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What does the OIG fraud alert on physician-owned entities mean?
On March 26, 2013, the Office of Inspector General of the Department of Health and Human Services issued a special fraud alert about physician-owned distributorships. Physician-owned distributorships (PODs) are entities owned by physicians that sell implantable medical devices that are used by the physician owners. These entities have sprung up as hospitals and physicians seek ways to lower device costs, and physicians seek avenues to address falling compensation.
The legal framework surrounding PODs has always been somewhat murky. In April 2008, CMS specifically solicited comment about PODs. Since then, several prominent law firms have indicated that they believe PODs are defensible, while others have offered unrelenting criticism. The fraud alert suggests that both sides may have a point. The fraud alert is clearly designed to throw cold water on the use of PODs, although the alert does not claim that PODs are always illegal. Instead, it characterizes them as “inherently suspect” under the Medicare Anti-kickback Statute.
The Medicare Anti-kickback Statute makes it a felony to offer, solicit, receive or pay anything of value if the payment is intended to influence referrals under a Federal healthcare program. The law is intent-based, meaning that the entire legal analysis hinges on why the parties have entered into a transaction. Courts have applied a “one purpose” test, meaning that if there are many reasons for a payment, but one of the reasons is to influence referrals, whoever had that intent is guilty of a felony.
The alert expresses concern that many PODs are created, at least in part, by a desire to influence referrals. The alert lists three features that it suggests are particularly troublesome: 1) selecting investors because they are in a position to generate business, 2) requiring investors who cease practicing in the service are to divest their ownership, and 3) returns that are disproportionately relative to the risk involved.
The alert includes five additional characteristics, such as conditioning referrals to a hospital or ambulatory surgery center (ASC) on the hospital/ASC’s use of the POD, or pressuring the physician owners to use the POD. The Office of Inspector General (OIG) explains that their main concern is that an owner of a POD may choose to perform more procedures, or more expensive procedures, than physicians who do not invest.
The alert highlights two red flags. The OIG is particularly worried when there are few investors in a POD, meaning that any one physician’s choices are likely to have a major impact on profit. The OIG is also focused on situations where a physician’s practice pattern changes after the physician invests in the POD.
While the fraud alert is somewhat big news because it is the OIG’s first clear statement about PODs. The analysis contained in the alert is not terribly surprising or controversial. The OIG has made similar statements about other physician-owned organizations, such as ASCs. In fact, the alert specifically notes that the same analytical principles used in the alert apply to other physician-owned entities. In that regard, the alert isn’t revolutionary. That said, the OIG has never issued a fraud alert about ASCs, and the alert suggests that the OIG may be considering applying a higher level of scrutiny to PODs than to other physician ownership relationships.
The alert shouldn’t prompt PODs to immediately cease operation, but it should serve as a vital reminder that PODs, like most relationships in the health care industry, come with real risk. Whenever payments to physicians vary based on the volume or value of referrals, or physicians are pressured into particular referral patterns, or forced to sell an investment because of their inability to bring business, there is a real potential of violating the Anti-kickback Statute. Since violating the Anti-kickback Statute is a felony, this is not a risk to be dismissed lightly, especially since it appears that the OIG will be carefully scrutinizing PODs.
Reference:
https://oig.hhs.gov/fraud/docs/alertsandbulletins/2013/POD_Special_Fraud_Alert.pdf