PHYSICIAN OWNED
DISTRIBUTORSHIPS
PODS
Marissa Arreola
Strasburger & Price, LLP
(713) 951-5647
marissa.arreola@strasburger.com
Physician-Owned Distributorships
Summary of Presentation
• Disclaimers
• What is a POD?
• Are PODs Legal?
• What’s Happening with PODs?
• Will POD Participants Suffer Legal
Consequences?
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What is a POD?
• 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”).
• PODs are one of several types of physician-owned
implant companies (POCs).
– POCs take several forms, including manufacturers,
GPOs, and PODs.
• The prevailing POD model is a “stocking distributor”
(buys and resells inventory)
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What is a POD?, cont.
• PODs first appeared in California but now are
active across the country
• PODs reported to be doing business with
hospitals in 36 states and the District of
Columbia
• According to industry rep reports, most
hospitals associated with PODs are in
California (73), Texas (72), Tennessee (17),
Pennsylvania (16), Utah (13), Georgia (12),
Louisiana (12)
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Are PODs Legal?
• The Federal Anti-kickback Law prohibits any remuneration
to induce physicians to purchase or order (or arrange for
purchase or order of) products, or refer patients for a
procedure, for which payment may be made under
Medicare/Medicaid/Other FHCPs
– Orthopaedic/spinal implants used in FHCP patients are
deemed paid for in the payment to the hospital or ASC
– Remuneration can include a return on investment and the
opportunity to earn a profit
– Law is violated if one purpose is to induce the prohibited
purchase, order or referral, even if there are other
legitimate purposes
• If only one purpose of giving the physician an investment
opportunity is a “referral,” you are solely in the realm of
prosecutorial discretion.
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Are PODs Legal?, cont.
• The Stark law prohibits physicians from making Medicare
referrals to hospitals if they have a financial relationship
absent an exception
• The arguably relevant exception is for Indirect
Compensation Arrangements
– Not available if arrangement violates the AKL
– In any event, only allows hospitals to pay physician-owned
entity if the payment is FMV and doesn’t vary based on the
volume or value of referrals (allows per unit payments)
• Query whether a purchase from a POD that adds no value to the
implant purchase transaction could meet FMV standards
• All AKL/Stark violations actionable under the
False Claims Act
– Whistleblower enforcement
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Other Legal Risks with PODs?
• Becoming a product supplier carries with it
products liability risk and FDA reporting
requirements
– When physicians become POD owners, they become resellers
of implants and are subject to products liability lawsuits.
– They also become subject to FDA reporting requirements and
fall under FDA jurisdiction for enforcement of adulteration and
misbranding violations.
• Starting Jan. 1, 2013, all medical device
manufacturers whose products are sold in US
must register with FDA
– Overseas outsourcing will no longer be secret
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What’s Happening with PODs?
• Recent government statements contain warnings
– OIG (2006, 2008): PODs “should be closely scrutinized under the fraud and
abuse laws” because relationships between manufacturers and physicians
“raise the type of risks that [the anti-fraud and abuse] statutes were
designed to address.”
– CMS (2008): PODs “may serve little purpose other than providing physicians
the opportunity to earn economic benefits in exchange for nothing more than
ordering medical devices” from their POD.
– OIG (2010): “We continue to have serious kickback concerns when
companies link investment opportunities to the ability to generate business
and offer returns on investment that are disproportionate to business risk.”
– Senate Finance Committee (2011): PODs “seem to create financial
incentives for physician investors to use those devices that give them the
greatest financial return and that, in the process, patient treatment decisions
may be based on personal financial gain.”
– Tom Scully, Former CMS Administrator (2011): “You can’t possibly think
[PODs are] OK. I understand that the docs feel squeezed and want to make
more money, but they’re racing towards a cliff. This can’t possibly hold up.”
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What’s Happening with PODs?, cont.
• Some states are taking action
– California made self-referral to PODs unlawful in workers’
compensation cases (effective January 1, 2012)
– New Hampshire House passed a bill prohibiting PODs in
2012
• Senate did not adopt and the bill was referred for study
– Oklahoma adopted a disclosure requirement for PODs in
workers’ compensation cases in 2011
• Some hospitals adopting policies prohibiting business with
PODs
• October 2013 OIG POD study results
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March 2013
OIG Special Fraud Alert
• On March 26, 2013, the Office of Inspector
General for the U.S. Department of Health &
Human Services (“OIG”) issued its first special
fraud alert (“Fraud Alert”) since 2010. This
special fraud alert focused on PODs.
• The Fraud Alert focuses on four potential areas
of concern with PODs
– corruption of medical judgment;
– Overutilization;
– increased costs to the Federal healthcare programs
and beneficiaries; and
– unfair competition.
March 2013
OIG Special Fraud Alert
These types of concerns are typically
associated with kickback arrangements,
and the OIG goes on to say that “[w]e do
not believe that disclosure to a patient of
the physician’s financial interest in a POD
is sufficient to address these concerns.”
March 2013
OIG Special Fraud Alert
The OIG further stresses its point by listing the following suspect
characteristics involving PODs or their physician-owners:
•
The size of POD investment offered to each physician varies with the
expected or actual volume or value of devices used by the physician.
•
POD distributions are not made in proportion to ownership interest, or
physician-owners pay different amounts for their ownership interests in
the POD based on the expected or actual volume or value of devices
used by the physicians.
•
Physician-owners condition their referrals to hospitals or ASCs on the
facilities’ purchase of POD devices.
•
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 POD devices for their patients.
March 2013
OIG Special Fraud Alert
• The POD retains the right to repurchase a physician-owner’s
interest for the physician’s failure or inability to refer, recommend,
or arrange for the purchase of POD 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 necessary
operational personnel.
• The POD does not maintain continuous oversight of all distribution
functions, and when a hospital or ASC requires physicians to
disclose conflicts of interest, the physician-owners either fail to
inform the hospital or ASC of their ownership interest in the POD
or actively conceal their ownership through misrepresentation.
March 2013
OIG Special Fraud Alert
• Avoiding these areas of concern will minimize
the risk of violating fraud and abuse laws, but it
will not eliminate this risk. Similarly, failing
to avoid these areas of concern does not
guarantee that the OIG will determine that a
fraud and abuse violation occurred.
• Physicians should work with experienced
healthcare attorneys when structuring new POD
entities or evaluating existing PODs for fraud
and abuse risks.
OIG POD STUDY
October 2013
• The report responds to a congressional request
to determine the extent to which PODs provide
spinal devices to hospitals.
• Study notes that POD advocates claim that
their devices cost less than devices provided by
other spinal device companies.
• Critics of PODs claims that physician ownership
creates a conflict of interests that may affect
physicians’ clinical decision making.
OIG POD STUDY
October 2013
• In FY 2011 PODs supplied devices used in
nearly 20%of spinal fusion surgeries billed to
Medicare.
• Spinal surgeries that used POD devices used
fewer devices but did not have lower per
surgery device costs than surgeries that did not
use POD devices
OIG POD STUDY
October 2013
• When hospitals in the study began buying from
PODs, their rates of spinal surgery grew faster than
the rate for hospitals overall.
• In FY2012, surgeons performed more spinal
surgeries at hospitals with POD devices than those
without POD devices.
• Of the nationwide respondents to the OIG study,
Texas had the third largest number of spinal
surgeries and the 2nd highest number of cases using
POD devices (California was highest). Texas’
percentage of surgeries using POD devices was
29%.
OIG POD STUDY
October 2013
Conclusions
• PODs are a substantial presence in the spinal device
market.
• The OIG questions whether POD devices do cost less
than those of other suppliers.
• More spinal surgeries are performed at facilities that
purchase from PODs.
• Not all physicians to disclose POD ownership to the
hospital or patient.
• These conclusions reduce the ability for hospitals
and patients to identify conflicts of interest amongst
POD owning providers.
Will POD Participants Suffer
Legal Consequences:
• Unfortunately, it’s impossible to predict
• OIG, DOJ, State Attorney General, or qui tam relator
could bring a case at any time
– History of federal government action related to physician
ownership has been to gradually shut down passive
ownership opportunities
• In the early ‘90s, DOJ shut down physician-owned imaging
and respiratory therapy companies under the AKL
• In the mid ‘90s, Stark law prohibited self referral for labs,
imaging, DME, hospitals, with certain exceptions
• 2010 OIG shut down a physician-owned lithotripsy/laser
business under AKL
• PODs offer little to deter enforcement
Mitigating Risk
• Disclose POD ownership to facility and patient
• Consider excluding government payor patients
from POD procedures, if clinically appropriate
• Structure POD company in accordance with
fraud and abuse laws and regulations for
physician owned entities
• Structure arrangement between POD and
facility such that the compensation complies
with current fraud and abuse regulations
THANK YOU!
Marissa Arreola
Strasburger & Price LLP
(713) 951-5647
marissa.arreola@strasburger.com
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