Doctor-owned device firms under federal scrutiny for fraud

Washington Physician-owned companies that distribute medical devices at hospitals and ambulatory surgery centers where their investors practice medicine have the potential to violate federal anti-kickback laws, the federal government has cautioned.

On March 26, the Dept. of Health and Human Services Office of Inspector General issued a special fraud alert stating that the way these “physician-owned distributorships,” or PODs, do business could pose a fraud and abuse risk as well as jeopardize patient safety. The concern is that the financial incentives offered to physician owners in these arrangements might encourage these doctors to perform medically unnecessary procedures, or choose to prescribe devices the distributorships sell instead of those that may be more clinically appropriate, the alert stated.

According to the OIG’s findings, some PODs may have characteristics that put them at risk for violating the federal anti-kickback statute, which is designed to safeguard patients against any physician referrals that may be influenced by financial incentives. OIG listed several circumstances under which these entities may qualify as being “inherently suspect” under the statute.

This would happen, for example, when physician owners are pressured to recommend the sale of devices sold by the POD, or are told that their distributions will be diminished if they fail to use these devices on their patients. Another problem could arise if the investment share of each physician in the distributorship is contingent upon the value or volume of devices he or she prescribes.

A representative of the American Academy of Orthopaedic Surgeons said the organization did not have an official position on PODs but that several of its committees were looking into the topic. The American Medical Association has maintained that physicians “should not be influenced in the prescribing of drugs, devices or appliances by a direct or indirect financial interest in a firm or other supplier, regardless of whether the firm is a manufacturer, distributor, wholesaler or repackager of the products involved.”

Lawmakers had urged action

These types of arrangements gained attention on Capitol Hill in 2011, when Sen. Orrin Hatch (R, Utah), the lead Republican on the Senate Finance Committee, revealed in an analysis that PODs were expanding rapidly in at least 20 states but that no specific legal parameters existed on how these entities should be governed. Bipartisan letters from members of key Senate committees had asked federal regulators to investigate the potential fraud risk of these entities and to provide guidance to health care professionals if such problems were detected.

In response to the OIG’s findings, Hatch said he would put continued scrutiny on these organizations.

Medical device manufacturers applauded the fraud alert’s findings. “Transparent, ethical interactions between health care professionals and medical technology companies are critical to innovation and improved patient care,” said Christopher L. White, senior executive vice president and general counsel and secretary for the Advanced Medical Technology Assn., or AdvaMed, in a statement.

“However, the emergence of companies with equity investments by physicians, who are also major revenue generators for the companies, raises important legal and policy issues relating to the potential effect on clinical decisions by physicians,” he said.