Hospitals and Doctors Beware: OIG Issues Special Fraud Alert on Physician-Owned Entities

by Morgan Lewis

Alert notes attributes and practices that produce substantial fraud and abuse risk.

On March 26, the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS) issued its "Special Fraud Alert: Physician-Owned Entities" (OIG Alert).[1] Physician-owned entities, such as physician-owned distributorships (PODs), are controversial and have been the subject of hot debate in the healthcare industry. The recent proliferation of such entities in the orthopedic and cardiac implant sectors has garnered the attention of government and industry groups, including the U.S. Senate Finance Committee; HHS-OIG; and the Advanced Medical Technology Association (AdvaMed), a leader in corporate compliance issues. Issued after a year of surveys and audits of hospitals' arrangements with PODs, the OIG Alert serves as a strongly worded guidance on the fraud and abuse concerns with the POD business model. It signals the OIG's position that such arrangements are highly suspect for fraud and abuse violations and dismisses some common and superficial justifications for the business model.

In the OIG Alert, the OIG notes that there are "specific attributes and practices of PODs that . . . produce substantial fraud and abuse risk and pose dangers to patient safety." Some of these characteristics include, but are not limited to, the following:

  • Physician-owners conditioning referrals to hospitals or ambulatory surgical centers (ASCs) on the purchase of POD devices through coercion or promises of referrals
  • Physician-owners being required, pressured, or actively encouraged to recommend or arrange for the purchase of devices sold by the POD
  • Physician-owners facing negative repercussions for failing to use POD products
  • PODs retaining the right to repurchase physician-owners' interests for failures or inabilities to arrange for the purchase of the PODs' products

These features, which are just a few of the many identified by the OIG, raise four major concerns traditionally associated with healthcare fraud and abuse: (i) impaired medical judgment, (ii) overutilization, (iii) increased costs to "Federal health care programs," and (iv) unfair competition. Importantly, PODs cannot avoid scrutiny by simply structuring themselves around the OIG's guidance because a POD arrangement "may not exhibit any of the above suspect characteristics and yet still be found to be unlawful." The OIG also rejected the often cited POD defense that a physician conflict of interest with POD ownership is cured by disclosure to patients of the physician's financial interest. The OIG reaffirmed that it has never accepted patient disclosure as an antidote to physician conflict of interest, with this position dating as far back as the promulgation of safe harbors for ASCs.

The OIG was careful to explain in the OIG Alert that it is "aware that some PODs purport to design or manufacture their own devices. OIG does not wish to discourage innovation; however, claims—particularly unsubstantiated claims—by physician-owners regarding the superiority of devices designed or manufactured by their PODs do not disprove unlawful intent. The risk of fraud and abuse is particularly high in circumstances when such physicians-owners are the sole (or nearly the sole) users of the devices sold or manufactured by their PODs."

Notably, the OIG emphasized that anti-kickback liability is a two-way street, stating that "because the anti-kickback statute ascribes criminal liability to parties on both sides of an impermissible 'kickback' transaction, hospitals and ASCs that enter into arrangements with PODs also may be at risk under the statute. In evaluating these arrangements, OIG will consider whether one purpose underlying a hospital's or an ASC's decision to purchase devices from a POD is to maintain or secure referrals from the POD's physician-owners."

The OIG Alert compels entities that do business with PODs, such as hospitals and ASCs, to revisit their legal assessment of such arrangements. The OIG made special reference to the risk of hospitals and other entities doing business with PODs and the potential for anti-kickback statute violations. A prompt review of any hospital arrangement with PODs is recommended.

Morgan Lewis has prepared a white paper on PODs, which reviews the legal, ethical, and policy issues associated with PODs and the significant compliance issues they raise for health industry stakeholders, including device companies, hospitals, and physicians. This white paper can be accessed here. An earlier version of this memorandum, prepared prior to the release of the OIG Alert, appears on the website for AdvaMed and can be accessed here.

Jacob Harper also contributed to this article.

[1]. View the OIG Alert here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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