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The Office of Inspector General (OIG) released a Special Fraud Alert for physician-owned distributorships, or “PODs,” on March 26, 2013. The alert concerns physician-owned entities that make money by selling implantable devices ordered by physician-owners. These entities remain inherently suspect under the anti-kickback statute.

The OIG reiterated its previous guidance that the opportunity for a referring physician to earn a profit, including through an ownership interest, could constitute remuneration prohibited by the anti-kickback statute. The OIG discussed questionable methods by which PODs select physician-owners and allocate investment interest among the owners, including:

     (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.        

The OIG is concerned that financial incentives arising out of POD ownership by ordering physicians could lead to corrupted medical judgment, overutilization, increased health care costs, and unfair competition. Specifically, the OIG is concerned about “the presence of such financial incentives in the implantable medical device context because such devices typically are ‘physician preference items.’” These concerns are magnified when (1) there are few physician-owners, suggesting a closer connection between the physician’s referrals and the return on investment, and (2) physician-owners change their medical practice habits shortly before or after obtaining ownership interest in a POD.

The alert describes specific characteristics of PODs, generally relating to how a POD interacts with its physician-owners, that draw increased OIG scrutiny. The extent to which PODs comply with the anti-kickback statute depends on the intent of the parties, which may be evidenced by characteristics such as legal structure and operational safeguards. Actual conduct of investors, management entities, suppliers, and customers during implementation and operation of the POD could evidence intent in violation of the anti-kickback statute.

The guidance issued by the OIG in connection with the ambulatory surgical center safe harbor also applies to PODs in that prior notification to patients of a physician’s interest in the POD will not sufficiently minimize abuse.

The alert reiterates the OIG’s concern about the proliferation of PODs. The OIG clarified that PODs are inherently suspect arrangements, and that hospitals or ambulatory surgical centers that enter into arrangements with PODs may also incur liability under the anti-kickback statute. Parties seeking clarification about whether a POD structure is compliant with the anti-kickback statute are encouraged to obtain an advisory opinion.

To read the full alert, click here.