Increased Government Scrutiny of Physician-Owned Device Distributorships

On March 26, 2013, the Office of Inspector General of the U.S. Department of Health and Human Services (OIG) increased its scrutiny of and pressure on physician-owned entities (particularly medical device distributorships) by issuance of a Special Fraud Alert. Although there is nothing specifically new or different from positions taken previously by the OIG regarding physician-owned distributorships (PODs), the Special Fraud Alert clarifies that the “OIG is concerned about the proliferation of PODs.” In other words, the position previously adopted by the OIG has not prevented physicians and medical device companies from designing arrangements that trouble the OIG.

In particular, the OIG is concerned that the role of referring physicians in PODs may affect the medical decision making of physicians and hospitals. If referring physicians benefit financially from ownership in distributorships of devices used in surgeries on their patients, this financial involvement may result in the “corruption of medical judgment, overutilization, increased costs to the Federal health care programs and beneficiaries, and unfair competition.” In other words, if a POD’s business is based primarily on the referrals or product use of its physician-owners, those referring physicians have an incentive to use the POD’s products instead of possibly better products and even though use of the product may not be the appropriate medical course of treatment.

The OIG also cautions hospitals, which are typically the purchasers of implantable devices used in surgeries, that purchasing from a POD owned by a physician whose referrals the hospital is seeking to attract or retain may be a violation of the anti-kickback statute. This problem may exist, even if the surgeon attests to the clinical superiority of the devices distributed by the POD in which the referring surgeon has invested.

The Special Fraud Alert is designed as a warning, both in its tone and because it does not reference the existing small-entity investment safe harbor to the anti-kickback statute, which insulates PODs from anti-kickback liability if the safe harbor criteria are implemented and observed by the POD. In general, the Special Fraud Alert does not change the types of distributorships that are appropriate vehicles for physician investment—entities that have a legitimate business purpose in the marketplace and that seek to expand their business beyond their physician investors.

Because of the OIG’s focus on PODs in the Special Fraud Alert, however, structuring and evaluating such ventures is likely to require strict legal analysis and continued adherence to safe harbor requirements and legitimate business purposes.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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