OIG Comes Down Hard on Physician-Owned Distributorship Arrangements

by Morgan Lewis

Hospitals and physician-owned entities should consider new report’s cost and utilization concerns.

On October 24, the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services (HHS) released its long-awaited report on the prevalence of physician-owned distributorships (PODs) and the increased costs incurred by Medicare following the rise of these entities. The U.S. Senate and OIG’s investigation of PODs began in earnest in 2011 with the release of the Senate Finance Committee’s POD overview and inquiry.[1] This was followed by a Special Fraud Alert issued by OIG, which characterized PODs as “inherently suspect under the anti-kickback statute.”[2]

Overview of the Report

OIG’s report identifies utilization concerns from data showing that POD products were used in one in five spinal fusion surgeries in 2011 and that, by 2012, more spinal surgeries were performed at hospitals purchasing from PODs than at hospitals that did not purchase from PODs. OIG’s analysis of its survey of hospitals purchasing from PODs noted a threefold increase in the growth rate of spinal surgeries in hospitals purchasing from PODs as compared to the overall spinal surgery growth rate in all hospitals. Per 1,000 surgical discharges, POD hospitals increased spinal surgeries by 16% (from 95 surgeries to 110), while spinal surgeries only increased by 5% (57 surgeries to 60) in all hospitals overall.

Notably, hospitals purchasing from PODs performed more than 28% more spinal surgeries than hospitals that did not purchase from PODs. In addition, OIG implied that hospitals’ disclosure protocols may be insufficient to give adequate notice to patients regarding a surgeon’s interest in a medical device company. OIG noted that just 8% of hospitals require disclosure to patients, and, while 65% required some form of disclosure of the interest to the hospital itself, this was typically only at the initial credentialing or hiring phase. Thus, both patients and hospitals may be ignorant of the ownership interests that their surgeons possess, as well as the potentially negative effects those interests have on a physician’s medical decisionmaking.

OIG also found that, on average, surgeons using POD devices implanted two fewer devices during surgery than those surgeons using non-POD devices (12.3 devices vs. 14.2). Nevertheless, the POD devices were not less costly than the non-POD devices, and spinal plates, in particular, cost an extra $845, on average, for the POD-procured unit. OIG concluded that the higher cost of POD-supplied products, “combined with the [higher] volume of spinal surgeries [that OIG] found at hospitals that purchase from PODs, may increase the cost of spinal surgery to the Medicare program and beneficiaries over time.”


Hospitals and physician-owned entities should be strongly motivated to assess any existing POD arrangements for the utilization, kickback, and patient disclosure concerns identified in OIG’s report. From a risk management perspective, hospitals and health systems may want to prioritize assessments of POD arrangements to assure that the OIG anti-kickback concerns are effectively addressed.

For more information on PODs from a legal and compliance standpoint, please see our March 2013 White Paper, “Anti-Fraud Concerns for Physician-Owned Distributors for Medical Device Products: What’s New Is Old. We Won’t Be Fooled Again.” This analysis notes that utilization and anti-kickback compliance concerns are not adequately addressed in POD arrangements that purport to have compliance safeguards and highlights the risks to hospitals in POD arrangements. The White Paper is available at http://advamed.org/res.download/288.

[1]. See Minority Staff of S. Fin. Comm., 112th Cong., Physician Owned Distributors (PODs): An Overview of Key Issues and Potential Areas for Congressional Oversight (Comm. Print 2011).

[2]. OIG, Special Fraud Alert: Physician-Owned Entities (Mar. 26, 2013).


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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