The U.S. Department of Health and Human Services, Office of Inspector General (OIG) is the enforcer of the federal Anti-Kickback Statute. As part of this function, the OIG has periodically released Special Fraud Alerts to provide guidance on trends in the health care industry and their potential for violation of the federal Anti-Kickback Statute. These Special Fraud Alerts are meant to serve as guidance to the health care industry for fraud and abuse compliance. Prior to this March, the last prior Special Fraud Alert issued by the OIG was in 2010.

On March 26, the OIG published such a Special Fraud Alert to deal specifically with physician-owned distributorships (PODs). PODs, more specifically, are physician-owned businesses that sell or arrange for the sale of implantable medical devices. These devices may then be ordered by the physician-owners in their clinical practice for use in surgical procedures. In writing its Special Fraud Alert, the OIG cautioned that it views these ventures as “inherently suspect.”

The OIG has addressed other physician investment ventures in its guidance documents in the past. This, however, is the first document specifically addressing PODs. While the OIG cautions that this Special Fraud Alert should not be used “as a blueprint for how to structure a lawful POD,” the document does serve as helpful guidance for instructing clients who are interested in entering into such a venture. The mere fact that the OIG issued such a guidance document sends a warning flag that these ventures are on the government’s radar and therefore these arrangements must be scrutinized carefully before finalization, if pursued at all.

Details of the Special Fraud Alert

The OIG first noted that it has issued other guidance documents regarding physician investment entities. In so reviewing, it reiterated its view that such physician-investor relationships have the “strong potential for improper inducements” and that any such arrangements must be closely scrutinized under the fraud and abuse laws.

The OIG then reviewed the purpose of the federal Anti-Kickback Statute, noting it is to “protect patients from improper referrals recommendations by health care professionals who may be unduly influenced by financial incentives.” The statute is violated when remuneration is purposefully paid to induce or reward referrals payable by the federal health care programs (such as Medicare).

The remainder of the Special Fraud Alert focused on the specifics of PODs. In general, the OIG stated that some questionable features of physician investment entities include: selecting investors because they are in a position to generate substantial business for the entity; requiring investors who cease practicing in the business area to give up ownership in the entity; and distributing returns on investment disproportionate to the level of risk. The OIG then stated that there are four major concerns that arise from any of these questionable characteristics. These four concerns are: “corruption of medical judgment, overutilization, increased costs to the federal health care programs and beneficiaries, and unfair competition.”

For example, the OIG is concerned that a physician’s ownership of an implantable medical device company would induce the physician to perform additional (potentially unnecessary) procedures or to perform more procedures with the implantable device when another device may be more clinically appropriate. The OIG said that its particular concern in this industry is because the type of device used during a procedure is often strongly influenced by the physician, rather than the facility (often a hospital or surgery center) at which the procedures are performed.

While disclosure of the physician-ownership interest may allay fraud and abuse concerns in certain venture scenarios, the OIG said this is not sufficient in the case of PODs. Quoting language from the preamble to the final regulation for the ambulatory surgical safe harbor to the Anti-Kickback Statute, the OIG found disclosures not sufficient in those arrangements because the disclosure under the circumstances would present a reason why the patient should patronize the facility. The OIG stated that this same logic applied in the POD context.

Acknowledging that liability under the Anti-Kickback Statute hinges on intent, the OIG stated unlawful intent may be evidenced by a POD’s “legal structure; its operational safeguards; and the actual conduct of investors, management entities, suppliers and customers during the implementation phase and ongoing operations.” Given what the OIG calls the “inherently suspect” nature of PODs, it provided an extensive, non-exhaustive list of characteristics in PODs or their physician-owners that the OIG finds worrisome. Amongst the list are as follows:

• The size of the offered investment, or the price of the ownership interest, varying by expected or actual volume or value of devices used by the physician. Similarly, distributions of profits in the POD not being proportionate to ownership interest.

• Exchanges of promises by the physician, or the physician conditioning referrals to facilities, in exchange for the facility’s use of the POD’s devices.

• The POD requiring, pressuring or encouraging physician-owners to “refer, recommend, or arrange for the purchase” of the POD’s devices. The same is true if the POD imposes negative repercussions on the physician-owners for failing to do such. For instance, the OIG includes amongst its list that the physician-owner is required to sell his or her ownership interest back to the POD for failure to “refer, recommend or arrange for the purchase of the POD’s services,” including by reasons such as the physician’s retirement or relocation.

• The POD being a mere “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.”

• Failure of POD owners to disclose, or to otherwise misrepresent, the POD ownership interest when asked by facilities for conflicts of interests.

The OIG made clear that not all of these characteristics need be present for there to be a violation of the Anti-Kickback Statute. In fact, the OIG stated that a POD ownership arrangement may have none of these characteristics and still violate the statute, as each individual arrangement most be examined for unlawful intent. For instance, the OIG noted that a POD servicing only its physician-owners’ patient base would pose a higher risk of fraud and abuse than one that sells to other facilities with referrals from non-owners.

Although the OIG conceded that the Anti-Kickback Statute does not prohibit profits, it noted another indicator of fraud and abuse that would cause the OIG to scrutinize the transaction closely would be disproportionately high rates of return on the investment. The OIG explained that this is because investment in the POD is typically minimal, leaving the insinuation that the purpose of the arrangement is to allow the physician-owners to profit from utilizing the devices on their own patients, potentially distorting the physicians’ medical judgment. The OIG noted that these concerns are heightened when (1) there are relatively few physician-owners; or (2) when the physicians alter their medical practices relative to the procedures for which the devices are utilized (for instance, performing more procedures) around the time of ownership in the POD.

We have had some physician-clients aggressively pursued to become involved in a POD. It has not been an undertaking one could recommend as being 100 percent clean. Congress has been looking at it for years. This Special Fraud Alert will undoubtedly have a chilling impact on such ventures.

While the Special Fraud Alert may not be relied on in order to structure a compliant POD, because many physicians do have interests in pursuing such a venture, it does provide helpful insight to those indicia of fraud and abuse that the OIG has already particularly noted and is looking for. The OIG also suggested the advisory opinion process for those looking for individualized assistance on a transaction. Interested readers may find the Special Fraud Alert at http://goo.gl/JaHxx. •

Vasilios J. Kalogredis is the president and founder of Kalogredis Sansweet Dearden & Burke, a health care law firm, and Professional Practice Consulting Inc., a health care consulting firm, in Wayne, Pa. He can be contacted at 800-688-8314 or at BKalogredis@KSDBhealthlaw.com

Karilynn Bayus is an associate at the firm. Her practice involves litigation of health care-related matters. Bayus graduated from Temple University’s Beasley School of Law in 2006. She may be reached at KBayus@KSDBhealthlaw.com.