On March 26, 2013, the Office of Inspector General (“OIG”) issued a Special Fraud Alert regarding physician-owned entities or distributorships (referred to as “PODs”) that generate revenue from the use of implantable medical devices ordered by their physician-owners for use in procedures performed by such physician-owners at hospitals or ambulatory surgery centers (“ASCs”).

While the Special Fraud Alert focuses on certain characteristics of PODs that create substantial risk of fraud and abuse and potential danger to patient safety, the OIG cited other prior pronouncements and guidance it issued over the past twenty-four years regarding its long-standing concern over physician investments in entities to which they refer.  Prior OIG guidance cited included the 1989 Special Fraud Alert on joint Venture Arrangements, published in 1994  and a letter dated October 6, 2006, regarding physician investments in the medical device industry.

It is clear that the OIG believes that significant risk of patient or program abuse, including but not limited to potential violations of the Federal Anti-Kickback statute, may flow from arrangements between and among physicians, device manufacturers and other device vendors.  The Anti-Kickback statute makes it a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce, or in return for, referrals of items or services reimbursable by a Federal health care program.

In its current Special Fraud Alert regarding physician-owned entities, the OIG recounted its view of certain questionable features regarding selection and retention of investors, solicitation of capital contributions, and distribution of profits, all of which potentially raise four general concerns typically associated with kickback arrangements:

1.  Corruption of medical judgment;

2.  Over-utilization;

3.  Increased costs to the Federal health care programs and beneficiaries; and

4.  Unfair competition.

The OIG is particularly concerned in this arena because the physician may play a significant role in the selection of the type of device and which manufacturer to use.  The OIG cautions that disclosure of financial interest may not be sufficient to cure what would otherwise amount to fraud and abuse, and identifies the following specific characteristics of arrangements that would cause concern:

— The size of the investment offered varies with anticipated volume or value of devices used by the physician.

— Distributions are made on the basis of volume as opposed to ownership interest.

— Conditioning referrals based on the use of certain devices on entities to which physicians refer.

— Arrangements that incentivize a physician’s use of certain devices or penalizes the physician for the failure to use certain devices.

— PODs ability to buyout physicians interests on favorable terms based on physician’s failure to meet certain volume requirements.

— The POD is a shell entity that is not truly engaged in the business, or provides no oversight related to distribution functions.

— Physicians fail to identify conflicts of interest through their involvement with PODs related to Hospital or ASC conflict of interest processes.

This Special Fraud Alert reiterates the OIG’s longstanding position that a physician’s ability to profit from referrals may lead to violations of the Federal Anti-Kickback statute.  Finally, the OIG reminds concerned parties that the OIG Advisory Opinion process is available.   For more information about physician-owned entities, the applicability of the Anti-Kickback statute, and the OIG Advisory Opinion process, please contact Adam Snyder or Don Black at (206) 447-7000.