March 05, 2020

Sanford Health False Claims Act Settlement: The Inherent Risks of Engaging with Physician-Owned Distributorships

By Hamza Siddiqui, Esq., Dallas, TX

What is the Case, Who was Involved and What were the Allegations?

On October 28, 2019, the United States Department of Justice (DOJ) entered into a settlement agreement with Sioux Falls, South Dakota-based hospital entities Sanford Health, Sanford Medical Center and Sanford Clinic (collectively, Sanford) for $20.25 million to settle claims for alleged violations of the False Claims Act (FCA) for knowingly submitting false claims to federal healthcare programs resulting from violations of the Anti-Kickback Statute (AKS) and for performing medically unnecessary spinal surgeries.1

The alleged violations stem from Sanford’s employment of a neurosurgeon, Dr. Wilson Asfora, whom it knew was implanting devices that were medically unnecessary and who was receiving improper remuneration from the use of these devices through a physician-owned distributorship (POD) arrangement.

Sanford was warned by Asfora’s physician colleagues and others that Asfora was improperly receiving kickbacks for his use of implantable devices distributed by his POD. They also expressed their concerns that the devices being implanted were medically unnecessary in whole or in part and were being implanted for financial considerations.  However, Sanford continued to employ Asfora and submit claims to several federal programs, including Medicare, Medicaid, the TRICARE Program and the Department of Veterans’ Affairs2 for surgeries performed by Asfora at its facilities.  Two neurosurgeons who had expressed concern to Sanford filed a qui tam lawsuit in the United States District Court for the District of South Dakota pursuant to the qui tam - whistleblower provisions of the FCA.

The False Claims Act

The FCA, 31 U.S.C. §§ 3729 - 3733, prohibits knowingly submitting false claims to the government, causing another to submit a false claim to the government or knowingly making a false record or statement to get a false claim paid by the government.  Knowledge of a false claim is defined as either (1) actual knowledge of the information, (2) deliberate ignorance of the truth or falsity of the information, or (3) reckless disregard of the truth or falsity of the information. Therefore, a specific intent to defraud is not necessary under the FCA.  Claim is defined as any request or demand, whether under a contract or otherwise, for money or property made directly to the federal government or to a contractor, grantee, or other recipient.

The FCA permits private persons to file suit for violations of the FCA on behalf of the government.  Known as a “qui tam” action, the suit is filed in the name of the government, and the person bringing the action is referred to as a “relator.”  The government may elect to intervene and proceed with the action within 60 days after it receives both the complaint and the material evidence and information, during which time the qui tam complaint remains under seal.

FCA violations can be found when claims are submitted resulting from violations of the AKS.3

The Anti-Kickback Statute

The alleged FCA violations Sanford committed were based on Sanford knowingly submitting claims that resulted from an improper kickback. The AKS, 42 U.S.C. § 1320a-7b(b), is a criminal statute which states that it is a felony for any person to knowingly and willfully offer, pay, solicit, or receive anything of value (i.e., “remuneration”) in return for a referral or to induce generation of business reimbursable under a federal healthcare program.  The statute covers payors of kickbacks as well as those who receive kickbacks, and covers anything of value in return for purchasing, leasing, ordering, arranging for, or recommending the purchase, lease, or ordering of any item or service that is reimbursable by a federal healthcare program.4

What Is a POD and What Regulations Are in Place for PODs?

A  POD is an entity owned by a physician which profits from the sale, or arrangement of the sale, of implantable medical devices that are ordered by the POD’s physician-owners for use in medical procedures and surgeries they perform on their own patients.5  The U.S. Department of Health and Human Services’ Office of Inspector General (OIG) has issued guidance relating to PODs, stating that they are inherently suspect because they may constitute an illegal financial benefit under the AKS.6  In particular, the OIG has stated that such arrangements “should be closely scrutinized under the fraud and abuse laws” due to the “strong potential for improper inducements between and among the physician investors, the entities, device vendors, and device purchasers.”7  Certain characteristics of PODs make them particularly susceptible to fraud and abuse, and pose a danger to patients.

Potentially problematic attributes of PODs include, but are not limited to: “(1) selecting investors because they are in a position to generate substantial business for the entity, (2) requiring investors who cease practicing in the service area to divest their ownership interests, and (3) distributing extraordinary returns on investment compared to the level of risk involved.”8  When PODs possess these or other similarly suspect characteristics, four major concerns associated with kickbacks are triggered:

  • Corruption of medical judgment,
  • Overutilization,
  • Increased costs to the federal healthcare programs and beneficiaries,
  • Unfair competition.9

PODs may cause their physician-owners to become financially incentivized to both perform more procedures and/or more extensive procedures than medically necessary, and to use their own POD-distributed medical devices in said procedures in lieu of other, more medically appropriate devices.  This creates a serious risk of harm to patients, as well as abuse and fraud which could fall under the AKS.10

The OIG points out that of significant concern, and where there is increased potential for abuse, is in the context of implantable medical device PODs, since these devices are often “physician preference items,” which means “that both the choice of brand and the type of device may be made or strongly influenced by the physician, rather than being controlled by the hospital or ASC [ambulatory surgical center] where the procedure is performed.”11  The OIG has also deemed that mere notice or disclosure to the patient of a physician-owner’s financial interest in the POD is not sufficient to prevent fraud and abuse because it may be considered a part of the physician’s testimonial (i.e., why the patient should patronize that facility or physician) and does not convey the conflict of interest present.12

Intent of Parties and ‘Red Flags’ for PODs

The lawfulness of a POD depends upon the intent of the parties involved.  The OIG has shared a non-exhaustive list of potential factors which may be “red flags” for PODs, suggesting these motives and the PODs themselves may be suspect.  One such characteristic is when physician-owners “condition their referrals to hospitals or 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.”13  The OIG has also noted that the criteria it has listed in its guidance is not meant to be a framework to create a lawful POD, as there may be other traits which may still be found illegal and/or increase the potential for fraud and abuse.

In addition, PODs may also be red-flagged when the physician-owners:

  1. “are few in number, such that the volume or value of a particular physician-owner’s recommendations or referrals closely correlates to that physician-owner’s return on investment, or
  2. alter their medical practice after or shortly before investing in the POD (for example, by performing more surgeries, or more extensive surgeries, or by switching to using their PODs’ devices on an exclusive, or nearly exclusive basis).”14

The OIG has stated that “[t]he risk of fraud and abuse is particularly high in circumstances when such physicians-owners are the sole (or nearly the sole) users of the devices sold or manufactured by their PODs.”15

While the generation of profits by a POD is not in and of itself a violation of the AKS, the OIG has expressed that disproportionately high profits “may trigger heightened scrutiny.” This is because such high profits increase the chances that one purpose of the arrangement --- note that under the AKS, even if just one purpose of the scheme is to induce referrals, the law is violated16 --- is to profit from physician-owners’ ability to prescribe and have purchased their own medical devices for their patients.  This could also likely result in the physician-owner’s medical judgment being swayed or warped by his/her own financial incentives.

The POD’s Impact on the Sanford Settlement

In the Sanford settlement, its employee, Dr. Asfora performed surgeries involving devices distributed from PODs in which he had a financial interest.  Sanford was “repeatedly warned” that Asfora was performing medically unnecessary procedures utilizing the devices in which he had a “substantial financial interest,” and Sanford was aware of the heightened compliance risks associated with PODs.17  Yet it continued to employ the physician-owner and benefit from false claims for medically unnecessary procedures submitted to federal healthcare programs.

Such actions by Sanford implicated one of the major issues with kickbacks, namely, increasing the costs of federal healthcare programs for beneficiaries.  One of the goals of the AKS is to prevent such abuse and fraud.

Another goal is to prevent the corruption of medical judgment, which was also at issue in the Sanford settlement.  Asfora, by owning the POD that distributed the implantable devices, was financially incentivized to compromise his medical judgment in order to utilize clinically inappropriate devices in medically unnecessary procedures.  These actions pose substantial risk to patients’ health, placing financial profits above the health and welfare of individuals who entrusted Sanford and its physicians with providing medically sound treatment.  Sanford knowingly continued to allow Asfora to jeopardize the health and safety of its patients in favor of financial benefit and submitted claims to federal healthcare programs for these procedures, resulting in the DOJ’s investigation and settlement to prevent similar abuses in the future. 

Lessons Learned

Through this settlement, the DOJ has made it clear that purchasing devices from PODs remains an “inherently suspect” activity. Facilities who knowingly engage with PODs must be on heightened alert for suspicious, fraudulent, or abusive activity by physician-owners or other parties involved.

Physician-owners of PODs are also not immune from government enforcement. The DOJ has filed a complaint with the U.S. District Court for the District of South Dakota against Asfora and his PODs Medical Designs LLC and Sicage LLC for alleged violations of the FCA for kickbacks paid to Asfora.18

  1. Press Release, U.S. Department of Justice, Sanford Health Entities to Pay $20.25 Million to Settle False Claims Act Allegations Regarding Kickbacks and Unnecessary Spinal Surgeries (Oct. 28, 2019), available at https://www.justice.gov/opa/pr/sanford-health-entities-pay-2025-million-settle-false-claims-act-allegations-regarding.
  2. Settlement Agreement 1 (Oct. 25, 2019) (citing from settlement agreement for United States ex rel. Bechtold, et al. v. Asfora, et al., No. 4:16-cv-04115-LLP (D.S.D.)).
  3. Off. of Inspector Gen., U.S. Dep’t of Health and Human Servs., A Roadmap for New Physicians - Fraud & Abuse Laws, available at https://oig.hhs.gov/compliance/physician-education/01laws.asp.
  4. Staman, J., Cong. Research Serv., RS22743, Health Care Fraud and Abuse Laws Affecting Medicare and Medicaid: An Overview 4 (2010), available at https://www.adea.org/documents/Section1/(1.3.1)-Anti-Kickback-Statute.pdf.
  5. Off. of Inspector Gen., U.S. Dep’t of Health and Human Servs., Special Fraud Alert: Physician-Owned Entities (2013), available at https://oig.hhs.gov/fraud/docs/alertsandbulletins/2013/POD_Special_Fraud_Alert.pdf
  6. Id.
  7. Id. (citing Letter from Vicki Robinson, Chief, Industry Guidance Branch, Department of Health and Human Services, OIG, Response to Request for Guidance Regarding Certain Physician Investments in the Medical Device Industries (Oct. 6, 2006)).
  8. Off. of Inspector Gen., U.S. Dep’t of Health and Human Servs., Special Fraud Alert: Physician-Owned Entities (2013), available at https://oig.hhs.gov/fraud/docs/alertsandbulletins/2013/POD_Special_Fraud_Alert.pdf.
  9. Id.
  10. Id.
  11. Id.
  12. Id. See also 64 Fed. Reg. 63,518, 63,536 (Nov. 19, 1999) (explaining similar rationale applied for the safe harbor rule for ASCs).
  13. Off. of Inspector Gen., U.S. Dep’t of Health and Human Servs., Special Fraud Alert: Physician-Owned Entities (2013), available at https://oig.hhs.gov/fraud/docs/alertsandbulletins/2013/POD_Special_Fraud_Alert.pdf.
  14. Id.
  15. Id.
  16. Id.
  17. Press Release, U.S. Department of Justice, Sanford Health Entities to Pay $20.25 Million to Settle False Claims Act Allegations Regarding Kickbacks and Unnecessary Spinal Surgeries (Oct. 28, 2019), available at https://www.justice.gov/opa/pr/sanford-health-entities-pay-2025-million-settle-false-claims-act-allegations-regarding.
  18. Press Release, U.S. Department of Justice, United States Files False Claims Act Complaint against South Dakota Neurosurgeon and Physician-Owned Distributorships (Nov. 14, 2019), available at https://www.justice.gov/opa/pr/united-states-files-false-claims-act-complaint-against-south-dakota-neurosurgeon-and.
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Hamza Siddiqui

Dallas, TX

Hamza Siddiqui is a healthcare attorney based out of Dallas, Texas. He advises on healthcare business operations, nursing issues and specialty pharmacy.  He is an avid Los Angeles Laker and Liverpool Football Club fan. He may be reached at Hamzasiddi13@gmail.com.