United States: OIG Special Fraud Alert On Physician-Owned Distributorships

Last Updated: April 17 2013
Article by Kristen A. Larremore and James F. Henry

On March 26, 2013, the U.S. Department of Health and Human Services Office of Inspector General (OIG) issued a Special Fraud Alert entitled "Physician-Owned Entities." The Alert is consistent with an ongoing theme of concern regarding compliance with the Anti-Kickback Statute (42 U.S.C. 1320a-7(b)) due to what the Alert calls the "inherently suspect" nature of physician-owned distributorships (PODs). For purposes of the Alert, the OIG defines a POD as "any physician-owned entity that derives revenue from selling, or arranging for the sale of, implantable medical devices," including "physician-owned entities that purport to design or manufacture, typically under contractual arrangements, their own medical devices or instrumentation." However, the OIG notes that while its guidance is focused on this type of POD, the principles set forth in the Alert apply when evaluating other types of physician-owned entity arrangements.

In the Alert the OIG indicates that PODs produce "substantial fraud and abuse risk" and are unlikely to hold up under the federal Anti-Kickback Statute because physician-owners may be unduly influenced by financial incentives. Due to the fact that the Anti-Kickback Statute (i.e., Section 1128(b) of the Social Security Act) imposes criminal liability on both sides of an impermissible "kickback" transaction, hospitals and ambulatory surgery centers (ASCs) should take careful heed of the Alert's principles and guidance, and so should physicians who own or who are considering ownership in a POD.

The federal Anti-Kickback Statute is designed to protect patients from inappropriate medical referrals or recommendations by health care professionals who may be unduly influenced by financial incentives, and the statute accordingly 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." Therefore, the extent to which PODs comply with the Anti-Kickback Statute depends on the intent of the parties, but that intent may be evidenced by such characteristics as the POD's legal structure and the operational safeguards that it may or may not put in place. Questionable organizational features of PODs specifically listed by the OIG include (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. Further, the OIG indicates that concerns regarding PODs are magnified when 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).

For some time, critics have consistently voiced concerns regarding the use of PODs , and a June 2011 report by the Senate Finance Committee questioned these types of arrangements, stating that "[t]he very nature of PODs seem[s] to create financial incentives for physician-investors to use those devices that give them the greatest financial return so that, in the process, patient treatment decisions may be based upon personal financial gain."

Consistent with this view, the OIG highlights in its Alert the significant risk arising from PODs that sell or arrange for the sale of "implantable medical devices" due to the fact that these devices are typically "physician preference items." Physicians often dictate the brand and type of implantable medical devices that hospitals or ambulatory surgery centers buy and stock for surgical procedures. Such financial incentives are inherent in PODs, and particularly those dealing with implantable medical devices, and the OIG voiced its concern that physicians could be induced to (1) perform more, or more extensive, procedures than are medically necessary and/or (2) use the device that the POD sells instead of a device that is potentially more clinically appropriate. Further, such financial incentives may foster corrupt medical judgment, increased health care costs, and unfair competition. Importantly, the OIG counsels that disclosure to a patient of a physician's financial interest in a POD is insufficient to address these concerns.

In an attempt to raise awareness of the risks associated with PODs and provide guidance both to physicians entering into PODs and to hospitals and ambulatory surgery centers contracting with PODs, the Alert lists eight characteristics of PODs that the OIG considers particularly suspect:

  • 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 the physicians use.
  • 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.

Although the OIG indicates this list is non-exclusive and is not a blueprint for compliance (i.e., it is not the equivalent of a safe harbor under the Anti-Kickback Statute), it is helpful guidance on what characteristics the OIG will focus on when looking at individual POD arrangements. The consistent concerns the OIG and previously the Senate Finance Committee have voiced should cause anyone coming into contact with a POD to look closely at the nature of the relationship and the characteristics of the proposed arrangement in order to address up front any risk factors that could lead to increased OIG scrutiny or a violation under the Anti-Kickback Statute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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