On March 26, 2013, the Office of Inspector General published much-awaited guidance on physician-owned medical device distributorships (commonly known as “PODs”) in the form of a Special Fraud Alert.  The OIG makes no bones about where it stands on PODs which it describes as “physician-owned 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.”

The Fraud Alert describes a number of characteristics which, according to the OIG, make POD arrangements potentially suspect under the federal anti-kickback statute.  These include the following:

1.            Selection of 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.

3.            Distributing extraordinary returns on investment compared to the level of risk involved.

4.            Choice of brand and the type of device may be made or strongly influenced by the physician.

5.            The size of the investment offered to each physician varies with the expected or actual volume or value of devices used by the physician.

6.            Distributions are 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.

7.            Physician-owners condition their referrals to hospitals or ASCs on their purchase of the POD’s devices through coercion or promises, for example, by stating or implying they will perform surgeries or refer patients elsewhere if a hospital or an ASC does not purchase devices from the POD, by promising or implying they will move surgeries to the hospital or ASC if it purchases devices from the POD, or by requiring a hospital or an ASC to enter into an exclusive purchase arrangement with the POD.

8.            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 the POD’s devices for their patients.

9.            The POD retains the right to repurchase a physician-owner’s interest for the physician’s failure or inability (through relocation, retirement, or otherwise) to refer, recommend, or arrange for the purchase of the POD’s devices.

10.          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.

11.          The POD does not maintain continuous oversight of all distribution functions.

12.          When a hospital or an ASC requires physicians to disclose 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.

13.          POD exclusively serves its physician-owners’ patient base.

14.          Physician-owners are few in number, such that the volume or value of a particular physician-owner’s recommendations or referrals closely correlates to that physician-owner’s return on investment.

15.          Physician-owners alter their medical practice after or shortly before investing in the POD.

Although the OIG notes that not all PODs will necessarily be illegal under the statute, it believes they are “inherently suspect”.