• The Department of Health and Human Services Office of Inspector General (OIG) has longstanding concerns about physician-owned entities that earn revenue from selling or arranging the sale of medical devices ordered by their physician owners.
• In a new advisory opinion, the OIG confirmed that ownership in such entities may be permissible under the small entity investment safe harbor if properly structured.
• The OIG emphasized that safe harbor protection applies only when all eight conditions are fully satisfied. 

The Department of Health and Human Services OIG recently issued Advisory Opinion No. 25-09, providing additional guidance regarding physician ownership in medical device manufacturers and the applicability of the small entity investment safe harbor set forth in 42 C.F.R. §1001.952(a)(2).

The OIG concluded that the requesting entity and its physician owners qualify for the small entity investment safe harbor because they met each of the statute’s conditions, thereby protecting the physicians from administrative sanctions.

Small Entity Investment Safe Harbor Background

The Anti-Kickback Statute covers arrangements when remuneration is used to induce referrals for items or services reimbursable by a federal health care program. The OIG has consistently raised concerns regarding physician-owned entities that derive revenue from selling medical devices ordered by their physician owners for use in their own procedures.

The advisory opinion noted that while this arrangement implicates the Anti-Kickback Statute because physician owners hold ownership interests and may receive profit distributions related to ordering the entity's medical products, it qualifies for the small entity investment safe harbor provided it continues satisfying all eight required conditions.

Safe Harbor Requirements

To qualify for the small entity investment safe harbor, entities must meet the following conditions:

1. No more than 40% of investment interests may be held by investors who can make or influence referrals to, furnish services to, or generate business for the entity.
2. Investment terms offered to passive investors in a position to generate business must be identical to terms offered to other passive investors.
3. Investment terms offered to investors who can generate business must be unrelated to previous or expected referral volume or business generated.
4. No requirement that passive investors make referrals or generate business as a condition of remaining an investor.
5. The entity cannot market or furnish services to passive investors differently than to non-investors.
6. No more than 40% of the entity's gross healthcare revenue may come from referrals or business generated by investors.
7. No loans or loan guarantees to investors who can generate business if loan proceeds are used to obtain the investment interest.
8. Investment returns must be directly proportional to capital investment (including fair market value of pre-operational services).

OIG’s Analysis

The OIG concluded that the requesting entity satisfied all eight conditions, based on its certifications. Key factors included:

• Compliance with the 40% thresholds for both investment interests and gross revenue
• Uniform investment terms unrelated to referral volume
• No requirements for investors to generate business
• Equal treatment of all investors
• No prohibited loans
• Proportional profit distributions based solely on capital investment

Key Takeaways

This advisory opinion serves as a reminder that physician investors and entities with physician shareholders must carefully adhere to all eight conditions of the small entity investment safe harbor. Important compliance points include:

• Limits: Monitor both investment interest ownership and revenue thresholds continuously.
• Uniform Terms: Ensure identical investment terms for all similarly situated investors.
• No Referral Requirements: Never condition investment on generating business for the entity.
• Proportional Returns: Base all distributions solely on capital investment amounts.
• Advisory Opinions: Where doubt exists, request formal OIG guidance for clarity and protection.