OIG Says Physician-Owned Distributors of Medical Devices Pose High Risk of Fraud and Abuse

The Office of the Inspector General issued a Special Fraud Alert on March 26, 2013, reiterating its long-standing view that physician-owned distributors of medical devices (commonly used in orthopedics) are “inherently suspect” under the federal Anti-Kickback Statute. This guidance makes clear that revenue generated through a POD could be considered illegal remuneration under the AKS, particularly if the POD chooses physician-investors based on their ability to provide business to the POD or if the POD mandates that physicians who stop practicing give up their ownership stakes.

Definition of “POD” and OIG Concern

The alert defines a “POD” as any physician-owned entity that derives revenue from selling, or arranging the sale of, implantable medical devices ordered by the physician-owners that are then used in procedures performed by the physician-owners in hospitals or ambulatory surgical centers. According to the OIG, PODs may offer their physician-owners financial incentives to perform more—or more extensive—procedures than are medically necessary and to use the POD’s devices instead of other devices that may be more clinically appropriate. The OIG also says that a physician’s disclosure to patients of his or her involvement in a POD will not be enough to alleviate OIG concerns over the arrangements.

Suspect Characteristics of PODs

The alert lists eight POD characteristics that could present a higher risk of fraud and abuse, including:

• The size of physician ownership stakes correspond to the expected or actual volume of devices used by the physicians.
• Distributions are not made in proportion to ownership interest, or physician-owners pay different prices for their ownership interests, due to the expected or actual volume or value of devices used by the physicians.
• The physician-owners condition their referrals to hospitals or ASCs on their purchase of the POD’s devices through coercion or promises (e.g., by stating or implying that the physicians will perform surgeries or refer patients elsewhere if a hospital or an ASC does not purchase devices from the POD, or by requiring a hospital or an ASC to enter into an exclusive purchase arrangement with the POD).
• The physician-owners are required or actively encouraged to use the POD’s devices on patients—or, conversely, are penalized for not using them. Such penalties may take the form of decreased distributions to the physicians or required divestiture by the physicians.
• The POD is a “shell entity.” That is, the POD 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 conduct consistent oversight of its distribution.
• The POD has the right to buy out a physician’s investment stake if the physician fails to refer or recommend the purchase of the POD’s devices.
• When a hospital or an ASC requires physicians to disclose conflicts of interest, the POD’s physician-owners fail to disclose their interest in the POD.

The alert also associates PODs that have a high return on investment rate with an increased risk of fraud and abuse.

Although the alert is focused on PODs of implantable medical devices, the OIG clarifies that “the same principles would apply when evaluating arrangements involving other types of physician-owned [entities]” (emphasis added).

Scrutinize POD Arrangements

This alert, which is the first issued by the OIG since 2010, signals the OIG’s clear enforcement position on PODs. Hospitals, ASCs and other providers that do business with PODs are well-advised to conduct a priority legal analysis of their POD arrangements. Otherwise, such providers may be at risk of violating the AKS, since the AKS imposes criminal and civil penalties on both sides of the impermissible “kickback” relationship.