Physician-owned distributorships (PODs) and other physician-owned entities (POEs) have emerged as a favored vehicle to reduce costs, but the popularity of PODs and POEs has led to increased scrutiny by federal regulators. In June 2011, the United States Senate called on the Office of Inspector General for the U.S. Department of Health and Human Services (OIG) and Centers for Medicare & Medicaid Services to investigate the proliferation of PODs and corresponding utilization practices. The Senate Reportcited the lack of regulatory guidance, and asked for specific guidance on the legality of PODs under the federal Anti-Kickback Statute and Physician Self-Referral Law (i.e., “Stark” law). In response to this request, the OIG added an examination of PODs providing spinal implants to its Work Plan for 2012and published its findings in an October 2013 report.

The OIG Report – plus a Special Fraud Alert issued on March 26, 2013, and several Advisory Opinions regarding physician-owned companies and ownership interests – put PODs and their owners on notice that such arrangements can be problematic under fraud and abuse laws. While PODs often distribute surgical items, they can be used for other products and services as well. The OIG joins those critics alleging that such arrangements do not reduce costs, but instead increase the risk of overutilization and pose conflicts of financial interest. Despite this criticism, the number of these entities continues to grow.

October 2013 OIG Report: Spinal Devices Supplied by Physician-Owned Distributors Are Prevalent

The OIG Report addressed only the specific congressional request regarding the prevalence of PODs and whether the use of PODs increased utilization for spinal devices. The OIG found that PODs supplied nearly 1 in 5 devices used in Medicare spinal fusion surgeries during FY 2011 and that a third of the 589 hospitals sampled had purchased at least one spinal fusion surgery device from a POD. The OIG concluded that PODs may increase the use of spinal devices without reducing costs since the hospitals buying from PODs: (1) performed more spinal surgeries than non-POD hospitals; (2) had increased rates of growth in the number of surgeries performed compared to the overall growth rate; and (3) paid the same or more for the devices as those supplied by non-POD companies.

March 26, 2013 OIG Special Fraud Alert on Physician-Owned Entities – PODs “Inherently Suspect”

The Special Fraud Alert issued on March 26, 2013 plainly states that the OIG is particularly concerned about the presence of financial incentives in the implantable medical device context because such items typically are “physician preference items,” strongly influenced by the physician instead of the hospital. The OIG contends PODs are “inherently suspect” under the Anti-Kickback statute, a statement that has generated much controversy.¹

The OIG did, however, provide some guidance, and listed what it considers “suspect” characteristics, including:

(1) the size of the investment varies with the volume/value of devices used by the physician; (2) distributions are not in proportion to ownership interest or physician-owners contribute different prices because of the volume/value of devices used; (3) owners condition referrals on the purchase of the POD’s devices through coercion or promises; (4) owners are encouraged/required to refer/recommend the use or purchase of the POD’s devices; (5) the POD retains the right to repurchase investment shares due to failure to refer/recommend purchases; (6) The company is a shell entity; (7) the company does not maintain oversight of the distribution functions; and (8) failure to inform or disclose a conflict of interest when requested.

In addition to the “suspect” characteristics above, the Alert repeated the OIG’s concerns for arrangements that: (1) select investors in a position to generate business for the entity; (2) require investors who cease practicing in the service area to divest other investments; (3) distribute extraordinary returns not commensurate with the risk involved; (4) include few physician-owners so referrals closely correlate to the return on investment; (5) result in physician-owners altering their medical practice after investing; and (6) have physician-owners as the sole users of the items or services.

While the foregoing issues have long garnered OIG attention, the OIG’s targeting of PODs for enhanced review signals a new direction for the agency. Most often Special Fraud Alerts address patently criminal conduct, such as durable medical equipment suppliers engaging in unscrupulous telemarketing practices (see the Special Fraud Alert). Here, for the first time in years, the OIG has labeled a specific type of transaction common in the health care industry as inherently suspect after reporting to Congress its findings in a quantitative report. Not only does this effort contribute to the OIG’s continued scrutiny of spinal devices (see the recent cases related to kyphoplasty), but again it invokes the Anti-Kickback statute in the context of overutilization due to alleged physician conflicts of interests. This signals a continuing enforcement trend – in which the OIG, and now Department of Justice (DOJ) with its implantable cardioverter defibrillator cases (see, for example, the DOJ news release) – that raises the specter of Anti-Kickback and Stark law violations supported by medical-based evidence for potentially unnecessary services.

Conclusion - Non-POD Physician Investors May Also Face Scrutiny

With the shift under the Affordable Care Act from reimbursing providers based on utilization now giving way to rewarding “quality,” providers should expect Congress and federal and state regulators to make similar findings and conclusions. Because the OIG was acting at the direction of Congress, physician investors can expect to see additional Congressional inquiries in other specialty areas, which will likely trigger OIG commentary regarding the risk posed by other POE arrangements. The popularity of POEs, coupled with the OIG’s findings that PODs may in fact increase costs and utilization, mean that physicians and investors should carefully review existing and potential investments. While POEs can reduce costs, physicians should consider the structure and purpose for creating or investing in the POE and actively manage the potential increased risk. The OIG repeatedly has warned providers and investors about what it considers the hallmarks of suspect arrangements. Physicians and investors should minimize the number of suspect characteristics and concerning features articulated by the OIG.

More Information

For more information regarding PODs, POEs or other health care legal developments, please contact one of the following Haynes and Boone, LLP lawyers.