Health Care Law Firm’s Response to the OIG

The Beat Goes On: OIG Issues Fraud Alert on Physician Owned Device Companies

Charles B. Oppenheim, Esq.
W. Bradley Tully, Esq.

On March 26, 2013, the Office of Inspector General of the U.S. Department of Health & Human Services (“OIG”) issued its Special Fraud Alert: Physician Owned Entities (the “Special Alert”), addressing the anti-kickback statute risks presented by physician owned device companies (“PODs”) that sell implantable medical devices to hospitals and ambulatory surgery centers (“ASCs”), which the physician owners of the POD may use in surgeries they perform at the hospital or ASC. The Special Alert is the latest in a long line of guidance issued by the OIG over approximately the past 25 years cautioning the healthcare field about the potential anti-kickback statute risks presented by physician investment in healthcare providers and related businesses, and also the latest development signaling heightened attention on PODs. (The anti-kickback statute prohibits knowingly and willfully offering, paying, soliciting, or receiving any remuneration to induce, or in return for, referrals of items or services reimbursable by a Federal health care program.)

In the Special Alert, the OIG acknowledges that “the lawfulness of any particular POD under the anti-kickback statute depends on the intent of the parties,” which the OIG explains “may be evidenced by a POD’s characteristics, including the details of its legal structure; its operational safeguards; and the actual conduct of its investors, management entities, suppliers, and customers during the implementation phase and ongoing operations.” However, the OIG adds that it believes that “PODs are inherently suspect under the anti-kickback statute,” and then goes on to identify several specific “suspect characteristics,” which are (word-for-word) as follows:

  • The size of the investment offered to each physician varies with the expected or actual volume or value of devices used by the physician.
  • Distributions are not made in proportion to ownership interest, or physician-owners pay different prices for their ownership interests, because of the expected or actual volume or value of devices used by the physicians.
  • Physician-owners condition their referrals to hospitals or ASCs on their purchase of the POD’s devices through coercion or promises, for example, by stating or implying they will perform surgeries or refer patients elsewhere if a hospital or an ASC does not purchase devices from the POD, by promising or implying they will move surgeries to the hospital or ASC if it purchases devices from the POD, or by requiring a hospital or an ASC to enter into an exclusive purchase arrangement with the POD.
  • Physician-owners are required, pressured, or actively encouraged to refer, recommend, or arrange for the purchase of the devices sold by the POD or, conversely, are threatened with, orexperience, negative repercussions (e.g., decreased distributions, required divestiture) for failing to use the POD’s devices for their patients.
  • The POD retains the right to repurchase a physician-owner’s interest for the physician’s failure or inability (through relocation, retirement, or otherwise) to refer, recommend, or arrange for the purchase of the POD’s devices.
  • The POD is a shell entity that does not conduct appropriate product evaluations, maintain or manage sufficient inventory in its own facility, or employ or otherwise contract with personnel necessary for operations.
  • The POD does not maintain continuous oversight of all distribution functions.
  • When a hospital or an ASC requires physicians to disclose conflicts of interest, the POD’s physician-owners either fail to inform the hospital or ASC of, or actively conceal through misrepresentations, their ownership interest in the POD.

For those who are familiar with the OIG’s decades-long guidance in the area of physician-owned health care providers and related businesses, none of these “suspect characteristics” will come as any great surprise. In fact, most PODs that have engaged experienced legal counsel to advise them on an appropriate legal structure and conduct are well aware of the potential danger presented by the characteristics identified by the OIG as “suspect” and are often formed to be (and operate as) the antithesis of these characteristics. Interestingly, the OIG, perhaps aware of this fact, seems to disavow the protective benefit of such a strategy, by stating that these characteristics “are not intended to serve as a blueprint for how to structure a lawful POD, as an arrangement may not exhibit any of the above suspect characteristics and yet still be found to be unlawful.”

Nevertheless, avoiding these risky attributes, to the extent feasible, would be a natural first step for a compliance-minded POD to consider undertaking. There are other key concerns, however, that the OIG does not mention in the Special Alert, the most important of which probably is that the sales a POD makes to its hospital and ASC customers should be at prices consistent with fair market value. In fact, one of the surest ways for a POD to increase risk under the anti-kickback statute would be to overcharge or gouge its customers. Conversely, one way to blunt anti-kick statute risk is for a POD to sell devices for less than the competition, thus providing a legitimate and non-referral related reason why a hospital or ASC would purchase devices from the POD (in fact, one of the reasons this model may have gained popularity is the substantial sums it has been reported that hospitals have saved by purchasing from PODs as compared to other vendors).

The OIG identifies some additional factors that can increase risk under the anti-kickback statute. For example, risk of a violation may increase when there are very few physician investors in a POD “such that the volume or value of a particular physician-owner’s recommendations or referrals closely correlates to that physician-owner’s return on investment,” or when the physician investors “alter their medical practice after or shortly before investing in the POD (for example, by performing more surgeries, or more extensive surgeries, or by switching to using their PODs’ devices on an exclusive, or nearly exclusive basis).”

Finally, the OIG states in the Special Alert that it is aware that some PODs “purport to design or manufacture their own devices,” but cautions that this does not “disprove unlawful intent.” The OIG goes on to say that the “risk of fraud and abuse is particularly high in circumstances when such physicians-owners are the sole (or nearly the sole) users of the devices sold or manufactured by their PODs.” Notwithstanding the OIG’s admonitions, the Special Alert does not actually change the law in this area, and if a POD and its hospital and ASC customers were operating lawfully before, then nothing in this Special Alert would change that.

The Special Alert will surely not be the last word on PODs, or the potential risks they may present under the anti-kickback statute, nor does it break new ground on the subject. Instead, it offers somewhat predictable guidance, consistent with the OIG’s long standing and often repeated antipathy for physician-owned health care providers and related businesses. Still, it will become one of several useful sources of information for PODs and those doing business with (or are considering doing business with) a POD, in helping to avoid certain of the riskier attributes of this business model.

For further information, please contact Charles B. Oppenheim, W. Bradley Tully, David Hatch or Karl Schmitz in our Los Angeles office at 310.551.8111, Paul Smith or Steve Phillips in our San Francisco office at (415) 875-8500, or Robert L. Roth in our Washington D.C. office at (202) 580- 7701.

Leave a Reply

Your email address will not be published. Required fields are marked *