Device Manufacturer Files Federal Challenge to OIG Special Fraud Alert on Physician-Owned Distributors
Suit argues Fraud Alert violates its First Amendment rights; alleges Alert stemmed from multi-year lobbying crusade by “Big Corporations” forced to compete with small physician-owned entities.
This post was written by Elizabeth Carder-Thompson.
On October 8, 2013, Reliance Medical Systems, LLC, filed a complaint in the U.S. District Court for the Central District of California, seeking a declaration that an Office of Inspector General (OIG) Special Fraud Alert on physician-owned distributors (PODs) unfairly and unconstitutionally burdens First Amendment rights of free speech and due process. (See our March 2013 analysis of the Fraud Alert.)
Reliance describes itself as “a design company that collaborates with spine surgeons to design highly customized spinal implant devices and surgical tools.” It states it had physician owners from its beginning in 2006, characterizing this as a business model that “maximizes and optimizes physician design input.” However, in 2012, before issuance of the Fraud Alert, it “moved away from the physician-owned entity business model, after careful consideration and out of an abundance of caution.” Interestingly, in a separate part of the complaint, Reliance allows that “the OIG is currently investigating Reliance, and its physicians with whom Reliance previously communicated.” The Complaint goes on to explain that it now wishes 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 is chilling its ability to speak with prospective physician owners. It also expresses 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.
The complaint provides a colorful chronology of events leading up to the OIG’s issuance of the POD Fraud Alert. First, it cites to the Ninth Circuit’s 1995 decision in Hanlester1 as the “leading case considering the limitations that the anti-kickback statute imposes on physician-owned entities,” concluding based on that decision that many physician-owned models are lawful. It further cites to a 2006 California Attorney General Opinion2 finding it appropriate under certain enumerated circumstances for a physician to prescribe medical devices distributed by a company in which the physician has an ownership interest. At that point, the account turns to describing a veritable crusade undertaken by “Big Corporations” – large entities also in the business of manufacturing medical devices – that the complaint alleges found their market share diminishing in the face of competition from the smaller physician-owned entities permitted by Hanlester and the California opinion. These Big Corporations are alleged to have mounted a campaign to influence the OIG to issue the POD Fraud Alert.
Among the actions said to have been undertaken by the Big Corporations during the ensuing years were:
- Forming lobbying entities
- Making major campaign contributions
- Hiring a major law firm to advocate for legislative and regulatory action before OIG, the Centers for Medicare & Medicaid Services, Congress, and states
- Causing the publication of papers and articles finding PODs to be abusive
- Lobbying successfully for Congressional hearings in 2011 (in turn causing the issuance of a Senate report on PODs questioning their legality)
- Successfully lobbying the OIG to issue the 2013 Fraud Alert finding PODs “inherently suspect” under the federal anti-kickback statute, even in the absence of “suspect characteristics,” and warning hospitals and other entities that they may be “at risk” if they choose to do business with PODs
Reliance argues that the Fraud Alert is, simply, “wrong and inconsistent with the law.” Further, it alleges “inappropriate leaks” to The Wall Street Journal and other publications of HHS-OIG efforts to enforce the Fraud Alert, including against Reliance itself, and it asserts the OIG has infringed its constitutional rights.
Nowhere in its complaint does Reliance address what the OIG characterizes in the Fraud Alert – and has long reiterated in multiple publications over the years – as “major concerns” that can arise from physician kickback activity and self-dealing: (1) corruption of medical judgment; (2) overutilization; (3) increased costs to federal health care programs and beneficiaries; and (4) unfair competition. Further, it fails to note that the OIG specifically acknowledges that the lawfulness of a particular POD under the anti-kickback statute is a fact-specific analysis that depends on the parties’ intent; that certain safeguards and characteristics might support the defensibility of a POD; and that the “anti-kickback statute is not a prohibition on the generation of profits.” All of these factors doubtless will be raised by the OIG in defense of the lawsuit.
In the meantime, while the Reliance complaint promises to reignite academic discussion of the POD issue among health care lawyers, it is unlikely to impact the willingness of physicians, hospitals, and other entities to re-enter the POD market.
1 Hanlester Network v. Shalala, 51 F.3d 1390 (9th Cir. 1995)
2 Opinion of Bill Lockyer, 89 Ops. Cal. Atty. Gen. 25 (2006)