OIG Issues New Special Fraud Alert on Physician-Owned Entities

Special Fraud AlertOn March 26, 2013, the Office of Inspector General (OIG) issued a new Special Fraud Alert regarding physician-owned entities. Physician ownership or investment in entities that derive revenue from selling or arranging for the sale of medical devices, supplies or equipment has been an area of OIG scrutiny for over two decades. OIG has issued a number of guidance documents on the subject of physician investments in entities to which they make referrals of patients for healthcare products and services, including a 1989 Special Fraud Alert on joint venture arrangements and various subsequent statements. In June 2011, the Senate Finance Committee minority staff issued a report that raised concerns about physician-owned distributorship (POD) arrangements. This resulted in a letter from five senators representing various key committees directing OIG and the Centers for Medicare and Medicaid Services (CMS) to study and report back regarding the increased occurrence of PODs. In September 2011, OIG wrote a letter to the committees announcing that it would conduct a national study on spine implant PODs. Similarly, CMS responded to the committees by letter providing an update on its rule-making efforts with respect to the Physician Payment Sunshine Act and Accountable Care Organization rules but did not specify any policy position on how these rules might be applicable to PODs.

PODs can take a variety of forms. They can involve investment in a medical device manufacturer, a joint venture between physicians and a medical device manufacturer to engage in research and development and manufacturing of medical devices or in distributing medical devices, and they can involve a separate entity owned either solely by physicians or by physicians and other investors, in which entities either engage in the development and manufacturing of medical devices or the wholesale or distribution of medical devices, with or without some oversight or management services from a medical device manufacturer. The Senate committees and OIG have been particularly concerned about PODs which have as their primary, if not only, customers facilities where the physician investors in the PODs perform surgeries, particularly if the only sales of the medical devices are in connection with surgeries performed by those physician investors. This type of arrangement is an area of particular focus in this new Special Fraud Alert from OIG.

The Federal Anti-Kickback Statute, Section 1128B(b) of the Social Security Act, makes it a criminal offense to knowingly and willfully offer, pay, solicit or receive any remuneration to induce, or in return for, referrals of items or services reimbursable by a federal healthcare program. OIG is charged with enforcing the Federal Anti-Kickback Statute and has scrutinized PODs with respect to whether they create unlawful remuneration in exchange for referrals by the physician owners.

The Special Fraud Alert lists a number of what OIG calls “suspect characteristics” of a POD that would likely be found to violate the Anti-Kickback Statute. Most of those suspect characteristics are similar to ones outlined in previous Special Fraud Alerts and are features that most physicians, with advice of good legal counsel, would avoid anyway.  They include such factors 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 from the POD are not made in proportion to ownership interest.
  • Physician-owners condition their referrals to hospitals or ASCs on their purchase of the POD’s devices through coercion or promises, for example, by stating or implying they will perform surgeries or refer their patients elsewhere if the facility does not purchase devices from the POD.
  • Physician-owners are required, pressured, or actively encouraged to arrange for purchase of the devices sold by the POD.
  • The POD retains the right to repurchase a physician-owner’s interest if the physician fails or is unable to make sufficient referrals for purchase of the POD’s devices.
  • The POD is a shell entity that does not conduct appropriate product evaluations, maintain sufficient inventory of its own, or employ or otherwise contract with personnel necessary for operations.
  • The POD does not maintain continuous oversight of all distribution functions.
  • When a hospital or an ASC requires physicians to disclose conflicts of interest, the POD’s physician-owner’s fail to disclose, or actively conceal, their ownership interest in the POD.

What is more interesting about this Special Fraud Alert is its particular emphasis on implantable medical devices. OIG states that since these tend to be “physician choice” devices in particular (a patient usually does not choose which hip implant brand they want), PODs that involve investment by the surgeon ordering the device are particularly susceptible to fraud and abuse. Moreover, OIG cautions hospitals and ambulatory surgery centers of their own exposure for being found in violation of the Anti-Kickback Statute for entering into arrangements with PODs. We have seen an increased reluctance by such facilities to purchase from PODs, and I expect this repeated warning from OIG will only further that reluctance, making it more difficult for PODs to be successful in selling implantable devices to facilities at which some or all of the physician investors perform surgeries.

Notably, OIG continues to stop short of declaring all PODs to be in violation of the Anti-Kickback Statute. This latest in a series of fraud alerts, however, shows that these arrangements continue to be “inherently suspect” in the view of OIG and OIG is certainly tightening the circles around which arrangements it would consider to be possibly permissible under the Anti-Kickback Statute. While there are certainly perfectly legitimate physician-owned entities involved in the research and development, manufacture and sale of medical devices which should be allowed to continue, before any physician undertakes to invest in or form such a business venture, they should consult experienced legal counsel with in-depth knowledge of these federal and state healthcare regulations.