United States: Physician-Owned Distributor (POD) Update

For some time, we have been reporting on issues involving federal government scrutiny of physician-owned distributors ("PODs"). From the Department of Health and Human Services Office of Inspector General's ("OIG") issuance of the March 2013 OIG Special Fraud Alert ("Special Fraud Alert"), to the Reliance Medical Systems challenge to the Fraud Alert, to the subsequent failure of that challenge, to further OIG scrutiny of the connections between PODs and physician-owned hospitals – the controversy over PODs has continued seemingly unabated.

Continuing our coverage of this important issue, we now report that, following up on a November 2015 Senate Finance Committee ("Committee") hearing ("November 2015 Hearing"), the Committee this month issued a comprehensive report entitled Physician Owned Distributorships: An Update on Key Issues and Areas of Congressional Concern ("Report"). In short, the Committee continues to be highly critical of the entire POD industry and its surgeon participants, and it urges not only expanded regulation in this area, but also increased and expanded investigative and enforcement activity by OIG and DOJ.

Summary of Report

The Report begins by identifying the key federal laws at issue in assessing the appropriateness of PODs – the Anti-Kickback Statute ("AKS"), the Physician Self-Referral Law ("Stark Law"), and the Physician Payments Sunshine Act ("Sunshine Act") – and outlining a timeline and summary of its extensive POD-related investigative activities, starting in February 2011. The Committee's scrutiny of this issue has spanned five years, including the release of a report outlining issues with PODs in June 2011 ("June 2011 Report") and, most recently, the November 2015 Hearing. If anything, the Committee's overall findings and conclusions on PODs have become more scathing.

The Report traces other federal activity with respect to PODs, including publication of the OIG's Special Fraud Alert, the 2014 publication of physician payment data as mandated by the Sunshine Act, and the issuance of other subsequent OIG publications. In addition, the Report considers in some detail the 2014-15 criminal indictment and arrest of Dr. Aria Sabit, a POD spine surgeon who practiced in California and Michigan, and his association with Reliance Medical Systems – as noted, the subject of DOJ investigative activity. While the criminal cases against Dr. Sabit are still pending, the Report cites facts acknowledged by Dr. Sabit as to how POD relationships caused him to compromise his medical judgment: in short, "incentivized by this illegal kickback arrangement and his involvement in the conspiracy, [Dr. Sabit] performed medically unnecessary surgeries that caused serious bodily injury [to patients]."1

Citing additional investigative efforts against surgeons launched by DOJ in November 2015, the Report states that the "Committee staff fully supports DOJ efforts to prosecute surgeons who put patients at risk for personal financial gain. We believe that DOJ's continued focus on these arrangements could persuade POD surgeons to sever their relationships with PODs and remind the health care industry that the POD business structure results in behavior that is unethical and potentially illegal."

Interestingly, the Committee undertook its own statistical analysis of POD utilization rates, employing data compiled by CBS News. While acknowledging that its analysis is "somewhat rudimentary," the Committee concludes in Section V of the Report that, based on this data and other sources, POD surgeons saw "significantly more" patients than non-POD surgeons, and performed fusion surgery on nearly twice as many patients as non-POD surgeons.

The Committee also traced changes in the POD business landscape since the OIG's 2013 issuance of the Special Fraud Alert. Its findings include:

  • POD growth has slowed but expansion has continued, with PODs now in 43 states and D.C.
  • Widespread POD penetration has distorted pricing, because of "predatory pricing" activity by POD physicians2
  • PODs have been able to circumvent required Open Payments/Sunshine reporting of physician owner payments by converting those surgeon owners to employees, for whom reporting is not required, or directing payments to family members or friends, or even outsourcing payments to a third party who then pays the surgeon
  • Although some PODs have implemented policies in an attempt to mitigate risks inherent to the business model, hospitals that do business with PODs still face "serious risks" that can only be eliminated by not conducting business with PODs. Despite the fact that hospitals are implementing policies to manage relationships with PODs, some hospitals experience "intense pressure" from PODs to allow them to remain hospital suppliers.

In Section VII of the Report, the Committee discusses how six named hospital systems have sought to limit or ban PODs, with some encountering extensive physician pushback. At the same time, the Committee acknowledges that some physician-owned businesses are not problematic, and that "physician ownership in legitimate innovator companies is allowable."3

The Report concludes in Section VIII that "the Committee remains highly concerned about the damage that PODs have done, and are continuing to do, to patient safety and federal healthcare programs." It includes the following five sweeping findings and detailed recommendations:

  • There is a lack of transparency in physician ownership of PODs. The Report recommends expanding Open Payments/Sunshine reporting requirements, and requiring hospitals and ambulatory surgical centers to review – and document their review of – such reported data. It further urges CMS and OIG to expand its compliance guidance to recommend hospital restrictions on PODs.
  • When hospitals purchase products from PODs, overutilization results, in turn suggesting that "some of the surgeries performed are medically unnecessary or overly complex." The Committee recommends that GAO "examine the costs and benefits of CMS requiring hospitals that choose to purchase from PODs to perform enhanced quality assurance and utilization review activities in connection with surgeries using POD-supplied products."
  • The business structure and payments involved with PODs have been found illegal. Moreover, according to the Report, "overt or implied threats made by physicians to move their practice unless a hospital accepts their POD would likely violate fraud and abuse laws." The Committee recommends continued and expanded efforts by law enforcement to prosecute physicians, PODs, and hospitals that are violating the law.
  • PODs are migrating from large hospitals and hospital systems that have implemented policies regulating their relationships with PODs, to smaller hospitals that do not have these policies. The Committee recommends that CMS not only require hospitals to establish policies governing their relationships with PODs consistent with OIG guidance, but also that CMS withhold reimbursement for surgeries involving POD-supplied devices, until those hospitals have implemented POD policies.
  • Changes in the payment structures of PODs are an "attempt to circumvent the AKS and the Sunshine Act." The Committee makes multiple recommendations to address this finding, including increased CMS enforcement actions "to ensure compliance with Sunshine Act reporting requirements," additional CMS guidance or rulemaking relating to Sunshine Act reporting requirements, and potential updates to the OIG Special Fraud Alert, including OIG consideration of whether the list of suspect POD characteristics in the Special Fraud Alert should be "revised or expanded."

Key Take-Aways

Based on the history of governmental scrutiny of PODs, our key take-aways from the Report include:

  • Hospital providers must remain vigilant in considering physician ownership of all types of distributors – not just in the spinal device sphere. The Report – as with much of the guidance and enforcement to date – has been focused on PODs in the field of spinal surgery, but the Committee acknowledges that its conclusions about PODs are not limited to the spinal device POD market. While current federal scrutiny remains on the spinal device market, this does not rule out enforcement action in other areas. Thus, it is important for hospital providers to be vigilant about monitoring physician ownership of all types of distributors.
  • At the same time, hospitals should ensure that their policies seeking to limit improper POD arrangements do not unwittingly address legitimate industry relationships with physicians. As the Reports notes, not all relationships between industry and physicians are improper. Both drug and device manufacturers rely extensively on physician expertise in research and other consulting relationships. Further, many device manufacturers have modest intellectual property (e.g., royalty) arrangements with physician innovators, that typically – and appropriately – exclude royalties to those innovators for their own self-referrals. We have reviewed some hospital anti-POD policies that are so broadly worded as to forbid even these legitimate arrangements.
  • Anticipate further guidance from OIG. As noted in the Report, after the Committee released its June 2011 report, it asked OIG to consider whether existing guidance was sufficient to address the increase in PODs. At that time, OIG questioned whether additional guidance was necessary. Nevertheless, since then, the OIG has issued a Special Fraud Alert (March 2013), a report on spinal device PODs (October 2013), and a report on the overlap between PODs and physician-owned hospitals (August 2015). Given the Committee's ongoing attention to this matter and recent DOJ enforcement actions, the time is ripe for additional compliance and related guidance from OIG.
  • Expect further development of data points relating to PODs. The data cited in the Report is limited and sometimes anecdotal. Although that nature of the POD business model may make it difficult to collect and analyze statistically rigorous data about the impact of the proliferation of PODs, we expect the government to continue to use Sunshine Act data to glean as much information as possible on the continuing area of interest.
  • Be on the lookout for stronger Sunshine Act provisions. The Report raises the possibility that the Sunshine Act could be strengthened on multiple fronts, including Congressional consideration of statutory increases in penalties for intentional Sunshine Act violations, additional CMS regulations expanding reporting requirements, and more vigorous OIG enforcement.

Conclusion

The Report in no uncertain terms warns of future oversight in this area, given the "significant concern for numerous members of the Committee staff, including the Chairman." Stay tuned for our ongoing coverage.

Footnotes

1. Notably, Kevin Reynolds, the son of one of Dr. Sabit's patients (now deceased), testified at the November 2015 Hearing. In his written testimony (available here), Mr. Reynolds blames Dr. Sabit's interest in Apex Medical Technologies LLC – an interest about which Mr. Reynolds and his mother were not aware prior to the surgery – for Dr. Sabit's decision to perform a more complex spinal fusion surgery than the surgery to which the patient agreed. Mr. Reynolds states, "I believe that Dr. Sabit had a clear financial incentive to use more screws and rods in my mother's back surgery. And I believe that this financial incentive played a role in his decision to perform more complex surgery on her that was not medically necessary."

2. According to hearing testimony by one physician in November, POD physicians who are able to supplement their income via POD self-referrals are able to sign contracts with insurers for "ridiculously low" reimbursement amounts, in turn enabling them to shut non-POD physicians out of the market.

3. In a footnote to the Report, the Committee cites approvingly "manufacturers who may have a relatively small portion of physician ownership (examples include physician ownership as a result of an initial capital investment, or development of new or innovative intellectual property) which generally diminishes as the company's products gain market acceptance. Unlike PODs, these companies widely market and sell their products to healthcare facilities where their physician owners do not practice, and in addition, physician owners' revenue is not tied to their referrals or usage of the company's devices.

This article is presented for informational purposes only and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.