Reliance Medical Systems, a Texas-based manufacturer and distributor of devices used in spinal surgeries, has sued the U.S. Department of Health and Human Services, claiming that a “Special Fraud Alert” issued last March by HHS’s Office of Inspector General (OIG) has damaged its business.

The Special Fraud Alert, issued March 26, 2013, targeted so-called physician-owned distributorships, or “PODs,” which sell medical devices to hospitals and ambulatory surgery centers. In a POD, doctors can profit personally by ordering devices that they use in surgical procedures on their own patients. The OIG stated that such arrangements are “inherently suspect” under the federal Anti-Kickback Statute, which prohibits payment of remuneration in exchange for ordering goods or services that are reimbursable by federal programs, including Medicare and Medicaid. Many manufacturers of medical devices, particularly orthopedic devices, have physician investors who purchase and use the companies’ products. 

The lawsuit, filed in U.S. District Court in Los Angeles on October 8, claims that Reliant now “cannot speak with physicians about the formation of a physician-owned entity out of concern that any such entity formed will be ’inherently suspected’ of violating laws that carry severe criminal and civil penalties.” Reliance claims that its revenues have dropped, and that its constitutional rights to free speech and due process have been violated by the Fraud Alert. 

Reliance pointed out that its physician investors currently disclose their ownership interests in the company to patients, and that such ownership is legal under California state law.