Special Fraud Alert: Physician-Owned Entities
By: Okan Gunay, Esq., Associate at Florida Healthcare Law Group
The Office of the Inspector General (OIG) has recently issued a Special Fraud Alert addressing 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. These entities frequently are referred to as physician-owned distributorships, or “POD’s.” The link to the Alert is the following: http://oig.hhs.gov/fraud/docs/alertsandbulletins/2013/POD_Special_Fraud_Alert.pdf
The OIG has noted that there is a 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.” Moreover, hospitals and ambulatory surgical centers (ASC’s) that enter into arrangements with POD’s also may be at risk under the anti-kickback statute.
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.
The federal Anti-Kickback Statute is a criminal statute that prohibits the exchange (or offer to exchange), of anything of value, in an effort to induce (or reward) the referral of federal health care program business (such as Medicare or Medicaid). See 42 U.S.C. § 1320a-7b.
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. Conviction for a single violation under the Anti-Kickback Statute may result in a fine of up to $25,000 and imprisonment for up to five (5) years. See 42 U.S.C. § 1320a-7b(b). In addition, conviction results in mandatory exclusion from participation in federal health care programs. 42 U.S.C. § 1320a-7(a).
Even absent a conviction, individuals who violate the Anti-Kickback Statute may still face exclusion from federal health care programs at the discretion of the Secretary of Health and Human Services. 42 U.S.C. § 1320a-7(b). The government may also assess civil money penalties, which could result in treble damages plus $50,000 for each violation of the Anti-Kickback Statute. 42 U.S.C § 1320a-7a(a)(7).
The 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. The Centers for Medicare and Medicaid Services (CMS) has also stated that POD’s “serve little purpose other than providing physicians the opportunity to earn economic benefits in exchange for nothing more than ordering medical devices or other products that the physician-investors use on their own patients.” See 73 Fed. Reg. 23527, 23694.
POD’s potentially raise four major concerns typically associated with kickbacks: (i) corruption of medical judgment; (ii) overutilization; (iii) increased costs to the Federal health care programs and beneficiaries; and (iv) unfair competition. Financial incentives POD’s 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 POD’s sell in lieu of other, potentially more clinically appropriate, devices. Disclosure to a patient of the physician’s financial interest in a POD is insufficient to address these concerns.
The 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, PODs are inherently suspect under the anti-kickback statute.
The anti-kickback statute is not a prohibition on the generation of profits; however, PODs that generate disproportionately high rates of return for physician-owners may trigger heightened scrutiny. Because the investment risk associated with PODs is often minimal, a high rate of return increases both the likelihood that one purpose of the arrangement is to enable the physician-owners to profit from their ability to dictate the implantable devices to be purchased for their patients and the potential that the physician-owner’s medical judgment will be distorted by financial incentives. Concerns are magnified in cases when the physician-owners: (1) are few in number, such that the volume or value of a particular physician-owner’s recommendations or referrals closely correlates to that physician-owner’s return on investment, or (2) alter their medical practice after or shortly before investing in the POD (for example, by performing more surgeries, or more extensive surgeries, or by switching to using their PODs’ devices on an exclusive, or nearly exclusive basis).
Finally, because the anti-kickback statute ascribes criminal liability to parties on both sides of an impermissible “kickback” transaction, hospitals and ASC’s that enter into arrangements with POD’s also may be at risk under the statute. In evaluating these arrangements, the OIG will consider whether one purpose underlying a hospital’s or an ASC’s decision to purchase devices from a POD is to maintain or secure referrals from the POD’s physician-owners.
The OIG is concerned about the proliferation of POD’s. Their Special Fraud Alert reiterates their longstanding position 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 OIG views POD’s as inherently suspect under the anti-kickback statute.