UPDATE 1-Medtronic to pay $75 mln to settle fraud charges

(Adds background, share price, Medtronic reaction)

By Diane Bartz

WASHINGTON, May 22 (Reuters) - Medtronic Inc (MDT.N) agreed to pay $75 million to settle allegations that a company it acquired caused hospitals to submit false claims to Medicare, the Justice Department said on Thursday.

The department accused Kyphon Inc, which later became Medtronic Spine LLC, of marketing a minimally invasive back surgery as a more expensive inpatient treatment rather than an outpatient procedure.

As a consequence, Medicare ended up paying more for some inpatient surgeries. Medicare is the government's health plan for the nation's 44 million elderly and disabled.

The surgery, known as kyphoplasty, treats compression fractures of the spine which can be caused by osteoporosis and other ailments.

Shares of Medtronic were up 1 percent at $50.96 in late morning trading on the New York Stock Exchange. Separately on Thursday, Credit Suisse raised its price target for Medtronic to $54 per share, up from $52.

The Justice Department case was prompted by two former Kyphon employees, who will receive $14.9 million as their share of the settlement under a federal whistleblower law.

Also as part of its settlement, Medtronic Spine agreed to comply with Medicare regulations and policies in the future.

Medtronic spokeswoman Marybeth Thorsgaard said the company knew about the government's case when it acquired Kyphon.

"There are no surprises associated with its resolution. The case had been publicly disclosed in Kyphon's SEC filings and was settled in principle with the government before the acquisition," she said in a telephone interview.

Medtronic said in a statement it would not incur an accounting charge for the settlement because Kyphon had a reserve on its books prior to the acquisition. (Reporting by Diane Bartz, editing by Dave Zimmerman)