Not long after responding to the Senate Finance Committee's inquiry into physician-owned implant distributors (PODs) with a promise to conduct a study of PODs operating in the spine industry, the HHS Office of Inspector General (OIG) released an advisory opinion affirming that offering referring physicians the opportunity to invest in companies to which they refer business creates a substantial risk under the federal health care programs anti-kickback law (AKL). The risks described in this advisory opinion reflect the risks presented by PODs and further emphasize at once OIG's continuing concern with physician-owned companies (POCs), and at the same time the need for OIG guidance on POCs, especially PODs.

In June, the Senate Finance Committee sent a report and letter to OIG requesting that the OIG investigate the legality of physician-owned implant distributors (PODs) under the AKL. (See "Senate asks OIG to probe physician-owned distributors," Health Alert, Hogan Lovells, 10 June 2011). On 13 September, the OIG responded to the Senators' letter, saying that it would conduct a review of PODs operating in the spinal implant arena that seeks to determine:

  • the extent to which PODs provide spinal implants purchased by hospitals;
  • the services that PODs offer to hospitals;
  • whether PODs save hospitals money in the acquisition of implants; and
  • whether the PODs identified in the study are associated with high use of spinal implants.  

The OIG's response emphasized that it continues to apply "key factors" in its analysis of physician joint ventures, including:

  • the opportunity for a referring physician to earn a profit;
  • the terms under which a physician may invest in the entity and/or may be required to divest his or her interest;
  • the return on the physician's investment; and
  • the amount of revenues generated for the entity by its physician-investors.  

The OIG also stated that its "ability to issue guidance about the application of the AKL to POD business models is limited because the AKL's intent requirement renders the legality of each POD highly dependent on each entity's particular characteristics, including its legal structure, operational safeguards, and the actual conduct of its investors." The Senate Committee has not yet responded to the OIG's response.

Not even a month later, on 11 October, the OIG issued Advisory Opinion 11-15, declining to bless a proposed POC that would provide pathology laboratory management services to an anatomical pathology laboratory. As compensation for those management services, the laboratory would pay a usage fee based on the percentage of the laboratory's yearly income that corresponds to the volume of services used by the laboratory. The management services company would offer investment opportunities to physicians in a position to refer business to the laboratory. Return on investment would correspond to the investor ownership percentage and not to the volume or value of tests the investors ordered individually.

In concluding that the arrangement posed a risk of fraud and abuse and that OIG could impose its civil money penalty or exclusion sanctions, the OIG's analysis in this opinion echoes the factors it has historically employed in its analysis of physician-owned entities – namely, it emphasizes the guidance in its previous Special Fraud Alert on Joint Venture Arrangements (1989) and its Special Advisory Bulletin on Contractual Joint Ventures (2003) as well as the analysis it has conducted of similar arrangements through the Advisory Opinion process. The OIG's analysis focuses on the arrangement's potential compliance with the small entity investment safe harbor and the safe harbors for space rental, equipment rental, or personal services and management contracts but concludes that it does not satisfy any of those safe harbors.

The opinion notes that the arrangement does not comply with the small entity investment safe harbor because the requestor certified that more than 40% of investment interests would be held by physicians in a position to generate business for the entity and that substantially more than 40% of the entity's revenue would come from business generated by its physician investors. The opinion also concludes that the arrangement would not meet the safe harbors for space rental, equipment rental, or personal services and management contracts, which share common elements, because the usage fees paid to the entity would not be set in advance but instead would be generated based on a percentage of the lab's income. 

Because the arrangement would not meet an applicable safe harbor, the OIG then evaluated whether it posed such a risk of fraud and abuse under the AKL that could justify an enforcement proceeding. In concluding that the proposed arrangement posed a risk of fraud and abuse, OIG pointed to three factors that are also highly relevant to the AKL risks posed by medical device supply chain POCs and PODs.

First, OIG noted that the usage fees paid by the lab to the requestor would take into account the volume or value of business generated for the lab by the physician investors by linking the profit distributions to the laboratory business the physicians sent to the lab. Significantly, OIG took this position despite the assumption that the physician investors' return would be based not on their individual referrals but on the percentage investment interest they purchased. In other words, OIG concluded that the arrangement posed a risk of fraud and abuse despite the fact that a referring physician's investment return was not directly linked to his or her referrals, because in the aggregate all of the physicians' investment returns were linked to their aggregate referrals.

Second, while conceding the absence of safe harbor protection, OIG nevertheless pointed specifically to the venture's failure to meet the small investment entity safe harbor's 40% tests, thus emphasizing the importance OIG attaches to those tests when analyzing the potential abuse associated with a POC.

Finally, OIG pointed to the fact that the requestor would be largely owned by persons with no experience in providing clinical pathology services but with the ability to refer patients for the services. OIG stated that this made the arrangement appear to have no business purpose other than to permit the physician investors to profit from their referrals. This inference of unlawful intent drawn simply from the fact of the investment opportunity is also highly relevant to medical device chain POCs and PODs, where the investor-physicians have no expertise in the medical device supply chain but are offered investment opportunities based on their ability to refer.

In sum, despite the failure to offer further guidance specific to the AKL risks associated with medical device chain POCs and PODs in its response to the Senate Committee, OIG plainly continues to view as highly suspect offering referring physicians the opportunity to invest in companies to which they will refer. Factors suggesting high risk in a POC/POD investment would be:

  • aggregate return on investment being related to the volume or value of investor referrals even if individual return is based on a purchased fair market value investment interest;
  • failure to meet both of the small entity investment safe harbor's 60/40 tests; and
  • investment opportunity offered to referring investors with no experience or expertise in the business.