OIG Issues Alert to Physician Device Distributorship Owners

Many surgeon clients have approached me over the years about investing in a physician-owned distributorship (POD).  A POD is a fairly common arrangement where a physician (typically a surgeon) purchases an ownership interest in a medical device company and then shares in the profits received by the distributor from sales to hospitals and ambulatory surgical centers (ASCs).  Surgeons are often attracted to ownership in a POD as a source of additional revenue.  Many believe that participation in a POD allows access to and a choice of the best and most innovative implants and devices for their patients. 

While there are many good reasons for surgeons to be owners of PODs, it has also been determined that a significant number of surgeon owners are not interested in ordering the most appropriate devices and implants for patients and will instead opt for  less appropriate devices and implants if those selections provide greater revenue to the POD.  The high profitability of surgeon-owned PODs has not gone unnoticed by healthcare regulators who have determined that such arrangements may constitute a direct criminal violation of the Anti-Kickback Statute (AKS) and other state and federal laws.

The Office of the Inspector General (OIG) recently issued a special fraud alert regarding POD arrangements. The OIG stated that it views a POD as “inherently suspect” under the AKS since PODs may encourage inappropriate medical referrals or recommendations by physicians unduly influenced by financial incentive. 

Consequently, if you participate in a POD or are considering doing so, it is important that you ensure that any such arrangement does not involve one or more of the following “suspect characteristics” identified in the recent OIG alert as of particular concern to the OIG:
• The investment offered to each physician varies with the expected or actual volume or value of devices used by the physician;
• Distributions are not made in proportion to ownership interest, but are based on the expected or actual volume or value of devices used by the physicians;
• Physician-owners condition their referrals to hospitals or ASCs on their purchase of the POD’s devices; for example, by stating or implying their choice of where they will perform surgeries or refer patients is dependent upon purchases from the POD;
• Physician-owners are required, pressured or actively encouraged by the POD to refer, recommend, or arrange for the purchase of the devices sold by the POD or, conversely, are threatened with or experience negative repercussions (e.g., decreased distributions, required divestiture) for failing to use the POD’s devices for their patients;
• The POD has the right to repurchase a physician-owner’s interest if the physician fails or is unable (through relocation, retirement, or otherwise) to refer, recommend, or arrange for the purchase of the POD’s devices;
• The POD is a shell entity (e.g., it does not conduct appropriate product evaluations, maintain or manage sufficient inventory in its own facility, or employ or otherwise contract with personnel necessary for operations);
• The POD does not maintain continuous oversight of all distribution functions; and
• The physician-owners either fail to inform the hospital or ASC of, or actively conceal through misrepresentations, their ownership interest in the POD, even if the hospital or ASC requires disclosure of such ownership.

There are certainly viable and legal ways for physicians to be involved in the development and distribution of medical devices, as long as the improper features described above are avoided and other precautions are taken.  It’s imperative that if you are considering any POD venture (or if are already involved with a POD) you promptly talk with knowledgeable legal counsel about the terms of the arrangement and the risk factors.  Implementing best-practices now will reduce the risk that your participation in a POD is illegal or more trouble than it’s worth.