Physician-Owned Distributor (POD) Update: Device Manufacturer's Challenge to OIG Fraud Alert Fails; OIG Finds PODs Increase Medicare Costs; and Hospitals Continue to Adopt Anti-POD Policies

This post was written by Elizabeth Carder-Thompson.

We have been reporting for some time on issues involving the Office of the Inspector General (OIG) scrutiny of physician-owned distributors (PODs).  In March 2013, we analyzed an OIG Special Fraud Alert on PODs and in October we reported on an interesting challenge to the Fraud Alert filed by a medical device manufacturer in the U.S. District Court for the Central District of California.  That suit argued that the Fraud Alert unfairly and unconstitutionally burdened the plaintiff’s First Amendment rights of free speech and due process. Below, we report on the disposition of that case, and several other related POD developments.

Reliance Medical Systems had described itself in its complaint as “a design company that collaborates with spine surgeons to design highly customized spinal implant devices and surgical tools.”  It stated that it had physician owners from its beginning in 2006, characterizing this as a business model that “maximizes and optimizes physician design input,” but it subsequently moved away from that model.  Among other things, the complaint argued that “Big Corporations” that had been forced to compete with small physician-owned entities undertook a multi-year lobbying crusade, resulting in the OIG’s issuance of Fraud Alert.  In a separate part of the complaint, Reliance allowed that “the OIG is currently investigating Reliance, and its physicians with whom Reliance previously communicated.”  It went on to explain that it now wished to return to a physician-owned business model, but that the Fraud Alert’s characterization of PODs as “inherently suspect” under the federal anti-kickback statute was chilling its ability to speak with prospective physician owners.  It also expressed concern about future OIG investigations, and about reluctance by hospitals and ambulatory surgical centers to enter contracts with it, for fear that they themselves may be “at risk” under the Fraud Alert for doing business with physician-owned entities.

While Reliance claimed it suffered both present and prospective injuries, the court found that it failed to demonstrate an actual or imminent injury to any legally protected interest, stating:

What has “chilled” Reliance’s speech about forming a physician-owned entity, the Court surmises, is its fear that forming such an entity will be viewed as illegal. Reliance’s argument is, at base, that the [Fraud Alert] has created uncertainty regarding whether such conduct is legal, thereby inhibiting it from discussing it. This is not a First Amendment injury that would confer standing.

The court further found that any injury to Reliance was “purely speculative,” and therefore that Reliance lacked standing to raise a due process claim.

The court went on to assert that, even if it had subject matter jurisdiction, it would decline to exercise it.  In short, the court found that there had been no “concrete action” in applying the Fraud Alert, and therefore that the action was not ripe.  Thus, it granted the motion to dismiss filed by the government.

Meanwhile, and not surprisingly, the tide definitely seems to have turned against the POD business model.  Beyond the Fraud Alert, the OIG in October 2013 issued a report on the prevalence and use of PODs by hospitals, finding that, “in FY 2011, PODs supplied devices used in nearly one in five spinal fusion surgeries billed to Medicare.”  Hospitals using physician-owned companies averaged 28 percent more spine surgeries, and their rate of spinal fusions jumped 21 percent after they began purchasing from PODs (compared to a 9 percent increase for hospitals overall, during the same period).   The OIG’s overall findings in the report are – as alluded to in the underlying Fraud Alert – that PODs likely increase Medicare costs and raise anti-kickback and conflict of interest concerns:

Our findings raise questions about PODs' claim that their devices cost less than those of other suppliers. Surgeons performed more spinal surgeries at hospitals that purchased from PODs, and those hospitals experienced increased rates of growth in the number of spinal surgeries performed in comparison to the rate for hospitals that did not purchase from PODs. Taken together, these factors may increase the cost of spinal surgery to Medicare over time. Finally, hospitals' policies varied in whether they required physicians to disclose ownership interests in PODs to either the hospitals or their patients. Thus the ability of hospitals and patients to identify potential conflicts of interest among these providers is reduced.

A July 25, 2013 article in the Wall Street Journal, “Surgeons Eyed Over Deals with Medical-Device Makers,” listed many large hospital and health systems across the country choosing not to do business with PODs.  Our own recent experience is that some hospitals even are requiring signed certifications from all vendors – including non-spine entities — that they have no physician ownership.  The new “Sunshine” regulations which now are effective require increased reporting of physician ownership by drug and device entities as well as group purchasing organization, and the published results will likely cause this scrutiny of PODs to continue unabated.

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