Physician-owned distributorships contribute to our perceptions

Douglas W. Jackson

During the past 2 years, I have become aware of physician-owned distributorships. While some Orthopedics Today readers may know very little about them, other readers may know more about them than I. Some orthopedists may have already started or joined one from their inception.

Physician-owned distributorships (PODs) are formed by physicians – orthopedic surgeons are often involved – and sales agents. The business entities purchase orthopedic devices and implants from manufacturers at discounted prices and then sell them at a higher price oftentimes to the hospital or surgery centers where the physicians work. In other instances, these PODs serve primarily as “middlemen” to give the physician investors the opportunity to profit from the sale and utilization of the medical devices provided to hospitals.

According to a report by the Senate Finance Committee conducted in June, more than 40 PODs have opened in California. More than 20 other states have seen some form of PODs open in recent years. Additionally, there has been a marked increase in PODs in rural areas.

Why are physicians forming PODs?

With reimbursement levels decreasing and practice overheads increasing, many physicians have explored alternate revenue sources to maintain and supplement their incomes. They believe they should share in profits like other business people, including their institutions.

For similar reasons, we have seen an explosion of ancillary services with an increasing number of orthopedic surgeons now owning surgery centers, X-ray equipment, MRI facilities, CAT scanners, physical therapy practices or selling durable medical equipment. Many practices make more from ancillary services than from traditional patient care. Strong arguments for physician ownership of ancillary services are patient convenience and quality of care. If an orthopedist does not own and operate these entities, then other specialties and hospitals will – oftentimes at higher prices with less quality, efficiency and physician control.

Similar arguments have arisen in the debates about PODs. Proponents ask why should hospitals be able to limit vendor choice by pricing decisions for patients and surgeons by dictating what vendors’ products are approved in their systems. They argue that hospitals allow companies to bid for business and then choose vendors that contribute to their profit stream. The chosen vendors often limit the physicians’ implant choices. In these cases, the question exists if the financial interests of the hospital are more important than the patient’s best interest.

Legal and ethical issues

From inception, there have been concerns regarding the nature and financial incentives of PODs. Likewise, few physicians have entered into a POD arrangement as there are many unanswered questions and a general fear of further scrutiny and future regulations.

Conflict of interest is often an issue because the physician owners both request that their institutions buy the products they sell and then implant the requested products. The financial incentives for the physician investors also raise the issue of self-referrals under the Stark Law and may potentially implicate the federal anti-kickback statute.

Physician-owned distributorships operate in a legal “gray area” and have avoided the Stark regulations as written and interpreted. However, they are currently being scrutinized under Stark Laws as “any arrangement involving remuneration, direct or indirect, between a physician (and a member of a physician’s immediate family) and an entity.” 42 C.F.R. § 411.354(c).

Some attorneys have set up entities in which they use indirect compensation arrangements looking at fair market values and aggregate compensation versus individual compensation based on volume. Others have used administrative fees creatively with the compensation fixed in advance, which does not vary on referrals and volume of usage. Attorneys have tried to structure these entities in such a way that compensation requirements fall under the anti-kickback safe harbors for personal services and management contracts.

In complying with existing rules, the owners need to give full disclosure to their patients related to their financial involvement in the device or implant selection. However, no one POD model has evolved as a “sure thing,” and questions about their legality will continue until the U.S. Department of Justice issues an official ruling.

Senators request probe of surgeons

According to a recently published study in the Journal of the American Medical Association, the increase in the number of PODs coincides with an explosion in spinal fusion surgery in Medicare beneficiaries. Deyo et al found that the rate of complex fusion procedures increased 15-fold, from 1.3 to 19.9 per 100,000 beneficiaries from 2002-2007. Based on a Wall Street Journal analysis of Medicare claims data, Medicare spent $343 million for spinal fusion surgery in 1997, a number which has increased to $2.24 billion in 2008.

In addition to looking at PODs, senators also want more information about a Wall Street Journal report that claims that payments of at least $62 million were made to 15 surgeons from a medical device company. The senators question how the funds may have influenced the clinical studies and device selections. As such, the claims are among the factors the senators have asked the Inspector General of the Department of Health and Human Services to include in its investigation of PODs and the influence of industry on spinal research.

I find it ironic that our congressional leaders are the ones raising issues of hypocrisy and conflict of interest. Could the headlines be turned around and read that surgeons are requesting a probe of senators on kickbacks, conflicts of interest and profiteering from their choices? Many congressional representatives have been masters at manipulating financial incentives and funding from lobbyists. This does not justify this behavior in our profession and raises the real issue. Should we as a profession review and address potential conflicts of interests in a more aggressive manner?

Bad publicity

Patients undergoing surgery as individuals place their trust in their surgeons to do what is right for them. They are dependent on the surgeon’s choice of hospital or surgical center and what implants and devices are used based on what is best for them. The recent and ongoing bad publicity affects us by the implication that surgeons are steering business to themselves based on their profiting.

An egregious example recently covered in the national media involved a Portland, Oregon neurosurgeon who reportedly performed unnecessary spinal surgery, including multiple spinal surgeries on the same patients. It was reported he used spinal implants supplied by a POD, which paid some surgeon investors as much as $500,000 a year to use its devices. The POD has subsequently closed and the neurosurgeon lost his hospital privileges and is now under investigation by the Oregon Medical Board.

This type of behavior results in substandard care and bad publicity. It is unfortunate that it occurs, even if it involves a very small percentage of physicians. The medical community in this example was slow in doing something decisive.

We know how difficult it is to discipline a colleague and how long it takes to work through the process. Our system takes time to work through all the hearings and legal aspects of restricting a physician’s ability to practice. However, we need to be involved in these debates and reviews sooner, respond positively and be involved in the necessary discipline and outcomes. Flagrant conflicts of interest undermine the credibility of our profession, and we need to be more active in defining and policing what they are.

Reference:

• Deyo RA, Mirza SK, Martin BI, Kreuter W, et al. Trends, major medical complications, and charges associated with surgery for lumbar spinal stenosis in older adults. JAMA. 2010; 303(13):1259-1265.

• Douglas W. Jackson, MD, is Chief Medical Editor of Orthopedics Today. He can be reached at Orthopedics Today, 6900 Grove Road, Thorofare, NJ 08086; email: OT@slackinc.com.