OIG Views PODs As "Inherently Suspect" Under the Anti-Kickback Statute

This post was also written by Elizabeth Doyle O’Brien.

Referencing what it deems a “proliferation” of physician-owned distributors (PODs), on March 26, 2013, the Department of Health and Human Services (HHS) Office of Inspector General (OIG) released a Special Fraud Alert identifying significant concerns with such entities under federal anti-kickback principles.¹ For purposes of the Alert, the OIG defines a POD as “any physician-owned entity that derives revenue from selling, or arranging for the sale of, implantable medical devices,” including “physician-owned entities that purport to design or manufacture, typically under contractual arrangements, their own medical devices or instrumentation.” Specifically, the OIG describes in somewhat unusual detail the multiple “attributes and practices” of PODs that the OIG believes “produce substantial fraud and abuse risk and pose dangers to patient safety.”

Notably, the Alert is focused on PODs that derive revenue from selling, or arranging for the sale of, implantable medical devices that are ordered by physician-owners for use in procedures that physician-owners “perform on their own patients at hospitals or ambulatory surgical centers (ASCs).” However, the OIG states that “the same principles would apply when evaluating arrangements involving other types of physician-owned entities.”

Brief Background

The legitimacy of PODs has been subject to question for a number of years by both Congress and the OIG. In June of 2011, a Finance Committee Minority analysis released by Sen. Orrin Hatch examined the growth of PODs, primarily in the orthopedic implant (spine and total joint) sector of the device industry. The Finance report concluded that “[t]he very nature of PODs seem to create financial incentives for physician investors to use those devices that give them the greatest financial return and that, in the process, patient treatment decisions may be based on personal financial gain. This is especially troubling given numerous concerned allegations provided to the Committee that, due to their financial interest, physician investors in PODs may perform more procedures than are medically necessary or may use implants of inferior quality or that are not best suited for the procedure.” For background on the Congressional activity, see our earlier update.

The OIG’s Work Plan for 2012 included an entry on PODs, as follows:

We will determine the extent to which physician-owned distributors (POD) provide spinal implants purchased by hospitals. We will also analyze Medicare claims data to determine whether PODs we identify in our review are associated with high use of spinal implants. PODs are business arrangements involving physician ownership of medical device companies and distributorships. PODs are focused primarily in the surgical arena and are currently primarily involve orthopedic implants such as spine and total joints. However, PODs appear to be quickly growing into other areas such as cardiac implants. Congress has expressed concern that PODs could create conflicts of interest and safety concerns for patients. (OEI; 01-11-00660)

Although the OIG report was expected in FY 2012, it has not yet been issued. Evidently, the OIG’s ongoing analysis has been such that it concluded a Fraud Alert was the most advisable next step.

Terms of POD Fraud Alert

The OIG summarizes the attributes and practices of PODs about which it has significant concerns as follows:

Selecting investors because they are in a position to generate substantial business for the entity;
Requiring investors who cease practicing in the service area to divest their ownership interest; and
Distributing extraordinary returns on investment compared to the level of financial risk involved.

The OIG states that such “questionable features” present four “major concerns” that are typical of kickbacks: (1) corruption of medical judgment; (2) overutilization; (3) increased costs to federal health care programs and beneficiaries; and (4) unfair competition. The OIG goes on to provide a more detailed series of POD characteristics that elevate the level of fraud and abuse risk in the OIG’s view (reprinted at end). The OIG adds that a POD “exclusively” serving its physician-owners’ patient base poses a higher risk of fraud and abuse than “a POD that sells to hospitals and ASCs on the basis of referrals from nonowner physicians.”

The OIG dismisses the notion that “disclosure to a patient of the physician’s financial interest in a POD is sufficient” to address its concerns, maintaining that “PODs are inherently suspect under the anti-kickback statute,” and cautions that the Alert should not be viewed as a road map for structuring acceptable POD entities. That said, the OIG acknowledges that the lawfulness of a particular POD under the anti-kickback statute is a fact-specific analysis and depends on the parties’ intent, and that certain safeguards and characteristics might support the defensibility of a POD. The OIG also concedes that the “anti-kickback statute is not a prohibition on the generation of profits.”²

The OIG specifically discusses in the Alert how PODs generating “disproportionately high rates of return for physician-owners may trigger heightened scrutiny.” Moreover, if “physician-owners are few in number” or “alter their medical practice after or shortly before investing in the POD,” in terms of the number of surgeries performed or the type of device the physician uses (for example, sudden exclusive use of the POD device), the OIG is particularly likely to view the POD as problematic under the anti-kickback statute. It believes such facts tend to show that referral volume bears directly on financial returns to the physician-owners.

Regarding PODs that “purport to design or manufacture their own devices,” the OIG states that the “risk of fraud and abuse is particularly high” where the physician-owners of the POD “are the sole (or nearly the sole) users of the devices” and that “claims—particularly unsubstantiated claims—by physician-owners regarding the superiority of [their] devices . . . do not disprove unlawful intent.”

Significantly, the Alert emphasizes that potential liability under the anti-kickback statute can extend to any ASC or hospital that purchases devices from a POD in order to “maintain or secure referrals from the POD’s physician-owners.” Thus, the third POD risk characteristic cited by the OIG in this regard looks at whether the physician owners (i) have stated or implied they will perform surgeries or refer patients elsewhere if the hospital or ASC does not purchase devices from the POD, (ii) have promised or implied they will move surgeries to the hospital or ASC if it does purchase devices from the POD, or (iii) have required the hospital or ASC to enter into an exclusive purchase arrangement with the POD.

Based on past experience, publication by the OIG of a Special Fraud Alert signals that increased investigative and enforcement activity is likely to follow. Given this, parties to existing POD arrangements—PODs themselves, device manufacturers, as well as hospitals and ASCs with POD purchasing arrangements—should work with their health care regulatory counsel to assess or reassess risk under the anti-kickback statute in light of the OIG’s detailed commentary.

POD Characteristics That Elevate Risk Per The OIG Fraud Alert:

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.

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¹ See OIG, “Special Fraud Alert: Physician-Owned Entities” (Mar. 26, 2013).

² The OIG perhaps is referencing a notable statement in a recent fraud and abuse opinion by the Sixth Circuit Court of Appeals, finding in favor of an entity under investigation, to the effect that: “Why a business ought to be punished solely for seeking to maximize profits escapes us.” U.S. ex rel. Williams v. Renal Care Group Inc., 2012 WL 4748104 (6th Cir. 10/5/12).