OIG Special Fraud Alert – Physician Owned Distributors

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OIG recently published a Special Fraud Alert on physician-owned entities that derive revenue from selling, or arranging for the sale of, implantable medical devices ordered by their physician-owners for use in procedures the physician-owners perform on their own patients at hospitals or ambulatory surgical centers (ASCs). These entities frequently are referred to as physician-owned distributorships, or “PODs.” 

As noted by the FDA Law Blog, “This is not the first time the OIG has focused on PODS.  In a 2006 public letter, the OIG noted “an apparent proliferation of physician investments in medical device and distribution entities, including group purchasing organizations,” and stated that OIG guidance on joint ventures (which includes a safe harbor regulation on investment interests) would apply to such entities.”  The 2006 letter noted “the strong potential for improper inducements between and among the physician investors, the entities, device vendors, and device purchasers” and stated that such ventures “should be closely scrutinized under the fraud and abuse laws.”   

Accordingly, the Special Fraud Alert focuses on the specific attributes and practices of PODs that OIG believes produce substantial fraud and abuse risk and pose dangers to patient safety.  OIG reiterated its concern about the proliferation of PODs and OIG’s longstanding position that the opportunity for a referring physician to earn a profit, including through an investment in an entity for which he or she generates business, could constitute illegal remuneration under the anti-kickback statute.  Thus, OIG concluded that it will view PODs as inherently suspect under the anti-kickback statute.   

“We recognize that this valuable model bears a risk of abuse,” Steinmann, who also represents the industry trade group American Association of Surgeon Distributors, said in a phone interview with Bloomberg News.  “We’re happy that the OIG is creating clarity in defining the characteristics of distributorships that violate the public trust.”  Steinmann said that to his knowledge, neither his company nor any other associated with the trade group are under investigation by the inspector general. 

A recent legal analysis by Morgan Lewis describing the risks inherent in PODs can be obtained here.  The Advanced Medical Technology Association (AdvaMed) applauded OIG’s action “in recognizing the inherent conflict-of-interest risks posed by physician-owned distributors (PODs).  AdvaMed agreed with OIG PODs “produce substantial fraud and abuse risk and pose dangers to patient safety.” 

“PODs are controversial business arrangements in which physician-investors form companies that purchase medical devices from third-party manufacturers and sell them to hospitals, often to the hospitals at which the POD physician-investors practice,” AdvaMed wrote. 

“Transparent, ethical interactions between health care professionals and medical technology companies are critical to innovation and improved patient care. However, the emergence of companies with equity investments by physicians, who are also major revenue generators for the companies, raises important legal and policy issues relating to the potential effect on clinical decisions by physicians.” 

The Special Fraud Alert also comes “after the minority staff of the Senate Finance Committee issued a report on PODS, followed the same month by a letter to the OIG from the Committee expressing concern about potential federal health care program abuse by PODs and requesting the OIG to conduct an inquiry into these organizations,” noted the FDA Law Blog.   While “OIG’s FY 2012 and 2013 Work Plans refer to such a report in preparation, but none has been forthcoming yet,” the post noted. 

Interestingly, while applying to PODs, OIG clarified that the principles set forth in the Fraud Alert “would apply when evaluating arrangements involving other types of physician-owned entities.”  This is particularly interesting given the recent final rule issued by the Centers for Medicare & Medicaid Services (CMS) to implement the physician payment transparency (“sunshine”) provisions of the Affordable Care Act.  The Sunshine Act applies to group purchasing organizations” (GPOs), which will be required to report their physician ownership and investment interests, as well as the payments they distribute to their physician owners and investors.   

As the FDA Law Blog notes, “PODs that meet the rule’s definition of applicable GPOs will have to meet these reporting requirements.”  The post notes that “CMS takes the questionable position in the preamble that distributors who take title to federally reimbursable medical products are “applicable manufacturers” subject to sunshine reporting requirements.”  Under this interpretation, the authors write, “even PODs that are not GPOs will be required to report their physician ownership and investment interests as well as the payments they distribute to their physician owners and investors.”  

Highlighting the affect of this Special Fraud Alert and its potential implications for the Sunshine Act, OIG maintained that it does “not believe that disclosure to a patient of the physician’s financial interest in a POD is sufficient to address these concerns.”  As OIG noted in the preamble to the final regulation for the safe harbor relating to ASCs:  

…disclosure in and of itself does not provide sufficient assurance against fraud  and abuse…[because] disclosure of financial interest is often part of a testimonial,  i.e., a reason why the patient should patronize that facility.  Thus, often patients are not put on guard against the potential conflict of interest, i.e., the possible effect of financial considerations on the physician’s medical judgment. 

This reference raises problematic concerns given the nature of the Sunshine Act and the transparency website it requires for the posting of physician payments.  Moving forward, will it be OIG’s position that a physician who discloses their financial interest to a patient for speaking at an educational or promotional event or conducting clinical trials or research, is not sufficient, and therefore may raise medical necessity or other concerns? 

Will OIG now look at teaching hospitals and physician groups where individuals have certain thresholds of payments (e.g., over $50,000) and begin investigating the medical necessity or clinical appropriateness of their decisions because even if the physician/hospital made such disclosures to their patients, it would not be sufficient?   

For example, it was recently reported in Oregon that a physician is being sued by the State under state consumer protection laws, for the physician’s failure to make financial disclosures to the patients. How far reaching is OIG’s position on the insufficiency of financial disclosure?  Could this reach continuing medical education (CME) disclosures by faculty and speakers? 

If this is OIG’s position, physicians will likely continue to reject, prohibit or discontinue relationships and collaboration with industry, which may have harmful effects on medical progress that may ultimately delay treatment for patients.  Accordingly, it will be incumbent upon all stakeholders affected by the Sunshine Act to seek clarification from OIG and CMS on these issues, and how and whether OIG will use the Sunshine database for such purposes. 

“Anytime a few bad actors determine the treatment and care of patients, as this warning makes clear, patient safety is put at risk and millions of dollars are lost to fraud,” Senator Orrin Hatch of Utah, the senior Republican on the Senate Finance Committee who has been tracking the use of PODs, said in an e- mail to Bloomberg News.  “I will continue to scrutinize these high-risk structures and demand answers from HHS.”

PODs, or an actual or potential physician-owner, that have questions about the structure of a particular POD arrangement, may request an OIG Advisory Opinion. 

Background: Anti-kickback Statute 

 One purpose of the anti-kickback statute is to protect patients from inappropriate medical referrals or recommendations by health care professionals who may be unduly influenced by financial incentives.  Section 1128B(b) of the Social Security Act (the Act) makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce, or in return for, referrals of items or services reimbursable by a Federal health care program.  When remuneration is paid purposefully to induce or reward referrals of items or services payable by a Federal health care program, the anti-kickback statute is violated.  

By its terms, the statute ascribes criminal liability to parties on both sides of an impermissible “kickback” transaction.  Violation of the statute constitutes a felony punishable by a maximum fine of $25,000, imprisonment up to 5 years, or both. Conviction will also lead to exclusion from Federal health care programs, including Medicare and Medicaid.  

Longstanding OIG guidance makes clear that the opportunity for a referring physician to earn a profit, including through an investment in an entity for which he or she generates business, could constitute illegal remuneration under the anti-kickback statute. The anti-kickback statute is violated if even one purpose of the remuneration is to induce such referrals.  

OIG has repeatedly expressed concerns about arrangements that exhibit questionable features with regard to the selection and retention of investors, the solicitation of capital contributions, and the distribution of profits. Such questionable features may 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.  

“PODs that exhibit any of these or other questionable features potentially raise four major concerns typically associated with kickbacks— 

  • corruption of medical judgment,
  • overutilization,
  • increased costs to the Federal health care programs and beneficiaries, and
  • unfair competition.”  

This is because the financial incentives PODs offer to their physician-owners may induce the physicians both to perform more procedures (or more extensive procedures) than are medically necessary and to use the devices the PODs sell in lieu of other, potentially more clinically appropriate, devices.  OIG is “particularly concerned about the presence of such financial incentives in the implantable medical device context because such devices typically are “physician preference items,” meaning 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 where the procedure is performed.  

The lawfulness of any particular POD under the anti-kickback statute depends on the intent of the parties. Such intent may be evidenced by a POD’s characteristics, including the details of its legal structure; its operational safeguards; and the actual conduct of its investors, management entities, suppliers, and customers during the implementation phase and ongoing operations.  Nonetheless, OIG reiterated its belief that PODs are inherently suspect under the anti-kickback statute, and noted its particularl concern when PODs, or their physician-owners, exhibit any of the following suspect characteristics:  

  • 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 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.  

OIG clarified that these criteria are not intended to serve as a blueprint for how to structure a lawful POD, as an arrangement may not exhibit any of the above suspect characteristics and yet still be found to be unlawful. Other characteristics not listed above may increase the risk of fraud and abuse associated with a particular POD or provide evidence of unlawful intent.  For example, a POD that exclusively serves its physician-owners’ patient base poses a higher risk of fraud and abuse than a POD that sells to hospitals and ASCs on the basis of referrals from nonowner physicians.  

OIG also noted that PODs that generate disproportionately high rates of return for physician-owners may trigger heightened scrutiny.  Because the investment risk associated with PODs is often minimal, a high rate of return increases both the likelihood that one purpose of the arrangement is to enable the physician-owners to profit from their ability to dictate the implantable devices to be purchased for their patients and the potential that the physician-owner’s medical judgment will be distorted by financial incentives.  

OIGs concerns are magnified in cases 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).  

In concluding, OIG noted that it did not want to discourage innovation for PODs that purport to design or manufacture their own devices.  However, claims—particularly unsubstantiated claims—by physician-owners regarding the superiority of devices designed or manufactured by their PODs do not disprove unlawful intent.  OIG maintained that “the 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.” 

Finally, because the anti-kickback statute ascribes criminal liability to parties on both sides of an impermissible “kickback” transaction, hospitals and ASCs that enter into arrangements with PODs also may be at risk under the statute.  In evaluating these arrangements, OIG will consider whether one purpose underlying a hospital’s or an ASC’s decision to purchase devices from a POD is to maintain or secure referrals from the POD’s physician-owners.


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