Updated on: November 29, -0001

OIG Issues Special Fraud Alert on Physician-owned Distributorships

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Original story posted on: March 27, 2013

Expressing concern that physician-owned distributorships (PODs) produce the potential for fraud and abuse and pose threats to patient safety, the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services (HHS) issued what the agency described as a “special fraud alert” on Wednesday.

In the alert posted to the OIG website, the agency – which since October 2006 has continued to issue guidance on physician investments in medical device manufacturers and distributors –  put on notice those physician-owned entities that derive revenue from selling implantable medical devices ordered by other physician owners for use in procedures performed on their own patients at hospitals or ambulatory surgery centers (ASCs).

“We noted … strong potential for improper inducements between and among the physician investors, the entities, device vendors, and their device purchasers,” the OIG alert read, citing an Oct. 6, 2006 letter. “This Special Fraud Alert focuses on the specific attributes and practices of PODs that we believe produce substantial fraud and abuse risk, and pose dangers to patient safety.”

Referring to the anti-kickback statue of the Social Security Act, the OIG said that one of the statue’s purposes is “to protect patients from inappropriate medical referrals or recommendations by healthcare professionals who may be unduly influenced by financial incentives.”

The OIG in its alert also identified suspicious characteristics that it associates with PODs, asserting that they are “inherently suspect, under the anti-kickback statue.”  Suspicious behavior, according to the OIG, constitutes the following sets of circumstances:

  • When the size of the investment offered to each physician varies with the expected or actual volume or value of devices used by the physician.
  • When distributions are not made in proportion to ownership interest, or when physician-owners pay different prices for their ownership interests because of the expected or actual volume or value of devices used by the physicians.
  • When physician-owners condition their referrals to hospitals or ASCs on their purchase of the POD devices through coercion or promises (for example, by stating or implying that they will perform surgeries or refer patients elsewhere if a hospital or an ASC does not purchase devices from the POD). Other such examples include promising or implying that they will move surgeries to the hospital or ASC if it purchases devices from the POD, or requiring a hospital or an ASC to enter into an exclusive purchase arrangement with the POD.
  • When physician-owners are required, pressured, or actively encouraged to refer, recommend, or arrange for the purchase of the devices sold by the POD – or, conversely, when they are threatened with or experience negative repercussions (decreased distributions, required divestiture, etc.) for failing to use the POD devices for their patients.
  • When the POD retains the right to repurchase a physician-owner’s interest for the physician’s failure or inability (through relocation, retirement, or otherwise) to refer, recommend, or arrange for the purchase of the POD devices.
  • When the POD is a 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 managing operations.
  • When the POD does not maintain continuous oversight of all distribution functions.
  • When a hospital or an ASC requires physicians to disclose conflicts of interest and the POD physician-owners either fail to inform the hospital or ASC of (or actively conceal through misrepresentations) their ownership interest in the POD.

The OIG also expressed concern for what it termed the “proliferation” of PODs, warning that the opportunity for physicians to profit through investment in an entity for which the physician generates business could “constitute illegal remuneration” under the anti-kickback statue.

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Chuck Buck is the publisher of RACmonitor 

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Read the OIG Special Fraud Alert

Chuck Buck

Chuck Buck is the publisher of RACmonitor and is the program host and executive producer of Monitor Monday.

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