OIG Fraud Alert: Physician-Owned Medical Device Manufacturers

January 26, 2016 | Health Services

Recently, the U.S. Department of Health and Human Services Office of the Inspector General (DHHS-OIG) issued a fraud alert.  The alert concerned physician owned distributors (PODs) that derive revenue from selling, or arranging for the sale of implantable medical devices ordered by their physician-owners for use on their own patients at hospitals or ambulatory surgical centers (ASCs).[1]

Notably, this is not the first time the OIG has addressed concern over PODs.  In October 6, 2006, the OIG opined that PODs exhibited “the strong potential for improper inducements between and among the physician investors, the entities, device vendors, and device purchasers” and the OIG noted that such ventures need to be “closely scrutinized under the fraud and abuse laws.”[2]

The OIG stated four major concerns regarding PODs: (i) corruption of medical judgment; (ii) overutilization; (iii) increased costs to Federal health care programs and beneficiaries; and (iv) unfair competition.  Specifically, the OIG stated that PODs may cause physicians to perform more procedures than medically necessary and to use devices that PODs sell rather than ones more clinically suitable.  Additionally, PODs producing implantable medical devices tended to increase the risk of violations because these devices are normally used as “physician preference items” without the control of the hospital or ASC where the procedure is performed.

The fraud alert also included a specialized list of suspect POD characteristics that would raise fraud and abuse concerns and prompt heightened scrutiny such as:

  • The size of the investment offered to each physician varies with the expected or actual volume or value of devices used by the physician.
  • Distributions not made in proportion to ownership interest or physician-owners pay different prices for their ownership interests because of the expected or actual volume or value of devices used by the physicians.
  • Physician-owners conditioned their referrals to hospitals or ASCs on their purchase of the POD’s devices through coercion or promises.
  • Physician-owners 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 for failing to use the POD’s devices for their patients.
  • 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 the POD’s 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 personnel necessary for operations.
  • The POD does not maintain continuous oversight of all distributions functions.
  • When a hospital or an ASC requires physicians to disclosure conflicts of interest, the POD’s physician-owners either fail to inform the hospital or ASC of, or actively conceal through misrepresentations, their ownership interest in the POD.

[2] Letter from Vicki Robinson, Chief, Industry Guidance Branch, Department of Health and Humans Services, OIG, Response to Request for Guidance Regarding Certain Physician Investments in the Medical Device Industries (Oct. 6, 2006).

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