Wall Street Journal health beat reporter John Carreyrou’s latest investigative piece, “Surgeons Eyed over Deals with Medical-Device Makers,” published July 25, describes the potential patient harms that can result when surgeons have a financial interest in the implantable medical devices that they order for their own patients via ownership in a physician-owned distributor (POD). The article correctly points out that the Office of Inspector General of the U.S. Department of Health and Human Services (OIG) has written in a recent “Special Fraud Alert on Physician-Owned Entities” (SFA) that PODs are “inherently suspect” under the federal healthcare programs (FHCP) antikickback law (AKL). While the article correctly underscores the potential patient harms associated with PODs, it contains misstatements of the law regarding whether PODs can be legally structured and the importance of the size of a physician’s return on investment in an AKL inquiry.

First, Mr. Carreyrou’s statement that such entities can be structured so that they are “legal” under the AKL is at least misleading. Among other things, this law makes it illegal for physicians to receive (or hospitals or device sellers to offer) any remuneration, including a return on investment, if even one purpose of the arrangement is to induce the physician to refer patients for products or services covered under Medicare or another FHCP (such as Medicaid). The supply chain for implantable medical devices in the United States almost uniformly involves direct sale from the product manufacturer to the hospital where the surgery is performed, and the hospital equally uniformly orders the implant that the operating surgeon dictates. It is almost impossible to imagine a situation where at least one purpose – and probably the primary or only purpose – of a hospital departing from this decades-old practice and instead acquiring the implant dictated by the physician from that physician’s POD is not such an inducement. Consequently, it is the POD business model that is illegal under the AKL, and as a result any POD, physician, hospital or device seller that participates with a POD risks prosecution for violation of the AKL.

Second, it is likewise misleading to suggest that the size of a physician’s return on investment is of any real importance to this inquiry. Historically, OIG has indicated that when a return on investment is “excessive” that may be one piece of evidence that parties to an investment venture have unlawful AKL intent. But the converse – that where investment is proportional, there is no violation – is not true. The intent for an investment return to induce referrals or product orders may be inferred from any number of factors. “Inherently suspect” factors cited in the SFA include that the POD offers investments only or primarily to referring doctors, that the POD only or primarily serves the doctor-owners’ patient base, and that the doctors shift their implant loyalties once the POD comes on the scene. These factors are present in every POD arrangement. As a result, every POD arrangement implicates the AKL regardless of how much money the doctor makes from POD self-referral.

PODs have proliferated over the past decade as physician reimbursement rates have declined. However, dealing with PODs is playing with fire and is not the right answer to declining payment rates. The OIG’s recent publication, and the investigations cited in this and previous Wall Street Journal articles, suggest that the government is catching up to this point of view. Hospitals have also reacted to the SFA by adopting policies of not dealing with PODs. For example, Intermountain Healthcare, a nonprofit system including 22 hospitals in Utah and Idaho, and the Group Purchasing Organization associated with Ascension Health, the largest Catholic nonprofit health system in the U.S. with operations including over 80 hospitals, very recently adopted policies stating that they will not purchase from or contract with PODs.