Senators call for probe of medical device distributorships

A bipartisan group of U.S. senators is asking federal authorities to conduct inquiries into the proliferation and potential abuses of physician-owned distributorships.

Physician-owned distributorships are entities that allow doctors to purchase ownership shares in an organization that buys products, or serves as the distributor for products, used in surgery.

Rather than the manufacturer selling directly to the hospital, physicians who control the choice of medical devices can, in the words of a report prepared by Sen. Orrin Hatch (R, Utah), "use their ability to generate referrals for hospitals to induce them to buy the medical devices from the companies in which physicians have ownership."

Hatch, in his role as ranking minority member of the Senate Finance Committee, released his report June 9. Accompanying the report were two letters -- one to Centers for Medicare & Medicaid Services Administrator Donald M. Berwick, MD, and another to U.S. Dept. of Health and Human Services Inspector General Daniel Levinson. The letters asked that each department review the POD industry to determine whether they are violating fraud and abuse and anti-kickback laws.

The letters were signed by Hatch, Senate Finance Committee chair Max Baucus (D, Mont.) and Sens. Herb Kohl (D., Wis.), Charles Grassley (R, Iowa) and Bob Corker (R, Tenn.) They asked for a response from CMS by July 15, and from the Office of Inspector General by Aug. 12.

As outlined in Hatch's report, physician-owned distributorships began in northern California in 2003 and are now present in at least 20 states. Usually, a small group of individuals, who may or may not be physicians, start the organizations and offer physicians shares for a cash buy-in of $10,000 or more. According to the report, offering letters by PODs claim dividend returns of 25% or more, guarantees to increase patient load, and no financial risk beyond the first investment.

In their letters, the senators wrote that some PODs may well be appropriate. For example, the Hatch report outlines a scenario under which a POD would not permit itself to do business with its own investors, their partners or affiliated partners, thus not gaining a profit off its physician investors' use of certain products. However, the report says, "Even this structure would not prevent two separate PODs from using each other's products as a means to circumvent these rules."

The Hatch report notes that the Senate Finance Committee received "numerous allegations" of physicians who performed more surgeries than medically necessary, or who used implants that were of "inferior quality or not best suited for the procedure," because of their financial interest in PODs. The report cites a study published April 7, 2010, in The Journal of the American Medical Association that found a 15-fold increase between 2002 and 2007 in the number of complex spinal fusion surgeries in Medicare patients. The study said it was "unclear" why the number of complex spinal fusion surgeries increased from 1.3 to 19.9 per 100,000 Medicare beneficiaries, and why, by comparison, the number of simple spinal fusion and decompression surgeries went down. The JAMA study did not mention PODs.

In their letters, the senators said they also are concerned that recently released accountable care organization regulations, which seek to make it possible for unaligned physicians and hospitals to work together to save money by increasing quality of care, will "provide an inadvertent loophole allowing the less reputable POD models to fall under the Stark and anti-kickback law waivers envisioned for ACOs."

Proponents of PODs say the organizations help hospital-physician alignment, and that they can help cut the cost of devices. Inland Spine Products, a POD operated by Arrowhead Orthopedic Medical Group in Redding, Calif., presented a paper to the American Academy of Orthopedic Surgeons in 2009 about its success saving money. According to the paper, hospitals, between May 2006 and May 2008, spent 34% less buying through Inland Spine Products than they would have buying at the manufacturers' contracted price.

The OIG in 2006 put out an opinion that PODs should be reviewed carefully because of "the strong potential for improper inducements." But the Hatch report noted that hospitals, physicians and medical device manufacturers would benefit from "clear legal guidance" about PODs, with the "most consistent comment from individuals interviewed by the committee on this topic was 'it was unclear to them if PODs were legal or illegal.' "