Current Regulatory Challenges Facing Physician-Owned Distributorships

Reesa N. Handelsman, Esq.
Kevin R. Miserez, Esq.

Over the past two years, arrangements known as physician-owned distributorships (“PODs”) have come under increased scrutiny by the Federal government. In general, PODs are entities with physician owners or investors that sell implantable medical devices to healthcare facilities, including hospitals and ambulatory surgical centers. PODs commonly generate revenue through their physician-owners ordering the implantable medical devices for procedures on their own patients at the healthcare facilities. While PODs can be structured in a number ways, the typical POD arrangement generally enables physician-investors to receive a return on investment tied to the volume or value of devices sold by their POD. While proponents of the POD model contend that PODs encourage industry innovation and reduce the cost of devices to healthcare facilities, POD critics argue that PODs hinder physician owners’ clinical decision-making and increase healthcare costs through increased utilization of implantable devices and associated surgical procedures.

On March 26, 2013, the Office of Inspector General (“OIG”) echoed its long-standing position that arrangements providing physicians the ability to earn a profit for referrals, even through an investment for which the physician generates business, could constitute illegal remuneration under the federal Anti-Kickback Statute (“AKS”), in a Special Fraud Alert. While the intent of the parties is the determining factor of whether an AKS violation has occurred, the OIG expressed its belief that PODs are “inherently suspect” under the AKS. The Alert went on to provide several “suspect characteristics” of PODs that may evidence unlawful intent under the AKS, including: (1)the size of the investment offered to physicians varies based on the expected or actual volume of devices they used or will use; (2)distributions are not made in proportion to ownership interest or physician-owners pay different prices for their ownership interests, on account of the expected or actual volume or value of devices they used or will use; (3)the physician-owners condition their referrals to hospitals or healthcare facilities on the purchase of the POD’s devices through coercion or promises; (4)physician-owners are required, pressured or encouraged to refer, recommend, or arrange for the purchase of the POD’s devices, or experience or are threatened with negative repercussions for failing to use the POD’s devices on their patients; (5)the POD retains the right to repurchase the physician’s ownership interest for the physician’s failure or inability to refer, recommend or arrange for the purchase of its devices; (6)the POD is a shell entity that does not conduct appropriate evaluations, maintain or manage sufficient inventory, or engage personnel necessary for operations; (7)the POD does not maintain continuous oversight of its distribution functions; (8)physicians actively conceal, or fail to disclose, their ownership interest in the POD when required to disclose conflicts of interest by a hospital or healthcare facility; (9)POD physician-owners are few in number such that the volume or value of referrals correlates closely to the physician’s return on investment; and (10)POD physician-owners’ behaviors change after becoming an investor (e.g., increases in the volume or extensiveness of surgeries, or exclusive or near-exclusive use of the POD’s devices).

For POD arrangements that include one or more of the above “suspect characteristics,” the parties to the arrangement may find themselves more susceptible to government investigations and enforcement actions. If a healthcare facility is found to have violated the AKS, the entity may face penalties under the False Claims Act for submitting false claims to Medicare on behalf of procedures performed by the PODs’ physician-owners. In addition to monetary penalties under the False Claims Act, which may result in treble damages up to three times the value of the denied or disallowed claims, the AKS assigns criminal liability to parties on both sides of a transaction that violates the statute.

A recent example of the government’s Investigative and enforcement activity occurred in September 2014 when the United State Department of Justice (“DOJ”) filed two complaints under the False Claims Act against Reliance Medical Systems (“Reliance”) alleging that Reliance, Reliance’s owners and a neurosurgeon Reliance POD owner violated the AKS because Reliance’s PODs made payments to physicians to induce their use of the PODs’ implantable devices at the hospitals where the physicians performed their surgeries. The government alleges in its complaint that, during an eight month-period in 2010, the defendant neurosurgeon received an approximated $265,000 return on his initial $5,000 investment, used Reliance devices in approximately 90% of the spinal fusion surgeries he performed, and never used Reliance products prior to becoming a physician-owner in a Reliance POD. While the complaint does not name the hospitals that purchased the devices as defendants, there still remains a possibility that this may happen as these cases move forward or in other future DOJ complaints relating to PODs.

In light of the current legal landscape surrounding PODs, healthcare facilities should assess the above-mentioned factors and risks before entering into business arrangements with PODs. Healthcare facilities should also have protocols in place to mitigate the risks associated with purchasing devices from PODs, which may include implementing more stringent conflict of interest policies that identify and address financial relationships between physicians and PODs. For example, the Physician Payments Sunshine Act, which requires device manufacturers and group purchasing organizations to annually report all physician ownership and investment interests to CMS, makes physician-owners’ arrangements with PODs readily available to the public. Furthermore, to create more transparent purchasing environments, healthcare facilities may also standardize product purchasing to diminish physicians’ purchasing preference s and ensure that purchasing choices are made based on appropriate factors. Finally, a number of healthcare facilities’ policies preclude contracting with PODs altogether while others implement strict contracting parameters surrounding PODs, such as restricting contracting with PODs unless they comply with the small entity safe harbor of the AKS. Regardless of the approach, given the increased scrutiny surrounding PODs, healthcare facilities should implement appropriate measures to mitigate the risks associated with purchasing products from PODs.