• OIG Issues Warning to Hospitals and Other Providers In Special Fraud Alert on Physician-Owned Distributorships for Implantable Medical Devices
  • April 4, 2013 | Author: Clay J. Countryman
  • Law Firm: Breazeale, Sachse & Wilson, L.L.P. - Baton Rouge Office
  • On March 26, 2013, the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services issued a Special Fraud Alert on Physician-Owned Entities.  In the introduction, the OIG provided that this Special Fraud Alert addresses physician-owned entities (i.e., referred to as physician-owned distributorships or “PODs”) that derive revenue from selling implantable medical devices ordered by their physician owners for use in procedures the physician-owners perform on their own patients at hospital and ambulatory surgical centers (ASCs).

    The OIG also emphasized in the introduction to this Special Fraud Alert that the OIG has previously issued several “general” guidance documents on the topic of physician investment to entities to which they refer, and that they have specifically issued previous guidance addressing physician investments in medical device manufacturers and distributors in a Oct. 6, 2006 letter to the health care industry.  In this particular Special Fraud Alert, the OIG noted that this Fraud Alert focuses on “the special attributes and practices of PODs that we believe produce substantial fraud and abuse risk and pose dangers to patient safety.”

    Application of the Anti-Kickback Statute to Physician Investments
    The OIG emphasized its position in “longstanding” OIG guidance that the opportunity for a referring physician to earn a profit, including through an investment in an entity for which a physician investor generates business, could constitute illegal remuneration under the Anti-Kickback Statute.  The OIG also listed the following aspects that the OIG has “repeatedly expressed” concerns under the Anti-Kickback Statute in arrangements (i.e., joint ventures) with physicians:

    1. Selecting investors because they are in a position to generate substantial business for the entity;
    2. Requiring investors who cease practicing in the service area to divest their ownership interests;
    3. Distributing extraordinary returns on investment compared to the level of risk involved.

    The OIG commented that PODs that exhibit any of the above aspects or other questionable features potentially raise four major concerns typically associated with kickbacks, including: (1) corruption of medical judgment, (2) overutilization, (3) increased costs to the Federal health care programs and beneficiaries, and (4) unfair competition.  The OIG stated that they were particularly concerned about the presence of financial incentives in the implantable medical device context because devices typically are “physician preference items,” meaning that both the choice of brand and the type of device may be made or strongly influenced by the physician, rather than being controlled by a hospital or ASC where a procedure is performed.  

    Hospitals and other providers should note that the OIG commented that a disclosure to a patient of the physician’s financial interest in the POD (which is commonly required by certain state laws) “is not sufficient” to address fraud and abuse concerns.

    This OIG Special Fraud Alert on Physician-Owned Entities listed the following concerns of which the OIG is “particularly concerned”:

    • 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 are not made in proportion to ownership interest, or physician-owners pay different prices for their ownership interests, because of 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 through coercion or promises, for example, by stating or implying they will perform surgeries or refer patients elsewhere if a hospital or an ASC does not purchase devices from the POD, by promising or implying they will move surgeries to the hospital or ASC if it purchases devices from the POD, or by requiring a hospital or an 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 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 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.
    • The 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.
    • The POD does not maintain continual oversight of all distribution functions.

    In its conclusion, the OIG noted that the Anti-Kickback Statute is not a prohibition on the generation of profits; however, PODs that generate disproportionately high rates of return for physician-owners may trigger heightened scrutiny.  These comment imply the OIG does not consider successful physician investments in other health care providers to be illegal; however, other factors associated in a physician’s investment and the structure of PODs may result in the OIG taking a position that distribution of profits closely aligned with a POD providing implantable medical devices ordered by a physician investor may constitute illegal remuneration for the orders.  

    Hospital’s should pay close attention to this Special Fraud Alert because in highlights the increasing potential for scrutiny and enforcement action by the OIG and other enforcement agencies.

    A copy of the OIG Special Fraud Alert on Physician-Owned Entities is available on the OIG’s web site at www.oig.hhs.gov/  under Whats New.