The U.S. Department of Health and Human Services Office of Inspector General (OIG) issued an Advisory Opinion on April 20, 2022, regarding physician ownership in a medical device company. The Advisory Opinion is significant because it is the OIG's first favorable analysis of a physician-owned medical device company under the federal Anti-Kickback Statute (AKS) since its 2013 Special Fraud Alert (Fraud Alert), in which the OIG expressly found physician-owned "distributorships" to be inherently suspect under the AKS.
Background
The proposed arrangement involves a medical device company (Company) owned by three physicians (Physician Owners) who order medical devices from the Company: 1) Physician A invented the technologies utilized in the Company's medical devices, 2) a child of Physician A (Physician B) and 3) Physician B's spouse (Physician C). Physician A and his spouse, who together held a majority ownership interest in the Company, contributed the entirety of their ownership interests in the Company to two trusts. Each trust benefits Physician A's children, including Physician B. Thus, the proposed arrangement implicates the AKS because the Physician Owners or their immediate family members have an ownership interest in the Company, and the medical devices they order from the Company may be reimbursed by a federal healthcare program.
Analysis
The Advisory Opinion first analyzes whether the proposed arrangement could fit within the Small Entity Investment safe harbor under the AKS, which requires that no more than 40 percent of the value of the investment interests be held by investors who are in a position to make or influence referrals to, furnish items or services to or otherwise generate business for the entity. The OIG concluded that the Small Entity Investment safe harbor could not be met because more than 40 percent of the ownership interest in the Company was held by the Physician Owners. Nevertheless, for the reasons discussed below, the OIG determined that the arrangement poses a low risk of fraud and abuse under the AKS because it lacks the hallmarks of the "inherently suspect" physician-owned distributorshipsdescribed in the Fraud Alert.
- Shell Entities. One area of concern
identified in the Fraud Alert was physician-owned businesses
operating as shell entities with no real responsibilities for
business operations. The OIG stated that unlike these shell
companies, the Company develops medical devices that it sells
domestically and internationally through the engagement of dozens
of employees and that it engages in the "full range of
operations" of a medical device company, as opposed to being a
mere link in the chain of production and distribution. The OIG also
noted that the technologies invented by Physician A are the driving
force behind the Company's business.
- Profit Distributions. Distribution of
profits based on the volume or value of medical devices ordered by
physician owners of medical device companies is another suspect
characteristic referenced in the Fraud Alert. In the proposed
arrangement, however, profit distributions to the trusts would be
reduced by the amount of revenue generated by Company orders from
Physician Owners, members of their medical group or other
physicians providing services in an ambulatory surgery center (ASC)
owned by Physician A (Carve-Out). This, according to the OIG, is a
"meaningful" safeguard against fraud and abuse because it
likely reduces the Physician Owners' financial incentives to
make referrals to, or otherwise generate business for, the
Company.
- Amount of Business Generated by Physician
Owners. The Fraud Alert indicated that when physician
owners are the sole (or primary) users of devices sold or
manufactured by the companies they own, the risk of fraud and abuse
is "particularly high." In the proposed arrangement, the
Company certified that the Physician Owners generate less than 1
percent of the Company's U.S. gross revenue.
- Physician-Investor Selection and
Retention. The OIG expressed concerns in the Fraud
Alert with arrangements that have suspect selection or retention
requirements for physician investors, such as selecting only
physicians who are in a position to generate substantial business
for the entity or requiring physicians to divest their ownership
interest once they decrease referrals or stop practicing medicine.
The OIG found it compelling that Physician A and his spouse
obtained majority ownership and control in the Company by Physician
A assigning his ownership of valuable technologies to the Company
(which it used to develop medical devices) and not because of past
or expected referrals. Further reducing the risk of fraud and
abuse, the OIG noted that the Company does not have the right to
repurchase the trusts' ownership interests, and there is no
requirement that the trusts divest their ownership if any of the
Physician Owners cease ordering from the Company. Also significant,
while the Company tracks sales, the reports are not used to
encourage referrals or to track orders from the Physician Owners
differently from other sources of business, other than to calculate
the Carve-Out amount.
- No Quid Pro Quo. The Fraud Alert cautions
against conditioning referrals to hospitals or ASCs on the
facilities' purchase of the physician-owned entity's
devices through coercion or promises. Here, the Physician Owners
certified that while they may recommend or utilize Company products
for surgeries they perform at certain hospitals and ASCs, they
would not attempt to influence the hospitals or ASCs to purchase
the Company's products by, for example, promising to perform
surgeries there or threatening to refer patients elsewhere.
- Ownership Transparency. Although the Fraud Alert states that ownership transparency is not, in and of itself, sufficient to decrease the risks related to physician-owned entities, the Advisory Opinion indicates that the Physician Owners' disclosures, coupled with their adherence to the other safeguards noted in the proposed arrangement, serve to reduce the risk of fraud and abuse under the AKS. Notably, when consulting with patients prior to a surgery in which a Company product might be used, written notice of each Physician Owner's financial relationship with the Company is provided. The notice includes a list of several alternative medical device companies in which the Physician Owners have no financial relationship from which patients may opt to receive products. Further, the Physician Owners inform each hospital and ASC where they perform procedures of their financial relationships with the Company. Additionally, when a Company product is the subject of an academic presentation, lecture or publication by one of the Physician Owners, a disclosure of the applicable Physician Owner's financial relationship is disclosed.
Conclusion
Although the Advisory Opinion is limited to the specific facts of the proposed arrangement, it provides helpful guidance for physicians evaluating or considering similar ownership arrangements in medical device companies. Critical to the OIG's conclusions that the proposed arrangement presents a low risk of fraud and abuse were the legitimacy of the Company's business, Carve-Out from profit distributions of revenue generated by the Physician Owners, small percentage of revenue generated by the Physician Owners and various ownership interest disclosures made by the Physician Owners.
For hospitals and ASCs that order products and supplies from physician-owned medical distributorships, the opinion is instructive on the importance of not placing such orders, or appearing to place such orders, for the purpose of securing or maintaining referrals from physician owners.
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