OIG Warns PODs

The Office of Inspector General (OIG) fired a “Warning Shot” on March 26, 2013, for physician-owned distributors (PODs) that don’t follow appropriate investor guidelines.

In a “Special Fraud Alert”, the OIG reiterates its longstanding position that it views PODs as “inherently suspect” under the anti-kickback statute. “The opportunity for a referring physician to earn a profit, including through an investment in an entity for which he or she generates business, could constitute illegal remuneration, ” stated the Alert.

Former federal prosecutor Tom Beimers, now in private practice with Faegre Baker Daniels LLP told OTW, “It seems to me that that the OIG analysis is a fairly straightforward application of prior relevant guidance. However, they frame the fraud alert in such a way as to provide a warning shot for PODs with certain characteristics, particularly related to variable ROI (return on investment) based on volume or value.  Quite clearly such PODs may now become the subject of enforcement actions or whistleblower False Claims Act lawsuits.”

In response to our inquiry, John Steinmann, D.O., founder of one of the first PODs, said members of the American Association of Surgeon Distributors (AASD) recognizes that the POD model “bears risk of abuse.” He says his association has advocated for comprehensive legal and ethical standards so that the distributorships are established according to the OIG guidelines. “We are very happy that the OIG is creating clarity in defining characteristics of such distributorships that violate the public trust and are also happy that this alert confirms the appropriateness of the model for which we have long advocated. We look forward to the OIG defining this model through compliance program guidance.”

Steinmann says his group believes the Alert is a strong step forward and appreciates the OIG’s efforts.

The Alert notes that the OIG is particularly concerned when PODs exhibit any of the following suspect characteristics:

• 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 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.
• Physician-owners condition their referrals to hospitals or ASCs (ambulatory surgery centers) on their purchase of the POD’s devices through coercion or promises,
• Physician-owners are required, pressured, or actively encouraged to refer, recommend, or arrange for the purchase of the devices sold by the POD.
• 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 distribution functions.
• 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.

PODs now capture around 10-15% of the U.S. spine market, according to Wells Fargo analyst, Larry Biegelsen. Former government officials familiar with the POD model tell us that as long as PODs squeeze out distribution costs for payers and hospitals, their financial incentives will remain aligned with PODs and the model is likely to remain in existence. OIG is expected to issue a detailed report on PODs later this year.

To read the entire Alert, click here.