On June 9, 2011, Senator Orrin Hatch released a report by the Senate Finance Committee Minority Staff that outlines key concerns about Physician-Owned Distributors (“PODs”), specifically regarding the lack of regulatory oversight and clear guidance from the Department of Health and Human Services Office of Inspector General (“OIG”). The Committee Minority’s report, Physician Owned Distributors (PODs): An Overview of Key Issues and Potential Areas for Congressional Oversight, set forth findings of committee staff who spoke to over fifty people and reviewed thousands of pages of documents. In addition to the report, the Chairman and Ranking Members of the Senate Financial Committee, Special Committee on Aging, and Judiciary Committee sent letters on the same day to the Administrator for Centers for Medicare & Medicaid Services (“CMS”)and the Inspector General of Health and Human Services (“HHS”) requesting further inquiry into the concerns set out in the Senator Hatch’s report.

The crux of the Committee’s concern with PODs is the potential for fraud and abuse the Committee believes to be inherently found in PODs. Historically, implantable medical devices (these are what the report focuses on) have been sold to hospitals and surgery centers directly from the device manufacturers or through independent distributors. More recently, PODs have come into existence to buy the devices from manufacturers and sell them to hospitals or surgery centers. PODs are mostly comprised of small groups of physicians who create companies to distribute, and in some cases manufacture, medical devices for implantation in surgeries. The large majority of products sold by PODs are sold to hospitals where their own physician investors practice. This is where the concern stems from—physicians’ potential ability to profit through distribution markups on products they are selling through the PODs in which they are owners or investors, particularly where the PODs likewise solicit discounts from manufacturers based on preferred positioning or other “captive” volume.

The report: (1) explains the history of PODs and their business models; (2) describes the concerns for fraud and abuse; (3) highlights the regulatory environment in which they exist; and (4) concludes by outlining what the should happen to address concerns. The nature of PODs creates financial incentives for physician owners to use devices that yield personal financial return, which may implicate the federal anti-kickback statute’s prohibition on inducements to purchase or order items covered under federal health care programs. The report listed anecdotal and evidence-based reasons for concern, such as instances of surgeons performing eight to ten procedures on elderly patients despite the serious health risks, stories of surgeons redoing previous surgeries to use their own POD products, an analysis from the Quality Implant Coalition, a coalition of manufacturers of implantable medical devices, which showed claims data from one hospital indicating a 300 percent increase in spinal fusion surgery after a spinal product POD moved into the hospital’s area, and an April 2010 Journal of the American Medical Association study that found a fifteen-fold increase in the number of spinal fusion surgeries for Medicare patients from 2002-2007, the period during which PODs became a more prevalent business model. On the other hand, the report mentioned a paper written by a POD, which was presented at the American Association of Orthopedic Surgeons 2009 annual meeting, in which the POD asserted that its business model helped saved the hospital with which it was affiliated thirty-four percent over a two year-period—a total savings of over one million dollars.

The legal implications of the business of PODs have not been entirely clear because the regulatory environment in which they find themselves is murky. As highlighted in the Senate Finance Committee report, the OIG issued written guidance on the issue of PODs and expressed the need to carefully review and closely scrutinize these entities under fraud and abuse laws and its Special Fraud Alert relating to joint venture arrangements. Similarly, CMS has declined to regulate PODs under the Stark law. However, the Senate Finance Committee report indicated that there has been a lack of any recent or more specific guidance on this topic. Further the report noted that POD arrangements might implicate the Sunshine Act’s reporting requirements relating to manufacturer financial arrangements with physicians, for which HHS has not yet issued guidance.

The report, as well as the letters to the HHS Inspector General and CMS Administrator, call for several measures to address concerns: (1) further inquiring into and closely examining PODs and their current structures and activities; (2) providing additional regulatory guidance from OIG and/or Congress; (3) including the distribution model of PODs into CMS’ final definition of “applicable manufacturers,” in order to require PODs to fall under the Sunshine Act financial reporting requirements; (4) accounting for the POD business model when CMS promulgates the final Accountable Care Organization regulation to protect against abuses posed by PODs; and (5) developing recommendations for further actions.