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 distributed by the PODs—has attracted increased scrutiny from both the Department of Health and Human Services, Office of Inspector General (“OIG”) and the United States Congress. Despite OIG guidance, Congressional reports, and press attention that has been critical of PODs, there was a noticeable lack of healthcare fraud and abuse enforcement activity involving PODs. That changed on September 8, 2014, when the Department of Justice (“DOJ”) filed a False Claims Act (“FCA”) suit against Reliance Medical Systems, LLC.See United States v. Reliance Med. Sys., LLC, No. 14-6979 (C.D. Cal. Sept. 8, 2014). The medical device industry will want to follow Reliance closely as this case might signal either 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 utilization of Reliance devices.
In Reliance, the defendants 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 that qui tam case and filed a complaint in intervention against Dr. Sabit on September 8, 2014.
According to the complaint in the DOJ’s suit, 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 harbor to the Anti-Kickback Statute (“AKS”), but stated that Reliance Medical Systems’ PODs did not meet this safe harbor’s requirements.
In alleging that the PODs violated the AKS, the DOJ relies heavily on the OIG’s previously expressed skepticism of PODs. Most recently, 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 AKS and indeed would 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 that they involve illegal remuneration to their 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 Medical Systems devices. Other allegations in the complaint include that Dr. Sabit’s frequency of performing spinal fusion surgeries soared by over 100% within just eight months after becoming a POD investor, and Reliance Medical Systems prohibited physicians from becoming investors unless the hospitals at which they performed procedures purchased Reliance Medical Systems products.
This case is unique because, despite Reliance Medical Systems’ absence from the relators’ May 2013 complaint—PODs are not mentioned at all—Reliance Medical Systems attracted attention to itself by suing the OIG in October 2013. See Complaint, Reliance Med. Sys. LLC v. HHS, No. 13-CV-7451 (C.D. Cal. 2013). Reliance Medical Systems argued that the OIG’s characterization 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 Medical Systems may have brought attention upon itself through its 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. Dr. 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 prior to their filing of the qui tam suit. Furthermore, although the OIG has stated that PODs are “inherently suspect” under the AKS, this case presented a fact pattern that closely mirrored many of the risk factors in the Special Fraud Alert and included 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 critical questions are where will the enforcement authorities draw the line and how aggressively will relators seek to push that line in articulating physician investments in PODs as illegal remuneration.