On March 26, 2013, the United States Office of Inspector General (“OIG”) issued a Special Fraud Alert (the “Alert”) specifically addressing its longstanding fraud and abuse concerns regarding physician-owned distributorships (“PODs”) that earn revenue from the sale of implantable medical devices (including those that design and manufacture such devices under contractual arrangement) while generally noting that the same principles addressed in the Alert apply to other types of physician-owned entities. According to the OIG, such entities could involve corruption of medical judgment, overutilization, increased costs to the Federal health care programs and beneficiaries, and unfair competition.
According to the OIG, PODs are “inherently suspect” under the Anti-Kickback Statute, and further PODs that involve any of the following suspect characteristics are particularly concerning because they may evidence the intent required to violate the Anti-Kickback Statute (punishable criminally by fine and/or imprisonment, exclusion from Medicare and Medicaid and/or imposition of other civil monetary penalties against wrongdoers):
- 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 continual oversight of all distribution functions.
A POD and any other physician-owned entity should particularly avoid the above listed characteristics. Additionally, such entities should note that the list above is not exhaustive (i.e. it is not to be considered a “safe harbor”) as even an arrangement that avoids such characteristics may involve other suspect characteristics increasing the risk of fraud and abuse. As an example, the OIG states that a POD that exclusively serves its physician owner patient base poses a high risk of fraud and abuse under the Anti-Kickback Statute.
PODs and other physician owned entities should review the characteristics listed above with their healthcare attorney. In the event that a physician owned entity involves one or more of these characteristics, the arrangement should be restructured as soon as possible.