On March 26, 2013, the HHS Office of Inspector General (OIG) issued a Special Fraud Alert warning that OIG will view physician-owned distributorships (PODs) as “inherently suspect” under the Federal anti-kickback statute. Because of the potential for physician-owners to increase compensation based on the level of referrals they make to PODs, OIG believes such arrangements may lead to “corruption of medical judgment, overutilization, increased costs to the Federal health programs and beneficiaries, and unfair competition.” OIG is especially concerned about potential abuse by PODs that distribute implantable medical devices, which OIG considers “physician preference items.” Purchase of these items are made at the discretion of the physician and not the hospital or ASC where the device will be implanted.

Though this Fraud Alert does not establish any new formal policies, the Alert clearly and strongly discourages such arrangements. OIG says that “PODs that generate disproportionately high rates of return for physician-owners may trigger heighted scrutiny” for potential anti-kickback violations. OIG will scrutinize those arrangements in which physicians have relatively small ownership stakes, but receive significant compensation based on a high level of device referrals. Moreover, OIG will monitor those PODs with a small number of physician-owners, as well as those PODs with physician-owners who “alter their medical practice after or shortly before investing in a POD” by, for example, performing more surgeries.

This Fraud Alert follows an October, 2012 questionnaire OIG sent to hospitals regarding their purchasing practices of spinal devices from PODs. That questionnaire focused on the extent to which hospitals purchase spinal devices from physicians-owners who then implant those devices at the purchasing hospital.

The Fraud Alert is available here.