The Department of Health and Human Services’ Office of Inspector General (OIG) recently released long-awaited guidance on Physician Owned Distributors. 

In a Special Fraud Alert released on March 26, 2013, OIG reiterated its long-standing position that physician-owned distributors (PODs) are inherently suspect under the anti-kickback statute. Although the specific concerns expressed by OIG are not particularly novel or surprising, the announcement should serve as a warning signal for PODs with identified suspect characteristics.  It seems likely that providers will be wary of working with these entities, as OIG may well take enforcement actions against certain PODs in order to create an additional deterrent effect.

In the Alert, OIG expressed concern with PODs “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 and ambulatory surgical centers.”  Picking up on analytical factors identified in prior OIG alerts, the agency stated that such arrangements cause significant concerns related to corruption of medical judgment, overutilization, increased costs, and unfair competition.  

According to OIG, PODs that exhibit any of the following characteristics may implicate the concerns the typically inform an Anti-Kickback Statute enforcement action: 

  • Selection or retention of physician-investors is related to the physicians’ ability to refer, recommend, or arrange for the purchase of the POD’s devices.
  • The POD generates extraordinary returns on investment. 
  • The size or price of the investment offered to each physician varies with the expected or actual volume or value of devices used by the physician.
  • Distributions are not proportionate to ownership interests because of the expected or actual volume or value of devices used by the physicians.
  • Physician-owners condition referrals on their purchase of the POD’s devices.
  • Physician-owners are required, pressured, or actively encouraged to refer, recommend, or arrange for the purchase of the POD’s devices.
  • The POD is a shell entity that does not conduct appropriate product evaluations, maintain or manage sufficient inventory in its own facility, or employ or contract with operations personnel.
  • The POD does not maintain continuous oversight of all distribution functions.
  • The physician-owners do not disclose their ownership interest in the POD as required by hospital or ASC policy. The Physician Sunshine Act, which goes into effect this August, will generally require physicians to disclose their interest in PODs even though a significant proportion of physicians are opposed to such disclosures.

OIG has long emphasized that parties on both sides of a kickback arrangement are open to liability. Perhaps anticipating enforcement actions, The Wall Street Journal reported that some hospitals have already ceased doing business with PODs matching the criteria described in the Alert, and more hospitals and ASCs are likely to follow suit in the wake of OIG’s pronouncement.  It is also likely that enterprising whistleblowers will seek to identify PODs matching the Alert criteria, on the theory that the government is likely to intervene in a False Claims Act case based on allegations matching the suspect characteristics listed by OIG.

While the OIG Alert is hardly the death knell for PODs that some industry observers had hoped for, it should cause serious indigestion for operators and their business partners where the arrangement reflects the highlighted criteria. 

The alert is available here.