In the summer of 2011, the principals of Reliance Medical Systems, LLC were secretly recorded making a pitch to potential surgeon-investors for one of 14 physician-owned distributors (PODs) they set up to sell their spinal implants.
Those recordings, a whistleblower lawsuit filed by two physicians and Medicare records are the foundation for a Department of Justice False Claims Act charge against the PODs. The 81-page lawsuit was filed in federal court on September 8, 2014.
The government claims that Reliance’s owners, Adam Pike, Bret Barry and John Hoffman, their subsidiary PODs, Apex Medical Technologies, Inc. and Kronos Spinal Technologies, LLC, as well as Aria Sabit, M.D., a participating POD neurosurgeon, made false claims for Medicare reimbursements because those claims were tainted by illegal kick-backs and some of the surgeries were either excessive or unnecessary.
It’s always the accountants!
The secretly recorded conversation allegedly provides evidence that Reliance sought to hide physician ownership and illegally circumvent the Anti-Kickback Statute (AKS).
The allegations of medically unnecessary or excessive surgeries were made in a separate whistleblower lawsuit filed by Cary Savitch, M.D. and Gary Proffett, M.D., against Sabit, Moustapha Abou-Samra, M.D., and Community Memorial Health System in Ventura, California, where Sabit’s surgeries took place.
Reliance Medical
During that secretly recorded meeting on July 26, 2011, Pike and his partner Berry allegedly described the purpose of Reliance’s PODs as: “It is about the money. We make lots of money… [We] started this coming out of MBA School together. We were aware of Stark and Anti-Kickback and we knew those existed and we devised a plan around those.”
According to the federal complaint, they made a boatload of money. Between 2007 and 2012, the government says Berry and Pike paid themselves $36 million. Hoffman allegedly got about $7 million.
Reliance’s attorney, Patric Hooper of Hooper Lundy, disputes that figure, telling the Wall Street Journal that his clients earned “much less.”
The alleged “tainted kickbacks, ” went to Aria Sabit, M.D., Sean Xie, M.D., Gowriharan Thaiyananthan, M.D., and Ali Mesiwala, M.D. In all, the government says 35 physicians were involved.
The POD Wars
This isn’t the first time Reliance has tangled with the Justice Department. In summer of 2013, the company went to federal court to argue that a Special Fraud Alert from the Office of Inspector General (OIG) declaring PODs “inherently suspect, ” violated their First Amendment rights to freely discuss legal business with physicians. The federal judge threw out their complaint, telling them to chill out until they were actually harmed.
POD proponents cite evidence that hospitals save money by purchasing their implants.
Congress and the Justice Department have been waging a campaign against PODs saying that the financial conflicts inherent in physician ownership of a business that earns revenue from devices implanted by the owners treads on the Stark Act and may result in higher implant utilization.
Spine companies, including Medtronic, Inc., NuVasive, Inc. and Globus Medical, Inc. have noted that POD sales have cut into their sales. Some Wall Street analysts have speculated that PODs have captured almost 20% of all spine implant sales.
In this lawsuit, the government has taken the first legal action against PODs.
Sailing Outside the “Safe-Harbor”
The government claims Reliance’s PODs didn’t satisfy safe-harbor requirements.
According to the safe-harbor rules, investment opportunities, among other requirements, cannot be related to expected volume of referrals and no more than 40% of the entity’s gross revenue in the past year may come from referrals or business generated from the investor.
In addition, the amount of return for the investment must be directly proportional to the amount of the capital investment.
Exclusive Revenue
The government claims that revenues for the PODs came exclusively from the sale of spinal implants to the hospitals at which the four surgeons performed surgeries. Reliance, through Apex and Kronos charged hospitals as much as $7, 500 for each cage and as much as $2, 400 for each pedicle screw and $2, 400 for each plate and $522 for rods and $1, 875 for a crosslink.
The four surgeons mentioned earlier allegedly earned a total of $5.9 million for very small, if any investments in the PODs. And therein lays the problem. By not having any or sufficient capital at risk, the company and investors fell outside the safe harbor provision that allows investments.
Berry, Pike and Hoffman formed Kronos in February 2007. In June of that year they allegedly offered Mesiwala and David Lundin, M.D., an “opportunity” to invest in the company. The two physicians initially shared 40% ownership through Mesiwala’s company called SoCal Medical Surgical (SMS).
The government says the doctors paid nothing for their shares.
From August 2007 to September 2008, SMS was paid $769, 800. Lundin got $110, 000 of that amount and Mesiwala got the rest. Lundin gave up his shares in September 2008, and Mesiwala became the sole physician investor in the POD, owning 25% and generating more than 90% of Kronos’ revenues. (A “Safe-Harbor” violation.)
In late 2009, Thaiyananthan was offered ownership. On January 15, 2010, Kronos paid him $79, 000. A week later, he invested $100, 000 for a 20% interest in Kronos.
Another week later, on January 31, 2010, Kronos paid him an additional $69, 400. He invested $100, 000 and was paid $148, 400 in the same month.
Hidden Ownership
One of the government’s main claims is that Reliance and the surgeons did everything they could to hide their financial relationships from patients and hospitals.
In August 2013, following a Wall Street Journal article about Sabit and Reliance, Pike and Berry replied with a letter to the editor.
They wrote that Reliance physicians did not hide their interests from patients. “Patients were regularly informed about our physicians’ business relationships.”
But according to the government, the secret recordings tell a different story.
Pike was recorded saying that he and Berry founded Reliance to “get around” the AKS.
The government says “getting around” the AKS meant structuring the operation in a way to hide the financial relationships with its physician-investors. Their attorneys even advised them in 2006 and 2007 to notify patients that their physicians had a financial interest in Reliance’s distributorships.
According to the complaint, Berry explained that the principals did not want anyone to know who its physician-investors were and allegedly said; “Our job is to let everybody outside…of our group think that you’re just using this product…We don’t want anyone to know that you are an owner.”
Pike added that if they sign up after the evaluation period, “the hospital doesn’t need to know that. The community doesn’t need to know that…No one knows but our own circle.”
False Certifications
So, says the government, Reliance made a series of false statements to hospitals that inquired about Reliance’s financial relationships with its particular physicians.
In September 2012, Laurann Turner, Reliance’s VP of operations, allegedly wrote to a California hospital that had inquired about financial interests, that Mesiwala, “is not a distributor for Kronos Spinal Technologies, nor has he received any payments or remunerations from Kronos as a consultant or investor.”
At the time she wrote the letter, Kronos, according to the government, had already paid Mesiwala more than $3 million.
The same thing happened in November 2011 and May 2012 when Reliance allegedly certified to Detroit Medical Center that no “physicians licensed to practice medicine…own all or part of [Apex].” At the time of certification, Sabit, who was now on the hospital’s surgical staff, owned 20% of Apex.
Sabit Denies Ownership
When asked about his ties to Apex by his boss, Moustapha Abou-Samra, M.D. and by hospital staff, Sabit allegedly denied any financial interest. He also did not disclose his ties to his patients.
On November 12, 2012, as part of a federal investigation, Sabit testified that he never had been paid any compensation by a medical device manufacturer and that he didn’t know of any device company in Bountiful, Utah, the headquarters of Reliance.
By January 2014, Sabit gave sworn testimony in a government investigation and invoked the Fifth Amendment.
“Using Your Own Stuff”
The government further claims that Reliance fully expected its investor-surgeons to use their products.
Reliance did not allow physicians to invest unless hospitals in which they performed surgeries agreed to buy Reliance devices.
Berry and Hoffman allegedly stated that Reliance does not offer investment opportunities to physicians who will not order a high volume of Reliance implants. Hoffman was recorded stating that Mesiwala was not invited because “he’s not busy at all.”
Pike was recorded telling a potential investor how much they make a month and this “comes from very dedicated employees…and it’s our intent not to ever sign someone up unless they are that dedicated…so that’s one of our criteria. “
Hoffman said certain physicians were not invited because they would not be “loyal” to Reliance.
They allegedly told investors that they mandate an evaluation period to “better understand your volume and your commitment to it and then when all agreed and the signing date comes, then it’s we know what we got.”
On July 20, 2011 Mesiwala was recorded telling a potential investor that “the expectation is that you will be using your own stuff.”
The government says before becoming an Apex investor, Sabit had never used Reliance implants. After investing, Sabit used Reliance implants in over 90% of his surgeries at the hospital. He also increased his volume to 130 fusions over the next eight months, an increase of over 100%.
Sabit declined to comment to the Wall Street Journal on September 16, 2014, and his lawyer didn’t respond to inquiries. Hooper, Reliance’s attorney told the Journal that his clients “did absolutely nothing wrong” and added: “We are going to defend this thing aggressively.”
Sabit reportedly surrendered his medical license in California last month under a settlement with the state’s medical board, after the board alleged that he committed gross acts of negligence while treating five patients. He’s still practicing in Michigan.
Steinman and Lukianov Comment
John Steinmann, M.D. a leading POD proponent told OTW that Reliance’s founders are not physicians, but former industry businessmen, who induced allegedly ethically challenged physicians to participate in their scheme.
He added that he and his colleagues have worked to establish ethical POD guidelines that would have prevented this kind of activity.
Alex Lukianov, head of NuVasive, told us, “We applaud the lawsuit by the DOJ against PODs and believe that this first of its kind direct legal enforcement action by the DOJ into this important topic is positive news for our industry.”
He added that he thought this case is unlikely to resolve anytime soon, “But surgeons associated with PODs will take notice as the potential for personal liability is now more real. Although this enforcement action should have an impact on the prevalence of PODs in the market, we don’t expect them to disappear overnight.”
Dr Mesiwalla office did 3 spine surgerys with fashions on me from 2008-2010. I have not ever felt better like they said I would !