyphon last fall for nearly $4 billion and told us the whistleblower concerns were investigated thoroughly and appropriate action was taken.

When Kyphon was sold, the executives got major payouts. That top lawyer who Patrick says told him to keep quiet reportedly received $14 million cash, which goes to show that kyphoplasty was good for patients and corporate executives, but it was taxpayers left feeling the pain.