OIG Issues Special Fraud Alert on Business Arrangements with Physician-Owned Entities

On March 26, the HHS Office of Inspector General (OIG) issued a Special Fraud Alert (Fraud Alert) reiterating its long-standing concern that the opportunity for a referring physician to earn a profit by investing in a venture for which the physician generates business may be a kickback.

The Fraud Alert focused on "PODs," i.e., physician-owned entities that sell or arrange for the sale of implantable medical devices, including companies that purport to design or manufacture devices. However, OIG specifically added that "the same principles would apply when evaluating . . . other types of physician-owned entities."

OIG provided a long list of particularly suspect characteristics of such business arrangements. The list is similar to other lists of risk factors previously published:

  • 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 used by the physicians.

  • 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.

OIG also emphasized that its concerns are further magnified in situations in which (1) the physician-owners are few in number, so that the volume or value of the physician's referrals correlates more closely to that physician's profits; and (2) the physician alters her or his medical practice in connection with the making of the applicable investment (e.g., switching devices or changing practice patterns to generate more business). The risk of fraud and abuse is seen as "particularly high" in circumstances in which the physician-owners are the sole (or nearly the sole) users of the investment entity's devices or services. OIG also noted that even if a POD has none of the characteristics cited above, it may still be an unlawful arrangement.

This guidance echoes the guidance provided in the October 6, 2006 letter from Vicki Robinson, the Chief of the Industry Guidance Branch, regarding physician investments in the medical device industry, which indicated that the amount of revenues generated by a physician investor is relevant in analyzing joint ventures. In that letter, referenced in the Fraud Alert, OIG suggested that keeping gross revenues generated by investors below 40% would be a protective factor. The guidance is also consistent with the Contractual Joint Ventures Special Advisory Bulletin of April 2003, in which OIG stated that a business that predominantly serves the owner's existing patient base is suspect.

In the Fraud Alert, OIG did appear to recognize that physician-owned companies can be an important source of innovation, but suggested that any use of PODs by third parties should be based on objective, verifiable criteria regarding the marketed devices, and even in that event a POD could still be suspect, depending upon its other characteristics. OIG also made it clear that disclosure to the patient of the physician's financial interest is insufficient to address anti-kickback concerns.

The message from the Fraud Alert is that OIG continues to be concerned about physician-owned enterprises, and is particularly concerned about PODs, which it views as "inherently suspect under the anti-kickback statute."