Senate Finance Committee Updates Report on Physician-Owned Distributorships

by Morgan Lewis

The report finds that PODs increase overutilization, lack transparency, and increase the risk of patient harm and warns that hospitals must combat the growing threat of PODs.

On May 10, the US Senate Committee on Finance (the Committee) issued an updated report on the fraud and overutilization concerns associated with physician-owned distributorships (PODs). The report expands on the Committee’s findings in its prior report (issued in June 2011) and confirms that PODs are suspect arrangements that lead inexorably to overutilization and medically unnecessary procedures. New concerns related to potential hospital complicity, lack of financial conflict disclosures of POD ownership relevant to the hospital procurement process, and circumvention of ownership status to disguise POD ownership suggest that hospitals and health systems that knowingly work with POD arrangements may face enforcement scrutiny.

Overview of the Report

The Committee remains “highly concerned about the damage that POD[s] have done, and are continuing to do, to patient safety and federal healthcare programs.” The report concludes that PODs not only lack transparency about their arrangements but also are actively trying to conceal their financial relationships from hospitals and patients. Accordingly, the Committee recommends modifications to federal transparency and reporting laws such that physicians must disclose ownership interest in nonpublicly traded device companies to hospitals and patients. It also proposes that the Centers for Medicare and Medicaid Services (CMS) should require hospitals to examine Sunshine Act data when making decisions about device purchases.

The Committee’s report further emphasizes that PODs result in overutilization, which it concludes results in medically unnecessary or overly complex surgeries. Although the focus of the Committee’s investigation was on spinal surgery, it notes that its conclusions apply equally to all PODs and suggests that they are beginning to migrate into other medical fields. The report also explains that the business structure and payments of certain PODs have been found illegal and that threats by physicians to move their practice to another hospital unless their current hospital purchases from their POD likely violate federal anti-fraud laws. The Committee recommended that law enforcement continue to expand its efforts to prosecute not only the offending physicians and PODs but also the hospitals that acquiesce to these demands. The report finds that, because larger hospital systems have developed stringent anti-POD policies, PODs and their physician owners are migrating to smaller community hospitals that may lack robust compliance resources to appropriately address this conflict of interest. The Committee recommends that all hospitals establish hospital-specific policies that reflect the guidance issued by the Office of Inspector General (OIG) in its 2013 Special Fraud Alert.

Finally, the Committee explored how PODs are changing their payment structures to circumvent the federal antikickback statute and the Sunshine Act. Specifically, the report finds that PODs are declaring physicians to be employees rather than investors and making payments to physicians in the name of family members or other intermediaries. Consequently, the Committee recommends that both the CMS and OIG significant increase their efforts to enhance Sunshine Act reporting and investigate and litigate potential kickback violations involving PODs that undertake this new payment model.

Enforcement and Compliance Implications

Morgan Lewis has followed the POD issues for several years and issued a comprehensive White Paper in 2013 that identified PODs as high-risk arrangements and identified overutilization and medically unnecessary procedures as probable negatives in these arrangements. The White Paper also identifies hospital risks and compliance strategies, including disclosure strategies and transparency compliance in addition to anti-fraud compliance. As our White Paper forecasted, however, mere disclosure of a POD arrangement that violates anti-fraud statutes is insufficient to protect patients and the federal fisc. The very purpose of the antikickback statute is to regulate medical conflict of interest. The POD model and its attendant conflicts presumptively increase the risk of medically unnecessary procedures.

Hospitals and health systems should implement substantive policies related to PODs to manage the risk of enforcement and liability for violations of anti-fraud statutes, including the federal antikickback statute and the False Claims Act. The Committee has signaled that hospitals are the retaining wall to unethical and illegal POD arrangements and should be part of the solution.

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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