SUMMARY: This Special Fraud Alert addresses 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 on their own patients at hospitals or ambulatory surgical centers (ASCs).
DATES: These regulations are effective on March 29, 2013.
FOR FURTHER INFORMATION CONTACT: Patrice S. Drew, Department of Health and Human Services, Office of Inspector General, Congressional and Regulatory Affairs, at (202) 619-1368.
This Special Fraud Alert addresses 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 on their own patients at hospitals or ambulatory surgical centers (ASCs). These entities frequently are referred to as physician-owned distributorships, or "PODs." /1/ The Office of Inspector General (OIG) has issued a number of guidance documents on the general subject of physician investments in entities to which they refer, including the 1989 Special Fraud Alert on Joint Venture Arrangements /2/ and various other publications. OIG also provided guidance specifically addressing physician investments in medical device manufacturers and distributors in an October 6, 2006 letter. /3/ In that letter, we noted "the strong potential for improper inducements between and among the physician investors, the entities, device vendors, and device purchasers" and stated that such ventures "should be closely scrutinized under the fraud and abuse laws." /4/ 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.
FOOTNOTE 1 The physician-owned entities addressed in this Special Fraud Alert are sometimes referred to as "physician-owned companies" or by other terminology. For purposes of this Special Fraud Alert, a "POD" is any physician-owned entity that derives revenue from selling, or arranging for the sale of, implantable medical devices and includes physician-owned entities that purport to design or manufacture, typically under contractual arrangements, their own medical devices or instrumentation. Although this Special Fraud Alert focuses on PODs that derive revenue from selling, or arranging for the sale of, implantable medical devices, the same principles would apply when evaluating arrangements involving other types of physician-owned entities. END FOOTNOTE
FOOTNOTE 2 Special Fraud Alert: Joint Venture Arrangements (August 1989), reprinted at 59 FR 65,372, 65,374 (Dec. 19, 1994). END FOOTNOTE
FOOTNOTE 3 Letter from Vicki Robinson, Chief, Industry Guidance Branch, Department of Health and Human Services, OIG, Response to Request for Guidance Regarding Certain Physician Investments in the Medical Device Industries (Oct. 6, 2006). END FOOTNOTE
FOOTNOTE 4 Id. END FOOTNOTE
II. The Anti-Kickback Statute
One purpose of the anti-kickback statute is to protect patients from inappropriate medical referrals or recommendations by health care professionals who may be unduly influenced by financial incentives. Section 1128B(b) of the Social Security Act (the Act) 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. When remuneration is paid purposefully to induce or reward referrals of items or services payable by a Federal health care program, the anti-kickback statute is violated. By its terms, the statute ascribes criminal liability to parties on both sides of an impermissible "kickback" transaction. Violation of the statute constitutes a felony punishable by a maximum fine of $25,000, imprisonment up to 5 years, or both. Conviction will also lead to exclusion from Federal health care programs, including Medicare and Medicaid. OIG may also initiate administrative proceedings to exclude persons from the Federal health care programs or to impose civil money penalties for fraud, kickbacks, and other prohibited activities under sections 1128(b)(7) and 1128A(a)(7) of the Act.
III. Physician-Owned Distributorships
Longstanding OIG guidance makes clear that the opportunity for a referring physician to earn a profit, including through an investment in an entity for which he or she generates business, could constitute illegal remuneration under the anti-kickback statute. The anti-kickback statute is violated if even one purpose of the remuneration is to induce such referrals.
OIG has repeatedly expressed concerns about arrangements that exhibit questionable features with regard to the selection and retention of investors, the solicitation of capital contributions, and the distribution of profits. Such questionable features may include, but are not limited to: (1) Selecting investors because they are in a position to generate substantial business for the entity, (2) requiring investors who cease practicing in the service area to divest their ownership interests, and (3) distributing extraordinary returns on investment compared to the level of risk involved.
PODs that exhibit any of these or other questionable features potentially raise four major concerns typically associated with kickbackscorruption of medical judgment, overutilization, increased costs to the Federal health care programs and beneficiaries, and unfair competition. This is because the financial incentives PODs offer to their physician-owners may induce the physicians both to perform more procedures (or more extensive procedures) than are medically necessary and to use the devices the PODs sell in lieu of other, potentially more clinically appropriate, devices. We are particularly concerned about the presence of such financial incentives in the implantable medical device context because such devices typically are "physician preference items," meaning that both the choice of brand and the type of device may be made or strongly influenced by the physician, rather than being controlled by the hospital or ASC where the procedure is performed.
We do not believe that disclosure to a patient of the physician's financial interest in a POD is sufficient to address these concerns. As we noted in the preamble to the final regulation for the safe harbor relating to ASCs:
* * * disclosure in and of itself does not provide sufficient assurance against fraud and abuse * * * [because] disclosure of financial interest is often part of a testimonial, i.e., a reason why the patient should patronize that facility. Thus, often patients are not put on guard against the potential conflict of interest, i.e., the possible effect of financial considerations on the physician's medical judgment.
See 64 FR 63,518, 63,536 (Nov. 19, 1999). Although these statements were made with respect to ASCs, the same principles apply in the POD context.
OIG recognizes that the lawfulness of any particular POD under the anti-kickback statute depends on the intent of the parties. Such intent may be evidenced by a POD's characteristics, including the details of its legal structure; its operational safeguards; and the actual conduct of its investors, management entities, suppliers, and customers during the implementation phase and ongoing operations. Nonetheless, we believe that PODs are inherently suspect under the anti-kickback statute. We are particularly concerned when PODs, or their physician-owners, exhibit any of the following suspect characteristics:
* The size of the investment offered to each physician varies with the expected or actual volume or value of devices used by the physician.
* Distributions are not made in proportion to ownership interest, or physician-owners pay different prices for their ownership interests, because of the expected or actual volume or value of devices used by the physicians.
* Physician-owners condition their referrals to hospitals or ASCs on their purchase of the POD's devices through coercion or promises, for example, by stating or implying they will perform surgeries or refer patients elsewhere if a hospital or an ASC does not purchase devices from the POD, by promising or implying they will move surgeries to the hospital or ASC if it purchases devices from the POD, or by requiring a hospital or an ASC to enter into an exclusive purchase arrangement with the POD.
* 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, are threatened with, or experience, negative repercussions (e.g., decreased distributions, required divestiture) for failing to use the POD's devices for their patients.
* 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's devices.
* 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 operations.
* The POD does not maintain continuous oversight of all distribution functions.
* When a hospital or an ASC requires physicians to disclose conflicts of interest, the POD's physician-owners either fail to inform the hospital or ASC of, or actively conceal through misrepresentations, their ownership interest in the POD.
This is a summary of a Federal Register article originally published on the page number listed below
Citation: "78 FR 19271"
Document Number: "Docket Number OIG-1302-N"
Federal Register Page Number: "19271"