OIG Issues Special Fraud Alert on Physician Owned Distributorships

By Delia A. Stubbs & Alan M. Kirschenbaum –

Yesterday the OIG issued a Special Fraud Alert on physician owned distributorships, or PODs.  The OIG describes these entities as “physician owned entities that derive revenue from selling, or arranging for the sale of, implantable medical devices ordered by their physician owners in procedures the physician owners perform on their own patients at hospitals or ambulatory surgery centers.”  Although the Fraud Alert primarily addresses PODs of implantable medical devices, the OIG clarified that the principles set forth in the Fraud Alert “would apply when evaluating arrangements involving other types of physician-owned entities.”

Mincing no words, the Fraud Alert twice describes PODs as “inherently suspect under the antikickback statute.”  That law makes it a crime to willfully offer, pay, solicit, or receive any remuneration to induce, or in return for, referrals of items or services reimbursable by a Federal health care program.  42 U.S.C. § 1320a-7b(b).  The OIG explains that “financial incentives PODs offer to their physician-owners may induce physicians both to perform more procedures (or more extensive procedures) than are medically necessary and to use the device the PODs sell in lieu of other, potentially more clinically appropriate, devices.”  This is especially true for implantable medical devices, the OIG states, because the choice of brand and type of the device may be made or strongly influenced by the physician.  The Fraud Alert describes certain attributes of suspect PODS, such as distributions based on the actual or expected volume of devices used by a physician owner, or physician owners conditioning referrals to hospitals on the latter’s purchase of the POD’s devices.  Heightened scrutiny is triggered by disproportionately high rates of return, or physicians’ changing their medical practices (e.g., performing more surgeries) after investing in a POD. 

This is not the first time the OIG has focused on PODS.  In a 2006 public letter, the OIG noted “an apparent proliferation of physician investments in medical device and distribution entities, including group purchasing organizations,” and stated that OIG guidance on joint ventures (which includes a safe harbor regulation on investment interests) would apply to such entities. 

In June 2011, the minority staff of the Senate Finance Committee issued a report on PODS, followed the same month by a letter to the OIG from the Committee expressing concern about potential federal health care program abuse by PODs and requesting the OIG to conduct an inquiry into these organizations.  The OIG’s FY 2012 and 2013 Work Plans refer to such a report in preparation, but none has been forthcoming yet.

It bears mention that, under a recent rule issued by the Centers for Medicare & Medicaid Services (CMS) to implement the physician payment transparency (“sunshine”) provisions of the Affordable Care Act, “applicable group purchasing organizations” (GPOs) will be required to report their physician ownership and investment interests, as well as the payments they distribute to their physician owners and investors.  PODs that meet the rule’s definition of applicable GPOs will have to meet these reporting requirements.  Moreover, CMS takes the questionable position in the preamble that distributors who take title to federally reimbursable medical products are “applicable manufacturers” subject to sunshine reporting requirements.  See 78 Fed. Reg. 9458, 9461 (Feb. 8, 2013).  (Our memorandum summarizing this regulation is available here.)  Under this interpretation, even PODs that are not GPOs will be required to report their physician ownership and investment interests as well as the payments they distribute to their physician owners and investors.  With this new transparency, public and government focus on PODs is unlikely to wane.