The U.S. Department of Health and Human Services Office of Inspector General (OIG) recently issued a Special Fraud Alert expressing concern that physician-owned entities "that derive revenue from selling, or arranging for the sale of, implantable medical devices ordered by their physician-owners for use in procedures the physician-owners perform on their own patients at hospitals or ambulatory surgical centers (ASC)" raise significant fraud and abuse and patient safety concerns.

The Special Fraud Alert builds on OIG's previous guidance regarding physician investment in entities to which they refer. While the Special Fraud Alert focuses on physician-owned distributorships (PODs) selling implantable medical devices, OIG stated its concerns would apply to other types of physician-owned entities. Specifically, OIG identified the following three questionable characteristics between PODs and their physician-investors: (1) selecting investors because they are in a position to generate substantial business for the POD, (2) requiring investors to divest their ownership interests upon ceasing to practice in the service area, and (3) distributing extraordinary returns on investment compared to the level of risk involved in the investment.

OIG stated these and other questionable characteristics may lead to corruption of medical judgment, overutilization, increased costs to federal healthcare programs and unfair competition by providing financial motivation for physician-owners to perform procedures that are not medically necessary or choose a device sold by the POD rather than a more clinically appropriate device. These concerns are heightened due to physicians' ability to choose the brand and type of implantable medical device they use in procedures rather than the choice being made by the facility where the procedure is performed.

OIG provided a list of eight suspect characteristics that may evidence an unlawful intent under the anti-kickback statute. In addition to the three characteristics set forth above, OIG included situations where physician-owners condition their referrals to hospitals or ASCs on the facility's purchase of devices from the POD, whether through coercion by threatening to refer elsewhere, or by promising to perform procedures at the facility if it purchases from the POD or enters into an exclusive purchase arrangement with the POD.

A POD which has a limited number of physician-owners leading to a correlation between the owners' referrals and return on investment also is particularly suspect according to the OIG. PODs that are shell entities with minimal inventory or employees also are designated as suspect, as well as those that retain the right to purchase a physician-owner's interest if the physician is unable to refer (e.g., through relocation or retirement).

OIG stated that written disclosure to patients of a physician's financial interest in a POD is not sufficient to address the concerns enumerated in the Special Fraud Alert. OIG further cautioned that hospitals and ASCs may face liability under the anti-kickback statute if "one purpose underlying a hospital's or ASC's decision to purchase devices from a POD is to maintain or secure referrals from the POD's physician-owners."