In recent years the growing number of physician-owned distributors (PODs) – medical device distributors owned at least in part by physicians who commonly use the devices they distributed – has attracted increased scrutiny from both the Department of Health and Human Services Office of Inspector General (OIG) and the US Congress. Despite OIG guidance, congressional reports and press attention that has been critical of PODs, there has been a noticeable lack of healthcare fraud and abuse enforcement activity involving PODs. This changed on September 8 2014, when the Department of Justice (DOJ) filed a False Claims Act suit against Reliance Medical Systems, LLC.(1) The medical device industry should follow Reliance closely as it might either signal the start of an enforcement trend against PODs or simply reflect an action targeting a network of PODs that allegedly paid particularly lucrative profits to physicians, while placing intense pressure on them to increase use of Reliance devices.


The defendants in Reliance include Reliance Medical Systems (which sells spinal fusion implants through a network of PODs), two of the specific PODs in the network and three investors in the PODs, including one physician-investor. The enforcement action appears to stem from a May 2013 qui tam suit filed against the physician-investor, Dr Sabit, his physician employer and the hospital where he performed surgeries, for allegedly submitting medically unnecessary claims. In July 2014 the DOJ elected to partially intervene in the case and filed a complaint in intervention against Sabit on September 8 2014.

According to the DOJ, Reliance Medical Systems and its PODs caused physician-investors and the hospitals at which they performed surgeries to submit false claims "tainted by kickbacks that Reliance paid to them through" the PODs, rendering these claims per se false. In its complaint, the DOJ acknowledged the possible applicability of the investment safe harbour to the Anti-kickback Statute, but stated that Reliance Medical Systems' PODs did not meet the safe-harbour requirements.

In alleging that the PODs had violated the Anti-kickback Statute, the DOJ is relying heavily on the OIG's previously expressed scepticism of PODs. In March 2013 the OIG issued a special fraud alert focusing on PODs. At the time, the OIG warned that PODs could constitute "illegal remuneration" under the Anti-kickback Statute and indeed may be considered "inherently suspect", because they provide an "opportunity for a referring physician to earn a profit".

Through this prior guidance, the OIG set forth several characteristics of PODs that heighten the risk of their involvment in illegal remuneration to physician-investors. The physician-POD relationships detailed in the DOJ's complaint mirror a number of these attributes. For example, certain physician-investors earned significantly more than their lay counterparts, despite investment interests of equal magnitude. The PODs paid highly lucrative returns on investment, which also allegedly bore a direct correlation to the number of procedures performed using Reliance devices. Other allegations in the complaint include that:

  • Sabit's frequency of performing spinal fusion surgeries soared by over 100% within just eight months of him becoming a POD investor; and
  • Reliance prohibited physicians from becoming investors unless the hospitals at which they performed procedures purchased its products.

In surviving the defendants' motion to dismiss, the government relied heavily on the nature of the PODs' relationships with their investors. Citing the seminal case of Hanlester Network v. Shalala, 51 F 3d 1390 (9th Cir 1995), the district court noted that encouragement by PODs to their investors to refer business would fall short of establishing a False Claims Act claim, as would even a "high volume of referrals, or a large return on investment". Instead, something more was needed, such as statements to prospective investors that the size of their investment interest would depend on the volume of business which they referred. The court ruled that the government's complaint did allege more than mere encouragement and therefore established a plausible inference of a kickback scheme because, for example, the government alleged that the PODs verified each physician's ability to generate referrals to the POD, prior to accepting the physician as an investor.

This case is unique because despite Reliance's absence from the relators' May 2013 complaint – PODs are not mentioned at all – it attracted attention to itself by suing the OIG in October 2013.(2) Reliance argued that the OIG's characterisation of PODs as "inherently suspect" chilled speech about PODs to potential investors, "unfairly and unconstitutionally burden[ing] First Amendment rights of free speech and due process". The court granted the OIG's motion to dismiss in February 2014, ruling that Reliance Medical Systems lacked standing because the creation of mere uncertainty about the legality of its conduct did not serve to establish a First Amendment injury.


While Reliance may have brought attention to itself through this suit, a bright spotlight now shines on the entire class of arrangements. The extent to which this case signals future enforcement activity against PODs remains uncertain. Sabit's case, which may have piqued the initial prosecutorial interest, generated heightened concern because of the physician's extraordinarily high complication rate and concerns over patient safety, including by the physician-relators before their filing of the qui tam suit. Further, although the OIG has stated that PODs are "inherently suspect" under the Anti-kickback Statute, this case presents a fact pattern that closely mirrors many of the risk factors in the special fraud alert and includes a number of alleged adverse statements made by multiple defendants, including brazenly bragging about profitability and lying to hospitals about physicians' ownership interest in distributors.

Thus, while the DOJ's complaint in Reliance may reflect a shift in the risk associated with PODs, the question remains as to where enforcement authorities will draw the line and how aggressively relators will seek to push that line in articulating physician investments in PODs as illegal remuneration.

Mark Langdon or Trevor L Wear or Brenna E Jenny

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.