April 2013 Volume 9 Number 8

New OIG Special Fraud Alert: Physician-Owned Medical Device Distributors Beware

By John E. Kelly and Danielle M. Sloane, Bass, Berry & Sims PLC, Washington, D.C.

AuthorAuthorAs previously noted in our October 2012 ABA article “Physician-Owned Medical Device Distributors: A Controversial Business Model,”1 the number of physician-owned medical device distributors (referred to generally as physician-owned distributorships or “PODs”) has increased in recent years despite being shrouded in controversy and intense debate regarding the legal viability of their structure. On March 26, 2013, the Department of Health and Human Services’ Office of Inspector General (“OIG”) took an aggressive position on this issue and made clear its skepticism of PODs in a Special Fraud Alert entitled “Physician-Owned Entities” (the “Special Fraud Alert”).2 The aim of the Special Fraud Alert is to address the anti-kickback concerns related to physicians holding ownership interests in companies that derive revenues from the sales of implantable medical devices which are utilized by the physician-owners for their patients.3 In the Special Fraud Alert, the OIG describes these arrangements as “inherently suspect” under the federal Anti-Kickback Statute,4 and indicates its general concern over the proliferation of PODs. The OIG also reminds the industry that the Anti-Kickback Statute ascribes liability to parties on both sides of an impermissible kickback and is violated if “even one purpose of the remuneration is to induce” referrals. Violations of the Anti-Kickback Statute can carry criminal and civil sanctions, result in exclusion from federal healthcare programs, and form the basis for violations of the False Claims Act.

In addressing PODs, the OIG first reiterates its longstanding concern regarding any arrangement that gives a referring physician the ability to earn profit for his or her referrals, including physician investment in an entity for which he or she generates business. The OIG identifies four major concerns with PODs that have questionable features: (i) corruption of medical judgment; (ii) overutilization; (iii) increased costs to federal healthcare programs and beneficiaries; and (iv) unfair competition. In its rationale, the OIG focuses on ensuring that physician judgment is not clouded by financial incentives. The OIG reasons that the financial incentives offered to POD physician-owners may induce the physician-owners to perform more procedures (or more extensive procedures) then are medically necessary. Also, the POD physician-owners may be induced to use the devices the PODs sell in lieu of other, potentially more clinically appropriate, devices. In the context of implantable medical devices, the OIG expresses particular concern due to the fact that such devices are typically chosen by the physician. The OIG dismisses patient disclosure as being sufficient to address these concerns.

While the lawfulness of a POD under the Anti-Kickback Statute turns on the intent of the parties, the OIG states that intent may be evidenced by a POD’s characteristics, including its structure, operational safeguards, and actual conduct of the individuals involved. The OIG indicates that it will look to conduct both during implementation and during ongoing operations. Thus, discussions prior to structuring a POD arrangement might also evidence the lawfulness of any particular POD. The OIG identifies the following list of characteristics as particularly concerning:

  • The size of the investment offered to each physician varies with the expected or actual volume or value of devices used by the physician.
  • Distributions are not made in proportion to ownership interest, or physician-owners pay different prices for their ownership interests, because of the expected or actual volume or value of devices used by the physicians.
  • Physician-owners condition their referrals to hospitals or ambulatory surgical centers (“ASCs”) on their purchase of the POD’s devices through coercion or promises, for example, by stating or implying they will perform surgeries or refer patients elsewhere if a hospital or an ASC does not purchase devices from the POD, by promising or implying they will move surgeries to the hospital or ASC if it purchases devices from the POD, or by requiring a hospital or an ASC to enter into an exclusive purchase arrangement with the POD.
  • Physician-owners are required, pressured, or actively encouraged to refer, recommend, or arrange for the purchase of the devices sold by the POD or, conversely, are threatened with, or experience, negative repercussions (e.g., decreased distributions, required divestiture) for failing to use the POD’s devices for their patients.
  • The POD retains the right to repurchase a physician-owner’s interest for the physician’s failure or inability (through relocation, retirement, or otherwise) to refer, recommend, or arrange for the purchase of the POD’s devices.
  • The POD is a shell entity that does not conduct appropriate product evaluations, maintain or manage sufficient inventory in its own facility, or employ or otherwise contract with personnel necessary for operations.
  • The POD does not maintain continuous oversight of all distribution functions.
  • When a hospital or an ASC requires physicians to disclose conflicts of interest, the POD’s physician-owners either fail to inform the hospital or ASC of, or actively conceal through misrepresentations, their ownership interest in the POD.5

Notably, however, the OIG indicates that even PODs that do not demonstrate any of the above suspect characteristics may be found unlawful and that other characteristics may increase the risk of fraud and abuse or evidence an unlawful intent. As an example, the OIG suggests that PODs that exclusively provide medical devices to its physician-owners pose a higher risk as compared to a POD that sells to facilities based on uninterested physician referrals.

While acknowledging that the Anti-Kickback Statute does not prohibit the generation of profits, the OIG indicates that disproportionately high rates of return for physician-owners will trigger heightened scrutiny and, combined with a low investment risk, is suggestive that one purpose of the arrangement is to reward referrals for use of the device. The OIG notes particular concern when either (i) there are few physician-owners such that their referrals closely correlate to their return on investment or (ii) physician-owners alter their practice after or shortly before investing in a manner that will improve their return on investment (e.g., increasing the number of surgeries or switching to the use of their POD’s device almost exclusively). The OIG states it does not wish to stifle innovation, but cautions that claims, particularly unsubstantiated claims, of device superiority do not negate an unlawful intent. The OIG states that the risk of fraud and abuse is particularly high when physician-owners are the sole or primary users of the device sold by the POD.

Toward the end of the Special Fraud Alert, the OIG provides a stark warning to hospitals and ASCs. The OIG reminds ASCs and hospitals that the Anti-Kickback Statute ascribes liability to both sides of an impermissible kickback. As a result, ASCs and hospitals may be at risk of violating the Anti-Kickback Statute if they enter into an arrangement with a POD and any one purpose of such arrangement is to maintain or secure referrals from the POD’s physician-owners.

In the end, the proliferation of PODs just hit a large speed bump. In light of the OIG’s new guidance, parties currently involved in a POD arrangement may want to carefully revisit its structure, as well as the motivation and prior conduct of the parties, to assess whether their current arrangement triggers cause for concern. If it does, restructuring may be necessary and beneficial. Similarly, those considering entering into a POD arrangement will want to consider their motivation, fully understand the risks associated with the proposal, and think about possible alternatives or ways to minimize exposure.


1John Kelly and Anne McNamara, Physician-Owned Medical Device Distributors: A Controversial Business Model , ABA Health eSource, Vol. 9, No. 2 (Oct 2012).
2

OIG Special Fraud Alert: Physician-Owned Entities (Mar. 26, 2013) available at https://oig.hhs.gov/fraud/docs/alertsandbulletins/2013/POD_Special_Fraud_Alert.pdf.

3

Although the Special Fraud Alert focuses on implantable medical devices, it seems equally applicable to other medical devices for which physicians influence purchasing decisions.

4

42 U.S.C. § 1395nn.

5

Id. at 3.


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