Physician-Owned Distributorships Raise Heightened Concern by OIG

In a special Office of Inspector General (OIG) fraud alert published last month by the OIG, OIG stated that physician-owned distributorships (“PODs”) have the “strong potential for improper inducements between and among the physician investors, the entities, device vendors and device purchasers.” A POD includes any physician-owned entities deriving revenue from selling, or arranging for the sale of, implantable medical devices ordered by the physician owner for use in procedures that the physician-owner performs on its own patients at hospitals or ASCs.

The Anti-Kickback Statute ascribes criminal liability to anyone (on both sides of the arrangement) who knowingly and willfully offers, pays, solicits or receives any remuneration to induce, or in return for, referrals or items or services reimburseable by a federal health care program. One purpose of the statute is to protect patients from inappropriate medical referrals or recommendations by health care professionals who may be unduly influenced by financial incentives. The OIG makes clear that a referring physician earning profit even through investment in an entity for which he or she generates business, could be illegal remuneration under the statute.

OIG is particularly concerned about POD investment arrangements that generate disproportionately high profits for physician-owners because the investment risk associated with PODs is often minimal. Therefore, OIG scrutinizes the selection of investors in a position to generate substantial business for the entity, in the entities requiring investors that cease participating in the service area to divest their ownership interests, and in those investors receiving “extraordinary” returns on investments compared to the level of risk involved.  OIG concerns are also heightened when physician-owners: 1.) are few in number, such that the volume or value of a particular physician’s recommendations or referrals closely correlates to that physician’s return on investment; or 2.) alter their medical practice after or shortly before investing in the POD (i.e., they perform more surgeries, or more extensive surgeries, or switch to using their PODs’ devices on an exclusive, or nearly exclusive basis).

OIG also fears that PODs breed corruption of medical judgment, overutilization, increased costs to Federal health care programs and beneficiaries, and unfair competition. Both the choice of brand and type of device are often made and strongly influenced by the physician, rather than controlled by the hospital or ASC where the procedure is performed. Therefore, OIG believes that physician-owners use the implantable devices of their PODs in lieu of other, more clinically appropriate devices or perform more procedures (or more extensive procedures) than are medically necessary.

Even in an age of transparency furthered by the Affordable Care Act, however, OIG does not believe that disclosure to a patient of the physician’s financial interest in a POD is sufficient to address these concerns. Nor will a physician-owner’s claim that their POD’s devices are superior in design or manufacturing disprove unlawful intent.

Because PODs may be lawful under the Anti-Kickback Statute, OIG scrutinizes the intent of the parties. However, the following characteristics are some examples that raise red flags for OIG:

• Size of investment offered to each physician varies with the volume or value (expected or actual) of devices used by the physician.

• Distributions are not proportional to ownership interest.

• Physician-owners pay different prices for ownership interests, because of the volume or value (expected or actual) of devices used by the physicians.

• Referrals to hospitals or ASCs are conditioned on the purchase of the physician’s POD devices through coercion or promises (i.e., physician states that or implies they will perform surgeries or refer patients elsewhere if a hospital or an ASC does not purchase devices from the POD; promises or implies they will move surgeries to the hospital or ASC if it purchases devices from the POD; or by requiring a hospital or ASC to enter into an exclusive purchase arrangement with the POD).

• Physician-owners are required, pressured, or actively encouraged to refer, recommend, or arrange for the purchase of the devices sold by the POD .

• Physician-owners are threatened with, or experience, negative repercussions (decreased distributions or required divestiture) for failing to use the POD devices for their patients.

• POD retains the right to repurchase a physician-owner’s interest for the physician’s failure or inability (through relocation, retirement, or otherwise) to refer, recommend, or arrange for the purchase of the POD’s devices.

• POD is a shell entity that 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.

• 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-owners either fail to inform the hospital or ASC of, or actively conceal through misrepresentations, their ownership interest in the POD.

The Anti-Kickback Statute is not a prohibition on the generation of profits and OIG does not wish to discourage innovation. However, OIG is particularly concerned with a physician’s intentional and illegitimate investment interests in PODs and thus, physicians should carefully consider their ownership arrangements with such entities.

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