Physician-Owned Device Companies: OIG Issues Further Guidance

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The Office of the Inspector General for the United States Department of Health and Human Services (OIG) issued a Special Fraud Alert on March 26, 2013 (the "2013 POD alert"), that identifies physician-owned distributorships and manufacturers (PODs) as suspect under the Federal Anti-Kickback Statute (AKS).1 The 2013 POD alert represents the latest OIG guidance to the healthcare industry addressing AKS risks associated with physician investments in entities to which they also refer business.2 The specific focus of the 2013 POD alert is on:

... physician-owned entities that derive revenue from selling, or arranging for the sale of, implantable medical devices ordered by their physician-owners for use in procedures the physician-owners perform on their own patients at hospitals or ambulatory surgical centers.

The OIG's analysis, however, can be extrapolated to apply to any physician-owned entities that sell medical items where the physician-owners have type and brand purchasing discretion.

POD Suspect Characteristics

In the 2013 POD alert, the OIG identifies eight suspect characteristics of PODs. Because the AKS turns on intent, however, the OIG makes clear these factors are merely guidelines and should not be interpreted as a "blue print for how to structure a lawful POD." The following list represents an overview of the suspect characteristics identified by the OIG:

  • 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.
  • Physician-owners are required, pressured, or actively encouraged to refer, recommend, or arrange for the purchase of the devices sold by the POD (or threatened for failing to do the same).
  • 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.

Anti-Kickback Concerns

Consistent with the OIG's prior AKS guidance in a variety of different contexts, PODs with suspect characteristics similar to those listed above potentially raise four primary concerns: (1) the corruption of medical judgment; (2) overutilization; (3) additional costs for federal health care programs and beneficiaries; and (4) unfair competition. Additionally, in the 2013 POD alert, the OIG states these concerns are "magnified" when physician-owners 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 alter their medical practice relative to the POD's line of business after or shortly before investing in the POD.  

Conclusion

While the OIG acknowledges that the AKS is not a "prohibition on the generation of profits," the 2013 POD alert should put physicians, physician-owned entities, and the hospitals and ASCs that contract with those entities on notice that the OIG considers their arrangements to be "inherently suspect." As a result, the specific facts and circumstances of any POD arrangement should be carefully analyzed to minimize the risk of government scrutiny.


Notes

1Special Fraud Alert: Physician-Owned Entities (March 2013).

2See e.g. Special Fraud Alert: Joint Venture Arrangements (August 1989), reprinted at 59 Fed. Reg. 65,372, 65,374 (Dec. 19, 1994); and Letter from Vicki Robinson, Chief, Industry Guidance Branch, Department of Health and Human Services, OIG, Response to Request for Guidance Regarding Certain Physician Investments in the Medical Device Industries (Oct. 6, 2006).

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