05/20/2022 | News release | Distributed by Public on 05/20/2022 11:51
Sometimes referred to as physician-owned distributorships, or "PODs," physician-owned medical device companies may design, manufacture, and/or distribute implantable devices used in neurosurgery, orthopedic surgery, and other surgical procedures. Controversy has arisen from the potential for these companies to profit from the sale of products that their physician owners may order for use in procedures performed on their own patients.
Many physicians and industry groups maintain that PODs promote innovation and higher-quality care by allowing physicians to leverage their expertise and entrepreneurialism to develop and improve medical device technology. Regulators and critics, however, contend that PODs are all too often characterized by financial incentives that constitute unlawful business arrangements and may encourage unnecessary-and even potentially harmful-medical procedures. In a 2013 Special Fraud Alert on Physician-Owned Entities, the Office of Inspector General (OIG) of the US Department of Health and Human Services (HHS) outlined what it considered to be "questionable features" of a POD, observing that PODs are "inherently suspect" under the Anti-Kickback Statute (AKS).
Against this backdrop, OIG's April 25, 2022, Advisory Opinion analyzed an arrangement whereby certain physicians held ownership in a company manufacturing products that those physician owners may order for use in their surgical procedures. Notably, the Opinion highlights an example of a physician-owned entity that OIG elected not to challenge. At the same time, the Opinion serves as a reminder that the 2013 Special Fraud Alert remains the definitive guidance for OIG's review of POD arrangements.
The Opinion involved three orthopedic surgeons-a father, his daughter, and the daughter's husband, all of whom were members of the same medical group-and a medical device company the father formed to develop his upper extremity surgical technology inventions into commercial medical devices. The father acquired a majority ownership interest and preferential voting rights in the company through a transaction in which he assigned his ownership of a substantial portfolio of proprietary technology to the company for use in developing its product lines. Later, the father contributed his company ownership to two irrevocable family trusts, the beneficiaries of whom included the daughter. The minority owners were company managers and employees, none of whom was a healthcare practitioner or an immediate family member of a healthcare practitioner who ordered company products.
All three of the physicians ordered the company's products for use in surgeries they performed at affiliated hospitals or ambulatory surgical centers (ASCs). However, their orders comprised a small percentage of the company's total sales. In 2019, 2020, and 2021, total product orders by the three physicians and other members of their group practice constituted 0.98%, 0.36%, and 0.45%, respectively, of all US gross revenues.
Moreover, the product orders that originated from the three physicians did not inure to their financial benefit. The only profit distributions the company issued were in the form of annual distributions to cover each owner's associated income tax obligations. The company certified that any future distributions to the physicians (via the family trusts) would be reduced by the amount of revenue attributed to product orders by any of the three physicians or other members of their medical group.
OIG determined that the arrangement implicated the AKS because: (1) the physicians ordered company products or recommended those products to others; (2) the products were reimbursable by federal healthcare programs; and (3) the physicians held a financial interest in the company as beneficiaries of the trusts (or, in the case of the husband, as the spouse of a trust beneficiary). OIG further determined that these financial interests were not protected under the AKS safe harbor for investment interests in small entities because the physicians' collective ownership exceeded a safe harbor requirement that no more than 40% of the value of the investment interests be held by investors who are potential referral sources.
Citing its 2013 Special Fraud Alert, OIG noted its "longstanding concerns regarding physician-owned entities that derive revenue from selling, or arranging for the sale of, implantable medical devices ordered by their physician owners for use in procedures the physician owners perform at hospitals or ASCs." Ultimately, however, the agency concluded that the arrangement did "not raise the concerns identified in the 2013 Special Fraud Alert" and included "certain other safeguards" that minimized the risk of fraud and abuse:
Advisory Opinion 22-07 is helpful in illustrating how a physician-owned medical device company should be structured and operated for purposes of AKS compliance. Medical device companies and their physician owners are advised to consider whether their companies' ownership structures and operations align in some form with OIG's analysis. Likewise, hospitals and ASCs purchasing products from PODs should consider the similarity with which those PODs are structured in regards to OIG's analysis.
By the same token, Advisory Opinion 22-07 reaffirms the 2013 Special Fraud Alert and OIG's position that PODs are "inherently suspect." Stakeholders should continue to refer to that guidance to ensure any arrangement involving a POD complies with the AKS, recognizing the increased scrutiny that PODs continue to receive.
The Advisory Opinion is available here.