Medical Device Company Files First Amendment Lawsuit Challenging OIG’s Criticism of Physician-Owned Distributors (PODs)

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On October 8, 2013, Reliance Medical Systems, LLC (“Reliance”) filed a Complaint against the HHS OIG in the United States District Court for the Central District of California.  The Complaint alleges that OIG’s assertion in a March 26, 2013 Special Fraud Alert regarding Physician-Owned Entities that PODs are “inherently suspect” infringes on Reliance’s First Amendment right to speak with physicians about potential investment in physician-owned entities.  The Complaint seeks a declaratory judgment that physician-owned entities that comply with the law are not “inherently suspect” under the Anti-Kickback Statute, and that hospitals and ambulatory surgery centers are not “at risk” if they enter into arrangements with physician-owned entities that comply with the law.  The OIG Fraud Alert is available here, and the Reliance complaint is available here

According to the Complaint, OIG currently is investigating Reliance and physicians with whom Reliance previously communicated in connection with Reliance’s prior formation of physician-owned entities.  The Complaint alleges that Reliance cannot exercise its First Amendment right to communicate with physicians about forming new physician-owned entities out of fear that such entities are “instantaneously cloaked with a presumption of guilt, in violation of Reliance’s due process rights, since these entities are presumed by the OIG to be ‘inherently suspect.’”

Reliance claims that OIG’s statement that PODs are “inherently suspect” under the federal Anti-Kickback Statute contradicts case law of the Ninth Circuit Court of Appeals and guidance of the California Attorney General.  In support of its position that PODs do not violate the Anti-Kickback Statute, Reliance cites Hanlester Network v. Shalala, 51 F.3d 1390 (9th Cir. 1995), which considered limitations imposed by the Anti-Kickback Statute on physician-owned entities and discussed circumstances in which physician investment would not violate law.  The Complaint also refers to an Opinion of the California Attorney General, 89 Ops. Cal. Atty. Gen. 25 (2006), which stated that a physician may prescribe a medical device distributed by a company in which the physician has an ownership interest.

The Complaint also alleges that the OIG Special Fraud Alert criticizing PODs arose out of efforts by large manufacturers of medical devices to lobby Congress and government agencies “for stronger legislative and regulatory action to halt the proliferation of physician-owned entities.”  According to the Complaint, “[t]he federal government has launched an ill-advised crusade against physician-owned companies” and “[i]n doing so, … has sided with large corporations over small businesses and chilled the First Amendment rights of small business owners and physicians.”

Reporters, Katy Lucas, Atlanta, +1 404 572 2822, klucas@kslaw.com and Constance F. Dotzenrod, Atlanta, + 1 404 572 3585, cdotzenrod@kslaw.com