On March 26, the US Department of Health and Human Services Office of Inspector General (OIG) issued a Special Fraud Alert on physician-owned entities, specifically physician-owned distributorships (PODs). In the Alert, the OIG discusses the attributes and practices of PODs that could create fraud and abuse and patient safety issues under the anti-kickback statute (AKS).

Questionable Features of PODs

The OIG noted three questionable features of physician-owned entities:

1. selecting investors based on ability to generate substantial business,
2. requiring investors who cease practicing in the entity’s service area to divest their ownership interests in the entity, and
3. distributing extraordinary returns on investment compared to the risk involved.

These features, and others, raise the following major concerns associated with kickbacks:

1. corruption of medical judgment,
2. overutilization,
3. increased costs to beneficiaries and government programs, and
4. unfair competition.

The OIG is particularly concerned with PODs because PODs derive revenue from selling or arranging the sale of implantable medical devices as ordered by the POD’s physician-owners for their patients. These devices tend to be physician preference items, and, therefore, the choice of device may not be controlled by the hospital or ambulatory surgery center (ASC) where the procedure is performed. The OIG noted that disclosure of the physician’s ownership interest in the POD is insufficient to remedy its concerns.

Additional Suspect Characteristics of PODs

In addition to the questionable features of physician-owned entities noted above, the OIG offered additional suspect characteristics of PODs, including: (1) conditioning referrals to hospitals or ASCs on purchase of POD devices and (2) maintaining a POD as a shell entity with limited functions.

Certain PODs may be subject to heightened scrutiny. For example, the OIG is concerned with PODs that generate disproportionately high rates of return for physician-owners. This concern is amplified when a physician-owner modifies his or her practice shortly after investing in the POD or when the physician-owners are so few in number that the volume or value of the particular physician-owner’s recommendations or referrals is closely correlated to the physician-owner’s return.

The OIG noted two other issues. First, claims of superiority of devices designed or manufactured by the physician-owner’s POD will not defeat the OIG’s claim of unlawful intent. Second, hospitals that enter into agreements with PODs may also create AKS liability. For example, if one purpose of the agreement is to maintain or secure referrals from the POD physician-owner, this could create liability for the hospital or ASC.

The Alert provides POD physician-owners and parties, such as hospitals, that contract with PODs with a starting point for AKS compliance. However, as the OIG notes, other characteristics not mentioned in the Alert could create fraud and abuse and patient safety issues. Therefore, PODs and providers contracting with PODs should assess such arrangements for compliance issues discussed in the Alert and other structures that may implicate the AKS.

The Special Fraud Alert can be found here.