Trends to Watch in 2013: Physician-Owned Distributors

by Snell & Wilmer

Physician-owned distributors (PODs) that sell medical devices have seen substantial growth over the last few years as well as increased regulatory scrutiny. We expect both trends to continue in 2013. PODs are arrangements in which a physician purchases an ownership interest in a medical device distributor and then shares in the profits received by the distributor from sales to hospitals and surgery centers. Proponents of PODs believe they help reduce medical device costs as compared to traditional distribution channels because the device manufacturer does not have to spend the time and expense to market to these physicians. Opponents of PODs see them as the next big health care scandal, citing concerns regarding physician conflicts of interest, overutilization, anti-competitive effects and violation of the federal Anti-Kickback Statute (AKS).

The primary federal regulator, the Office of Inspector General for the U.S. Department of Health and Human Services (OIG), has indicated that it will focus on the sales practices of spinal implant PODs. However, there has been little enforcement action against PODs to date, so the jury is still out on whether PODs comply with applicable regulatory requirements. Health care providers that choose to invest in or contract with PODs should be aware that there are various models for how PODs can be operated, and some models seem to pose less regulatory scrutiny than others.


There are primarily three types of POD models – distributor, manufacturer and group-purchasing organizations (GPOs). In a distributor model, the POD acts as a product distributor that buys devices from manufacturers (taking risk of ownership), and then resells them to the purchaser. In a manufacturer model, the POD contracts with the purchaser to manufacture the device, but outsources the actual manufacturing to a third party that usually ships the device directly to the purchaser. Finally, in a GPO model, the POD acts as a GPO for its members, thereby aggregating buying power to negotiate lower prices from manufacturers.

The recent focus of news and U.S. Senate reports have been on the explosion of PODs over the past 10 years. The concern is that this growth in these PODs coincides with a 15-fold increase in the number of spinal fusion surgeries provided to Medicare beneficiaries from 1997 to 2008.

In 2011, the OIG indicated that they had initiated a review to determine the extent to which PODs provide spinal implants purchased by hospitals. To date, the OIG has noted that the legality of any physician-owned entity (including PODs) is dependent on several key factors, including:

  • Details of the PODs legal structure and operational safeguards;
  • Actual conduct of its investors, management entities, suppliers and customers during the implementation phase and ongoing operations;
  • Investment opportunity for a referring physician to earn a profit, including through an investment in an entity for which the physician generates business;
  • Terms under which a physician may invest in the entity or be required to divest his or her ownership interest in the entity;
  • Actual return or projected return on the physician's investment; and
  • Amount of revenues generated for the entity by its physician investors.

These “key factors” harken back to a Special Fraud Alert published by the OIG over 20 years ago regarding “suspect joint ventures.” Many of these same factors may be present in PODs and could pose added enforcement risk.

Enforcement Risk and Best Practices

The main enforcement statute applicable to PODs is the federal AKS. Medical device purchase agreements with a POD could violate AKS if, for example, one purpose of the hospital doing business with the POD is to induce patient referrals from the physician investors through the purchasing of a device that is paid for by a federal health care program. The AKS risk is elevated in cases where a physician investor in a POD is also on the hospital committee that determines which devices will be used at the hospital.

AKS provides a “small investments” safe harbor that may be available to PODs. This safe harbor sets forth the “60-40 rule,” among other requirements, that limits to no more than 40 percent ownership by physicians who are in a position to induce referrals or otherwise generate business for the entity. Likewise, no more than 40 percent of the entity’s gross revenue may come from referrals or other business generated by its investors. If the POD does not qualify for this safe harbor, it does not mean the POD is in violation of AKS, but it does mean that the POD’s arrangements would be subject to a full “facts and circumstances” analysis, the outcome of which can be uncertain.

It may not be possible to eliminate all enforcement risk related to PODs. However, PODs should consider adopting certain best practices to attempt to reduce the enforcement risk:

  • Compliance with applicable AKS safe harbors as well as Stark Law requirements (such as the indirect compensation exception);
  • Financial risk to the physician investors in the POD, including taking device ownership risk (i.e., warehousing) and sizable up-front investment requirements;
  • Compensation of each physician investor equally regardless of personal referrals;
  • Prohibition against physicians altering their referral patterns based on POD agreements with hospitals; and
  • A business culture where physician investors remain active with the POD and view themselves as having an investment opportunity to profit from a real business venture, and not a guaranteed return for generating business.

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.

© Snell & Wilmer | Attorney Advertising

Written by:

Snell & Wilmer

Snell & Wilmer on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.