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Health Law News From Arnold & Porter
April 01, 2013
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OIG's strong language on physician-owned distributorships is clear message to investors

From international law firm Arnold & Porter LLP comes timely views on current regulatory and legislative topics that weigh on the minds of today’s physicians and health care executives.

In a Special Fraud Alert released on March 26, the Department of Health and Human Services Office of Inspector General (OIG) stated in no uncertain terms that physician-owned entities that arrange for the sale of “implantable medical devices ordered by their physician-owners for use in procedures [that] the physician-owners perform on their own patients at hospitals or ambulatory surgical centers” are “inherently suspect under the anti-kickback statute.”

 

According to the OIG alert, these PODs “produce substantial fraud and abuse risk and pose dangers to patient safety.” As such, a POD that exhibits “any of the following suspect characteristics” will be of particular concern:

  • 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 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.

Ted Lotchin

These characteristics are particularly troublesome to the OIG in the implantable medical device context because the use of these “physician preference items” may be “strongly influenced” by a POD’s physician-investors, “rather than being controlled by the hospital or ASC where the procedure is performed.” It is unclear whether the OIG’s alert is a direct response to the Senate Finance Committee’s investigation of physician-owned entities, but the strong language in this guidance document should not be taken lightly by investors in these entities or the hospitals and ASCs with which these entities conduct business.

Ted Lotchin, JD, MPH, can be reached at Arnold & Porter LLP, 555 12th St. NW, Washington, DC 20004-1206; 202-942-5250; email: Ted.Lotchin@aporter.com