Life Science Compliance Update

May 27, 2015

Doctor Involved in Physician-Owned Distributorship Pleads Guilty To Kickback Violations and Unnecessary Surgeries; Marks First POD-Specific Enforcement Action

Spinal implants

Physician-owned distributorships (PODs), which are medical device distributors owned, at least in part, by physicians who use the devices, have attracted scrutiny from Congress and the HHS-OIG for several years. However, it was not until September of 2014 when the Department of Justice got involved by suing Reliance Medical Systems over an alleged kickback scheme involving PODs, whereby physician investors would be paid essentially based on the number of Reliance spinal implants they used. On May 22, one of the neurosurgeons named in the complaint, Dr. Aria Sabit, admitted that the financial incentives provided by the PODs "caused him to compromise his medical judgment and cause serious bodily injury to his patients by performing medically unnecessary spine surgeries on some of the patients in whom he implanted [the] spinal implant devices," states DOJ

A 2011 Congressional report entitled Physician Owned Distributors (PODs): An Overview of Key Issues and Potential Areas for Congressional Oversight stated that “[t]he very nature of PODs seem to create financial incentives for physician investors to use those devices that give them the greatest financial return and that, in the process, patient treatment decisions may be based on personal financial gain." In 2013, the HHS-OIG issued a Special Fraud Alert specifically targeting physician-owned entities as well, stating that PODs “are inherently suspicious under the anti-kickback statute.” 

Thus, the industry has been on alert that PODs are an area of enforcement interest, and last year spinal implant company Reliance Medical Systems was the first to be hit with a complaint from the Department of Justice. The DOJ alleged that Reliance's owners created more than a dozen physician-owned distributorships that sold Reliance's spinal implants to physician-owners for use in surgery. The government alleged that Reliance used one of its distributorships, Apex Medical, to funnel improper payments to Dr. Sabit for using Reliance spinal implants in his surgeries.

"Apex was owned by another neurosurgeon and three non-physicians who operated Apex as a physician-owned distributorship and paid neurosurgeons lucrative illegal kickbacks tied directly to the volume and complexity of the surgeries that the surgeons performed, and the number of Apex spinal implant devices the surgeons used in their spine surgeries," states DOJ. "In exchange for the opportunity to invest in Apex and share in its profits, Sabit admitted that he agreed to convince his hospital to buy spinal implant devices from Apex and use a sufficient number of Apex spinal implant devices in his spine surgeries."

Specific facts in this case also put Reliance in a bad light, including recorded statements by the company’s owners telling potential physician investors that Reliance was formed as part of a plan to “get around” the federal Anti-Kickback statute, and that Reliance pays its physician-investors enough in the first month or two to “put their kids through college.”

According to the DOJ, Sabit began using Reliance implants on his patients only after he acquired an ownership interest in Apex and started receiving payments from the sale of Reliance’s spinal implants.  Apex allegedly paid Sabit $438,570 between May 2010 and July 2012, during which time Sabit used Reliance implants in approximately 90 percent of his spinal fusion surgeries.  The government also alleged that these payments caused Sabit to perform medically unnecessary or excessive surgeries on certain patients who did not need the spinal implants. 

Sabit admitted that his involvement with the POD, Apex, led him to compromise his medical judgment and harm patients by performing medically unnecessary spine surgeries and using more implant devices than needed. The DOJ states that he also admitted to referring patients for more complex surgeries, such as multi-level spine fusion, that they did not need.

Reliance and Dr. Sabit have been a target for a number of year now. CBS News ran a story in 2013 that focused on a wrongful death suit against Sabit, and scrutinized his financial relationship with Apex--the supplier of the device that allegedly caused the patient harm. 

On November 5, 2014, the District Court of California denied Reliance Medical’s motion to dismiss the DOJ’s complaint. Download Reliance's Motion to Dismiss Denied

In addition to the charges related to Apex and Reliance, Sabit admitted to a number of fraudulent billing patterns. "Sabit admitted that he derived significant profits by convincing patients to undergo spinal fusion surgeries with instrumentation (meaning specific medical devices designed to stabilize and strengthen the spine), which he never rendered, and subsequently billing public and private healthcare benefit programs for those fraudulent services," DOJ states. "Sabit further admitted he operated on patients and dictated in his operative reports—that he knew would later be used to support his fraudulent insurance claims—that he had performed spinal fusion with instrumentation, which he never performed."

A sentencing hearing is scheduled for Sabit on Sept. 15, 2015.


May 22, 2015

Medco Will Pay $7.9 Million to Resolve Kickback Allegations Related To Formulary Placement; Follows Astra Zeneca’s $7.9 Million Payout Earlier This Year


Medco Health Solutions Inc., a wholly-owned subsidiary of the pharmacy benefit manager Express Scripts Holding Company, has agreed to pay $7.9 million to settle allegations that it engaged in a kickback scheme in violation of the False Claims Act, the Justice Department announced on Wednesday.  Medco provides pharmacy benefit management (PBM) services to clients who receive subsidies under the Medicare Retiree Drug Subsidy program.

PBMs such as Medco act as intermediaries between pharmaceutical manufacturers and third-party payers to administer a plan’s prescription drug benefits. PBMs use the purchasing power of their healthcare plan clients to negotiate lower prices for prescription drugs from pharmaceutical manufacturers. These manufacturers have an incentive to offer discounts to PBMs if that means the company’s drug will be featured on the PBM’s formulary of preferred medicine. 

Here, though, the government alleges that Medco solicited remuneration from AstraZeneca in exchange for identifying Nexium as the “sole and exclusive” proton pump inhibitor on Medco’s drug formulary list.  The United States alleged that Medco received some or all of the remuneration from AstraZeneca in the form of reduced prices on other AstraZeneca drugs, including Prilosec, Toprol XL and Plendil.  The United States contended that this kickback arrangement between Medco and AstraZeneca violated the Federal Anti-Kickback statute, and thereby caused the submission of false or fraudulent claims for Nexium to the Retiree Drug Subsidy Program. 

In January 2015, the United States and AstraZeneca reached a $7.9 million settlement to resolve kickback allegations arising out of the same conduct. This case is examined in our free sample issue of our new publication, Life Science Compliance Update.

The allegations implicating AstraZeneca and Medco were initially made in a whistleblower lawsuit filed in 2010 by two high ranking former AstraZeneca employees--Paul DiMattia, a former executive director of commercial operations, and F. Folger Tuggle, who had been a managed markets account director in charge of the Medco account. The two relators split $1,422,000 from the AstraZeneca settlement, and DOJ notes that they will be entitled to a further share from the Medco settlement as well.

“We will continue to pursue pharmacy benefit managers that enter into kickback arrangements with pharmaceutical manufacturers,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer of the Justice Department’s Civil Division.  “Hidden financial agreements between drug manufacturers and pharmacy benefit managers can improperly influence which drugs are available to patients and the price paid for drugs.”

“Pharmacy benefit managers that seek or accept kickbacks will be held accountable for their improper conduct,” echoed Special Agent in Charge Nick DiGiulio of the U.S. Department of Health and Human Services-Office of Inspector General (HHS-OIG).  “We will continue to crack down on kickback arrangements, which can undermine drug choices for patients and corrode the public’s trust in the health care system.”

It will be important to follow the government’s interest in pharmacy benefit manager negotiations with drugmakers, as the line between permissible discounts and illegal kickbacks still seems blurry, even after a number of settlements. 


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