ARE PHYSICIAN-OWNED DISTRIBUTORSHIPS LEGAL?

Physician-owned distributorships (POD’s), are rapidly growing across the country, and already exist in at least 20 states.  However, there are growing concerns over their legality, primarily in the context of anti-kickback regulations.  Just this month, Sen. Orrin Hatch, Ranking Member of the Senate Finance Committee, has called for an investigation into the structure of POD’s and their potential adverse impact on the Medicare program and its beneficiaries.

What Are POD’s and How Do They Work?

POD’s are business arrangements involving physician ownership of medical device companies.  At its most basic level, medical device companies are formed by physician-owners.  These physician-owners then have control over medical devices they implant in patients, and are given a share of the profits generated by the sale of the medical devices.  To put it more simply, Surgeon A is a physician-owner of a medical device company.  When patients come to Surgeon A, he implants the medical device in the patient during surgery.  Surgeon A profits from the sale and utilization of the medical device.

POD’s have been popular among surgeons and we are now seeing more orthopedic POD’s in the context of joint-replacement devices.

Potential Legal Problems with POD’s

There are several different concerns over the legality of POD’s.  One such concern is whether physician-owners are performing medically unnecessary procedures in order to profit off the sale of the medical device.  There are some statistics to back up this claim.  An article in the Wall Street Journal (“Senators Request Probe of Surgeons”, June 9, 2011) maintains that the spread of POD’s has coincided with an explosion in spinal fusion surgery.  A 2010 study in the Journal of of the American Medical Association found that complex spinal fusions increased 15-times among Medicare patients with spinal stenosis between 2002 and 2007.  According to a Wall Street Journal analysis, spinal infusion went from costing Medicare $343 million in 1997 to costing $2.4 billion in 2008.

Another legal concern involves the ant-kickback statute.  Some have argued POD’s may violate anti-kickback statutes and other federal fraud and abuse laws by creating financial incentives for physician investors to use devices that steer business back to themselves.  Unfortunately, there has been no clear guidance by the OIG on this topic.  While the OIG has acknowledged the risks of abuse POD’s pose, the lack of any specific rules from the government appears to be contributing to the potential for abuse and has allowed these entities to flourish.

Attention on this matter has made it up to Congress, where five senators have called for an investigation.  The five senators requesting an investigation are: Sen. Orrin Hatch (R-Utah), Senate Finance Committee Chairman Max Baucus (D-Mont.) and Sens. Herb Kohl (D-Wis.), Charles Grassley (R-Iowa) and Bob Corker (R-Tenn.). The senators have requested the Inspector General submit an initial report on his findings by Aug. 1

With all the uncertainty and potential liability, POD’s will continue to be a hot-topic in the area of healthcare compliance until the legality question is answered.

 

 

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