On March 26, the Office of Inspector General of the U.S. Department of Health and Human Services (OIG) issued a Special Fraud Alert about PODs, or physician-owned distributorships. PODs are entities that sell implantable medical devices that are used by the physician-owners.

Typically, physicians either acquire or manufacture the devices, then enter a contract with a facility or facilities to sell the devices. The legal framework surrounding PODs has always been complex. In April 2008, the Centers for Medicare & Medicaid Services (CMS) solicited comments about PODs specifically.

Since then, several prominent law firms have indicated that they believe PODS are defensible while others have offered unrelenting criticism. The recent fraud alert suggests that both sides may have a point. It clearly was designed to throw cold water on the use of PODs, although the alert does not claim that PODs are always illegal. Instead, it characterizes them as “inherently suspect” under the Medicare anti-kickback statute.

This statute makes it a felony to offer, solicit, receive or pay anything of value if any of those actions are intended to influence referrals under a federal healthcare program. The law is intent-based, meaning that legal analysis hinges on why the parties have entered into a transaction. Courts have applied a “one purpose” test, meaning that if there are many reasons for a payment, but one of the reasons is to influence referrals, whoever had that intent is guilty of a felony.

The alert indicates concern that many PODs are created at least in part by a desire to influence referrals. The alert lists three features suggested as particularly troublesome: a) selecting investors because they are in a position to generate business; b) requiring investors who cease practicing in the service to divest their ownership; and c) offering returns that are disproportionate to the risk involved. The alert includes five additional suspicious characteristics, such as offering referrals to a hospital or ASC on the condition of the hospital’s/ASC’s use of the POD, or pressuring the physician owners to use the POD. The OIG explained that its main concern is that an owner of a POD may choose to perform more procedures, or more expensive procedures, than physicians who do not invest.

The alert also highlights two other red flags. The OIG is particularly worried when there are few investors in a POD, meaning that any one physician’s choices are likely to have a major impact on profit. The OIG also is focused on situations in which a physician’s practice pattern changes after the physician invests in the POD.

While the fraud alert is somewhat big news because it is the OIG’s first clear statement about PODs, the analysis contained in the alert is not terribly surprising or controversial. The OIG has made similar statements about other physician-owned organizations, such as ambulatory surgical centers (ASCs).

In fact, the alert specifically notes that the same analytical principles used to craft it also apply to other physician-owned entities. In that regard, this isn’t exactly revolutionary. That said, the OIG has never issued a fraud alert about ASCs, and it does suggest that the OIG may be considering applying a higher level of scrutiny to PODs than to other physician ownership relationships.

All this shouldn’t prompt PODs to immediately cease operations, but it should serve as a vital reminder that the relationships involved in PODs, like most relationships in the healthcare industry, come with real risk. Whenever payments to physicians vary based on the volume or value of referrals, or whenever physicians are pressured into particular referral patterns or forced to sell an investment because of their inability to bring business, there is a real potential of violating the anti-kickback statute. Since this constitutes a felony, it is not a risk to be dismissed lightly, especially since it appears that the OIG will be scrutinizing PODs particularly carefully.

Hospitals should use this alert as an opportunity to consider all physician relationships carefully. Hospitals can and should have close relationships with physicians. They simply need to be careful that those relationships are not premised in part on a desire to pay the physicians for referrals. Hospitals have a legitimate reason to consider PODs; they may offer an opportunity to lower device costs.

As long as the hospital evaluates the entire relationship thoroughly, it is possible to have a compliant relationship with a POD. But these are not relationships to enter into cavalierly; counsel staff who are especially familiar with the anti-kickback statute should review the structure.

About the Author

David Glaser is a shareholder in Fredrikson & Byron’s Health Law Group and helped establish its Health Care Fraud & Compliance Group. David helps healthcare entities negotiate the maze of healthcare regulations, providing advice about risk management, reimbursement and business planning issues. He has considerable experience in healthcare regulation and litigation, including compliance, criminal and civil fraud investigations, and reimbursement disputes.

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