OIG Special Fraud Alert Labels Physician-Owned Distributorships (PODs) as “Inherently Suspect”

by Davis Wright Tremaine LLP

The U.S. Department of Health & Human Services, Office of Inspector General (the “OIG”) issued a Special Fraud Alert (“Alert”) on March 26, underscoring its heightened focus on fraud and abuse risks posed by physician-owned distributorships (“PODs”). In its Alert, the OIG stated that, although “the lawfulness of any particular POD under the anti-kickback statute depends on the intent of the parties,” PODs are “inherently suspect under the anti-kickback statute (emphasis added).”

The Alert comes approximately two years after the OIG began to more closely scrutinize PODs as a result of a report published by the U.S. Senate Finance Committee in June 2011 titled “Physician Owned Distributors (PODs): An Overview of Key Issues and Potential Areas for Congressional Oversight.” In that report, the Committee expressed its concern to the OIG that the “very nature of PODs seems to create financial incentives for physician investors to use those devices that give them the greatest financial return” at the expense of patient welfare.

In its response to the U.S. Senate Finance Committee, the OIG committed to undertake a review of PODs before determining whether to issue additional guidance and stated that “different POD models can raise varying levels of legal concern; thus, the answers to many of the important legal questions … depend on the specific facts of the case.”

PODs have proliferated over the past several years. Many facilities, however, have decided to avoid doing business with them due to ambiguities surrounding the lawful structuring of PODs under fraud and abuse laws.

Structuring of PODs
In the Alert, the OIG stated its four major anti-kickback concerns with PODs as follows:

  • Corruption of medical judgment;
  • Overutilization;
  • Increased costs to the federal health care programs and beneficiaries; and
  • Unfair competition.

In the Alert, the OIG also stated that because implantable medical devices are typically “physician preference items” rather than items chosen by a hospital or ambulatory surgical center where a procedure is performed, financial incentives may influence a POD’s physician-investors to choose devices for their own patients that are not the most clinically appropriate, or lead physician-investors to perform more procedures (or more extensive procedures) than are clinically necessary. The OIG does not believe that disclosure of a physician’s financial interest to patients would of itself be sufficient to address these concerns.

While the Alert fails to provide clear guidance on how to structure a compliant POD, the OIG has repeatedly called out questionable features of POD arrangements in which a referring physician may earn a profit through investment in an entity for which he or she generates business. These include:

  • Investors who are in a position to generate substantial business for the entity;
  • Investors who cease practicing in the service area must divest their ownership interests; and
  • Extraordinary returns on investment compared to the level of risk involved.

The OIG becomes particularly concerned when PODs, or their physician-owners, exhibit certain suspect characteristics, such as:

  • 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 of profits are not made in proportion to ownership interest;
  • Physician-owners condition their referrals to a facility on that facility’s purchase of the POD’s devices; and
  • The POD is a shell entity.

PODs may still be unlawful in the absence of these suspect characteristics, according to the OIG. For example, in Advisory Opinion No. 11-15 (issued in October 2011), the OIG disapproved of a physician-owned entity even though profit distributions were not directly linked to the owners’ referrals to the entity. This arrangement was still considered by the OIG to pose a substantial risk of fraud and abuse under the anti-kickback statute.
Other potentially suspicious activities, according to the Alert, could include a POD exclusively serving the physician-owners’ patient base, a POD generating a disproportionately high rate of return for physician-owners (in comparison to their investment), and a POD selling or manufacturing devices solely for use by physician-owners.

Significantly, the Alert points out that “the anti-kickback statute ascribes criminal liability to parties on both sides of an impermissible ‘kickback’ transaction (emphasis added).” Facilities should pay special attention when physician-owners are potentially conditioning referrals to them (whether explicitly or implicitly) based on the facility’s purchase of the POD’s devices. Facilities that purchase devices from PODs will be at risk of violating the anti-kickback statute if one purpose of such transaction is “to maintain or secure referrals from the POD’s physician-owners.”

PODs and the facilities that do business with them should consider whether the POD business model is likely to be the target of heightened scrutiny and possible enforcement by the OIG, and whether PODs pose unacceptable risk in light of the current regulatory environment.


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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