    [Senate Hearing 114-356]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-356

     PHYSICIAN-OWNED DISTRIBUTORS: ARE THEY HARMFUL TO PATIENTS AND PAYERS?

    =======================================================================

                                    HEARING

                                   before the

                              COMMITTEE ON FINANCE
                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               NOVEMBER 17, 2015

                                   __________

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                Printed for the use of the Committee on Finance
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                              COMMITTEE ON FINANCE

                         ORRIN G. HATCH, Utah, Chairman

    CHUCK GRASSLEY, Iowa                 RON WYDEN, Oregon
    MIKE CRAPO, Idaho                    CHARLES E. SCHUMER, New York
    PAT ROBERTS, Kansas                  DEBBIE STABENOW, Michigan
    MICHAEL B. ENZI, Wyoming             MARIA CANTWELL, Washington
    JOHN CORNYN, Texas                   BILL NELSON, Florida
    JOHN THUNE, South Dakota             ROBERT MENENDEZ, New Jersey
    RICHARD BURR, North Carolina         THOMAS R. CARPER, Delaware
    JOHNNY ISAKSON, Georgia              BENJAMIN L. CARDIN, Maryland
    ROB PORTMAN, Ohio                    SHERROD BROWN, Ohio
    PATRICK J. TOOMEY, Pennsylvania      MICHAEL F. BENNET, Colorado
    DANIEL COATS, Indiana                ROBERT P. CASEY, Jr., Pennsylvania
    DEAN HELLER, Nevada                  MARK R. WARNER, Virginia
    TIM SCOTT, South Carolina

                         Chris Campbell, Staff Director
                  Joshua Sheinkman, Democratic Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------

                               OPENING STATEMENTS

                                                                       Page
    Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman,
      Committee on Finance...........................................     1
    Wyden, Hon. Ron, a U.S. Senator from Oregon......................    11
    .................................................................

                                   WITNESSES

    Lederhaus, Scott, M.D., president, Association for Medical
      Ethics, Monarch Beach, CA......................................     4
    Steinmann, John, D.O., board advisor, American Association of
      Surgical Distributors, Redlands, CA............................     6
    Draper, Suzie, vice president of business ethics and compliance,
      Intermountain Healthcare, Salt Lake City, UT...................     7
    Reynolds, Kevin, son of a patient of a surgeon affiliated with a
      Physician-Owned Distributor, Ventura, CA.......................     9

                   ALPHABETICAL LISTING AND APPENDIX MATERIAL

    Draper, Suzie:
        Testimony....................................................     7
        Prepared statement with attachments..........................    17
    Hatch, Hon. Orrin G.:
        Opening statement............................................     1
        Prepared statement...........................................    28
    Lederhaus, Scott, M.D.:
        Testimony....................................................     4
        Prepared statement with attachments..........................    29
    Reynolds, Kevin:
        Testimony....................................................     9
        Prepared statement with attachments..........................    45
    Steinmann, John, D.O.:
        Testimony....................................................     6
        Prepared statement with attachment...........................    57
    Wyden, Hon. Ron:
        Opening statement............................................    11
        Prepared statement...........................................    68

                                 Communications

    AdvaMed..........................................................    71
    American Association of Surgeon Distributors (AASD)..............    73
    American Physical Therapy Association (APTA).....................    74
    Gaines, Bruce Le'Roy, II.........................................    75
    Globus Medical, Inc..............................................    76
    Medical Device Manufacturers Association (MDMA)..................    80
    Neospine.........................................................    82
    Orthotic and Prosthetic Alliance.................................    83
    RetireSafe.......................................................    87
    Ropes and Gray LLP...............................................    88

                                     (iii)

     PHYSICIAN-OWNED DISTRIBUTORS: ARE THEY HARMFUL TO PATIENTS AND PAYERS?

                                  ----------

                           TUESDAY, NOVEMBER 17, 2015

                                           U.S. Senate,
                                          Committee on Finance,
                                                        Washington, DC.
        The hearing was convened, pursuant to notice, at 2:30 p.m.,
    in room SD-215, Dirksen Senate Office Building, Hon. Orrin G.
    Hatch (chairman of the committee) presiding.
        Present: Senators Grassley, Thune, Scott, Wyden, Stabenow,
    Brown, and Bennet.
        Also present: Republican Staff: Kimberly Brandt, Chief
    Oversight Counsel; Justin Coon, Detailee; and Jill Wright,
    Detailee. Democratic Staff: Dave Berick, Chief Investigator;
    and Matt Kazan, Health Policy Advisor.

     OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
                  UTAH, CHAIRMAN, COMMITTEE ON FINANCE

        The Chairman. The committee will come to order. I want to
    welcome everyone to this afternoon's hearing.
        Today we are here to explore the various issues surrounding
    the growth and prevalence of Physician-Owned Distributors, or
    what we call PODs. Simply put, PODs are medical device
    businesses in which a physician is both an investor and a
    distributor, essentially a salesperson, of either the devices
    or of some of the components.
        And while these arrangements are not always problematic, we
    are seeing more and more of these physician salespeople using
    the very devices they sell in the surgeries and procedures they
    perform. Many critics have argued, with significant evidence to
    support their case, that this practice creates a financial
    incentive for these physicians to recommend and perform more
    and more unnecessary surgeries.
        Typically, the more devices or hardware a POD physician
    implants in their patients, the larger the payment he or she
    receives from the POD. So an incentive clearly exists to these
    surgeons to perform a steady stream of procedures, increasing
    the use of products supplied by their POD, thereby increasing
    their own incomes.
        The question we will address today is whether these
    arrangements and the apparent conflicts of interest that exist
    among POD physicians have had a negative impact on our health-
    care system and, of course, the well-being of patients.
        As some of you may recall, in June 2011 the Republican
    staff of the Finance Committee issued a report on PODs,
    outlining key issues and potential areas for congressional
    oversight. In response to some of the concerns outlined in the
    report, former Chairman Baucus and I, along with Senators Kohl,
    Grassley, and Corker, wrote to the Inspector General of the
    Department of Health and Human Services to share our concerns
    about the proliferation of PODs and the lack of guidance as to
    how these arrangements square with existing Federal law.
        For years, the HHS Inspector General has warned about the
    conflict of interest created by a joint partnership between
    physicians and companies, including device manufacturers that
    depend on them for referrals or new business. In March 2013,
    the Office of the Inspector General issued a special fraud
    alert calling PODs, quote, ``inherently suspect'' under the
    government's anti-kickback laws. Later that year, the Inspector
    General reported that the number of spinal surgeries in
    hospitals that purchase implantable devices from PODs grows at
    a faster rate compared to other hospitals.
        The OIG also found that for nearly one in five spinal
    fusion surgeries billed to Medicare, the device was supplied by
    a POD, indicating a potentially significant link between PODs
    and Federal health-care costs. Most notably, this same report
    found that physicians with investments in PODs perform on
    average 20 percent more surgeries than their counterparts who
    do not have these kinds of financial relationships.
        Needless to say, these findings confirm much of my
    skepticism about PODs. And while the OIG's guidance helped to
    persuade many in the industry that PODs were a risky business
    model, we continue to see reports in the media and from our
    constituents that these types of arrangements are still
    prevalent in our health-care systems. And because the Federal
    Government does not regulate these types of business
    arrangements, it is difficult to determine just how many PODs
    exist or where they all are. This lack of accountability is one
    reason why the issue is, at least to me, so complicated.
        Anecdotally, we received reports of PODs operating in every
    State represented on the committee. From what we have heard,
    the growth rate of PODs has slowed since the Inspector
    General's March 2013 alert. However, the total number of PODs
    remains roughly the same as before the report.
        Now, our information indicates that PODs are no longer
    concentrated in large hospital chains, as many chains have
    adopted policies forbidding or strictly curtailing POD usage.
    As a result, many PODs have migrated to smaller and more rural
    hospitals.
        Some proponents of PODs have argued that some of our
    hardline statements and positions regarding their business
    arrangements go too far. They claim that implementing a
    sweeping prohibition on physician ownership in medical
    technology companies might have an unintended chilling effect
    on legitimate business practices as well as medical
    breakthroughs and research.
        Nevertheless, we note that a number of POD physicians have
    abused their positions of trust and have put their own personal
    financial gain above the safety of their patients. According to
    Department of Justice filings, one such physician was Dr. Aria
    Sabit, who, within months of accepting a lucrative investment
    offer from a POD, more than doubled his number of instrumented
    spinal fusion surgeries.
        Prior to making his investment, Dr. Sabit had never used
    the POD's product before. After his investment, he used their
    products in more than 90 percent of his spinal fusion
    surgeries. All told, Dr. Sabit had invested $5,000 in the POD.
    In just over 2 years, he saw a return of over $438,000.
        Now, I am not typically one to decry investments with a
    high rate of return, but those numbers alone should be enough
    to, at the very least, raise a few eyebrows. In the end, Dr.
    Sabit pled guilty to more than $11 million in health-care
    fraud, and to causing bodily harm to his patients. One of our
    witnesses today, Kevin Reynolds, will tell us about his
    mother's experience under Dr. Sabit's care.
        As part of our ongoing inquiry into these issues, the
    Finance Committee has become aware of additional cases that
    warrant further review. As a result, Ranking Member Wyden and I
    will be making a formal referral to the HHS Office of Inspector
    General and the Department of Justice on at least one case we
    feel deserves review for potential criminal action. We will be
    submitting additional information to the HHS OIG and to CMS
    about the rate at which PODs report their ownership interests.
    We believe these findings will say quite a bit about the lack
    of accountability for these types of business relationships or
    arrangements.
        I hope that today's hearing will be another important step
    in our ongoing efforts to provide appropriate oversight and
    enforcement on this issue.
        [The prepared statement of Chairman Hatch appears in the
    appendix.]
        The Chairman. Now, I want to especially thank our witnesses
    for appearing today. I look forward to hearing their insights
    on these complex matters. And when Senator Wyden gets here, we
    will turn to him for his opening statement.
        We are grateful to have all of you here today, and we will
    look forward to taking your testimony. And I guess we will
    begin with you, Doctor, all right?
        Dr. Lederhaus. Well, thank you very much. I am honored to
    be here----
        The Chairman. Well, let me take a second to introduce you.
    [Laughter.]
        Dr. Lederhaus. All right.
        The Chairman. There are four witnesses at today's hearing.
    The first one is Dr. Scott Lederhaus. Dr. Lederhaus is a
    neurosurgeon from California who has been concerned about the
    potential negative effects of PODs on the health-care industry.
        Dr. Lederhaus is president of the Association for Medical
    Ethics. And we want to thank you for being here today.
        And let me just announce the other witnesses. Our second
    witness today is Dr. John Steinmann. Dr. Steinmann is a POD
    physician from California. Dr. Steinmann serves as chairman of
    the board of the American Association of Surgical Distributors,
    which is the POD industry group. And we want to thank you, Dr.
    Steinmann, for being here today.
        Our third witness is Ms. Suzie Draper. Ms. Draper is the
    vice president of business ethics and compliance at
    Intermountain Healthcare, the major hospital chain in my home
    State of Utah, and one that has been constantly referred to as
    a chain that does a really good job. So I want to thank you,
    Ms. Draper, for being with us today, once more, and we will get
    to you in just a few minutes.
        The final witness today is Mr. Kevin Reynolds. Mr. Reynolds
    is a Navy veteran, a certified medical assistant, and a massage
    therapist. Mr. Reynolds's mother, Lillian Kaulbach, died after
    receiving spinal fusion from a POD doctor. So we are grateful
    to have you here as well.
        And we will begin with you, Dr. Lederhaus.

    STATEMENT OF SCOTT LEDERHAUS, M.D., PRESIDENT, ASSOCIATION FOR
                   MEDICAL ETHICS, MONARCH BEACH, CA

        Dr. Lederhaus. Thank you very much for allowing me to speak
    today. As you mentioned, I am part of the Association for
    Medical Ethics, which was a group formed in 2005 essentially to
    address issues regarding spine fraud. It was formed by Gemma
    Cunningham and Chuck Rosen, who is an orthopedic spine surgeon
    at UC-Irvine Medical Center and also instrumental in passage of
    the Sunshine Act.
        I became involved in POD evaluation simply because of what
    I was observing at my own hospital and area. I was witnessing
    patients who had multilevel fusions for no reason; people in
    their mid-80s being treated for back pain with a 12-level
    fusion operation. Many of these people, of course, did not do
    well, and many of the docs in the area were also doing
    surgeries that did not seem to make sense to me. And this was
    before the issue of PODs even really came out in the press or
    anybody really knew anything about what they were. It appeared
    as though everybody who suffered from back pain became a
    surgical candidate.
        Over time, Mr. John Carreyrou began writing articles in the
    Wall Street Journal which highlighted some of the Physician-
    Owned Distributors, and it became more apparent to me what was
    going on in my own area. And that information fit with what I
    was witnessing on a regular basis.
        In some instances, I looked for information regarding these

    Physician-Owned Distributors. There was no information on the
    Internet. There were no salespeople to talk about the product.
    There was no reason to understand why anyone would use these
    products unless they were getting money from financial
    kickbacks.
        There was secrecy among the surgeons themselves. Nobody was
    admitting to being involved in a POD. They were not telling
    their patients they were involved in a POD, and the community
    at large had no idea what was going on. And to date, these PODs
    are still kept in a rather stealthy, secret mode.
        A few years ago, the Department of Justice began
    investigating the Reliance Medical POD, and they discovered a
    number of things, one of which was that many of these surgeons
    were making in excess of $50,000 a month simply for implanting
    their POD hardware. And this did not include the fee that the
    surgeons were charging to actually do the surgery.
        One of the owners of this particular POD made close to $4
    million in a 6-year period from the implantation of his POD
    hardware. The POD investigation done by Mr. Carreyrou of the
    Wall Street Journal discovered that there were 11 PODs in six
    different States which involved 32 spine surgeons. There were
    only two owners of this group, and only one salesperson, which
    led to even more curiosity and speculation about what was being
    done.
        Once this POD evaluation was under scrutiny by the
    Department of Justice, it became apparent that some of these
    POD surgeons switched to a different POD, because they knew the
    one they were using was no longer available. The issue about
    saving money on PODs also is erroneous. One of the physicians
    who was using a POD put in $4.6 million worth of implants in
    2011. My neurosurgery group, myself and three partners,
    implanted $1.3 million worth of implants in the same time
    period. So this one individual put in 3.5 times the volume of
    myself and my three partners combined. So claiming savings does
    not make any sense if there is a high volume of implants being
    implanted for the sake of enhancing income.
        How does this affect the patients? Many of the patients I
    have seen in second opinions are worse off and in more pain.
    They have been using narcotics on a chronic basis. They have
    had multiple operations. Some of them have had infections, many
    of them being life-threatening infections. They have been
    unable to work, had a loss of income. Patients feel as though
    they have been abused and abandoned, and this adds to the
    burden of the Federal Government. The Federal Government
    becomes financially responsible to care for these patients.
        Another issue is one I have termed ``predatory pricing.'' A
    physician who is a member of a POD can go into a geographic
    area and obtain all of the health-care contracts because they
    can underbid the non-POD physicians. Thus, one POD physician
    may be able to sign a health-care contract at 40 percent of
    Medicare reimbursement, whereas the non-POD docs cannot survive
    on that reimbursement. So this becomes an issue about
    preselecting the POD docs over the non-POD docs, and rewarding
    the people who, in many instances, are doing harm to the
    patients.
        Our societies, the American Association of Neurological
    Surgeons (AANS), the Congress of Neurological Surgeons (CNS),
    the AMA, and the American Academy of Orthopedic Surgeons
    (AAOS), in their code of ethics state it is unethical to
    receive compensation from a manufacturer for using a particular
    device or product.
        Are these PODs ethical? I believe the reason we talk about
    ethical PODs is because PODs are not legal. Safe harbor laws
    negate legality, as no POD can satisfy the restrictions of the
    safe harbor restrictions. Since PODs cannot fulfill these legal
    requirements, those who are involved in a POD then simply try
    to be or appear ethical.
        In conclusion, I feel that some hospitals have ignored the
    warnings and continue to use PODs. In my opinion, there have
    been no cost savings. The FDA approval has been meaningless, as
    implants can be made in foreign countries or anywhere else, and
    one can obtain FDA approval via ``substantial equivalency.''
    And there is also a big question of quality with POD implants--
    where are these implants made, and who is making them? This is
    not an issue that can be ignored. It can and will affect
    everyone to some extent.
        Thank you.
        [The prepared statement of Dr. Lederhaus appears in the
    appendix.]
        The Chairman. Dr. Steinmann, we will turn to you.

      STATEMENT OF JOHN STEINMANN, D.O., BOARD ADVISOR, AMERICAN
           ASSOCIATION OF SURGICAL DISTRIBUTORS, REDLANDS, CA

        Dr. Steinmann. Chairman Hatch, Ranking Member Wyden,
    honorable Senators, and valued staff, it is my honor to be here
    to speak with you today on the subject of surgeon ownership in
    medical device distributorships. I am an orthopedic surgeon in
    practice for 25 years. I am a senior partner in one of
    California's largest orthopedic groups and a board member of
    the California Orthopedic Association.
        I want to make it clear that I am not here to defend any of
    the individuals or stories that are portrayed by the other
    witnesses. I am here because I offer another side to this
    story, a side that shows the potential value of this model,
    when the distributorship is structured in a manner that deeply
    protects patients.
        You will hear testimony today that raises valid concerns
    about distributorships that are not structured correctly. You
    will hear from a family member of a patient with a terrible
    outcome following a spinal surgery performed by a surgeon with
    severely compromised ethics. And, Mr. Reynolds, on behalf of
    the medical profession, I am truly sorry we cannot do a better
    job of removing bad doctors from our ranks.
        This is why, as we bring necessary change to our health-
    care system, we need to support models with strong standards
    that protect patients' health. We must reduce waste in our
    system and correct the serious flaws that enrich certain
    industries to the detriment of our country.
        Ask yourselves, please, why in this country do we pay twice
    what Europe pays for our own U.S.-manufactured products? We
    need to address this market failure and fix it. We owe that to
    the 1.7 million Americans who are affected by a medical
    bankruptcy every year.
        In this country, we acquire medical devices in a horribly
    inefficient and very expensive manner. First, when ordering
    medical devices, surgeons bear no financial burden for their
    decision, and hence the choice of the implant is most often
    based on rep relationship or brand loyalty, never on value.
    There is no incentive for surgeons to create or support a
    competitive environment--a better-controlled price.
        Second, we missed the opportunity to create competition and
    purchase in volume. We must move from this highly inefficient
    commission distribution system to a stocking distribution
    system where surgeons and hospitals prospectively derive a
    consensus on product designs and features, identify competitive
    manufacturers, and create an environment that rewards the
    products of highest value. Ownership of this stocking
    distribution company can be either the surgeon or the hospital,
    depending upon the circumstance.
        We have proven that this model can work in a manner that
    protects patients and can result in savings in excess of 35
    percent, a number that could, in theory, gain us back the $7 to
    $10 billion a year we waste in this country on orthopedic and
    spinal devices.
        The American Association of Surgeon Distributors has
    promoted a structure that ensures transparency, protects
    patients, and ensures cost savings. The distributorship we
    developed 8 years ago has served four hospitals. Our main
    hospital has documented over $8 million in savings, all in a
    manner that is fully transparent to our patients, to our
    colleagues, to our hospitals, and to our government, and with
    no increase in surgeries performed. That is nearly $250,000 in
    savings per surgeon per year.
        The conflict of interest associated with surgeon ownership
    and distribution is a serious and a valid concern. We have
    proven those concerns can be countered and patients protected
    with high, clear, enforceable standards such as those of the
    AASD. We should derive confidence that conflicts such as fee-
    for-service and bundled payments, which offer a far stronger
    incentive, are safely managed by these very same principles.
        In closing, the health-care industry is finally starting to
    innovate methods to increase value by finding means to enhance
    the patient experience at a lower cost. And it would be a shame
    for our country's leadership not to endorse in some manner any
    model that is proven to effectively produce these goals.
        This is why, policymakers, I ask you to please request of
    the Office of the Inspector General affirmative program
    guidance along the lines of those standards outlined by the
    AASD so that patients can be protected and the American public
    can start to see the benefits of effective, well-structured
    innovations in health-care delivery.
        Again, I thank you for the opportunity to discuss these
    standards and welcome any questions you may have.
        The Chairman. Well, thank you, Dr. Steinmann. We appreciate
    your testimony.
        [The prepared statement of Dr. Steinmann appears in the
    appendix.]
        The Chairman. Ms. Draper, we will take your testimony now.

     STATEMENT OF SUZIE DRAPER, VICE PRESIDENT OF BUSINESS ETHICS
      AND COMPLIANCE, INTERMOUNTAIN HEALTHCARE, SALT LAKE CITY, UT

        Ms. Draper. Thank you very much. Intermountain Healthcare
    appreciates the opportunity to describe our policy for dealing
    with Physician-Owned Entities. My name is Suzie Draper, and I
    am vice president of business ethics and compliance at
    Intermountain Healthcare.
        Based in Salt Lake City, Intermountain is a not-for-profit
    health-care system that operates 22 hospitals in Utah and
    Idaho, more than 185 physician clinics, and an insurance plan
    called SelectHealth. Intermountain has become well-known
    internationally and nationally for identifying best clinical
    practices and applying them consistently. Our focus is on
    providing high-value health care, and our mission is to help
    people live the healthiest lives possible.
        My testimony will describe Intermountain's challenges in
    implementing policies and procedures regarding both Physician-
    Owned Distributors and Physician-Owned Entities as vendors.
        Intermountain Healthcare's supply chain organization is
    responsible for over $1.5 billion annually and oversees the
    distribution of over 2 million medical devices annually. In the
    early years of our supply chain, we sought information about
    physician ownership for vendors, even though these
    relationships were not viewed as an absolute impediment to
    contracting. Over time, however, we received increasing reports
    from the field regarding suspected and nondisclosed financial
    relationships between vendors and physicians who were in the
    position to order products.
        Prior to the OIG's Special Fraud Alert in 2013,
    Intermountain internally struggled to reach consensus on the
    proper way to approach PODs and then strike a balance between
    competing interests. With the publication of the Special Fraud
    Alert, consensus at Intermountain crystalized around a bright-
    line policy that would be straightforward to implement. We thus
    were able to create our Physician-Owned Entities Financial
    Arrangements Policy--that is a mouthful--or our POE policy.
    This policy prohibits Intermountain from purchasing from a POE
    any product or service other than those that were personally
    furnished by a physician owner or health professional employee.
        Our policy does have two exceptions. The first exception
    applies to POEs in which the physicians are not in a position
    to generate business for Intermountain. This exception requires
    a written contract in which the POE attests that its physicians
    do not generate such business and that the POE does not have
    any of the eight suspect characteristics identified in the
    Special Fraud Alert.
        The second exception to our POE policy is made for useful,
    disruptive technologies that are preapproved by Intermountain's
    senior management team. This exception gives us the flexibility
    to make available new products and services that are beneficial
    to the patients.
        Finally, our POE policy has also required a great deal of
    coordination between our compliance and our supply chain staffs
    to ensure that our policy is appropriately applied.
        Our first priority was to terminate non-compliant
    arrangements for implantable medical devices. Our policy has
    helped Intermountain comply with the Anti-Kickback Statute when
    dealing with POEs, and it has helped us avoid relationships
    with the type of suspect PODs identified in the Special Fraud
    Alert.
        However, the implementation of our policy has not been
    without challenges. I will discuss three. The first challenge
    concerns the trade-off between standardization and competition.
        To some degree, our POE policy has narrowed the field of
    qualified suppliers. Standardization is generally viewed as a
    positive cost-saving measure. However, in this situation, we
    may be standardizing on a legacy group of products, a practice
    some argue is inefficient, anti-competitive, and potentially
    subject to abuse. Our challenge is to strike the right balance
    between competition and standardization while ensuring the
    products we source are the best for our patients.
        The second challenge concerns medical innovation. As I
    mentioned, our POE policy provides an exception for certain
    POEs with products or services that are potentially
    groundbreaking, from a therapeutic perspective. This exception
    applies in the infrequent circumstance where disruptive
    technology is only available through a POE and is approved by a
    panel of three non-conflicted clinicians and then ratified by
    our senior management. The challenge with this exception is
    that it is very narrow in scope, and there have only been a few
    instances where suppliers have met these requirements. This is
    not because the suppliers were unwilling to comply with the
    Special Fraud Alert, but rather their products or services were
    not truly disruptive.
        The third challenge that we have with our POE policy is our
    need to preserve innovation and collaboration at Intermountain.
    We are considering adding a third policy exception for
    technologies that are co-developed by Intermountain and its
    employees. We recognize that many of our own physicians are in
    the best position to invent beneficial technologies, and we
    hope that this exception will provide a compliant model for
    those activities.
        In conclusion, I should note that we have included some of
    the specifics of our implementation steps in my written
    testimony.
        Thank you for the opportunity to share our process.
        The Chairman. Well, thank you, and we appreciate you, Ms.
    Draper. And I know that Intermountain does a terrific job and
    is well-recognized all over the country.
        [The prepared statement of Ms. Draper appears in the
    appendix.]
        The Chairman. Mr. Reynolds, we will take your testimony
    now.

      STATEMENT OF KEVIN REYNOLDS, SON OF A PATIENT OF A SURGEON
       AFFILIATED WITH A PHYSICIAN-OWNED DISTRIBUTOR, VENTURA, CA

        Mr. Reynolds. Thank you. Good afternoon, Chairman Hatch,
    Ranking Member Wyden, and distinguished members of the Finance
    Committee. I would also like to thank you for your comments,
    Dr. Steinmann.
        I, Kevin Reynolds, stand before this committee on behalf of
    my mother, Lillian Kaulbach, and patients across the country
    who have been harmed by Physician-Owned Distributorships, or
    PODs.
        My testimony today describes my family's involvement with
    PODs, specifically a POD called Apex Medical Technology, LLC,
    that was owned by Dr. Aria Sabit. Based on my mother's
    experience with the POD, I believe that PODs are a serious
    threat to patient health and must be stopped immediately.
        PODs are a conflict of interest with the oath that doctors
    take that states they must do no harm. Beyond that oath, there
    is an unspoken trust and belief in our health-care system that
    doctors make decisions based on the patient's best interest.
    When doctors recommend surgery, patients put their trust in
    that judgment.
        My mother's medical problem started in 2002 when she called
    me to tell me that she was having a hard time taking care of
    her paralyzed mother and her brother, who had recently had his
    skull removed after an accident. I dropped everything to go
    help my mother. With my help, my mother continued to take care
    of her mother and brother for several years. During this time,
    she had several major surgeries due to conditions brought on by
    the physical and mental stress of caretaking for her family.
        After several surgeries, my mother still suffered from
    severe and persistent back pain. She turned to Dr. Aria Sabit
    for help in the fall of 2010. I went with my mother as she met
    with Dr. Sabit in his office, and our meeting with him was very
    brief. It lasted probably only 3 to 5 minutes. Dr. Sabit did
    not perform any physical examination of my mother.
    Nevertheless, at the end of the meeting, Dr. Sabit recommended
    that she have spinal fusion surgery.
        My mother and I trusted Dr. Sabit's judgment and decided
    she would have the spinal surgery. At that time, when we met
    with Dr. Sabit, we had no indication that he had an ownership
    interest in any products that might be used in her surgery.
        Dr. Sabit performed surgery on my mother in October of
    2010. My mother and I signed a consent form authorizing one
    level of fusion. However, Dr. Sabit performed four levels of
    surgery on his own without asking the family or my mother for
    consent. After surgery, my mother developed five to six
    different infections. The hospital staff told me there was
    nothing they could do.
        They asked me not once, but twice, to pull the plug. I said
    ``no.'' Miraculously, my mother showed some improvement, but
    she was never able to walk again. Instead, she became bedridden
    and was sent to a nursing home to battle these infections,
    taking up to 25 pills a day. On May 31, 2011, my mother passed
    away from complications related to Dr. Sabit's spinal fusion
    surgery. She was only 68 years old.
        It was only after my mother died that I learned of Dr.
    Sabit's involvement with Apex Medical Technology, LLC, a
    company that manufactures screws and rods that were used in my
    mother's surgery. A single screw used in that type of surgery
    can cost around $100 to make and sell for upwards of $1,000 to
    $10,000 each.
        As has been reported, Dr. Sabit had a 20-percent stake in
    Apex. It has also been reported that from May 2010 to August
    2012, Dr. Sabit's share of the profits in Apex was
    approximately over $400,000. Simply put, I believe that Dr.
    Sabit had a clear financial incentive to use more screws and
    rods in my mom's back surgery than what was needed. And I
    believe this is a financial incentive that played a role in his
    decision to perform a more complex surgery on her than was
    medically necessary.
        Some people have asked me if I would do anything
    differently if I had known that Dr. Sabit had ownership and
    interest in the products he planned to use in my mother's back
    surgery. Looking back, the answer is ``yes.''
        Knowing that information and understanding the conflict of
    interest, we would have sought a second opinion before
    authorizing any surgery. Of course, we were not given the
    opportunity, because we did not know that Dr. Sabit was
    involved in PODs.
        Since my mother's death, I have tried to tell her story. I
    have spoken out locally and nationally to news organizations, I
    have testified in Dr. Sabit's criminal proceedings, and it is
    my privilege to appear before this Senate Finance Committee.
        But I know, even if Dr. Sabit goes to prison, patients will
    not be protected from the same dangers that claimed my mother's
    life and so many others. There are still other doctors who
    participate in PODs and have the same financial incentive that
    Dr. Sabit had for performing unnecessary and dangerous
    surgeries on a daily basis.
        On behalf of my mother, Lillian Kaulbach, once again, I ask
    and demand this committee to stop these doctors. Please do
    whatever is necessary to ensure that doctors make decisions
    based on what is best for the patient, not the doctors'
    wallets. Doctors should do no harm.
        And the last statement is a mantra. PODs no more. Thank you
    for letting me go over, Mr. Chairman.
        The Chairman. Well, thank you, sir.
        [The prepared statement of Mr. Reynolds appears in the
    appendix.]
        The Chairman. I apologize to the vice chairman. I should
    have called on him before anybody else, and we are going to
    turn to him now for his statement. And he will be the first to
    ask any questions.

                 OPENING STATEMENT OF HON. RON WYDEN,
                       A U.S. SENATOR FROM OREGON

        Senator Wyden. Mr. Chairman, no apology necessary. It has
    been a pleasure to work with you on this as we have worked
    together on so many issues. And I look forward to our pursuing
    this again in a bipartisan fashion, and today we put some
    bipartisan sunlight on it.
        I want to apologize to all our guests as well. I am on the
    Intelligence Committee--obviously, we face great challenges
    there--and also on the transportation conference. So I am going
    to touch on a few issues here now.
        I have been involved in these kinds of issues since my days
    as co-director of the Gray Panthers, and I think this is some
    of the most egregious and offensive behavior I have seen in a
    long, long time. And here is what concerns me. What is going on
    here are double-dip payments that are also a conflict of
    interest that puts American patients at risk. And let me be
    very specific.
        The first dip is for the payment made by Medicare or a
    private insurer for the surgery. The second dip is the cut that
    the doctor gets from the manufacturer for implanting the
    device. So what we are talking about here is a system that
    creates these new incentives for more surgeries and more
    implantable devices.
        And the chairman and I--because we have been working very
    closely together on a bipartisan basis--have looked at a number
    of these cases. The Inspector General wrote some time ago that
    these distributorships are inherently suspect under the Anti-
    Kickback Statute.
        In my own home State, Dr. James Makker had his medical
    license revoked in 2012 after a long string of questionable
    surgeries and malpractice suits. News reports have indicated
    Dr. Makker was also affiliated with a Physician-Owned
    Distributorship. Before he lost his license, Dr. Makker had one
    of the highest number of spinal fusion surgeries of any surgeon
    in the Nation. He would sometimes operate six or seven times on
    the same patient.
        Now, as Chairman Hatch and I have noted in so many of our
    inquiries that have been bipartisan, not all the practitioners
    in this field are involved in this kind of activity. And you
    all have highlighted that: that there are so many very
    responsible practitioners in the medical profession.
        But the fact is, with respect to this type of business, too
    often the business practices of these distributorships are
    simply in the dark, out of any kind of sunshine or
    transparency. The patients, the hospitals, the regulators,
    frequently do not know when a doctor is part of a
    distributorship.
        So clearly, we need to do far more to ensure that the
    public is aware, which is how I see this. The patient has a
    right to know, and then, of course, taxpayers, because you have
    public payers, the people of this country, through the Medicare
    program. There is really an urgent need for more transparency.
        Now, the Finance Committee has also gotten some troubling
    information from industry sources. Distributorships, under the
    Sunshine Act, are required to report doctors' ownership
    interests as well as their own payments to doctors. But neither
    seems to happen, again, when it comes to many of these
    distributorships. The committee got one report of a device
    manufacturer offering to make payments to doctors through a
    third party to avoid disclosure.
        So Chairman Hatch and I are going to work very closely
    together with respect to these allegations and possible
    Sunshine Act violations that ought to go to the Inspector
    General.
        But you are going to see, on this committee, Democrats and
    Republicans working together. These are extraordinarily
    important issues. And as far as I am concerned--and I feel
    badly, because now I have to go to yet another meeting in the
    Capitol--I want you to know that I am going to work very
    closely with the chairman. And I can tell you, Democratic
    Senators are very much committed to pursuing this with Chairman
    Hatch and our colleagues on the other side of the aisle.
        And I apologize to our guests for three things,
    essentially, all at once.
        Thank you very much, Mr. Chairman.
        [The prepared statement of Senator Wyden appears in the
    appendix.]
        The Chairman. Thanks, Senator. I appreciate you very much.
        Well, let me just say that my colleagues and I are very
    concerned about the conflicts of interest that exist when
    physician owners of PODs receive revenues from the sale of
    devices that they order for procedures they perform on their
    own patients. Typically, surgeons, not hospitals, choose the
    devices that they will use in their surgeries, which increases
    the potential for abuse by POD surgeons. And without controls,
    this position of power gives POD surgeons the opportunity to
    grant themselves a steady stream of income by increasing the
    use of devices supplied by their POD.
        Now, my concern is that POD ownership may affect the
    physicians' clinical decision-making by influencing them to
    perform unnecessary surgeries or to choose devices in which
    they have financial interests, rather than another device that
    might be even more appropriate for the patient.
        So I would like to ask each of you to explain very briefly,
    if you would, in just a few sentences, whether you believe that
    this particular conflict of interest compromises medical
    judgment.
        We will start with you, Dr. Lederhaus.
        Dr. Lederhaus. Well, I think it certainly does, and it is a
    conflict of interest. And why would I say that? Because I am a
    physician. I could stand to make money on a Physician-Owned
    Distributorship; why not just join a Physician-Owned
    Distributorship and enhance my income?
        And the reason is, I fully believe they are a conflict of
    interest due to the fact that I have seen a lot of harm done to
    patients, as you have already heard about. This is a public
    safety issue, and to be involved in a POD presents a huge
    conflict of interest.
        The Chairman. How about you, Dr. Steinmann? What do you
    have to say about it? You have used PODs. What do you think?
        Dr. Steinmann. I believe that an ethical surgeon will not
    be changed into an unethical surgeon by this model. I believe
    that the data that we have shown--and if you will look at the
    CMS data on our distributorship alone, the three spine surgeons
    in our distributorship order spinal fusions at a rate that is
    half the national average.
        I do not believe that Scott Lederhaus would change his
    surgical indications tomorrow if he owned a distributorship. I
    do not believe it is powerful enough to change a person's
    ethics.
        We have, and are met with, a powerful conflict of interest
    in every patient we see. We are paid on a back-pain patient
    $100 to recommend a conservative regimen of exercise and safe
    medication, or we are paid $5,000 to operate on their back.
        Dr. Lederhaus and myself both see 20 to 30 patients before
    we select one that is appropriate for an operation. Our
    indications for surgery have never changed in the 8 years that
    we have been in a distributorship, and I can say that is true
    for every one of the distributorships that we have been
    involved in helping to develop.
        We do this for the right reason, and it does not change our

    decision-making.
        The Chairman. Good.
        Ms. Draper?
        Ms. Draper. The relationship between a physician and his
    patient is kind of a sacred relationship, and you are putting
    your trust in that physician to make the best decisions for
    you. We would hope that, just like my two esteemed physicians
    here, that they would not be compromised by a financial
    interest.
        But like any potential conflict of interest, transparency
    is key. And making sure that everyone involved understands a
    physician's potential additional financial advantage for the
    prescribing of a surgery or any other medical device is
    essential if we are going to help maintain this ethical
    relationship.
        The Chairman. Thank you.
        Mr. Reynolds, do you have anything you would care to add?
        Mr. Reynolds. Yes. I believe this is a conflict of interest
    and becomes blood money. When protocols follow therapy,
    medication, reconstruction, when all those avenues have been
    pursued, then possibly surgery should be considered.
        This POD system, I believe, is just a simple cash cow,
    fraudulent money above and beyond any expectations that anybody
    could ever imagine. I just find it unacceptable how this has
    gone on for so long, and it does affect the Nation on so many
    different levels.
        Thank you.
        The Chairman. Well, thank you.
        Now, this is an interesting panel, as far as I am
    concerned. I used to be, in my early life, a medical liability
    defense lawyer, defending doctors and hospitals and health-care
    providers and nurses, et cetera. So naturally I take a real
    interest in this.
        And let me just ask this question, and I will ask it of
    you, Dr. Lederhaus. Your testimony here has been very
    persuasive.
        Some have suggested changing the Sunshine Act to add
    reporting requirements for physicians who have ownership
    interests in pharmaceuticals, biologicals, devices and, of
    course, medical supplies. Do you believe that this would
    eliminate the conflict of interest, and is it enough to protect
    patients from physicians with a financial interest in PODs?
        Dr. Lederhaus. I think it would be difficult to control.
    There are certainly enough dishonest physicians who will hide
    their involvement with pharmaceuticals or implant companies,
    and I just do not know of a good way of monitoring that, even
    with respect to Dr. Steinmann's way of monitoring his POD
    physicians. I think a large group of physicians throughout the
    country just cannot be effectively monitored or, unfortunately,
    trusted.
        The Chairman. All right.
        Mr. Reynolds, you have endured a tremendous loss as a
    result of an unscrupulous POD physician. And it sounds like the
    surgeon in her case performed an unnecessary surgery and then
    implanted a bunch of unnecessary hardware, or at least too much
    hardware.
        When helping your mother plan for her medical care, you
    said that you had no idea that Dr. Sabit might have had a
    financial interest in the devices used in the surgery. Now,
    given your experience, what would have been the best and
    easiest way for you to learn that the doctor was part of a POD?
        Mr. Reynolds. I think, from an ethical standpoint, the
    doctor should disclose that, whenever he is going to surgery
    and putting hardware into somebody.
        I had been with my mother through seven major surgeries.
    She had a knee reconstruction and knee replacement following
    protocol, shoulder reconstruction and shoulder replacement
    following protocol, hernia operation, gall bladder operation.
    She had each one of these in consecutive years leading up to
    this surgery.
        It got to the point where medication for the pain
    management had got up to morphine, and it was too much. So I
    decided--I had had so much success with Medicare and Medi-Cal,
    had spent so much money, and she recovered and gained and got
    better, but it got to the point where back surgery was needed.
        The simple fact--once again, doctors: do no harm. Disclose
    your ownership in materials and hardware that are going into
    your patients. So I had so much success that in hindsight, I
    just took a leap of faith with this doctor and not knowing--
    because I am not a big one to be on the Internet, I am not a
    big one to be looking up and checking out people--because I had
    had so much success in the system, I took him upon his word
    that he would do the right thing.
        I would like to see it disclosed. I would like to see it
    policed and audited a little bit better. And reform is a must,
    and it must happen as soon as possible.
        Thank you.
        The Chairman. Well, thank you.
        Dr. Steinmann, the AASD believes that PODs can implement
    various safeguards that eliminate any legal barriers to
    operation. Can you explain how you believe that these
    safeguards are sufficient to protect patients when their
    surgeon has a financial interest in the devices that he or she
    chooses for the surgeries? Could you help me to understand that
    a little bit?
        Dr. Steinmann. Yes. The AASD has published 12 standards,
    and they are very comprehensive. They go beyond the eight
    issues that the OIG brought up.
        As was brought up earlier today, when met with a conflict
    of interest--which exists everywhere in health care, politics,
    law--they are managed best with transparency. And so one of the
    AASD standards requires transparency; requires disclosure to
    patients, to colleagues and to hospitals; requires that
    products are evaluated in a systematic manner for quality; and
    requires utilization reporting from the 12 months before you
    start your distributorship every year thereafter. It requires
    every 12 months an audit on all the 12 standards to ensure that
    you are compliant.
        The Chairman. Well, Dr. Lederhaus, do you agree with Dr.
    Steinmann on what he has suggested here?
        Dr. Lederhaus. Well, there would certainly be ways that
    these companies could be made compliant, if you will, although
    I still see that, despite some groups claiming to be ethical,
    they are anything but ethical and have ways of getting around
    some of these requirements.
        I think, in Dr. Steinmann's group, they use primarily
    Renovis POD implants. I cannot tell from looking at his website
    where they are made or who makes them. I do not think his
    company makes them. In the past, I have attended two of Dr.
    Steinmann's discussions regarding his POD set-up. In theory,
    there are ways of improving the ways PODs are set up and
    monitored, but in practice, I think it would be difficult to
    finalize and manage and oversee.
        The Chairman. All right. From what the OIG, the Office of
    Inspector General, said about PODs, it seems that it is very
    difficult to determine how many PODs there are and who actually
    owns them.
        Dr. Steinmann, you represent a group of PODs that promotes
    ethics. That is why you are testifying here today. Do you have
    any recommendations, any additional recommendations, for
    dealing with the confusing web of entities, from manufacturers
    to distributors, that may be involved in paying physician
    investors?
        Dr. Steinmann. I believe that we have proven that AASD
    standards absolutely can work, and, if we were to receive
    affirmative program guidance from the OIG, that would bring
    transparency to every one of these relationships, and it would
    bring transparency to every one of these relationships'
    conduct.
        And really, that is what it comes down to, because you have
    to be transparent and you have to conduct yourself
    appropriately.
        The Chairman. Well, thank you.
        Ms. Draper, we are grateful to have you here, and from my
    own State. And we have had you testify before, and you have
    always done a very good job.
        But one of your roles is to advise hospitals about how to
    comply with the laws governing the Federal health-care system.
    Do you feel that existing laws, regulations, and guidance from
    the Federal Government provide enough clarity for hospitals to
    design POD policies that comply with the law, or is more
    guidance needed?
        Ms. Draper. We felt that the Special Fraud Alert was enough
    to give us enough guidance so that we could set a policy that
    was consistent with how we like to focus on the patient and
    proven clinical protocols and practices. The challenge that we
    have, which I think has been alluded to, is whether there is
    enough transparency or whether through the Sunshine Act all of
    these physician financial arrangements are truly disclosed so
    that we can appropriately manage the policies that we already
    have in place.
        We hear anecdotal stories similar to what was already
    talked about of payments done through other entities or
    employment relationships, et cetera. So, as we continue to be
    vigilant in implementing sustainable controls, increased
    knowledge of these relationships is essential for us to set the
    best policy.
        The Chairman. Well, thank you.
        I want to thank all of you witnesses here today. This has
    been a very interesting hearing to me. And these are important
    issues. I hope we can all work together to find solutions to
    ensure an appropriate balance between physician
    entrepreneurship and safeguards to protect beneficiaries from
    unintended harm.
        I think this is something we owe to the patients and to
    America's seniors and to the health-care system as a whole.
        So with that, this hearing is adjourned. But I want to
    thank all of our witnesses for appearing here today to discuss
    these important issues, as well as all of our colleagues who
    have participated in this hearing. It is my hope that we can
    all work together to find solutions to ensure an appropriate
    balance between physician entrepreneurship and safeguards to
    protect beneficiaries from unintended harm. I think this is
    something that we owe to America's seniors and to the health-
    care system as a whole.
        And, as a former medical liability defense lawyer, I have
    to say that a lot of the great ideas that have improved the
    profession, that have solved a lot of future problems well in
    advance of their origination, really come from good physicians
    and good managers who really care about these issues and who
    really want to make sure that everything is ethical and
    aboveboard and appropriate.
        So I appreciate the testimony each of you has given here
    today, and I am going to ask that any written questions by any
    member of this panel be submitted by Tuesday, December 1st.
        So with that, we will adjourn this hearing, and thank you
    once again for appearing and helping us to understand these
    things a little bit better. Thank you so much. This was great.
    With that, we will adjourn.
        [Whereupon, at 3:20 p.m., the hearing was concluded.]

                                A P P E N D I X

                  Additional Material Submitted for the Record

                                  ----------

     Prepared Statement of Suzie Draper, Vice President of Business Ethics
                    and Compliance, Intermountain Healthcare
        Intermountain Healthcare appreciates the opportunity to describe
    its experience with the development and implementation of policies for
    dealing with Physician-Owned Entities. My name is Suzie Draper, and I
    am the Vice President of Business Ethics and Compliance at
    Intermountain Healthcare in Salt Lake City, Utah. Intermountain is a
    not-for-profit 501(c)(3) integrated healthcare system that operates 22
    hospitals in Utah and Idaho; more than 185 clinics; and an insurance
    plan, SelectHealth, which covers more than 750,000 lives in Utah and
    Idaho. Intermountain's Medical Group employs approximately 1,200
    physicians, and about 4,000 other physicians affiliate with
    Intermountain.

        Intermountain has become well-known nationally and internationally
    for identifying best clinical practices and applying them consistently.
    Dr. John E. Wennberg of the Dartmouth Institute for Health Policy and
    Clinical Practice said, ``Intermountain is the best model in the
    country of how you can actually change healthcare for the better.''
    Dartmouth estimated that if healthcare were provided nationally in the
    way it is provided at Intermountain, ``the nation could reduce
    healthcare spending for acute and chronic illnesses by more than 40
    percent.''

        Intermountain's focus is on providing high-value healthcare and
    helping people live the healthiest lives possible. To that end:

            We have developed physician-led clinical programs so that
    medicine at Intermountain is practiced by collaborative teams and is
    based on the best available data.
            We establish specific clinical improvement goals, with
    accountability for accomplishing these goals reaching all the way to
    Intermountain's Board of Trustees.
            We have developed information technology that allows us to
    track, compare, and improve outcomes--and eliminate inappropriate
    variation.
            We view variation as an opportunity to improve, whether we
    find it in our clinical processes, our business processes, or our
    supply chain.
                                  1. objective
        This testimony describes Intermountain Healthcare's challenges in
    implementing policies and procedures regarding Physician-Owned
    Distributors (PODs) and Physician-Owned Entities (POEs).
                             2. process and history
    2.1  The Evolution of a Centralized Supply Chain Organization (SCO)
        Originally, Intermountain's supply chain processes were largely
    decentralized, with contracting authority at the individual facility
    level. In 2006, Intermountain created a Supply Chain Organization (SCO)
    to more effectively manage its annual spend on goods and services
    purchased from outside vendors. The SCO is responsible for more than
    $1.5 billion in annual spending and oversees the distribution of more
    than 2 million medical devices annually. Creation of the SCO has
    resulted in significant efficiencies, and Intermountain's SCO was
    ranked third in the United States in the most recent annual top 25 list
    of healthcare supply chains ranked by Gartner, Inc.
    2.2  Contracting Challenges and PODs
        In the early years of the SCO, resources were devoted to
    centralizing the purchasing process and to significantly increasing the
    evaluation of current and potential vendors. Typically, information
    regarding physician ownership of vendors was sought, but physician
    ownership was not viewed as an absolute impediment to contracting. Over
    time, however, there were increasing reports from the field regarding
    suspected and non-disclosed financial arrangements between vendors and
    physicians who were in a position to order the vendor's products.
    2.3  The POD Regulatory Landscape Prior to the Special Fraud Alert
        Prior to the issuance of the Special Fraud Alert on March 26, 2013,
    there was no statute, regulation, or clear agency guidance limiting
    hospitals from contracting with PODs. In 2006, AdvaMed requested
    additional guidance from the Office of Inspector General (OIG), which
    replied only that OIG ``would take [AdvaMed's] views . . . into
    consideration as we contemplate future OIG guidance projects.'' In
    2008, CMS was asked by a commenter on the CY 2008 PFS proposed rule
    (identified by CMS as a ``large medical device manufacturer'') to
    define PODs to be designated health services (DHS) entities subject to
    the Stark Law; in the 2009 Inpatient Prospective Payment System (IPPS)
    final rule, CMS declined to do so. In response to a Senate inquiry to
    CMS and OIG on PODs, in 2011 CMS stated it would ``consider this issue
    carefully'' but at that time declined to define PODs to be GPOs subject
    to the Sunshine Act. OIG similarly responded in 2011 that it would
    initiate a study but that ``OIG's ability to issue guidance about the
    application of the [kickback] statute to these business structures is
    limited.''
    2.4  Intermountain's Evolving Approach to PODs Prior to the Special
            Fraud Alert
        As the 2011 Senate Finance Committee Minority analysis (the Hatch
    Report) noted, there was a general lack of clear regulatory guidance to
    hospitals in this area. In connection with Intermountain's self-
    disclosure and ongoing discussions with the DOJ and OIG, a policy
    review of all hospital-physician arrangements was undertaken.
    Intermountain struggled to reach consensus on the proper approach to
    PODs that struck the appropriate balance of competing interests. The
    Hatch Report identified potential vulnerabilities in the typical POD
    model, while the Sunshine Act viewed disclosure as a means to limit the
    risk of abuse. A May 2012 Food and Drug Policy Forum article by Joseph
    Truhe, Esq., arguing that PODs were not only lawful but beneficial to
    the supply chain, was widely disseminated. From a strictly legal
    perspective, fair market arrangements between PODs and hospitals
    arguably satisfied the discount safe harbor to the Kickback Law and the
    relevant Stark Law rules, but there was growing discomfort with the
    potential conflicts of interest involved.
    2.5  Special Fraud Alert
        With the publication of the Special Fraud Alert, consensus at
    Intermountain crystallized around a bright-line policy that would be
    straightforward to implement. Prior to March of 2013, Intermountain was
    still unclear on how to best minimize the uneasiness caused by all the
    factors identified above. Intermountain's uneasiness was greatly
    alleviated by the OIG's Special Fraud Alert: Physician-Owned Entities
    (the ``SFA''). The SFA stated that the OIG was particularly concerned
    about the financial incentives present in Physician-Owned
    Distributorships (``PODs'') of implantable medical devices ``because
    such devices typically are `physician preference items,' meaning that
    both the choice of brand and the type of device may be made or strongly
    influenced by the physician, rather than being controlled by the
    hospital or ASC where the procedure is performed.''

        The SFA went on to identify eight ``suspect characteristics'' of
    PODs that might run afoul of the Anti-kickback Statute, which
    characteristics are as follows:

          1.  The size of the investment offered to each physician varies
    with the expected or actual volume or value of devices used by the
    physician.
          2.  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.
          3.  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.
          4.  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.
          5.  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.
          6.  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.
          7.  The POD does not maintain continuous oversight of all
    distribution functions.
          8.  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.

        The SFA also stated that ``hospitals and ASCs that enter into
    arrangements with PODs also may be at risk under the statute.'' Based
    on the SFA's warning, Intermountain elected to follow the course of
    action suggested in Footnote 1 of the SFA and develop a revised policy
    governing Intermountain's relationships with not just PODs but all
    Physician-Owned Entities (``POEs'').
    2.6  Policy Revision
        In May 2013, Intermountain revised its policy entitled the
    ``Physician-Owned Entities Financial Arrangements Policy'' (the ``POE
    Policy''). Under the POE Policy, Intermountain will not enter into any
    agreement to purchase from a POE any item or service other than
    professional medical services personally furnished by the physician
    owner or other health professional employed by the POE, unless the POE
    falls into one of two exceptions. The first exception applies to POEs
    whose physician owner (or physician who is an immediate family member
    of any owner) is not in a position to generate business for
    Intermountain. This exception also requires that prior to purchasing
    any item or service that meets the exception, Intermountain must enter
    into a written contract with the POE that includes the following
    representations and warranties and ongoing covenants from the POE: (1)
    that the entity does not have and will not have any of the eight
    suspect characteristics identified in the SFA, and (2) that no
    physician owner or physician who is an immediate family member of an
    owner in the POE be in a position to generate business for
    Intermountain, and that the POE will notify Intermountain if that
    representation is no longer true.

        The second exception to the POE Policy is an exception made for
    disruptive technologies that are pre-approved by Intermountain's Senior
    Management Team in accordance with Intermountain's Disruptive
    Technologies Exception Guideline. This exception allows Intermountain
    the flexibility to make exceptions for products and services that if
    not purchased by Intermountain may pose a risk to the quality of care
    an Intermountain patient may receive as more fully described in Section
    2.8 below.

        Finally, the POE Policy also requires Intermountain's compliance
    team to work with Intermountain's Supply Chain staff to develop a plan
    to terminate or not renew existing arrangements that do not meet the
    requirements of the POE Policy, with first priority given to
    terminating and not renewing non-compliant arrangements for implantable
    medical devices. The implementation of the POE Policy has helped
    Intermountain to avoid relationships with the types of suspect POE
    identified in the SFA; however, the implementation has not been without
    costs to Intermountain. Implementation of the POE Policy has also led
    to other obstacles and challenges that were not present prior to the
    OIG's release of the SFA and Intermountain's implementation of its
    policy as a response to the SFA.
    2.7  Balancing Competition and Standardization
        In many instances Intermountain's implementation of the POE Policy
    narrows the field of suppliers that are qualified to receive and
    respond to RFPs for certain products and services. This decrease in
    qualified suppliers naturally increases product and supplier
    rationalization and standardization. These are generally viewed as
    positive, cost-saving measures. However, in this situation
    Intermountain may be standardizing on a legacy supply chain, which some
    argue is anti-competitive and potentially subject to abuse. Extending
    RFPs to compliant POEs may resolve those flaws, but that extension is
    often prohibited by the POE Policy.
    2.8  The Disruptive Technologies Exception
        Intermountain's Disruptive Technology Exception is limited to the
    disruptive technology in question (not the POE's entire catalog of
    items or services) and does not apply where a substantially equivalent
    product or service is available from a non-POE or, for example, where a
    device obtains 510k clearance. The challenge with this exception is its
    narrow scope. There have been only a handful of products and suppliers
    that have met these requirements--not because the suppliers are
    unwilling to comply with the Special Fraud Alert but, rather, because
    their items or services are not truly disruptive technologies.
    2.9  Promoting Innovation and Collaboration
        Another challenge is the potential chilling effect the POE Policy
    might have on Intermountain's innovative and collaborative culture. In
    an effort to reaffirm that culture and to insert appropriate
    safeguards, Intermountain is considering adding another exception to
    the POE Policy for technologies that are co-developed by the POE and
    Intermountain. This new exception would be available for items or
    services that are innovative, distinguishable, potentially superior,
    and otherwise compliant with the exception and Intermountain policy. We
    recognize that many of Intermountain's own physicians are in the best
    position to invent disruptive and innovative technologies, and we hope
    that this exception will provide a compliant model for those
    activities.
                           3. ongoing implementation
    3.1  Attestation Form
        Defining the policy prohibiting purchasing products or services
    from Physician-Owned Entities was only the first step; implementing the
    policy presented additional challenges and opportunities. One challenge
    was to determine the process for inquiring regarding an entity's
    ownership. In collaboration with legal counsel, Intermountain developed
    a form letter that references the OIG Special Fraud Alert and outlines
    Intermountain's policy regarding purchasing from Physician-Owned
    Entities. The letter then asks the supplier to attest to not having
    physician ownership and to meeting the policy's other provisions; the
    supplier makes this attestation by completing and signing a Compliance
    and Attestation form.
    3.2  Implants, Then What?
        Due to the large number of suppliers Intermountain purchases from,
    the attestation form is being implemented in several phases beginning
    with total joint and spinal implants and then other categories of
    implants. The next area of specific focus is being developed.
    3.3  AP Database and AP Payments--Invoices, Contracts
        When Intermountain sets up a supplier in its payment database,
    there is a field to indicate whether the supplier has physician
    ownership. That information may have come from an Intermountain Supply
    Chain employee, the supplier, or a local sales representative (who may
    not have actual knowledge of the supplier's ownership). There is
    ongoing effort to ensure the database is accurate and complete.
    3.4  Exceptions to the Policy
        As noted above, Intermountain's policy includes two exceptions to
    prohibiting purchases for POEs: (1) the physician-owner is not in a
    position to generate business for intermountain, and (2) the product
    purchased is a ``disruptive technology.'' Additionally, professional
    services provided personally by a physician are categorically exempt
    from the policy. The first exception presumes that any physician
    practicing within Intermountain's service area is in a position to
    generate business for Intermountain Healthcare. For a supplier to meet
    the first exception, the supplier must attest to the physician-owner's
    not being in a position to generate business and must adduce sufficient
    supporting evidence.
    3.5  Divestitures
        Implementation of this policy by Intermountain has affected the
    local medical device market. A few physician-owned companies have
    chosen to have their physician-owners divest in order to continue
    supplying Intermountain. Other companies have combined divestiture with
    ongoing financial arrangements with the divesting physician owners,
    including employment. Analyzing these evolving arrangements under the
    POE Policy is an ongoing challenge.
    3.6  Operational Wind Down
        In a system the size of Intermountain, it is very difficult to
    simply stop purchasing a product for reasons outside the normal
    procurement channels. In the case of ending purchases from POEs, we
    chose to stop purchasing products that are, in some instances, widely
    used and possibly the preferred product. Prior to telling a supplier
    that we would no longer purchase items or services because of physician
    ownership, we worked through a process to notify all the users of those
    items or services of the change--particularly physicians--and to find
    satisfactory replacements. After those notifications are made, we then
    notify the manufacturer that we will discontinue purchases from them
    due to their being a Physician-Owned Entity. Additionally, all stock on
    hand that was not already purchased from the POE is removed and
    returned.

        We discovered a few issues with discontinuing some purchases.
    Primarily, orthopedic surgeons prefer to replace an implant, if
    replacement is necessary, with the same device from the same
    manufacturer. Similarly, orthopedic surgeons prefer to implant the same
    device in the bilateral body part after the first implant is placed.
    For example, if a patient has had a hip replacement using a device from
    a POE and then requires a hip replacement on the other hip, the surgeon
    prefers to use the same device from the same manufacturer for the
    second hip. To meet these demands, we have authorized one-time
    purchases of those devices and maintained contracts with the suppliers
    in order to make those purchases. Some flexibility is needed to meet
    the medical needs of patients.

        In addition to the issue of orthopedic surgeon preferences, some
    items or services are arguably superior to their supposed equivalents
    and yet do not meet the high bar of a disruptive technology. To date we
    have not finalized a satisfactory resolution to this issue.

                                    Exhibits

     Office of Inspector General--Special Fraud Alert: Physician-Owned
    Entities
     Intermountain's Physician-Owned Entities Financial Arrangements
    Policy
     Intermountain's letter and attestation that is sent to Physician-
    Owned Entities

                                     ______

                    Department of Health and Human Services

                          Office of Inspector General

                              Washington, DC 20201

    _______________________________________________________________________

                 Special Fraud Alert: Physician-Owned Entities

    March 26, 2013

    I. Introduction

    This Special Fraud Alert addresses 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 (ASCs). These entities frequently are
    referred to as Physician-Owned Distributorships, or ``PODs.'' \1\ The
    Office of Inspector General (OIG) has issued a number ofguidance
    documents on the general subject of physician investments in entities
    to which they refer, including the 1989 Special Fraud Alert on Joint
    Venture Arrangements \2\ and various other publications. OIG also
    provided guidance specifically addressing physician investments in
    medical device manufacturers and distributors in an October 6, 2006
    letter.\3\ In that letter, we noted ``the strong potential for improper
    inducements between and among the physician investors, the entities,
    device vendors, and device purchasers'' and stated that such ventures
    ``should be closely scrutinized under the fraud and abuse laws.'' \4\
    This Special Fraud Alert focuses on the specific attributes and
    practices of PODs that we believe produce substantial fraud and abuse
    risk and pose dangers to patient safety.
    ---------------------------------------------------------------------------
        \1\ The Physician-Owned Entities addressed in this Special Fraud
    Alert are sometimes referred to as ``physician-owned companies'' or by
    other terminology. For purposes of this Special Fraud Alert, a ``POD''
    is any Physician-Owned Entity that derives revenue from selling, or
    arranging for the sale of, implantable medical devices and includes
    Physician-Owned Entities that purport to design or manufacture,
    typically under contractual arrangements, their own medical devices or
    instrumentation. Although this Special Fraud Alert focuses on PODs that
    derive revenue from selling, or arranging for the sale of, implantable
    medical devices, the same principles would apply when evaluating
    arrangements involving other types of Physician-Owned Entities.
        \2\ Special Fraud Alert: Joint Venture Arrangements (August 1989),
    reprinted at 59 Fed. Reg. 65,372, 65,374 (Dec. 19, 1994).
        \3\ Letter from Vicki Robinson, Chief, Industry Guidance Branch,
    Department of Health and Human Services, OIG, Response to Request for
    Guidance Regarding Certain Physician Investments in the Medical Device
    Industries (Oct. 6, 2006).
        \4\ Id.
    ---------------------------------------------------------------------------

    II. The Anti-Kickback Statute

    One purpose of the anti-kickback statute is to protect patients from
    inappropriate medical referrals or recommendations by health care
    professionals who may be unduly influenced by financial incentives.
    Section 1128B(b) of the Social Security Act (the Act) makes it a
    criminal offense to knowingly and willfully offer, pay, solicit, or
    receive any remuneration to induce, or in return for, referrals of
    items or services reimbursable by a Federal health care program. When
    remuneration is paid purposefully to induce or reward referrals of
    items or services payable by a Federal health care program, the anti-
    kickback statute is violated. By its terms, the statute ascribes
    criminal liability to parties on both sides of an impermissible
    ``kickback'' transaction. Violation of the statute constitutes a felony
    punishable by a maximum fine of $25,000, imprisonment up to 5 years, or
    both. Conviction will also lead to exclusion from Federal healthcare
    programs, including Medicare and Medicaid. OIG may also initiate
    administrative proceedings to exclude persons from the Federal health
    care programs or to impose civil money penalties for fraud, kickbacks,
    and other prohibited activities under sections 1128(b)(7) and
    1128A(a)(7) of the Act.

    III. Physician-Owned Distributorships

    Longstanding OIG guidance makes clear that 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 under the anti-kickback statute. The anti-kickback
    statute is violated if even one purpose of the remuneration is to
    induce such referrals.

    OIG has repeatedly expressed concerns about arrangements that exhibit
    questionable features with regard to the selection and retention of
    investors, the solicitation of capital contributions, and the
    distribution of profits. Such questionable features may include, but
    are not limited to: (1) selecting 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, and (3) distributing extraordinary returns on
    investment compared to the level of risk involved.

    PODs that exhibit any of these or other questionable features
    potentially raise four major concerns typically associated with
    kickbacks--corruption of medical judgment, overutilization, increased
    costs to the Federal health care programs and beneficiaries, and unfair
    competition. This is because the financial incentives PODs offer to
    their physician-owners may induce the physicians both to perform more
    procedures (or more extensive procedures) than are medically necessary
    and to use the devices the PODs sell in lieu of other, potentially more
    clinically appropriate, devices. We are particularly concerned about
    the presence of such financial incentives in the implantable medical
    device context because such devices typically are ``physician
    preference items,'' meaning that both the choice of brand and the type
    of device may be made or strongly influenced by the physician, rather
    than being controlled by the hospital or ASC where the procedure is
    performed.

    We do not believe that disclosure to a patient of the physician's
    financial interest in a POD is sufficient to address these concerns. As
    we noted in the preamble to the final regulation for the safe harbor
    relating to ASCs:

            . . . disclosure in and of itself does not provide sufficient
            assurance against fraud and abuse . . . [because] disclosure of
            financial interest is often part of a testimonial, i.e., a
            reason why the patient should patronize that facility. Thus,
            often patients are not put on guard against the potential
            conflict of interest, i.e., the possible effect of financial
            considerations on the physician's medical judgment.

    See 64 Fed. Reg. 63,518, 63,536 (Nov. 19, 1999). Although these
    statements were made with respect to ASCs, the same principles apply in
    the POD context.

    OIG recognizes that the lawfulness of any particular POD under the
    anti-kickback statute depends on the intent of the parties. Such intent
    may be evidenced by a POD's characteristics, including the details of
    its legal structure; its operational safeguards; and the actual conduct
    of its investors, management entities, suppliers, and customers during
    the implementation phase and ongoing operations. Nonetheless, we
    believe that PODs are inherently suspect under the anti-kickback
    statute. We are particularly concerned when PODs, or their physician-
    owners, 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
    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.

          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.

          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.

          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.

          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.

    These criteria are not intended to serve as a blueprint for how to
    structure a lawful POD, as an arrangement may not exhibit any of the
    above suspect characteristics and yet still be found to be unlawful.
    Other characteristics not listed above may increase the risk of fraud
    and abuse associated with a particular POD or provide evidence of
    unlawful intent. For example, a POD that exclusively serves its
    physician-owners' patient base poses a higher risk of fraud and abuse
    than a POD that sells to hospitals and ASCs on the basis of referrals
    from nonowner physicians.

    The anti-kickback statute is not a prohibition on the generation of
    profits; however, PODs that generate disproportionately high rates of
    return for physician-owners may trigger heightened scrutiny. Because
    the investment risk associated with PODs is often minimal, a high rate
    of return increases both the likelihood that one purpose of the
    arrangement is to enable the physician-owners to profit from their
    ability to dictate the implantable devices to be purchasedfor their
    patients and the potential that the physician-owner's medical judgment
    will be distorted by financial incentives. Our concerns are magnified
    in cases when the physician-owners: (1) 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, or (2) alter their medical practice after or shortly before
    investing in the POD (for example, by performing more surgeries, or
    more extensive surgeries, or by switching to using their PODs' devices
    on an exclusive, or nearly exclusive basis).

    We are aware that some PODs purport to design or manufacture their own
    devices. OIG does not wish to discourage innovation; however, claims--
    particularly unsubstantiated claims--by physician-owners regarding the
    superiority of devices designed or manufactured by their PODs do not
    disprove unlawful intent. The risk of fraud and abuse is particularly
    high in circumstances when such physicians-owners are the sole (or
    nearly the sole) users of the devices sold or manufactured by their
    PODs.

    Finally, because the anti-kickback statute ascribes criminal liability
    to parties on both sides of an impermissible ``kickback'' transaction,
    hospitals and ASCs that enter into arrangements with PODs also may be
    at risk under the statute. In evaluating these arrangements, OIG will
    consider whether one purpose underlying a hospital's or an ASC's
    decision to purchase devices from a POD is to maintain or secure
    referrals from the POD's physician-owners.

    IV. Conclusion

    OIG is concerned about the proliferation of PODs. This Special Fraud
    Alert reiterates our longstanding position that 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 under the anti-kickback statute. OIG views PODs as
    inherently suspect under the anti-kickback statute. Should a POD, or an
    actual or potential physician-owner, continue to have questions about
    the structure of a particular POD arrangement, the OIG Advisory Opinion
    process remains available. Information about the process may be found
    at:
    http://oig.hhs.gov/faqs/advisory-opinions-faq.asp.

    To report suspected fraud involving Physician-Owned Entities, contact
    the OIG Hotline at http://oig.hhs.gov/fraud/report-fraud/index.asp or
    by phone at 1-800-447-8477 (1-800-HHS-TIPS).

                                     ______

    Physician-Owned Entities Financial Arrangements Policy

    Policy Statement
    Except as set forth in this Policy, Intermountain will not enter into
    any agreement to purchase from a Physician-Owned Entity any item or
    service other than a professional medical service personally furnished
    by a Physician or by an allied health professional employed by the
    Physician-Owned Entity under a Physician's supervision.
    Scope
    IHC Health Services, Inc.
    Definitions
    Immediate Family Member--Husband or wife; birth or adoptive parent,
    child or sibling; stepparent, stepchild, stepbrother or stepsister;
    father-in-law, mother-in-law, son-in-law, daughter-in-law, brother-in-
    law, or sister-in-law; grandparent or grandchild; and spouse of
    grandparent or grandchild.

    Ownership or Investment Interest--Has the same meaning set forth in 42
    CFR Sec. 411.354(b) or any successor regulation. For these purposes,
    ownership may be direct or indirect, and may be by means of equity or
    debt. There is no minimum percentage ownership below which this policy
    would not apply. Investments in publicly-traded securities or mutual
    funds are excluded from the definition so long as they meet the
    requirements of 42 CFR Sec. 411.356(a) or (b) or any successor
    regulation.

    Royalty Interest--Payments made to the creator/owner of an item or
    intellectual property for each unit/copy of the property sold.

    Physician--A doctor of medicine or osteopathy, a doctor of dental
    surgery or dental medicine, a doctor of podiatric medicine, a doctor of
    optometry, or a chiropractor.

    Physician-Owned Entity (POE)--Any entity in which a Physician or
    Immediate Family Member of a Physician holds an ownership, investment,
    or royalty interest if royalties are paid on purchases resulting from
    the royalty holder's order.
    Provisions
    1   If no Physician owner (or Physician who is an Immediate Family
    Member of any owner) of the POE is in a position to generate business
    for Intermountain, the prohibition does not apply. Utah-based
    physicians are presumed to be in a position to generate business for
    Intermountain.

      1.1   Evidence that the POE satisfies provision 1 above must be
    submitted to and approved by the Anti-Kickback Statue (AKS) Committee
    before entering into any financial arrangement with the POE.

      1.2   Intermountain may contract for an item or service meeting this
    exception so long as the contract:

        1.2.1   is in writing;

        1.2.2   is fully executed and effective prior to the first
    purchase;

        1.2.3   includes a representation and warranty and ongoing covenant
    from the Physician-Owned Entity that the entity does not and will not
    have any of the following eight suspect characteristics identified in
    the Department of Health and Human Services' Office of Inspector
    General's ``Special Fraud Alert: Physician-Owned Entities'' or later
    related regulations or guidance;

              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
    ambulatory surgical centers (ASCs) on their purchase of the POE'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 POE, by promising
    or implying they will move surgeries to the hospital or ASC if it
    purchases devices from the POE, or by requiring a hospital or an ASC to
    enter into an exclusive purchase arrangement with the POE.

              Physician-owners are required, pressured, or actively
    encouraged to refer, recommend, or arrange for the purchase of the
    devices sold by the POE or, conversely, are threatened with, or
    experience, negative repercussions (e.g., decreased distributions,
    required divestiture) for failing to use the POE's devices for their
    patients.

              The POE 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 POE's devices.

              The POE 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 POE does not maintain continuous oversight of all
    distribution functions.

              When a hospital or an ASC requires Physicians to disclose
    conflicts of interest, the POE's Physician-owners either fail to inform
    the hospital or ASC of, or actively conceal through misrepresentations,
    their ownership interest in the POE.

        1.2.4   includes a representation and warranty and ongoing covenant
    that no Physician-owner or Physician who is an Immediate Family Member
    of any owner of the POE is in a position to generate business for
    Intermountain, and requires immediate notice to Intermountain if that
    is no longer true; and

        1.2.5   provides for the right of Intermountain to terminate the
    agreement no later than ten (10) days after any such notice.

    2   An exception to this policy may also be made for disruptive
    technologies when approved by the Intermountain President/Chief
    Executive Officer, Chief Medical Officer, and General Counsel (see
    Disruptive Technologies Exception Guideline).

    3   The Vice President of Business Ethics and Compliance works with
    Supply Chain Organization staff to terminate or non-renew existing
    arrangements that do not meet the requirements of this Policy in an
    orderly fashion, with first priority given to implantable medical
    devices.
    Exceptions
    None
    Primary Sources
    Special Fraud Alert: Physician-Owned Entities

    42 CFR Sec. 411.354(b)

    42 CFR Sec. 411.356(a) and (b)
    Secondary Materials
    ``Physician Investment in Medical Device Manufacturers and
    Distributors'' (Letter from the OIG) (Oct. 6, 2006)

    Disruptive Technologies Exception Guideline

    Confidential and proprietary to Intermountain Health Care, Inc. If
    Intermountain Healthcare authorizes a person to access policies,
    procedures, and guidelines (PPGs), it also authorizes that person to
    disclose information from PPGs--not copies--but only as reasonably
    necessary for healthcare matters related to Intermountain Healthcare.

    Reasonable efforts will be made to keep employees informed of policy
    changes; however, Intermountain Healthcare reserves the right in its
    sole discretion to amend, replace, and/or terminate this policy at any
    time.

    Intermountain Healthcare is an At-Will Employer. The terms of this
    policy do not, either directly or indirectly, constitute any form of
    employment contract or other binding agreement between any employee and
    Intermountain.

    Contact Intermountain Healthcare's Legal Department for questions.

                                     ______

    Intermountain Healthcare

    36 South State Street, Tenth floor
    Salt Lake City, UT 84111-1486
    801-442-2000

    Re:  Action Required: Intermountain Policy on Physician-Owned Entities

    To Whom It May Concern:

    As you may know, on March 26, 2013, the Office of Inspector General,
    U.S. Department of Health and Human Services (OIG) published a fraud
    Alert entitled ``Special Fraud Alert: Physician-Owned Entities.'' A
    copy is attached for your reference. The Fraud Alert addresses
    Physician-Owned Entities that derive revenue from ``selling. or
    arranging for the sale of, implantable medical devices'' and ``includes
    Physician-Owned Entities that purport to design or manufacture,
    typically under contractual arrangements, their own medical devices, or
    instrumentation.'' The OIG refers to such entities as ``PODs,'' but
    notes that the same principles would apply when evaluating arrangements
    involving other types of Physician-Owned Entities (POEs).

    Prior guidance from the OIG on the subject of POEs had been equivocal,
    indicating only that such arrangements could potentially implicate the
    Federal anti-kickback statute and should be evaluated based on the
    particular facts and circumstances. By contrast, the Fraud Alert
    suggests heightened concern about POEs, which the OIG describes as
    ``inherently suspect under the anti-kickback statute.''

    In response, under the direction of Intermountain's President and CEO,
    Intermountain has adopted an updated policy regarding contracting with
    POEs. A copy of the policy is attached for your reference.

    The basic thrust of the policy is quite simple: Intermountain will no
    longer contract with POEs and will discontinue purchases under existing
    contracts with POEs.

    Under the policy, a POE includes any entity owned in any part by a
    physician or an immediate family member of a physician. There is no
    minimum percentage required to trigger the prohibition. ``Ownership''
    can mean shares, partnership units. bonds and other forms of debt, or
    royalties based on purchases by the ordering physician.

    We are writing you to reconfirm that <> is not a POE
    under the policy's definition, as you have previously represented.
    <> will qualify as a POE if it has any owner who is a
    physician, or whose immediate family member is a physician. Under the
    policy, ``immediate family member'' means husband or wife; birth or
    adoptive parent, child or sibling; stepparent, stepchild, stepbrother,
    or stepsister; father-in-law, mother-in-law, son-in-law, daughter-in-
    law, brother-in-law, or sister-in-law; grandparent or grandchild; and
    spouse of grandparent or grandchild.

    Please take a moment to review the policy and, if <> is
    not a POE, sign the attached attestation. Other than filling in
    information where denoted by a blank line, please do not modify the
    attestation. False or incomplete attestations will be taken seriously,
    and will be treated both as a breach of the purchase agreement between
    <> and Intermountain and, depending on the facts,
    unprofessional conduct that may result in disciplinary action through
    the medical staff process. If Intermountain does not receive a signed
    copy of the attached attestation prior to <>,
    Intermountain will initiate a process to terminate any further
    purchases from <>.

    If <> is a POE, but you believe the prohibition should
    not apply as set forth in Provision 1 (no physician owner is in a
    position to generate business for Intermountain) or Provision 2
    (disruptive technologies) of the policy, please contact Mr. Jeramy
    Green at (801) 442-3557 to discuss the procedures under the policy to
    allow purchases to continue.

    We recognize that this Policy will change some existing arrangements,
    but believe that ultimately this is the right thing to do. We very much
    value <>'s contribution over the years, and the contribution made by
    every supplier and physician at Intermountain in providing the care for
    which Intermountain is known.

    If you have any questions about this letter or the policy, please
    contact Mr. Green at the number referenced above or me at (801) 442-
    1502.

    Sincerely,

    Suzie Draper
    Vice President of Business Ethics and Compliance
    Intermountain Healthcare

    cc:  Jeramy Green, Esq., Intermountain Healthcare

                                     ______

                     ATTESTATION AND COMPLIANCE CERTIFICATE

    I, ____________________, hereby attest as an authorized officer of
    _______________ (``Supplier'') that :

      I have read the Intermountain Policy entitled ``Financial
    Arrangements with
    Physician-Owned Entities.'' I understand that it is my responsibility
    to read and understand the Policy or seek guidance should I require
    clarification about the standards and requirements set forth in the
    Policy.

      I hereby certify that Supplier does not meet the definition of a
    Physician-Owned Entity as described in the Policy.

      If at any time Supplier becomes a Physician-Owned Entity, I agree to
    report that change within five (5) working days to the Intermountain
    Healthcare Compliance Hotline at (800) 442-4845.

      I understand and acknowledge that failure to complete this
    Certificate truthfully and accurately or to update this Certificate as
    required constitutes a breach of Supplier's agreement with
    Intermountain, and may also subject its physician owners to
    disciplinary review and action.

    I have read this Attestation and Compliance Certificate and do hereby
    demonstrate my understanding and agreement to abide by its terms by
    affixing my signature on the date indicated below.

    Company Name: ____________________
    Signature: __________________________                Date:
    _______________
    Name: ______________________________
    Title: _______________________________

    Please return a signed copy electronically to brad.nokes@imail.org and
    the signed original to

    Attn: Brad Nokes
    Intermountain Healthcare
    Central Office--Corporate Compliance
    36 South State Street, Tenth floor
    Salt Lake City, UT 84111-1486

                                     ______

                  Prepared Statement of Hon. Orrin G. Hatch,
                            a U.S. Senator From Utah
    WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah)
    today delivered the following opening statement at a Committee hearing
    to examine
    Physician-Owned Distributorships (PODs), entities in which physicians
    derive revenue from the sale of medical devices they prescribe to
    patients:

        Today, we are here to explore the various issues surrounding the
    growth and prevalence of Physician-Owned Distributors, or PODs.

        Simply put, PODs are medical device businesses in which a physician
    is both an investor and a distributor--essentially a salesperson--of
    either the devices or some of the components.

        While these arrangements are not always problematic, we are seeing
    more and more of these physician-salespeople using the very devices
    they sell in the surgeries and procedures they perform. Many critics
    have argued--with significant evidence to support their case--that this
    practice creates a financial incentive for these physicians to
    recommend and perform more and more unnecessary surgeries.

        Typically, the more devices or hardware a POD physician implants in
    their patients, the larger the payment he or she receives from the POD.
    So, an incentive clearly exists for these surgeons to perform a steady
    stream of procedures, increasing the use of products supplied by their
    POD, thereby increasing their own income.

        The question we'll address today is whether these arrangements and
    the apparent conflicts of interest that exist among POD physicians have
    had a negative impact on our health-care system and the well-being of
    patients.

        As some of you may recall, in June 2011, the Republican staff of
    the Finance Committee issued a report on PODs outlining key issues and
    potential areas for congressional oversight. In response to some of the
    concerns outlined in the report, former Chairman Baucus and I, along
    with Senators Kohl, Grassley, and Corker, wrote to the Inspector
    General of the Department of Health and Human Services to share our
    concerns about the proliferation of PODs and the lack of guidance as to
    how these arrangements square with existing Federal law.

        For years, the HHS Inspector General has warned about the conflict
    of interest created by joint partnerships between physicians and
    companies--including device manufacturers--that depend on them for
    referrals or new business. In March 2013, the OIG issued an alert
    calling PODs ``inherently suspect'' under the government's anti-
    kickback laws.

        Later that year, the Inspector General reported that the number of
    spinal surgeries in hospitals that purchase implantable devices from
    PODs grows at a faster rate compared to other hospitals. The OIG also
    found that, for nearly one in five spinal fusion surgeries billed to
    Medicare, the device was supplied by a POD, indicating a potentially
    significant link between PODs and Federal healthcare costs.

        Most notably, this same report found that physicians with
    investments in PODs perform, on average, 20 percent more surgeries than
    their counterparts who don't have these kinds of financial
    relationships.

        Needless to say, these findings confirmed much of my skepticism
    about PODs.

        And, while the OIG's guidance helped to persuade many in the
    industry that PODs were a risky business model, we continue to see
    reports in the media and from our constituents that these types of
    arrangements are still prevalent in our health-care system.

        Because the Federal Government does not regulate these types of
    business arrangements, it is difficult to determine just how many PODs
    exist or where they all are. This lack of accountability is one reason
    why this issue so complicated.

        Anecdotally, we've received reports of PODs operating in every
    State represented on the committee.

        From what we've heard, the growth rate of PODs has slowed since the
    Inspector General's March 2013 alert. However, the total number of PODs
    remains roughly the same as before the report.

        Our information also suggests that PODs are no longer concentrated
    in large hospital chains, as many chains have adopted policies
    forbidding or strictly curtailing POD usage. As a result, many PODs
    have migrated to smaller and more rural hospitals.

        Some proponents of PODs have argued that some of our hardline
    statements and positions regarding their business arrangements go too
    far. They claim that implementing a sweeping prohibition on physician
    ownership in medical technology companies might have an unintended
    chilling effect on legitimate business practices as well as medical
    breakthroughs and research.

        Nevertheless, we know that a number of POD physicians have abused
    their positions of trust and have put their own personal financial gain
    above the safety of their patients.

        According to Department of Justice filings, one such physician was
    Dr. Aria Sabit, who, within months of accepting a lucrative investment
    offer from a POD, more than doubled his number of instrumented spinal
    fusion surgeries.

        Prior to making his investment, Dr. Sabit had never used the POD's
    products before. After his investment, he used their products in more
    than 90 percent of his spinal fusion surgeries.

        All told, Dr. Sabit invested $5,000 in the POD. In just over 2
    years, he saw a return of over $438,000.

        Now, I'm not typically one to decry investments with a high rate of
    return. But, those numbers alone should be enough to, at the very
    least, raise a few eyebrows.

        In the end, Dr. Sabit pled guilty to more than $11 million in
    health care fraud and to causing bodily harm to patients. One of our
    witnesses today, Kevin Reynolds, will tell us about his mother's
    experience under Dr. Sabit's care.

        As part of our ongoing inquiry into these issues, the Finance
    Committee has become aware of additional cases that warrant further
    review. As a result, Ranking Member Wyden and I will be making a formal
    referral to the HHS OIG and the Department of Justice on at least one
    case we feel deserves review for potential criminal action.

        We will be submitting additional information to the HHS OIG and to
    CMS about the rate at which PODs report their ownership interests. We
    believe these findings will say quite a bit about the lack of
    accountability for these types of business arrangements.

        I hope that today's hearing will be another important step in our
    ongoing efforts to provide appropriate oversight and enforcement on
    this issue.

                                     ______

                 Prepared Statement of Scott Lederhaus, M.D.,
                   President, Association for Medical Ethics
                                  introduction
        Chairman Hatch and committee members, it is an honor to be invited
    to testify before the Senate Committee on Finance's hearing on
    ``Physician-Owned Distributors: Are They Harmful to Patients and
    Payers? '' As a neurosurgeon, spine surgeon, and president of the
    Association for Medical Ethics, I have spent the last several years
    speaking out about the pervasive effect Physician-Owned
    Distributorships of implantable medical devices, also known as PODs, on
    the medical community to my colleagues, patients and the media.

        The Association for Medical Ethics is a grass roots group that was
    established by Ms. Gemma Cunningham and Dr. Charles Rosen at University
    of California, Irvine. The group formed in 2005 due to concerns
    regarding excessive and unnecessary spinal surgery being done in the
    United States. Initially consisting of orthopedic surgeons and
    neurosurgeons, the Association is now a national group and has expanded
    to include a variety of medical and surgical specialties. The members
    believe there is a need to address the rampant physician financial
    conflicts of interest contributing to the overuse and misuse of spine
    surgery in America. Dr. Charles Rosen was the only physician who
    testified in 2007 before Senate hearings about these abuses, which
    helped push through the Sunshine Act. Our current efforts have been
    directed towards the abuses and conflicts of interest with Physician-
    Owned Distributors. I have been a member since 2007, a board member and
    now president of the group in 2014 and 2015.

        In my testimony for the committee, I will define how PODs are
    affecting patients, physicians and the American medical community.
               understanding physician-owned distributors (pods)
        There are approximately 13.6 million patient visits for neck or low
    back conditions per year costing about $950 per patient per year.
    Between 49 percent and 70 percent of all adults will experience back
    pain during their lifetime and 12-30 percent of all adults have an
    active back problem. Back pain is the second most common reason adults
    consult a primary care provider and it is estimated that the total cost
    of spine related problems is approximately $90 billion per year with
    $10 to $20 billion in economic losses each year. Low back pain is the
    number one cause of disability in the United States and worldwide.
    Spinal fusion surgery is one of the most common surgical procedures
    done in the United States, roughly 500,000 operations per year. These
    500,000 operations a year are where the opportunity arose for many
    spine surgeons to exploit the American medical system and endanger
    their patients.

        Extensive spinal fusion surgery in the United States has exploded
    over the last decade often without indication and for no reason other
    than to enhance the income of some greedy and misguided spine surgeons.
    Outcomes are often poor. This behavior by some spine surgeons borders
    on criminal behavior, yet is largely ignored by most physicians and
    generally unrecognized by the public. The development of all types of
    spinal implants has dramatically increased over the last decade,
    enabling these spine surgeons to run amok by performing un-indicated
    multilevel spinal fusion operations. Due to the vast array of spinal
    implants now available--and the large amount of money to be made--spine
    surgeons have consciously and subconsciously loosened their
    ``indications'' for the use of these new implants. When you have a
    hammer, everything looks like a nail. The profit from the ``sale'' of
    these screws, rods, and cages to the hospital is often more money to
    the surgeon than received for the surgical fee.

        At present there are more types, shapes, sizes, materials and ways
    of putting implants into the spine from almost any direction; front,
    back or side, than ever before. The signature turn of the further
    explosion of operative spine procedures occurred when spine surgeons
    began performing operations to treat low back pain. Low back pain
    became the key ingredient for spinal fusion operations that initially
    seemed to make sense with limited and specific indications. However,
    over time the ``surgical candidate'' became anyone with a backache. Due
    to the evolution of thought processes regarding the treatment of back
    disorders, the spinal surgeon can now simply rationalize almost any
    back complaint as a surgical indication by grossly expanding the
    accepted criteria. Some patients may benefit by this shotgun approach,
    but the improvement may be more on the basis of luck than following
    evidenced-based medicine and good surgical guidelines.

        Another reason for the surgical aggressiveness can be attributed to
    the continued financial cuts to a physician's income. Any cut in
    payments from Medicare directly translates into cuts in commercial
    insurance across the board. In order to maintain the same level of
    income, many doctors have made a conscious effort to see more patients
    and do more surgery, and some have become more ``aggressive'' with
    their surgical indications. The stage was set for some spine surgeons
    to enhance their income by increasing the numbers and levels of spine
    fusion procedures with the plethora of spinal implants available,
    particularly with the loosening of indications for spinal surgery.

        With the further advent of PODs around 2003, doctors could now
    enhance their income far beyond what was imaginable prior to being
    involved in a POD. A POD is an entity whereby the physician purchases
    an ownership in an implant company. The POD buys the implants wholesale
    and then sells those implants to the hospital at retail. The surgeon
    inserts the POD implants into their patients and the doctor and POD
    organizers pocket the difference. Thus, the POD-docs can make
    additional income on each and every implant inserted in their patients
    creating obvious conflicts of interest. This has resulted in thousands
    of patients being treated by some overly aggressive spine surgeons,
    which have resulted in many un-indicated, multilevel spinal fusion
    operations, many of whom have suffered injuries, horrific infections
    and even death.

        As a result of what my partners and I witnessed for years, we felt
    something had to do be done. I was compelled to notify the appropriate
    authorities and have some resolution to the horrible acts of neglect
    and malpractice that my partners and I witnessed on a regular basis.
    However, going after these individuals legally is a quagmire of issues,
    which is bogged down and largely impotent. The peer review (hospital
    physician oversight) process is generally useless and powerless. Too
    often, doctors who sit on peer review committees may choose to look the
    other way to avoid being tied up in legal proceedings. Hospital
    administrators often close their eyes to the abuses since the extensive
    spinal fusion operations bring huge profits into the hospital. The
    State Medical Boards have done little to protect the public.

       what are the positions of our surgical societies and the american
      medical association on investing in pods and conflicts of interest?
                       american medical association (ama)
        (http://www.amednews.com/article/20130408/government/130409964/7/).
    The American Medical Association (AMA) Code of Ethics, Opinion 8.06
    issued in 2002 under Prescribing and Dispensing Drugs and Devices on
    the AMA website states: ``Physicians may not accept any kind of payment
    or compensation from a drug company or device manufacturer for
    prescribing its products.'' ``Furthermore, 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 re-packager of the products involved.''
    (http://www.ama-assn.org//ama/pub/physician-resources/medical-ethics/
    code-medical-ethics/opinion806.page).
      north american spine society (nass): ethical stance on industry and
                                      pods
        According to the North American Spine Society (NASS) Code of Ethics
    (http://www.spine.org/Pages/PracticePolicy/EthicsProfConduct/
    CodeofEthics.aspx) revised March 2012: ``A NASS member should not enter
    into any academic or consulting relationship with industry that might
    influence his or her care of patients. If a conflict or apparent
    conflict develops between the physician's financial interest and the
    physician's responsibilities to the patient, the conflict must be
    resolved to the patient's benefit. A NASS member must disclose to
    colleagues and patients, in a professional context, any financial
    relationships that he or she has with industry. A NASS member who fails
    to disclose financial or other significant relationships with industry
    in accordance with NASS' current Disclosure Policy is in violation of
    this Code of Ethics. NASS does not prevent or restrict its members from
    participating in a POD, but requires POD owners to disclose their
    ownership to their patients. Level 1 compliance for all NASS committee
    chairs and board members cannot have any POD involvement.''
       american academy of orthopedic surgeons (aaos): ethical stance on
                                    industry
        According to the American Academy of Orthopedic Surgeons (AAOS)
    Code of Ethics, revised 2011, section IIIC: (http://www.aaos.org/about/
    papers/ethics.asp): ``When an orthopedic surgeon receives anything of
    value including royalties, from a manufacturer, the orthopedic surgeon
    must disclose this fact to the patient. It is unethical for an
    orthopedic surgeon to receive compensation (excluding royalties) from a
    manufacturer for using a particular device or product. Fair market
    reimbursement for reasonable administrative costs in conducting or
    participating in a scientifically sound research clinical trial is
    acceptable.''
             american association of neurological surgeons (aans):
                           ethical stance on industry
        The American Association of Neurological Surgeons Position
    Statement: 2008 May 5, http://www.aans.org//
    link.aspx?_id=360DCEF0D6464BA3A086EF32819B1DD6
    &_z=z. Guidelines on Neurosurgeon-Industry Conflicts of Interest,
    Article 51297 states in their 2008 Code of Ethics: ``It is unethical
    for a neurosurgeon to receive compensation of any kind from industry in
    exchange for using a particular device or medication in clinical
    practice. A neurosurgeon who has influence in selecting a particular
    product or service for an entity (organization, institution) shall
    disclose any relationship with industry to colleagues, the institution
    and other affected entities. A `conflict of interest' occurs when a
    neurosurgeon or an immediate family member has, directly or indirectly,
    a financial interest or positional interest or other relationship with
    industry that could be perceived as influencing the neurosurgeon's
    obligation to act in the best interest of the patient.''
      california association of neurological surgeons (cans): california
     association of neurological surgeons newsletter, volume 40, number 3,
                 march 2013 and volume 40, number 4, april 2013
        The California Association of Neurological Surgeons (CANS) in 2012
    requested of ``the AANS and the Congress of Neurological Surgeons (CNS)
    a Conflict of Interest Statement to include Physician-Owned
    Distributorships (PODs).'' CANS requested that the position statement
    should affirm that the neurosurgeon should disclose to the patient his
    or her financial interest that is related to any aspect of the
    patient's evaluation and care related to the use of POD products.
                aans: code of ethics: revised november 22, 2014
        http://www.aans.org/en/About%20AANS//media/4A6862BB037742FF99B833
    D609D23B1E.ashx. The AANS finally included Physician-Owned
    ``Enterprise'' in their updated Code of Ethics. ``The AANS Member who
    has influence in selecting a particular device, product or service for
    an entity shall disclose any relationship(s) with industry to
    colleagues, the institution and other affected entities prior to the
    entity's selection or purchase of the device, product or service. If a
    AANS Member has a financial or ownership interest in a physician-owned
    enterprise, or any other entity that sells, or arranges to sell,
    implantable medical devices, and/or in a durable medical goods
    provider, imaging center, surgery center or other health care facility
    where the neurological surgeon's financial interest is not immediately
    obvious, the AANS Member must disclose that financial interest to the
    patient and the institution where the patient is being treated. The
    financial or ownership interest must be disclosed on a timely basis so
    as to allow the patient to take the interest(s) into account when
    making his or her health care decisions. The AANS Member has an
    obligation to be aware of the applicable laws regarding physician
    ownership, compensation and control of these entities. Disclosure of
    professionally-related commercial interests and any other interests
    that may influence clinical decision-making is required in
    communications to patients, the public and colleagues.''

        Dr. Gerald Rodts, 2010 Congress of Neurological Surgeon (CNS)
    President stated in his 2010 CNS Presidential Address: ``Findings of
    disk dehydration or degeneration at greater than or equal to 3 levels
    in a patient without deformity and only back pain do not justify a 3-
    or 4-level fusion. Without any medical evidence to support such
    extensive fusions, it is unethical to perform them. We all have a
    responsibility in our own practices, in our own hospitals and in our
    own communities to police ourselves. We need to get the issue out in
    the open and discuss it openly and honestly at regional or national
    neurosurgery meetings. It can no longer be the 800 pound gorilla in the
    room that everyone is ignoring.'' Dr. Gerald E. Rodts, M.D. 2010 CNS
    Presidential Address. Neurosurgical Pioneers: Foundation for Future
    Innovation. Clinical Neurosurgery, Volume 58, 2011.
    https://www.cns.org/sites/default/files/clinical_neuro/Chapter1_0.pdf.
                     summary of ethical problems with pods
        Every reputable physician association states that physicians must
    not be influenced in their choice of medical product by a financial
    interest. But it is difficult to believe that even physicians with the
    best of intentions could avoid being influenced in their choice of
    product and procedure by POD ownership. This conflict of interest is
    not the same as the financial incentive that exists in all fee-for-
    service medicine: it's additive, and it's also qualitatively different.
    Not only is there potentially a lot more money involved for the
    physician-owners, but, the doctor's financial interest is likely to
    overwhelm any ability the hospital might otherwise have to exercise
    quality control. As Dr. James R. Bean, a former President of the
    American College of Neurosurgeons has said, ``PODs invite an abuse that
    can neither be regulated nor prevented'' (Bean, ``Are Physician-Owned
    Distributorships (PODs) Ethical,'' AANS Neurosurgeon, Volume 21, No. 2,
    2012). And while disclosure to patients of such a conflict-of-interest
    is an ethical requirement, it is not sufficient. Relying on sound
    social science evidence, the HHS Office of Inspector General (OIG) has
    noted that patients often will perceive disclosure as a testimonial in
    favor of the procedure or product, Special Fraud Alert on Physician-
    Owned Entities (2013), http://oig.hhs.gov/fraud/docs/
    alertsandbulletins/2013/POD_Special_Fraud_Alert.pdf; e.g.

        It has been my experience that patients have no idea what an
    implant looks like, where they are made, what they are made of, what
    kind of quality they may be or what would be best for them. That
    decision is left to the spine surgeon. As a result patients are blindly
    willing to accept whatever implant the surgeon would decide to use
    regardless of the quality of those implants or where they are made. A
    patient has no idea what a POD is or how a POD might affect their
    treatment or outcome. So a disclosure by the physician of the POD
    implants to be used is nothing more than the physician telling their
    patients what they will be inserting into their spines.
          unfair competition, predatory pricing, and market distortion
        In addition to the severe ethical problems posed by PODs, they
    adversely affect competition and distort the true price of healthcare
    services. On the basic question of competition, PODs eliminate it.
    Because implants are physician preference items, once physicians invest
    in a POD, the hospitals and ASCs where they perform their procedures
    either buy from the POD, or the physicians will take their cases
    elsewhere. Direct sale from an implant manufacturer to the facility is
    eliminated.

        Moreover, through what might be described as ``Predatory Pricing,''
    PODs prevent the non-POD doctors from being able to compete on a level
    playing field when it comes to contract negotiations with insurance
    groups. Physicians whose income is supplemented by their self-referral
    earnings from a POD can agree to what would otherwise be
    unrealistically low insurance reimbursement rates for their physician
    services. Thus, the physicians who are members of a POD can simply
    eliminate competition between the POD and non-POD physicians by signing
    ridiculously low reimbursement healthcare contracts. This rewards the
    POD physicians, stifles competition, and has nothing to do with good or
    competitive care, but only about money. It can only hurt the market for
    health care services when inappropriate financial incentives hide the
    true costs that should be the basis for reimbursement rates and
    policies.
                                the oig and pods
        I am not a lawyer, and fortunately the committee has not asked me
    here today to give legal advice. But you don't have to be a lawyer to
    understand something is illegal when the OIG describes self-referral to
    PODs as ``inherently suspect'' under the Federal health care programs
    anti-kickback law. According to OIG, the law is that if one purpose of
    offering a physician an opportunity to earn a return from a POD
    investment is to induce that doctor to order products from the POD, the
    law is violated. Can anyone seriously believe that there is any
    physician anywhere who has a POD ownership interest without at least
    ``one purpose'' being the financial reward from ordering POD products
    for his or her own patients?

        I'm also not an economist. But you don't have to be an economist to
    understand that PODs don't save money when the OIG reports that from a
    study of almost 600 hospitals and almost 1,000 spinal fusion cases
    (Physician-Owned Distributors of Spinal Devices: Overview of Prevalence
    and Utilization, October 2013, https://oig.hhs.gov/oei/reports/oei-01-
    11-00660.asp). The OIG reported that the cost of implants purchased
    from PODs was not less, and in some cases was more, than from the
    purchase of non-POD devices. Also not surprising was the fact that the
    rate of growth of spinal surgeries at POD-purchasing hospitals was
    three times the rate at non-POD hospitals. POD Hospitals also performed
    28 percent more surgeries than non-POD hospitals. If PODs present a
    serious conflict of interest, are ``inherently suspect'' under the
    anti-kickback law, don't save money and do lead to overutilization of
    medical services, it is hard to understand why any of them are still in
    business.
                             pods in the real world
        The poor judgment and extensive surgeries are not just theoretical.
    Physicians with ownership in PODs have caused real harm to patients. I
    have personally seen patients in consultation who have been the brunt
    of a POD surgeon. Examples are numerous: The 85-year-old man who has
    back pain undergoes a T8 to S1 (10 spinal levels) fusion with pedicle
    screws and rods up and down the spine to treat the back pain. Needless
    to say this not indicated or supported in the literature, but in most
    instances detrimental and can be lethal. The 45-year-old woman who has
    a single level herniated disc in her back with radiating leg pain who
    may benefit by a one hour, limited lumbar discectomy, but undergoes a
    two level lumbar fusion operation. The patient who has a multilevel
    lumbar fusion for suspected nerve root pain who does not improve only
    to find out the POD doctor did not examine their arthritic hips, which
    was the actual source of the pain. The patient who presents with carpal
    tunnel syndrome in the hand, yet gets a multiple level fusion in the
    neck. The patient who has mild spinal canal narrowing in the neck
    without any spinal cord compression, but is told they need a multilevel
    neck fusion to avoid becoming paralyzed. The patient with back pain who
    undergoes a three level lumbar fusion operation, which does not help
    the pain, undergoes additional levels of fusion with still no
    improvement, who then undergoes a sacro-iliac joint fusion, still
    without resolution of the pain, only then to be referred to a pain
    management physician who puts in a spinal cord stimulator to help with
    the pain.

        Mr. John Carreyrou authored an article for the Wall Street Journal
    about Dr. Aria Sabit, a neurosurgeon in Ventura, Calif., who used Apex
    Medical implants through Reliance Medical, the same Reliance Medical
    implants from Mr. Bret Berry and Mr. Adam Pike who claimed they had no
    financial dealings with the doctors. According to the Wall Street
    Journal articles by Mr. John Carreyrou on July 25, 2013 (``Surgeons
    Eyed Over Deals With Medical-Device Makers'') and July 27, 2013 (``Does
    My Surgeon Profit From My Implants?''), the Reliance Medical network of
    Mr. Pike and Mr. Berry eventually grew to comprise at least 11 PODs
    operating in six States--Utah, California, Texas, Louisiana, Florida
    and South Carolina--thus, further evidence that Reliance Medical is a
    group of PODs that utilize one of their 26 LLCs for distribution
    purposes of the POD implants. Dr. Sabit worked in Ventura, CA for 17
    months and somehow managed to acquire 30 malpractice lawsuits against
    him. It just so happened that in many of his cases he used Apex Medical
    Implants, which are Reliance Medical implants supplied by Mr. Pike, Mr.
    Berry and Mr. Hoffman (the owners and salesperson for Reliance Medical
    implants). The profits from Apex Medical POD included 20 percent of the
    proceeds each going to Mr. Adam Pike, Mr. Bret Berry, Mr. John Hoffman,
    Dr. Sean Xie (a neurosurgeon in Los Angeles who apparently trained with
    Dr. Sabit, as a co-owner in Apex POD) and Dr. Aria Sabit. Dr. Sabit's
    surgeries, often without indication and very extensive spine fusion
    procedures, caused injury to many patients including nerve root damage,
    spinal fluid leaks, failed fusions, and life threatening infections to
    mention a few complications. Dr. Sabit reportedly was paid $400,000 in
    just over a year for the use of the Apex POD implants. These issues
    were discussed in the articles by Mr. Carreyrou. Thankfully, the
    Department of Justice has brought cases against Dr. Sabit and against
    Reliance, bringing both criminal charges and claims under the False
    Claims Act, e.g., United States District Court for the Eastern District
    of Michigan, United States of America v. Aria O. Sabit filed February
    7, 2014, page 32 and 33, http://projects.scpr.org/longreads/selling-
    the-spine/docs/doj_investi-gation.pdf. The USA v. Reliance Medical
    Systems, Mr. Adam Pike, Mr. Brett Berry, Mr. John Hoffman and Dr. Aria
    Sabit is the first test case against a POD. However, what is really
    remarkable is that although OIG's report estimated that 20 percent of
    the spinal fusion operations done in America were done with POD
    implants in 2011, there currently do not appear to be any other
    enforcement cases.
                   hospital systems react to pod controversy
        Over time, many hospital systems have recognized that PODs
    represent additional liability exposure and perhaps increased abuse,
    expense, and inherent conflicts of interest. Especially following the
    OIG's 2013 Special Fraud Alert, many hospitals have taken the opinion
    that PODs are too risky and have eliminated them from their facilities.
    Some of the hospitals that no longer allow PODs are:

            Catholic Healthcare West, now Dignity Health (40 Hospitals)
            Scripps Hospital System in San Diego
            Martin Memorial Health System (Florida)
            Providence Health and Services (28 Hospitals)
            Loma Linda University
            University of California, Irvine
            The Memorial Care Health System in Orange County (6 Hospitals)
            Tenet Health Care (77 Hospitals in 14 States)
            Ascension Health (70 Hospitals, largest Catholic non-profit)
            Intermountain Healthcare (22 hospitals in Utah and Idaho)
            Hospital Corporation of America (HCA, 165 hospitals, 115
    ASC's)
            Baylor Scott and White Health (43 hospitals in Texas)

        It is encouraging that the private sector is stepping up to push
    back on PODs to fill the gap left by the absence of law enforcement.
    But there are still way too many hospitals that are dealing with PODs.
    The private sector alone is not enough to protect patients and the
    health care system.
                        can there be an ``ethical'' pod?
        In a word, ``no.'' Surgery involving implantable medical devices is
    one of the great medical innovations of the 20th century. Millions of
    patients have received life-changing and life-prolonging relief from
    disabilities that crippled or killed previous generations. Physicians
    who provide this kind of care are justifiably proud of what they do.
    After long years of training to become specialists in these fields,
    many of the physicians in this country have been frustrated to watch as
    a health care system tries to ``bend the cost curve'' which continues
    to devalue their services. That the physicians of this country are
    looking for an alternative should then be of no surprise.

        But PODs cannot be the answer. Giving physicians a financial
    interest in the implants they order for their own patients creates a
    conflict of interest that is quantitatively greater and qualitatively
    different from the choice of whether to treat a patient in the first
    place. Medical ethics largely places the decision of whether an
    inappropriate financial interest exists in the hands of the physician.
    However, it is difficult to believe that any physician could fail to be
    influenced in choice of products based on the financial interest
    involved, or choice of facility based on whether the facility will deal
    with the POD. PODs adversely affect competition and distort the true
    cost of health care products and services. And while decreased health
    care costs and better controlled utilization of health care services
    would not eliminate the conflict interest, unfair competition, or
    market distortion, the OIG's research demonstrates that PODs fail to
    deliver even on these.
                                   conclusion
        In conclusion, my experience as a neurosurgeon these past 30+
    years, and my observations of the world around me from my position as
    President of the Association for Medical Ethics, leads me to believe
    that physicians should not be permitted to profit from the implants
    they order for their own patients by investment in a POD. PODs present
    doctors with an ethical conflict that realistically can't be overcome.
    They create unfair competition among implant sellers, hospitals, and
    physicians. They distort the true cost of medical products and
    services. And even if they did so in the transparent light of day, the
    potential for harm to patients and the integrity of the physician-
    patient relationship can't be put at risk in this way. The only answer
    in my opinion is that PODs cannot be allowed.

                                     ______

    Supporting Addendum One

                   Physician-Owned Distributors: The Wave of
                      the Future or the End of the Model?

    Scott Charles Lederhaus

    Inland Neurosurgical Institute, 255 E. Bonita Avenue, Building #9,
    Pomona, CA 91767; Tel.: (909) 450-0369; Fax: (909) 450-0366;
    slederhaus@gmail.com.

            ABSTRACT: New business entities called Physician-Owned
            Distributors (PODs) have sprung up around the country. PODs,
            are business entities, that enhance the income of physicians
            who are investors via the recovery of money paid out for the
            implantation of medical devices in their patients. There have
            been a varying opinions among attorney groups and the Office of
            Inspector General as to their legality and what would
            constitute a legal entity. The legal opinion of attorneys
            employed by the major implant companies is that the PODs are
            illegal, whereas the legal opinion of those physicians setting
            up a POD is that the PODs are legal when properly and
            ``legally'' constructed. The Office of the Inspector General
            has been watching these businesses as possible violations of
            the Stark Laws and kickbacks being paid out to the physician
            owners in the PODs. Some hospital groups have been prohibiting
            PODs from doing business in their hospitals because of fear of
            the excessive use of implants and possible kickback violations.
            These are confusing issues and as of this time there is no
            clear and concise model that can be considered legal, yet the
            PODs persist and are becoming more prevalent.

    KEY WORDS: physcian-owned distributors, PODs, OIG, kickback, Stark.
    safe harbors, alliance surgical distributors, omega solutions,
    implants, Sunshine Act, predatory pricing, False Claims Act, civil
    monetary penalty.

    I. DEFINITION

    Physician-Owned Distributors (PODs) are sometimes called physician-
    owned intermediaries or physician-owned companies by virtue of their
    place in the supply chain. PODs are groups of physicians, usually
    surgeons, who enter into a business relationship with a business entity
    that purchases implanted devices such as total joint prostheses or
    spinal hardware (i.e., pedicle screws, cages, and rods that the owner
    physician ordered for their cases). The physicians in the POD profit
    financially by participating in the sale of medical devices intended
    for implantation in their own patients. thus creating the opportunity
    for them to profit from their own referrals and implants.

    II. INTENT AND DESIGN MODEL

    Probably in large part because of the continued decline in
    reimbursement from Medicare and private payers, PODs have become
    increasingly widespread throughout the United States in an effort to
    increase physician income.\1\ The design with which the PODs achieve
    their goal varies. The simplest model involves the POD business being
    set up by a entrepreneur, who could be a physician or nonphysician. The
    developer of this model then seeks investors who implant devices such
    as spinal implants, joint replacement, cardiac pacemakers, and spinal
    cord stimulators. The initial financial contribution to be a investor
    may vary, but it could exceed $50,000. The investor may own their
    implants, a percentage of the POD, or both. The hospital at which the
    surgery takes place pays the POD for the product after the investor
    implants the devices. The POD includes a shell--a second corporation or
    entity--that is used to facilitate payment to the investors, thus
    avoiding, direct payment from the POD which then sells its products to
    the physician investors. The investor may be involved as a solo
    physician in his own investment group or possibly could be involved in
    a small group of physicians who all share in the profits; both of these
    models are considered mini-PODs. Therefore, in most of these models
    there is a direct payment per implant to the POD.
    ---------------------------------------------------------------------------
        \1\ Physician-Owned Distributors (PODs): An Overview of Key Issues
    and Potential Areas for Congressional Oversight. Printed by the United
    States Senate by U.S. Senator Orrin Hatch (R-Utah), Ranking Member,
    June 2011. Available from: http://finance.senate.gov/news-room/ranking/
    release/?id=126c-415e-fla3-41e9-ab49-665a71188flc.
    ---------------------------------------------------------------------------

    III. CONFLICTS OF INTEREST

    The Office of Inspector General (OIG) along with the Stark legislation
    have examined PODs as a source of kickbacks and conflicts of
    interest.\2\, \3\ Kickbacks can be in the form of direct
    financial payments. consulting and royalty agreements, trips for
    doctors and their families, or consulting meetings. The conflict of
    interest is borne out in that an investor in a POD stands to make large
    sums of money for the implants used. The more extensive the surgery the
    higher the reimbursement, which may be a set up for egregious acts on
    the part of the surgeon. Unfortunately, all too often, greed becomes
    the determining factor in the extent of surgery and issues surrounding
    minimal or no indication for surgery.
    ---------------------------------------------------------------------------
        \2\ The 1989 Special Fraud Alert is available on the OIG's website.
    Available from: http://oig.hhs.gov/fraud/docs/safeharborregulations/
    012389.htm.
        \3\ Testimony of Gregory Demske, Assistant Inspector General for
    Legal Affairs, before the U.S. Senate Special Committee on Aging
    Examining the Relationship Between the Medical Device Industry and
    Physicians (Feb. 27, 2008), Available from:
         http://oig.hhs.gov/testimony/docs/2008/demske_testimony022708.pdf.
    ---------------------------------------------------------------------------

    IV. EXISTING LEGISLATION AGAINST THE POD MODEL

    According to a OIG/Department of Health and Human Services (HHS) Fraud
    and Abuse Alert from January 23. 1989,\2\ noted that Congress did not
    intend to bar absolutely any investment by physicians in other health
    care entities but has included a ``safe harbor'' for investment
    interests in large public corporations. The OIG and DHS have done this
    to ensure that the companies are sufficiently large enough so that the
    return on investment is, at most, tangentially related to any referrals
    or items or services made by a shareholder. Therefore, under the
    proposed rule, referrals by physicians to entities in which they have
    any kind of investment interest (other than in large corporations
    available to the general public), such as limited partnerships, would
    be subject to prosecution.

        Safe harbors' protection of medical business entities makes it
    possible that certain business arrangements might violate the anti-
    kickback laws. Thus, if the business qualifies as a safe harbor then
    the doctors involved do not have to worry about being accused of making
    money from referrals. To be a ``legal'' POD entity under the safe
    harbor regulations a number of legal issues would need to be satisfied
    to avoid being held accountable under anti-kickback regulations.

        Safe harbor regulation allow for certain arrangements when the
    business entity, a POD in this case, is not publicly traded, derives
    less than 40 percent income from physician investors, be no more than
    40 percent physician-owned, receive no referrals from investing
    physicians, have terms for passive investors that are no different than
    those for physician investors, and require payments to physicians that
    are not directly related to volume or referrals. Passive physician
    owners are not required to make referrals to the POD and physicians are
    not required to divest their interest if they retire or are no longer
    actively engaged in the practice of medicine in the POD market. It is
    doubtful if any of the PODs today would qualify as safe harbors because
    a large, publicly traded company does not fit the POD model. In
    general, then, safe harbor protection would not apply to a POD.

        If the safe harbor classification does not apply, then the Ethics
    in Patient Referral Act (Stark law against self referrals) may apply.
    The theory behind the Stark law is to control unnecessary spending that
    arises from improper financial relationships with Federal programs. The
    statute applies to anyone who is connected financially under any
    federally funded health care program, not just Medicare or Medicaid. A
    physician is prohibited from referring Medicare-funded inpatient or
    outpatient services when the physician or anyone in their immediate
    family has a financial relationship with the associated hospital unless
    the relationship meets a Stark exception, for example, a possible
    indirect financial relationship.\4\ To violate Stark laws, the intent
    to violate does not matter, whereas with anti-kickback regulations,
    intent to violate is critical.
    ---------------------------------------------------------------------------
        \4\ Ngai E, Oppenheim C, Regulatory and Structural Considerations
    for Physician-Owned Medical Device Companies, Health Law Perspectives 1
    (February 2011). Available from:
    http://health-law.com/health-law-perspectives/february-2011/#3.

        Under the Stark law, anyone who fulfils either of the following
    ---------------------------------------------------------------------------
    criteria is potentially liable for prosecution:

            A physician who has a ``financial relationship,'' which is
            defined as (a) ownership of an entity, or (b) a compensation
            arrangement between physicians and the entity, including family
            member.

            The entity cannot make a claim to Medicare for a prohibited
            referral. This is done to prevent physicians from making
            referrals based on financial gain, thus preventing
            overutilization, which increases health care costs.

        Because PODs do not qualify as safe harbors, they must follow anti-
    kickback regulations and potentially Stark laws. A member of a POD then
    has to be concerned about whether the POD is a legal entity and if, as
    an investor, they would be potentially at fault for breaking these
    laws. The Stark laws prohibit Medicare payments for any hospital
    services referred by a physician with a prohibited financial
    relationship or who requires refunds are subject to penalties that
    increase with each new referral. This is especially true when the
    physician knows or should have known they are an investor in a POD. The
    Centers for Medicare and Medicaid Services has recognized the
    physician-POD-hospital connection and believe this is an indirect
    financial relationship under the Stark laws and would run afoul of the
    physician self-referral statute.\5\ The Federal Register \5\ reported
    that there is concern about possible program or patient abuse when
    physicians profit from the referrals they make to hospitals through
    physician-owned companies. In the Federal Register it is noted that
    many cases the physician investors bear little, if any, economic risk
    with respect to the medical devices. It is felt that some PODs serve
    little purpose other than providing physicians the opportunity to earn
    economic benefits in exchange for nothing more than ordering medical
    devices or other products that the physician investors use on their own
    patients. ``The financial incentives paid to the physicians may foster
    an anticompetitive climate, raise quality of care concerns, and lead to
    overutilization of the device or other products to which the physician
    is linked.'' \5\, \6\
    ---------------------------------------------------------------------------
        \5\ The Federal Register, Volume 73, No. 84, Wednesday, April 30,
    2008, Page # 23694. Available from: http://www.copyright.gov/fedreg/
    2008/73fr23390.pdf.
        \6\ The Federal Register, Volume 72, No. 133, Thursday, July 12,
    2007, Page 38187. Available from: http://www.rjg.com/
    ProposedAmendment.pdf.

        If the Stark restrictions are not enough, the False Claims Act
    (FCA) can also be a legal avenue against a investor. The FCA is the
    Federal Government's primary civil enforcement tool for addressing
    health care fraud. Under the False Claims Act the government may
    enforce significant penalties against any person who knowingly submits
    a false claim for unnecessary medical services. Whisteblowers can
    report those violators who have defrauded the government, and many of
    the individuals who file these lawsuits are employees or former
    employees of the companies that committed the fraud. If there are
    violations of the anti-kickback or Stark laws, then there is a
    potential for a violation of the FCA, which is implicated in cases of
    the questionable medical necessity of procedures. In February 2008,
    Gregory Demske of the OIG stated that, ``[PODs] will be closely
    scrutinized due to potential for abuse. These groups can be prosecuted
    under the Federal False Claims Act, Federal anti-kickback statute, or
    civil monitories penalty law.'' \7\ The Civil Monetary Penalty (CMP)
    refers to device manufacturers paying a physician to recommend the
    specific device for use in hospital procedures. Therefore, a physician
    owner in a POD is walking a tight rope with respect to believing they
    can navigate the potential laws designed to punish those involved in
    health care fraud and abuse.
    ---------------------------------------------------------------------------
        \7\ Gregory Demske, Dept. of OIG, February 27, 2008, Examining the
    Relationship Between the Medical Device Industry and Physicians,
    hearing before the Senate Special Committee on Aging. U.S. Senate
    Assistant Inspector General for Legal Affairs of the OIG, February 27,
    2008, testimony corrected May 22, 2008. Available from:
         http://www.oig.hhs.gov/testimony/docs/2008/
    demske_testimony022708.pdf.
    ---------------------------------------------------------------------------

    V. GOVERNMENT LEGAL ISSUES

    A June 2011 inquiry by the Senate Finance Committee provided an
    overview of key issues and potential areas for congressional oversight.
    This investigative report noted that PODs began developing around 2003
    and have branched out from orthopedics to spinal implants, cardiac
    pacemakers, and other implants.\8\, \9\ It was noted that
    there are multiple PODs in at least 20 states, with as many as 40 PODs
    in California alone.\1\ On June 9, 2011, letters were sent to the U.S.
    Department of Health and Human Services and the CMS, both of which were
    authored by Senator Orrin Hatch (ranking member of the Finance
    Committee), Senator Herb Kohl (chairman of the Special Committee on
    Aging). Senator Charles Grassley (ranking member of the Judiciary
    Committee), Senator Max Baucus (chairman of the Finance Committee), and
    Senator Bob Corker (ranking member of the Special Committee on Aging).
    The authors requested that PODs be included in the Sunshine Act as far
    as making public the payments made to physicians through these POD
    groups. In addition, the letters requested that the DHS and CMS address
    potential loopholes in the POD model that may relate to the upcoming
    accountable care organizations and any potential conflicts of interest,
    safety concerns, and the impact on health care, all of which are
    considered ``troubling issues about PODs.'' \8\
    ---------------------------------------------------------------------------
        \8\ The United States Senate, letter dated June 9, 2011 to Donald
    Berwick, M.D., Administrator for Medicare and Medicaid Services, from
    Senators Hatch, Kohl, Grassley, Baucus, and Corker. Available from:
    http://finance.senate.gov/newsroom/ranking/release/?id=126c415e-fla3-
    41e9-ab49-665a71188flc.
        \9\ The United States Senate, letter dated June 6, 2011 to the
    Honorable Daniel R. Levinson, Inspector General of the U.S. Department
    of Health and Human Services, from Senators Hatch, Kohl, Grassley,
    Baucus, and Corker. Available from: http://finance.senate.gov/newsroom/
    ranking/release/?id=126c415e-fla3-41e9-ab49-665a71188flc.
    ---------------------------------------------------------------------------

    VI. GETTING AROUND THE GOVERNMENT LEGAL ISSUES

    Bill Lockyer, Attorney General for the State of California, issued a
    opinion letter in February 2006.\10\ He stated that a physician may
    prescribe a medical device distributed by a company in which a
    physician has an ownership provided that the return on investment is
    based on the physician's proportional ownership share and that the
    requisite disclosures are made. He goes on to point out that the
    company's profits are not dependent on the number of referrals that the
    physician has made if the physician complied with relevant patient
    disclosure requirements. The opinion mentions the Department of Health
    and Human Services regulations defining ``financial interests'' subject
    to the federal anti-kickback statute and that interest offered to
    passive investors would be no different than that offered to other
    investors. He states that the investment would be required to be lawful
    under the federal anti-kickback statute and implemented regulations.
    Regarding the Unfair Competition Law, which governs anticompetitive
    business practices as well as injuries to consumers, he notes that, ``a
    business practice can be unfair if it offends and established public
    policy or is immoral. unethical, oppressive, unscrupulous. or
    substantially injurious to consumers.'' \11\ The terms of financial
    interest, proportional return on investment, and passive investors are
    vague and not well defined in Lockyer's opinion letter. Despite his
    opinion, the Attorney General of the State of California has no
    jurisdiction over the federal laws regarding fraud and abuse, anti-
    kickback regulations, or the Stark laws.
    ---------------------------------------------------------------------------
        \10\ From the Office of the Attorney General of the State of
    California, opinion No. 05-614, dated February 27, 2006. Available
    from: http://www.ag.ca.gov/opinions/pdfs/05-614.pdf.
        \11\ Carreyrou, J, Hospital Bars Surgeon from Operating Room,
    Medical Board in Oregon Separately Investigates Doctor who Stood Out
    for High Rate of Multiple Spinal Procedures, Wall Street Journal, April
    13, 2011. John Carreyrou and Tom McGinty. Available from:
    http://online.wsj.com/article/
    SB10001424052748704336504576259142044058726.html.

        Many of the attorney groups that argue that PODs are illegal
    generally have some connection to the medical device companies and thus
    argue in favor of the illegal nature of PODs.\12\,
    \13\, \14\ No different are the attorney groups that argue
    that PODs are legal.\15\, \16\ Thus, there seems to be no
    unbiased opinion when it comes to the legal views on either side of the
    argument. Hooper, Lundy, and Bookman, a law firm in California that has
    worked with PODs, including Alliance Surgical Distributors, a POD owned
    by Dr. John Steinmann in Redlands, California; Omega Solutions, a POD
    in Fresno, California; and Atlas Medical in Southern California.
    Hooper, Lundy, and Bookman have stated and recognize that a POD may be
    impacted by anti-kickback statutes and they point out that the OIG
    recognizes that these PODs are vulnerable to violations of anti-
    kickback laws, and the firm also states that, ``following these
    guidelines does not guarantee the POD is lawful.'' \4\ In an attempt to
    avoid the need for safe harbors, Hooper. Lundy and Bookman claim to
    have set up a potentially legal POD by using indirect compensation as
    an exception to the Stark self-referral laws: the products are sold at
    fair market value, and pricing competes with that of other companies.
    As reported by Orthopedics This Week,\17\ the firm has established 19
    requirements that must be met for a POD to be considered a legal
    entity; these requirements will in effect make the POD as legal because
    it can meet the current restrictive federal law. The Indirect
    Compensation Agreement is a Stark exception but is not relevant to the
    kickback laws. Therefore, the kickback laws can still be applied even
    with a Stark exception. Dr. Steinmann, owner of the POD Alliance
    Surgical Distributors, has opined that his model is a win-win for the
    doctor and hospital because he is able to supply the hospital with
    competitively priced implants and enable the physician members of the
    POD to enhance their income by using his model and his implants. His
    model does not take into account the surgeon who uses the POD implants
    and ``saves the hospital money'' but in actuality would increase costs
    by performing extensive surgery that may not be needed. According to
    Hooper, Lundy, and Bookman, using the 19 provisions, PODs can be as
    legal as possible although they still could be violating the anti-
    kickback laws.
    ---------------------------------------------------------------------------
        \12\ Immelt, SJ, Wisor, RL, Physician-Owned Intermediaries in the
    Medical Device Industry: Fraud and Abuse Compliance Risks Physicians,
    Hospitals and Manufacturers, Hogan and Hartson Law Firm, March 2010.
    Available from: http://.www.jisrf.org/pdf_files/POI_White-
    PaperMarch2010.pdf.
        \13\ Author unknown, Hogan and Hartson Law Firm, Physician-Owned
    Distributors of Spinal Implants: The Impropriety of Physicians as
    Commissioned Sales Representatives, November 2009. Available from:
    http://www.hoganlovells.com/files/upload/PODWhitePaper_Nov2009.pdf.
        \14\ Immelt, SJ, ``Psst! Have I got a deal for you,'' AAOS Now,
    July 2009 Issue. Available from: http://www.aaos.org/news/aaosnow/
    jul09/managing6.asp.
        \15\ Leahy, M, Managing Implant Distributions and Costs: Two
    Solutions that Put Surgeons and Hospitals in the Driver's Seat, AAOS
    Now, September 2010. Available from: http://www.aaos.org/news/aaosnow/
    sep10/managing3.asp.
        \16\ Physician-Owned Distributors (PODs): An Overview of Key Issues
    and Potential Areas for Congressional Oversight, The United States
    Senate Committee on Finance, June 2011. An Inquiry by Senate Finance
    Committee Minority Staff, U.S. Senator Orrin Hatch (R-Utah), Ranking
    Member. Available from: http://www.hoganlovells.com/files/Uploads/
    Documents/Senate%20POD%20report.pdf.
        \17\ Eisner W, Orthopedics This Week: The Risks of PODs, May 9,
    2011. Available from: http://ryortho.com/index.php?s=56&p=52.

        The 19 steps for the formation of a POD \18\ as required by Hooper,
    Lundy and Bookman include the following:
    ---------------------------------------------------------------------------
        \18\ Carreyrou, J, Senators Request Probe of Surgeons, Wall Street
    Journal, June 9, 2011. Available from:
         http://online.wsj.com/article/
    SB10001424052702304778304576373592455703056.html.

    ---------------------------------------------------------------------------
         1.  The company will hire and employ its own personnel.

         2.  The company will purchase products directly from
    manufacturers/distributors under its own contracts.

         3.  The company will sell products directly to its own customers
    such as hospitals or surgery centers under its own contracts.

         4.  The company will manage its own inventory.

         5.  The company will have its own distinct office and warehouse
    space for the operation of its own business.

         6.  Products will be shipped to the company by the manufacturer/
    distributor and will be separately warehoused by the company before
    resale to hospitals or surgery centers.

         7.  The company will hold any and all licenses or governmental
    approvals necessary for the operation of its business.

         8.  The investment price offered to physicians will not be based
    on the projected referrals from the physicians, nor will the amount
    being offered to physicians reflect the anticipated referrals generated
    from the physicians procedures.

         9.  No physician's investment interest will be subject to
    repurchase for failure to use the company's devices in their surgeries.

        10.  The investing physicians will not be pressured in any way to
    utilize the company's devices in their surgeries.

        11.  The investing physicians will not exert pressure on the
    hospitals or surgery centers to purchase the devices from the company.

        12.  The company will be adequately capitalized for its operations
    through the initial capital contributions of its members and the
    physician investments will not be nominal. The members' capital
    contributions will not come from the manufacturer or distributors that
    sell devices to the company, nor will the managers or its affiliates
    loan funds to the physician investor for their capital contributions.

        13.  The use of the devices will at all times be medically
    necessary.

        14.  The company will not bill patients or payers (including
    Medicare and Medi-Cal) for the devices.

        15.  The company will have written agreements with the
    manufacturers/distributors for purchase of the devices.

        16.  The company will have written agreements with the purchasers,
    hospitals. or surgery centers for the sale of the devices.

        17.  The purchasers, hospitals, or surgery centers will be charged
    a fixed price based on negotiations, which will not increase with the
    use of more devices.

        18.  The company will generally have a fixed list of prices that
    will be generally available to all purchasers, hospitals, or surgery
    centers.

        19.  However, the company may be willing to accept lower pricing if
    the purchaser dictates lower fixed pricing. The payments by the
    purchasers will not be higher than fair market value for the devices.

        Omega Solutions was the distributor used by Dr. Vishal Makker, who
    was exposed by the Wall Street Journal in March,\17\ April,\19\ and
    June 2011;\11\ the Journal highlighted that Makker was using implants
    from a POD and allegedly was performing multiple repeat surgeries while
    receiving $500,000 per year from Omega Solutions. As well, Makker's
    girlfriend was an Omega product representative. Omega Solutions closed
    its doors after the Wall Street Journal articles because the instrument
    manufacturers declined to do business with Omega any longer. Since the
    exposition of Dr. Makker the Oregon's Providence Health and Services
    Hospital, the Providence Health and Services have eliminated PODs from
    their 28 hospital system, which was implemented by John Koster, M.D.
    and President/CEO on February 9, 2012.
    ---------------------------------------------------------------------------
        \19\ Medicare Records Reveal Troubling Train of Surgeries, Wall
    Street Journal, March 29, 2011, John Carreyrou and Tom McGinty.
    Available from:
         http://online.wsj.com/article/
    SB10001424052748703858404576214642193925996.html.

        Regarding physician ownership in light of the OIG opinion mentioned
    earlier, Paul Hastings,\20\ an attorney employed by Medtronic-Sofamore
    Danek, stated that, ``this could be considered a `referral,' which is
    applicable to the anti-kickback statutes. Return on investment to a
    physician from a medical device company to which the physician refers
    must be based solely on the value of the investment. The physician with
    a ownership must disclose the financial interest in writing to the
    patient at the time the referral is made. These referral companies may
    be permissible, but should not be considered a blanket permission to
    engage in such activities.'' Hastings concluding the following: (1) the
    physician must disclose ownership interest in writing to the patient;
    (2) physicians should remember that they must comply with the most
    restrictive federal laws, which may carry significant criminal
    penalties; (3) the return on investment must be solely on the value of
    the investment; (4) the attorney general seems to view solicitation by
    medical device companies of physicians as investors to be a potential
    violation of the California Unfair Competition Law (hospitals have to
    use the physician implants); and (5) the physician should be careful
    not to commit in any way to using a company's products or to enter into
    a arrangement that guarantees return based on the volume of referrals.
    ---------------------------------------------------------------------------
        \20\ Hastings, Paul, memorandum, February 28, 2006, subject:
    Opinion of California Attorney General No. 05-614, http://www.paul-
    hastings.com.

        Thomas Bulliet,\17\, \21\ an attorney in a firm that
    represents some large spinal implant companies, noted that PODs are
    entrepreneur-driven opportunities where doctors are seduced into
    kicking in a ``little bit of money'' in exchange for shares of the
    company. ``There is no purpose for these companies but to give the
    doctor's a return. . . . The anti-kickback statute is violated if one
    purpose of the financial reward to a doctor is to get him to order a
    particular product or refer patients to a particular hospital.''
    ---------------------------------------------------------------------------
        \21\ Bulleit, T, Physician-Owned ``Distributors'' of Spinal
    Implants: The Impropriety of Physicians as Commissioned Sales
    Representatives, November, 2009, Hogan and Hartson, LLP. Available
    from: http://www.hoganlovells.com/files/upload/
    PODWhitePaper_Nov2009.pdf.

        Mr. Kevin McAnaney,\22\ a attorney who specializes in healthcare
    fraud, claims physician ownership of medical device companies is legal
    providing that the physicians are buying their shares at fair market
    value and that their profits are based on their percentage of ownership
    of interest and not on the volume of business they generate for the
    company. The problem would arise if the money made is directly tied to
    his usage of the product.
    ---------------------------------------------------------------------------
        \22\ Author unknown, The Journal of Healthcare Contracting,
    Physician or supplier? When physicians own substantial portions of
    medical device companies, contracting professionals play a key role in
    keeping their IDNs on safe legal ground. Available from:
         http://www.jhconline.com/article-sepoct2007-
    physicianorsupplier.asp.
    ---------------------------------------------------------------------------

    VII. THE STANCE OF GOVERNMENT TODAY

    Advanced Medical Technology, an organization representing the code of
    ethics of interaction with health care professionals, headed by Stephen
    Ubl, requested clarification from the OIG regarding guidance for
    certain physician investments in medical device manufacturers and
    distributors.\23\ The OIG has taken the stance of closely scrutinizing
    PODs under the fraud and abuse laws (Dept HHS, Oct 6, 2006). The OIG
    considers these arrangements ripe for potential violations of fraud and
    abuse and that these models will be observed closely. More recently the
    Senate Finance Committees \12\ have strongly requested clarification on
    PODs to draw a line in the sand so everyone can understand what is
    ``legal.'' ``You can't possibly think this is okay,'' said Tom Scully,
    senior counsel at the law firm Alston and Bird who headed the Medicare
    program from 2001 to 2004. ``I understand that the docs feel squeezed
    and want to make more money, but they're racing toward a cliff. This
    can't possibly hold up.'' \18\
    ---------------------------------------------------------------------------
        \23\ Letter from Stephen J. Ubl, President and CEO of AdvaMed to
    Ms. Vicki Robinson, Esq., Chief Industry Guidance Branch, Office of
    OIG, September 6, 2006, Request for Guidance Regarding Certain
    Physician Investments in Medical Device Manufacturers and Distributors.
    Available from: https://www.crowell.com/pdf/MedicalDevice/AdvaMed-
    Letter.pdf.

        In September 2011 , Daniel Levinson, Inspector General of the OIG,
    gave the following response: \24\
    ---------------------------------------------------------------------------
        \24\ Letter from Dan Levinson from the Department of Health and
    Human Services, September 13, 2011, to the Senate Finance Committee.

            We expect that our study will produce important information
            about PODs. We will consider this information in determining
            whether to issue additional guidance addressing phyician-owned
            entities, including PODs. However, as we have discussed a wide
            variety of POD models are being utilized, and different POD
            models can raise varying levels of legal concern; thus, the
            answer to many of the important legal questions posed about
            PODs depend on the specific facts of the case. The Federal
            Anti-Kickback Statute is a criminal, intent-based statute that
            plays a central role in addressing improprieties in physician-
            industy relationships. The legality of any individual
            Physician-Owned Entity under the Federal Anti-kickback Statute
            is highly dependent on each entity's particular
            characteristics, including the details of its legal structure;
            its operational safeguards; and, importantly, the actual
            conduct of its investors, management entities, suppliers, and
            customers during the implementation phase and ongoing
            operations For these reasons, the OIG's ability to issue
            guidance about the application of these business structures is
    ---------------------------------------------------------------------------
            limited.

            It has been OIG's longstanding view that 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 an illegal inducement under the Federal Anti-
            Kickback Statute. When evaluating the legality of such an
            investment, OIG would consider, among other factors, the terms
            under which a physician owner may be required to divest his or
            her ownership interest; the actual return or projected return
            on the physician's investment; and the amount of revenues
            generated for the entity by its physician investors. OIG has
            repeatedly expressed this view, and listed these factors, in
            various guidance documents, including Special Fraud Alerts,
            advisory opinions, and published letters to the industry.

        It is clear from Levinson's response that there is no formal
    decision as to what constitutes a legal POD or whether a POD even can
    be legal. The ``wait and watch,'' noncommittal attitude of the OIG
    continues to confuse proponents on either side.

    VII.A. The Sunshine Act

    The Sunshine Act, introduced in 2009 by Senator Chuck Grassley (R-IA)
    and Herb Kohl (D-Wl),\25\ requires manufacturers and group purchasing
    organizations to report a wide variety of payments to physicians and
    Physician-Owned Entities. Penalties for not reporting include fines
    from $1,000 to $10,000 for each payment not reported, with a cap of
    $150,000 per year. For intentional failure to report, the penalties
    will be steeper, with fines of $10,000 to $100,000 for each payment not
    reported, with a cap of $1 million per year. For PODs, the Sunshine Act
    requires reporting physicians' ownership interests in private
    companies, including the dollar amount(s) invested, the current value,
    and any payment or transfer of value to the owner, including dividends
    or other payments. The information is to be published in a searchable
    website in 2013. The Sunshine Act alone does not imply that the PODs
    are illegal, only that items such as the dividends and payments are to
    be made public.
    ---------------------------------------------------------------------------
        \25\ The Sunshine Act. Available from: http://www.aging.senate.gov/
    record.cfm?id=307097.
    ---------------------------------------------------------------------------

    VII.B. The Stance of Some Hospital Groups

    The Martin Memorial Health Systems in Stuart, Florida, have decided to
    stop doing business with PODs because in their opinion PODs are
    ``inconsistent with the spirit and intent of the federal anti-kickback
    statute.'' \26\ Other hospital groups are requiring their physician
    members to sign financial relationships with their suppliers to avoid
    anti-kickback and self-referral laws. The Scripps Hospital system in
    San Diego, California, has eliminated the use of PODs in their
    hospitals. According to Daniel Roach, Vice President of Compliance,
    except for very limited use the Catholic Healthcare West Hospital
    systems have eliminated PODs from their system of 40 hospitals
    throughout California, Arizona, and Nevada (Roach D, personal
    communication). As well, the 28-hospital Providence Health and Services
    have eliminated PODs where Dr. Makker had performed surgery.
    ---------------------------------------------------------------------------
        \26\ Memorandum, from Martin Memorial Health Systems, Inc., and
    Affiliated Entities, Regarding Physician-Owned Intermediaries, May 6,
    2011. Available from:
         http://www.hoganlovells.com/files/Uploads/Documents/
    Hospital%20Policy%20on%20Physi
    cian%20Owned%20Intermediaries.pdf.
    ---------------------------------------------------------------------------

    VIII. OTHER POD ISSUES NOT PREVIOUSLY CONSIDERED

    VIII.A. Predatory Pricing

    If one considers health plan contracts including capitated payment
    issues to the physicians who are investors in a POD, the POD physicians
    cannot be competed with. Over the years, physicians have been competing
    to the point of who will accept the bottom dollar on a contract. Now,
    with the POD model available, one can consider predatory pricing when
    it comes to contract negotiations. Without the monies paid from a POD,
    a non-POD physician has little or no power to compete with a physician
    or group of physicians who utilize a POD model. In theory, the POD
    physicians could survive without being paid any fees for services or
    capitated money to provide care for their patients from their
    contracted insurance groups. The POD physicians can generate more
    income than would be possible with any insurance payment plan. Thus,
    the POD physician essentially could work without compensation when it
    comes to the insurers and could dominate their local provider market.
    How could anyone who is not part of a POD compete with this model? This
    could be considered a violation of California's unfair business
    practice under the Unfair Competition Law, section
    17200.\20\, \27\ The antitrust laws were enacted to promote
    competition. Now we have gone to the other extreme to eliminate
    competition by reducing payments to amounts so low as to consider the
    POD model being almost free services to insurers. Although this is a
    new concept, it is occurring. This essentially promotes those
    physicians who may egregiously perform extensive and non indicated
    operations for the sake of enhancing income solely on the implants
    used. Gone are the days of lumbar discectomies when a multilevel fusion
    can be done instead. Thus, predatory pricing rewards those unscrupulous
    surgeons who have no sense of ethics or doing what is best for the
    patient.
    ---------------------------------------------------------------------------
        \27\ Strickland J, Simonetti L, Moritz A, An Overview of
    California's Unfair Competition Law. Available from: http://
    www.stroock.com/SiteFiles/Pub168.pdf.
    ---------------------------------------------------------------------------

    VIII.B. Who Loses?

    In a POD situation, if a surgeon performs more than that which needs to
    be done, the hospital loses because the costs of the implants generally
    are paid directly by the hospital. In some instances the costs may be
    paid by the health maintenance organization or insurance company,
    depending on the contracts the hospital may have with the insurer. In
    the instance of Medicare, the hospital loses because patients are
    admitted on a diagnosis-related group basis, multiple implants would be
    paid for by the hospital and Medicare would only pay based on the
    admitting
    diagnosis-related group. The other loser in this model is the patient,
    who unknowingly has submitted to a extensive operation with little or
    no indication for the treatment.

    VIII.C. What Can Be Done?

    It is doubtful that all physicians can be trusted enough to perform
    operations or provide services for only those patients who need surgery
    and do only what is best for their patients. There are too many
    financial enticements to keep those marginally ethical docs on the
    straight and narrow. It will be up to the hospitals to be proactive in
    their stance regarding PODs. At a minimum, hospitals should develop a
    conflict of interest statement that all physicians should sign. If a
    hospital's opinion is that the PODs do not coincide with the intent of
    the law, then it would be up to the individual hospital to decide
    whether or not PODs should be allowed at their facility. These efforts
    likely would eliminate the PODs ability to develop or gain a foothold
    at any given hospital.

    VIII.D. Can a POD be Legal?

    With the controversy regarding the legality of PODs, one must decide if
    sitting on the fence waiting for the federal government to formally
    declare PODs illegal or legal or if the risks of joining a POD are
    worth it. With time there may be more openly prosecuted cases involving
    PODs undergoing OIG investigations for fraud and abuse with surgeons
    performing egregious nonindicated, multilevel procedures.

        It would seem that a POD cannot qualify for protection as a safe
    harbor. Thus, a indirect payment model, as a potential Stark exception,
    would be necessary, as outlined in part by Dr. Steinmann's 19-point
    compliance, with several important additions and differences.

         1.  The POD investors could only own a fixed, small percentage of
    the company and eliminate multiple small and individual or mini-PODs.

         2.  Reimbursement from a POD can be based only on the percentage
    ownership of a individual POD and not by individual use of a product.

         3.  A POD must have a large number of physician owners, perhaps 25
    or more, all with equal percentages of ownership, who locally work in a
    close geographic area, so that one cannot construe that payment is
    based on volume as it would be in a smaller POD and an investor cannot
    choose heavy users throughout a large geographic area.

         4.  Any implant company potentially could compete for the business
    at any hospital from the POD.

         5.  The physician owners would not purchase specific implants
    because purchasing a implant would force a physician to use only one
    particular product that may be of inferior quality or not what would be
    best for the patient.

         6.  The POD would not accrue implants but would purchase implants
    from the most cost-conscious and quality options manufactured by any of
    the small or large implant companies.

         7.  Implants purchased by the hospital through any vendor would be
    no more expensive with a POD; a POD could not charge higher fees than
    other implant companies.

         8.  Each hospital that allows PODs must have a conflict of
    interest statement that each physician member or that hospital signs.

         9.  If any physician is egregiously performing nonindicated,
    multilevel operations (which would have to be monitored via a peer-
    review process and conflict of interest declaration at each hospital),
    those individuals would be eliminated from the POD and potentially
    reported for possible fraud and abuse prosecution.

        10.  The POD owner would have to declare in writing to their
    patients that they have a financial interest in the company.

        11.  There would be no need for passive investors because the POD
    models would not qualify as safe harbors.

        12.  Physician investors who retire or move out of the area of a
    particular POD would sell their interests back to the POD.

        13.  POD investors who care for non-federally funded insurance,
    including workers compensation, should follow these same guidelines to
    avoid egregious acts and kickbacks.

    IX. CONCLUSION

    The POD model as described by John Steinmann and others has been looked
    at legally by Hooper, Lundy, and Bookman in California. Nevertheless,
    even this legal team, despite all efforts to develop a legal entity
    that complies with the most stringent federal legislation, recognizes
    and acknowledges that their efforts to make a legal POD still could be
    considered illegal under scrutiny by the federal government. It should
    be remembered that a legal opinion from an attorney or group of
    attorneys does not have legal jurisdiction over the OIG/DHS and the
    federally funded patients. It is ultimately up to the OIG and Fraud and
    Abuse to determine what is considered legal and what is deemed illegal
    and worthy of prosecution. For these reasons, one should be exceedingly
    careful when becoming involved in a POD. Only after a POD investor
    loses his license to practice medicine, incurs heavy fines, or faces
    potential prison time for egregious acts will these POD groups
    collapse, as they did in the case of the Omega Solutions group and Dr.
    Makker. Perhaps all hospitals should consider what the Stuart, Florida-
    based Martin Memorial Health Systems decided this year: stop doing
    business with such entities. Martin Memorial Health Systems told its
    staff that PODs are ``inconsistent with the spirit and intent of the
    federal anti-kickhack statute.'' If a legal POD could be devised with
    stringent guidelines then perhaps there is a place in the market for
    such a model. Without strict guidelines the POD model will be poorly
    defined and lead to fragmentation of structure, and we will be back to
    our current dilemma of forming semi-legal or entirely illegal PODs and
    dealing with predatory pricing and kickbacks. Continuing on as we are
    is not acceptable and will eventually require the OlG to take a firm
    stance for or against PODs. It is up to physicians to practice
    responsible, ethical surgery for the benefit of their patients.
    However, if a legal POD entity can be developed that satisfies all the
    stringent federal laws and restrictions it also could be a revenue
    source for physicians in these difficult economic times.

    Supporting Addendum Two

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                     ______

      Prepared Statement of Kevin Reynolds, Son of a Patient of a Surgeon
                 Affiliated With a Physician-Owned Distributor
        I, Kevin Reynolds, stand before this committee on behalf of my
    mother Lillian Kaulbach and patients across the country who have been
    harmed by Physician-Owned Distributors (PODs). My testimony today
    describes my family's involvement with PODs, specifically a POD called
    Apex Medical Technologies LLC that was owned partly by Dr. Aria Sabit.

        Based on my mother's experience with a POD, I believe that PODs are
    a serious threat to patient health and must be stopped immediately.

        PODs pose a conflict of interest with the oath that doctors take,
    which states that they must ``do no harm.'' Beyond that oath, there is
    an unspoken trust and belief in our healthcare system that doctors make
    decisions based on the patient's best interest. When doctors recommend
    surgery, patients put trust in their judgment.

        My mother's medical problems started in 2002, when she called to
    tell me that she was having a hard time taking care of her paralyzed
    mother and her brother who recently had half of his skull removed after
    an accident. I dropped everything to go help my mom.

        With my help, my mother continued to take care of her mother and
    brother for several years. During that time, she had several major
    surgeries due to conditions brought on by the physical and mental
    stress of taking care of her family.

        After seven surgeries, my mother still suffered from severe and
    persistent back pain. She turned to Dr. Sabit for help in the fall of
    2010.

        I went with my mother when she met with Dr. Sabit in his office.
    Our meeting with him was very brief. It lasted no more than 3 to 5
    minutes, and Dr. Sabit did not perform any physical examination of my
    mother. Nonetheless, at the end of the meeting, Dr. Sabit recommended
    that she have spinal fusion surgery.

        My mother and I trusted Dr. Sabit's judgement and decided that she
    should have the spinal fusion surgery. At the time when we met with Dr.
    Sabit, we had no indication that he had an ownership interest in any of
    the products that might be used in the surgery.

        Dr. Sabit performed surgery on my mother in October 2010. My mother
    and I signed consent forms that authorized Level 1 spinal fusion.
    However, Dr. Sabit performed Level 4 surgery on his own without asking
    the family or my mother for consent.

        After surgery, my mother developed 5 or 6 different infections. The
    hospital staff told me that they could do no more. They asked me to
    pull the plug not once, but twice. I said no.

        Miraculously, my mother showed some improvement. But she was never
    able to walk again. Instead, she became bedridden and was sent to a
    nursing home to battle these infections, taking up to 25 pills a day.

        On May 31, 2011, my mother passed away from complications related
    to Dr. Sabit's spinal fusion surgery. She was 68 years old.

        It was only after my mother died that I learned about Dr. Sabit's
    involvement with Apex Medical Technologies LLC, a company that
    manufactures screws and rods that were used in my mother's surgery. A
    single screw used in this type of surgery costs around $100 to make and
    sells for $1,000.

        It has been reported that Dr. Sabit had a 20 percent stake in Apex.
    It has also been reported that from May 2010 to August 2012, Dr.
    Sabit's share of profit in Apex was $330,000.

        Simply put, I believe that Dr. Sabit had a clear financial
    incentive to use more screws and rods in my mother's back surgery. And
    I believe that this financial incentive played a role in his decision
    to perform more complex surgery on her that was not medically
    necessary.

        Some people have asked if I would do anything differently if I had
    known that Dr. Sabit had an ownership interest in the products he
    planned to use in my mother's surgery. Looking back, I believe that the
    answer is ``yes.'' Knowing that information, and understanding the
    conflict of interest, we would have sought a second opinion before
    authorizing any surgery.

        Of course, we weren't given that opportunity because we didn't know
    that Dr. Sabit was involved with a POD.

        Since my mother's death, I have tried to tell her story. I've
    spoken with local and national news organizations, have testified in
    Dr. Sabit's criminal proceedings, and it's my privilege to appear
    before the Senate Finance Committee today.

        But I know that even if Dr. Sabit goes to prison, patients will not
    be protected from the same dangers that claimed my mother's life. There
    are still other doctors who participate in PODs and have the same
    financial incentives that Dr. Sabit had to perform unnecessary and
    dangerous surgery.

        On behalf of myself and my mother, Lillian Kaulbach, I ask the
    committee to do everything in its power to stop these doctors. Please
    do whatever is necessary to ensure that doctors make decisions based on
    what is best for the patient, not the doctor's wallet.

                                     ______

                  From The Wall Street Journal, July 25, 2013

              Surgeons Eyed Over Deals With Medical-Device Makers

     Justice Department Investigation Shines Light on Federal Authorities'
              Broader Scrutiny of Physician-Owned Distributorships

                               By John Carreyrou
    Ten months after an Afghan-born surgeon named Aria Sabit arrived in
    Ventura, California, local hospital staffers noticed he suddenly
    developed a preference for an obscure brand of spinal implants for many
    of his surgeries. Soon his volume of operations increased, with
    sometimes-tragic results.

    By the time he moved on less than a year later in late 2010, he had
    become embroiled in investigations by the California medical board and
    the Food and Drug Administration and more than two dozen medical
    malpractice lawsuits, including 12 involving surgeries he did with the
    new implants.

    Now, the Department of Justice is investigating Dr. Sabit because it
    has emerged that he had an ownership interest in the company that
    distributed, and profited from, the surgical devices he switched to,
    people familiar with the matter say.

    Federal prosecutors' scrutiny of Dr. Sabit is part of a broader civil
    investigation into a network of physician-owned spinal-implant
    distributorships operated by two former medical-device company
    employees, the people with knowledge of the matter say. This network,
    which was run out of Utah and comprised at least 11 Physician-Owned
    Distributorships in 6 States, generated tens of millions of dollars in
    profits for its investors over 6 years.

    Physician-Owned Distributorships, or PODs, have proliferated in
    medicine. Distributorships, whether owned by physicians or not, act as
    intermediaries between
    medical-device makers and hospitals: In exchange for marketing and
    stocking devices, the distributors get a cut of each sale. When
    surgeons own the distributorship, that commission goes into their
    pockets. And since surgeons often dictate to their hospitals which
    devices to buy, they can effectively steer business to themselves.

    Depending on how they are set up, such entities can be legal. But in
    March, the Department of Health and Human Services' Office of Inspector
    General issued a special fraud alert about PODs, warning that they
    ``pose dangers to patient safety'' by inducing surgeons to do more
    procedures than necessary and to favor devices they profit from over
    more ``clinically appropriate'' ones.

    In Dr. Sabit's case, the Justice Department has been looking into
    whether his financial interest in the implants caused him to over-
    operate or contributed to a spate of alleged patient complications.
    Twenty-eight former patients or their families have sued Dr. Sabit in
    Ventura Superior Court, alleging negligent acts ranging from misplacing
    implants in their spines to performing surgeries that were
    unnecessarily extensive. Dr. Sabit has settled 11 of the suits, one has
    been dismissed and 16 are still pending against him.

    Through his attorneys, Dr. Sabit, who is now practicing medicine in
    Michigan, declined to comment, citing the malpractice lawsuits and
    California's medical privacy laws. He has denied the suits' allegations
    in court filings and, in a deposition, blamed a surgeon who recruited
    him to Ventura for encouraging patients to sue him. Dr. Sabit has sued
    that surgeon and the Ventura hospital for wrongful termination.

    In his malpractice depositions, Dr. Sabit has alternately denied
    receiving any monetary benefit from the implants he used in his
    surgeries or said he didn't know whether he did.

    However, a person with knowledge of the matter says Dr. Sabit owned
    one-fifth of a spinal-implant distributor called Apex Medical
    Technologies LLC from May 2010 to August 2012. Over that period, which
    includes 8 months of his tenure in Ventura, he received profit
    distributions from Apex that averaged about $12,000 per month, this
    person says.

    Dr. Sabit, 39, was born in Kabul, Afghanistan, but his family fled the
    country in 1979 during the Soviet invasion. In a deposition, he said
    they lived in a tent in Pakistan for 4 years until they emigrated to
    the U.S.

    The family settled in Arlington, VA. Dr. Sabit's father, Abdul Jabbar
    Sabit, got a job as a reporter for Voice of America. He returned to
    Afghanistan after the fall of the Taliban and served as Afghanistan's
    attorney general from 2006 to 2008.

        Dr. Sabit attended college and medical school at Virginia
    Commonwealth University and did his neurosurgery residency at the
    University of Medicine and Dentistry of New Jersey. He was recruited to
    Ventura by Moustapha Abou-Samra, a Syrian-born neurosurgeon who had
    practiced in the middle-class community north of Los Angeles for more
    than 3 decades.

    Dr. Sabit raised eyebrows at Ventura's Community Memorial Hospital soon
    after he arrived in June 2009. An avid weight lifter, he said in one of
    his malpractice depositions that he used supplements such as creatine
    to build muscle mass. People who worked with him say he was physically
    intimidating. In the operating room, he played loud heavy-metal music,
    several hospital nurses have testified.

    At first, Dr. Abou-Samra portrayed his recruit as a young star on the
    cutting edge of neurosurgery who could perform sophisticated spinal
    procedures CMH had previously been forced to refer out to academic
    medical centers, several Ventura doctors say. Dr. Abou-Samra didn't
    return calls for comment. A spokesman for CMH declined to comment for
    this article.

    Though he was fresh from his residency, Dr. Sabit said in a deposition
    that he quickly became one of the hospital's busiest surgeons and was
    billing four times as much as Dr. Abou-Samra within a year. He said
    this created tensions with Dr. Abou-Samra. During 18 months at CMH, Dr.
    Sabit performed 371 procedures, including 306 spine operations,
    according to a list of his cases the hospital provided in the
    malpractice litigation.

    Dr. Sabit prided himself on working fast, according to Joan Kruse, a
    CMH nurse deposed in the malpractice litigation. ``He would grab
    instruments. He'd shove them into the wound,'' she testified. ``I've
    never seen any neurosurgeon be that rough and brutal with'' tissue
    ``that close to the spinal cord,'' she said.

    In one of his depositions, Dr. Sabit said he found Ms. Kruse to be
    ``very disagreeable'' and had asked that she be barred from his
    surgeries.

    Dr. Sabit used a variety of spinal-implant brands during his first 10
    months in Ventura, but he switched to Apex in April 2010, according to
    Marilyn Harris, CMH's director of surgical services. In her deposition
    in the malpractice litigation, Ms. Harris said the switch prompted
    speculation at the hospital that Dr. Sabit had joined a POD and was
    profiting from his use of Apex implants.

    Dr. Sabit denied to Ms. Harris that this was the case, and later
    testified he couldn't recall when he began using Apex products. Ms.
    Harris testified that he showed up in her office unannounced and told
    her: ``I don't even know what a POD is. I'm not part of a POD.'' Ms.
    Harris said ``he was in a heightened state of anxiety'' and ``very
    emphatic.''

    However, a person with knowledge of the matter says that Apex was in
    fact a POD and that Dr. Sabit purchased a one-fifth stake in it in May
    2010, after a short trial period.

    Apex was created by two men, Adam Pike and Bret Berry. Following a
    model they replicated at least 11 times across 6 States, Messrs. Pike
    and Berry recruited Dr. Sabit and a neurosurgeon in Los Angeles to
    become partners with them in Apex. Each surgeon bought a 20 percent
    interest in the company, with the remaining 60 percent going to Messrs.
    Pike and Berry and one of their business associates.

    The two men are veterans of the medical-device industry who partnered
    up to create their own spinal-implant company, Reliance Medical
    Systems. From offices in Bountiful, Utah, Reliance contracts with
    machine shops to manufacture replicas of bigger companies' products
    that it sells under its own brand. The practice is legal under a
    streamlined FDA approval process for medical devices deemed
    ``substantially equivalent'' to ones already on the market.

    To get their products adopted, Messrs. Pike and Berry created a series
    of distributorships similar to Apex and sold ownership stakes to groups
    of surgeons across the country, according to a person familiar with the
    operation. Each surgeon received a monthly profit distribution, this
    person said. The more Reliance implants the surgeons put in patients'
    backs, the more business their distributorship did and the more they
    earned.

    Under California's anti-kickback statute, it is illegal to pay doctors
    to induce patient referrals, or for doctors to accept such payments.
    The practice is also illegal under Federal law if the patients are
    insured by health programs such as Medicare. According to the people
    familiar with its civil probe, the Justice Department is examining
    whether the distributorships Messrs. Pike and Berry created were
    effectively kickback mechanisms to induce surgeons to use Reliance
    implants.

    The answer to that question hinges in part on whether the amount Dr.
    Sabit and the other surgeons paid for their distributorship stakes is
    too small to be considered a real investment, given the size of their
    returns, which in some cases reached $50,000 a month.

    Federal prosecutors are looking into whether Dr. Sabit's financial
    interest in Apex made him more prone to operate or to do bigger and
    riskier surgeries than necessary, the people familiar with the matter
    say.

    The printout of Dr. Sabit's surgeries at CMH shows that, before
    allegedly switching to Apex, he averaged 14 spine procedures a month
    and spine surgeries accounted for 76 percent of his operations. After
    he allegedly switched to Apex, he averaged 22 spine procedures a month
    and their share of his case load rose to 87 percent.

    In a court filing, Dr. Sabit has pointed to deposition testimony from
    CMH Chief Executive Officer Gary Wilde, in which Mr. Wilde stated, ``we
    believed that the vast majority of cases Dr. Sabit did were
    appropriate.''

    It is unclear how many patients Dr. Sabit used Apex implants on. Of the
    28 patients who sued, he implanted Apex hardware in 12 of them,
    according to the malpractice depositions and people familiar with the
    matter. None of those suits allege that the Apex implants were
    defective.

    A spokesperson for Reliance says the fact that Dr. Sabit didn't use
    Apex on more than half of the plaintiffs shows that there is no causal
    relationship between his use of Apex and the suits. ``It is wholly
    inaccurate to assume that these claims are a result of the use of Apex
    products. To the best of our knowledge, there have never been any
    allegations by patients or doctors about faulty Apex products,'' the
    spokesperson said.

    One of the patients Dr. Sabit operated on using Apex was Guanda
    Dusette, a 72-year-old retired nurse. Jack Padour, Ms. Dusette's
    primary-care doctor, says he referred her to Dr. Sabit after she
    complained of persistent back pain. Dr. Sabit proposed removing part of
    two disks in her spine, a relatively routine procedure designed to take
    pressure off the nerve root, Dr. Padour says.

    Dr. Sabit operated on Ms. Dusette on July 8, 2010. However, the surgery
    he performed turned out to be much more extensive: Using Apex implants,
    he fused together eight vertebral levels in her spine, Dr. Padour says.

    After the surgery, Ms. Dusette was ``in agonizing pain,'' according to
    Dr. Padour. The metal screws and rods Dr. Sabit had drilled into her
    spine began coming loose, and the rods pressed against the skin of her
    back from the inside, according to Dr. Padour and Ms. Dusette's
    attorney.

    Ms. Dusette was re-operated on at Cedars-Sinai Medical Center in Los
    Angeles, where all the hardware Dr. Sabit implanted was taken out, Dr.
    Padour says. She subsequently sued both Dr. Sabit and CMH. She recently
    reached a confidential settlement with the hospital, but her case
    against Dr. Sabit is still pending. Dr. Sabit has denied her suit's
    allegations.

    Outside the hospital, Dr. Sabit's surgical outcomes caught the
    attention of Gary Proffett, the medical director of a physician
    association called SeaView that coordinates patients' care on behalf of
    health plans. Of 75 SeaView patients operated on by Dr. Sabit over his
    18-month tenure in Ventura, 28 developed major complications, including
    two who died, Dr. Proffett said in an interview. Dr. Proffett reported
    the SeaView complications and deaths to the California Medical Board.

    Many of Dr. Sabit's post-surgical complications involved infections,
    according to depositions by several nurses and Cary Savitch, an
    infectious diseases doctor at CMH.

    Dr. Sabit has disputed this. In a court filing, he said CMH's
    infections control nurse ``performed an exhaustive review of my
    infection rate'' and concluded that it ``was normal and acceptable.''

    One alleged victim of infection was Lillian Kaulback, an overweight
    woman in her late 60s with a number of health issues, ranging from
    diabetes to a history of ankle, shoulder and knee surgeries. Dr. Sabit
    operated on her on October 7, 2010, using Apex implants to fuse three
    vertebral levels in her spine, according to several people familiar
    with her case.

        A person close to Ms. Kaulback says she was mobile and active
    before her surgery, playing bingo, attending family functions and going
    to a local club to watch couples dance. After the surgery, she never
    walked again and was in and out of the intensive care unit, this person
    says.

    Dr. Savitch, who treated Ms. Kaulback after her surgery, recalled in
    his deposition that she had a big wound on her back that ``was open''
    and ``dripping pus'' and had ``six different bugs growing from'' it.

    To his astonishment, Dr. Sabit closed the infected wound and didn't
    document it in Ms. Kaulback's medical chart, Dr. Savitch testified.
    ``Whenever you have an infected wound, you need it to drain. . . . The
    last thing you do is close it,'' he said.

    The wound opened back up the following day, according to Dr. Savitch's
    deposition. The person close to Ms. Kaulback says she was eventually
    transferred to a nursing home, where she spent 6 months in acute pain.
    She died there on May 31, 2011.

    Ms. Kaulback's son has filed a wrongful-death suit against Dr. Sabit
    and CMH. The case is pending. Dr. Sabit and CMH have denied the suit's
    allegations.

    In their depositions, Ms. Kruse and other nurses testified that Dr.
    Sabit was cavalier about keeping the operating field sterile and would
    sometimes contaminate it by not scrubbing in properly or by letting his
    hair dangle over an open wound.

    The Reliance spokesperson said, ``There is absolutely no connection
    between allegations of infection and Reliance's products or its
    sterilization procedures.''

    When CMH confronted him about alleged post-surgical infections among
    his patients, Dr. Sabit blamed one of the hospital's two operating
    rooms, which he argued in a letter wasn't kept sufficiently clean and
    sterile.

    On December 3, 2010, CMH suspended Dr. Sabit. Mr. Wilde, the CEO,
    handed him a letter stating that the hospital had decided ``immediate
    action must be taken to protect the life or well-being of patients.''
    The letter said the suspension was based in part on Dr. Sabit's alleged
    negligent treatment of two unidentified patients. In a subsequent court
    filing, a senior CMH staffer said one of those two patients died.

    Dr. Sabit filed his own statement with the court in which he denied
    being negligent and said ``there was no medical basis at all for the
    summary suspension.'' Instead, Dr. Sabit wrote, Dr. Abou-Samra and the
    hospital had conspired to suspend him so Dr. Abou-Samra could fire him
    and ``avoid paying me the huge bonuses he would otherwise have to
    pay.''

    After Dr. Sabit threatened to sue the hospital, CMH reinstated him on
    December 7, 2010. But Dr. Abou-Samra refused to let him rejoin his
    practice, so Dr. Sabit voluntarily resigned his hospital privileges on
    December 21, 2010.

    Following Dr. Sabit's departure, the California medical board launched
    an investigation, according to several CMH doctors and nurses
    interviewed by the board. A spokeswoman for the medical board declined
    to comment. The FDA also sent investigators to Ventura and audited
    Reliance's operations in Utah in May 2011. The results of the audit
    weren't made public. The Reliance spokesperson said: ``Our products,
    which are certified by a third-party, meet the strict sterilization
    procedures and protocols established by the FDA.''

    Reliance discontinued its relationship with Dr. Sabit in August 2012
    and stopped operating Apex as a POD, according to a person with
    knowledge of the company's operations. It has since bought out the
    ownership interests of surgeons in its other PODs but continues to pay
    many of them consulting fees, this person says.

    Write to John Carreyrou at john.carreyrou@wsj.com

                                     ______

               Spinal Fusion Surgery Spawns Lawsuits, Controversy

                                 By Tom Kisken
                               February 15, 2012

    Spinal fusion procedures that triggered many of the 17 lawsuits lodged
    against a former Ventura neurosurgeon regularly spawn litigation and
    are sometimes used on patients who have little chance of benefiting,
    according to surgeon specialists at USC and UCLA.

    In fusions, metal rods and screws are used to anchor the spine in place
    while grafted bone or other material is employed to generate bone
    growth that fuses the vertebrae. The procedures are used to treat
    fractures, excessive curvature or other injuries, usually in the lower
    back.

    The operations play a pivotal role in allegations facing Dr. Aria
    Sabit, a 36-year-old neurosurgeon who started operating at Community
    Memorial Hospital in Ventura in summer 2009, fresh out of a 7-year
    residency in New Jersey.

    In the flood of lawsuits, patients allege he performed fusions in which
    the anchoring hardware was misplaced and screws pulled out of bone.
    They said they suffered from postoperative infections, that some of the
    surgeries were unnecessary or too much hardware was used.

    Sabit was fired by Ventura County Neurosurgical Associates Medical
    Group after 17 months, in December 2010, according to a lawsuit filed
    by the physician against the group and then withdrawn. All of the
    lawsuits filed individually by patients against Sabit came after he
    stopped practicing in Ventura.

    Now practicing in eastern Michigan, Sabit has refuted the allegations.
    Regulatory agencies reported no findings against him in Michigan,
    California or New Jersey. In his former lawsuit against the medical
    group, he disputed that his rates of complications and surgeries were
    high, blaming the group for generating untrue criticism against him.

    Community Memorial officials said they initiated an investigation of
    Sabit by the California Medical Board. The hospital and a leader of the
    medical group--both targeted in some of the patient lawsuits--said they
    can't discuss the case but have defended themselves against accusations
    that they waited too long to take action against Sabit.

    Tell Dr. Jeff Wang, a UCLA orthopedic surgeon who performs spinal
    fusion surgeries every week, about the 17 lawsuits and he offers an
    exclamation; the number surprises him. But fusion surgery is ``very''
    litigious, and most doctors will face at least one lawsuit in their
    careers, he said.

    ``I think people have certain expectations,'' he said of patients with
    long histories of lower back pain. ``The results can be mixed, and it's
    not necessarily the fault of the surgeon or the fault of the patients.
    We just don't have all the answers when it comes to nerves in the
    spine.''

    In the procedures, as many as a dozen vertebrae are fused together by
    bone. Pedicle screws, plates, small titanium or carbon fiber cages and
    other hardware are used to stabilize the spine in place until the graft
    takes hold.

    The procedures are often used for fractured vertebrae or damage caused
    by scoliosis or tumors. But sometimes the procedures are used for
    patients with symptoms that show they are not likely to benefit from
    fusion, said Dr. Patrick Hsieh, a neurosurgeon at USC.

    Elderly people who suffer from advanced conditions like heart problems,
    diabetes or some bone diseases like osteoporosis often are not the best
    candidates, Hsieh said.

    Dr. Richard Deyo is an Oregon Health and Science University internist
    and researcher who studies back pain. He cited four studies from Europe
    that suggest patients who suffer from lower back pain because of worn-
    out disks in their spine but have no underlying spinal problems often
    see no more benefit from fusion than from nonsurgical care.

    ``And yet this is the fastest-growing reason for doing spinal
    fusions,'' he said, suggesting the procedures also push up the cost of
    care by generating more treatment that patients or insurers must cover.

    ``The U.S. does five times more spine surgery than the United
    Kingdom,'' he said. ``We do twice as much spine surgery as other
    developing countries. There's no evidence that we're having better
    outcomes.''

    Hsieh said patients who suffer bone softening may not be good
    candidates for fusion.

    Wang said the condition increases risk but said fusion may, in certain
    situations, still be appropriate.

    ``There are gray areas where you think it may be helpful or not
    helpful,'' said Dr. John Regan, a spine surgeon in Beverly Hills.
    ``There are some physicians who overreach.''

    Sabit faces lawsuits filled with allegations that still must be proved
    in court. But if the cases reach trial, with one case set for an April
    start, spinal fusion could play a key role. His former patients allege
    he performed too many surgeries, relied on hardware that included rods,
    screws and interbody cages, and sometimes misused that equipment.

    ``He didn't know what he was doing,'' said Woodland Hills lawyer Steven
    Goldberg. He represents an Oxnard woman who underwent fusion surgery,
    only to have the screws pull away from her bone. ``When I met her, she
    was totally bent over like a paper clip.''

    Sabit's lawyer, Louis ``Duke'' DeHaas, branded the allegations of
    inappropriate procedures and faulty technique as common in malpractice
    litigation.

    ``That's what they allege in these lawsuits,'' he said. ``It doesn't
    mean it's meritorious. You can allege anything you want. That's why we
    have trials.''

    Sabit has denied all the allegations. Once a refugee of Afghanistan
    whose father returned to the country and served 2 years as its attorney
    general, Sabit attended Virginia Commonwealth University. He went
    through 7 years of neurosurgery residency at the University of Medicine
    and Dentistry of New Jersey, in Newark, training at The University
    Hospital. In his final year, he served as chief resident.

    ``He successfully completed the residency,'' said Dr. Charles
    Prestigiacomo, who leads the neurosurgery residency program. ``He did a
    fine job.''

    After finishing his residency in July 2009, he began operating at
    Community Memorial in Ventura, partnering with a highly regarded
    neurosurgeon, Dr. Moustapha Abou-Samra. In court papers, Sabit said he
    started to do some of the most difficult operations at the hospital,
    earning a reputation as a ``go-to physician.''

    ``He was introduced as the next generation of neurosurgery,'' said Dr.
    Jack Padour, a Ventura internist who has two patients who filed
    lawsuits against Sabit. ``We thought, `Great, we need a guy like that.'
    ''

    Complaints against the doctor involve infections after surgery, screws
    or rods that were improperly placed on patients and procedures that
    resulted in extreme pain and had to be redone.

    Olivia Sawyer, 53, of Santa Paula said a doctor at USC took out
    everything Sabit put into her because the rods used for her spine were
    crooked. She tried to file a lawsuit but was told the 1-year statute of
    limitations had passed.

    Charles Shinn, 46, of Ventura complained in court documents that Sabit
    told him he was going to do a minimally invasive procedure and then,
    without informing him, chose a much more involved procedure that
    included an interbody cage placed on his spine.

    Guanda Dusette, 71, of Oxnard said she paid an online service $15 to
    research Sabit before choosing him for a spinal fusion. She alleged the
    screws pulled away from the bone after surgery, contributing to nonstop
    pain and leading to corrective surgery at Cedars Sinai Medical Center.

    ``What happened to me shouldn't happen to people,'' Dusette said.

    But sometimes doctors can't prevent screws from loosening in the bone,
    said Wang of UCLA, adding that the problems can be caused by poor bone
    quality or a graft that failed to fully fuse the vertebrae. ``Whenever
    you're putting the hardware in, there's always a certain risk,'' he
    said. ``Even in the most skilled hands, the anatomy can cause the
    screws to be misplaced.''

    Surgeons fresh out of residency face a learning curve, said Hsieh, but
    a 7-year residency for neurosurgery means they should be ready to
    handle most fusions.

    ``Experience matters even if you're well trained,'' said Deyo, the
    researcher. ``It's always true that the more you do, the more expert
    you become.''

    Hsieh said fusion surgery problems usually stem from the planning--
    choosing the right patients and figuring what strategy will bring the
    best result.

    ``As surgeons, we are experts, but who we operate on and who we make
    better is not based on just how good we are. It's also based on if we
    pick an appropriate patient,'' he said.

                                     ______

                        From CBS News, October 24, 2013

       Surgeon Salesmen? Doctors Profit From Devices They Put in Patients
    By the summer of 2010, 68-year-old Lillian Kaulback had developed
    severe back pain. She was referred to Dr. Aria Sabit, a spine surgeon
    in Ventura, Calif.

    Her son Kevin Reynolds, who was at the appointment with her, says a few
    things struck him as strange from the start. There was no secretary or
    medical assistant there to greet them--just Sabit. There was no
    physical exam, and Reynolds says Sabit told his mother she needed
    surgery within 3 to 5 minutes of meeting her.

    Patients like Kaulback have a higher risk of complications--she was 68,
    overweight, and diabetic. Still, Sabit performed a three-level spine
    fusion, screwing together four of her vertebrae. Reynolds says within
    days, she developed a life-threatening infection. ``The independent
    team asked me not once, but twice to pull the plug on her,'' he told
    ``CBS This Morning.'' ``I said `no.' ''

    Lillian Kaulback never walked again. Seven months after the surgery, in
    May of 2011, she passed away.

    Reynolds is now suing Sabit for wrongful death. One of his biggest
    questions centers on the screws and rods used to fuse the spine, which
    came from a company called Apex Medical Technologies LLC. Apex had no
    public phone number, website, or listing of its owners. ``CBS This
    Morning'' has learned one of its owners was Sabit himself, with a 20
    percent stake. From May of 2010 to August of 2012, his share of the
    profit was about $330,000.

    Reynolds claims the financial incentive caused Sabit to do a riskier
    procedure than necessary, so he could put in more hardware. A single
    screw used in spine fusion surgery can cost $100 to make, and can sell
    for $1,000. ``I don't think he would've worked on as many levels or
    possibly did that type of invasive surgery,'' Reynolds told ``CBS This
    Morning.'' He says Sabit never mentioned his ownership stake in Apex.

    Court records show Kaulback's case is one of 28 brought against Sabit
    for just 17 months of work at Ventura's Community Memorial Hospital. At
    least 10 of the suits involve Apex implants. Legal filings show in the
    7 months before Sabit became an owner of the company, he did 115 spine
    surgeries. In the 7 months after, he did 154, a 34 percent increase.
    (Seven full months was the length of time from when Sabit began using
    the implants to when he left the hospital in December of 2010.)

    Sabit chose not to give ``CBS This Morning'' an interview for this
    story, citing pending litigation. But in a deposition, he claimed he
    simply had more cases as he became more established. ``As time went on
    I got more and more referrals,'' he said. ``By June of 2010, the wait
    time to have surgery done by me was probably around 2\1/2\ to 3
    months.''

    Physician-owned companies, also known as Physician-Owned
    Distributorships or PODs, have been around for a little over a decade,
    but already supply an estimated one-sixth of spinal implants
    nationwide. Most simply serve as middlemen, buying implants wholesale
    and selling them to hospitals, but some also design and manufacture
    their own products. In addition to spinal implants, they currently
    supply hip, knee, cardiac, and other devices.

    Doctors are not required to disclose their ownership in these
    companies, so it's very difficult to get information about them. Often
    patients--and even hospitals--don't know their physicians are involved.
    But today, the Inspector General of the Department of Health and Human
    Services released a long awaited study on them.

    The report found that in fiscal year 2012, hospitals served by
    physician-owned companies averaged 28 percent more spine surgeries.
    Their rate of spine fusions jumped 21 percent after they began
    purchasing from these companies (that compares to a 9 percent increase
    for hospitals overall, during the same period). The report also found
    that surgeries involving physician-owned companies used 13 percent
    fewer devices.

    Dr. Scott Lederhaus and Dr. Charles Rosen are on the board of the
    Association for Medical Ethics. Both spine surgeons, they say they've
    seen many patients harmed by physician-owned companies, due to the
    strong financial incentive to perform unnecessary procedures. ``The
    guys that are being egregious could make, just from putting in the
    implants . . . perhaps in excess of a half a million dollars each, per
    year,'' Lederhaus told ``CBS This Morning.''

    ``Doctors are not supposed to be salesmen,'' Rosen added.

    Lederhaus and Rosen say physician-owned companies should be banned
    entirely. But Dr. John Steinmann says that would be a big mistake. His
    company is one of the few that discloses who its owners are. He says by
    cutting out the middle man and buying in bulk, he saves his hospital $1
    million a year. ``I can perform exactly the same effective surgeries at
    a 40 percent lower rate,'' he told ``CBS This Morning.''

    Steinmann says these arrangements can greatly lower healthcare costs,
    they just need to be regulated, to weed out the ``bad apples.'' To help
    do so, he founded the American Association of Surgeon Distributors,
    which certifies what it believes are legal and ethical physician-owned
    companies. It requires doctors to disclose their ownership stakes and
    show cost savings, and it monitors the number of surgeries they are
    performing.

    But at least for now, it appears Steinmann is the exception rather than
    the rule. His association has fully certified just 14 of the more than
    200 physician-owned companies operating across the country, according
    to the most recent estimates from the Centers for Medicare and Medicaid
    Services. And the inspector general report found that on average,
    physician-owned companies are charging no less than traditional
    suppliers. (You can read the association's response to the report
    here.)

    The Justice Department is now investigating whether Sabit's ownership
    of Apex led him to do unnecessary procedures, according to the Office
    of Senator Orrin Hatch, R-Utah, and the Finance Committee. No one from
    Apex would give ``CBS This Morning'' an interview, but a spokesman
    claimed none of the suits involving the company's implants allege
    unnecessary procedures. In fact, at least 8 of the 10 plaintiffs we
    identified said they plan to argue just that, though no one has claimed
    the implants were defective.

    In depositions, Sabit has denied the allegations. He charges that his
    former medical group, Ventura County Neurosurgical Associates,
    encouraged patients to sue, so it could fire him and avoid paying his
    bonuses. He claims he is owed millions and has sued for wrongful
    termination.

    Sabit also blamed a non-sterile operating room for patient infections,
    and in a deposition, the chief executive officer of the hospital--which
    is also being sued--defended him, saying ``the vast majority of cases
    that Dr. Sabit did were appropriate.'' Sabit has settled at least nine
    of the 28 cases, and at least one has been dismissed. He is no longer a
    part-owner of Apex.

    Last month, the California Medical Board accused Sabit of committing
    dishonest, corrupt, and negligent acts in his care of five patients. It
    charged that he performed unnecessary procedures on three of them, and
    repeatedly documented procedures that he did not perform. The board
    will decide whether to revoke his state license after a hearing. For
    the time being he is still practicing, in Lapeer, MI.

                                     ______

                           From Orthopedics This Week

              ``From Kabul With Love''--Dr. Sabit's Misadventures
                                By Walter Eisner
                                 March 3, 2015
    Spine surgeon Aria Sabit, M.D., is sitting in a Michigan jail awaiting
    trial on Federal healthcare fraud charges and trying to procure U.S.
    citizenship in an unlawful manner. He's sitting in jail because
    prosecutors convinced a Federal magistrate that Sabit would flee the
    country in a scheme worthy of an Ian Fleming novel.

    The Federal Government says Aria surrendered his medical license in
    California, effective in 2014, and moved to Michigan, where he was
    licensed to practice medicine in March 2011. There he opened the
    Southfield-based Michigan Brain and Spine Physicians Group and began
    performing spine surgeries.

    Or so he claimed. According to a Federal indictment, Sabit performed
    lumbar fusion surgery on a number of patients, but didn't actually
    install any hardware. Then he allegedly committed the worst sin--
    billing Medicare for work that wasn't done.

    The U.S. Department of Justice (DOJ) charged him with false claims.
    After a detention hearing on December 4, 2014, the magistrate ordered
    Sabit held in jail. Prosecutors told the judge they fear he is a flight
    risk and would try to return to his native Afghanistan to start a
    hospital and drill for oil. They said he is a member of a politically
    prominent family.

    After his detention, a Federal grand jury indicted him on 18 counts of
    fraud and 1 count of ``unlawful procurement of naturalization'' in a
    20-page indictment. That happened on December 9, 2014.

    Beginning in approximately 2011, and continuing through November 2014,
    Sabit, according to the indictment, convinced patients to undergo
    spinal fusion surgeries, ``which were either medically unnecessary or
    never rendered and then billed public and private insurance programs
    for the fraudulent services.''

    According to the government's case against him, Sabit allegedly
    dictated surgical notes that he had performed various spine surgeries,
    which included laminectomies, discectomies or other procedures, with
    instrumentation--but which he never actually conducted.

    The government is claiming that Sabit's operative reports and treatment
    records allegedly contained false statements about the diagnosis for
    the patient, the procedure performed, and the instrumentation used in
    the procedure. Sabit would also order spinal injections and
    simultaneously schedule the patient for surgery, ``thus not waiting a
    sufficient amount of time to lapse to ascertain if the non-invasive
    treatment was successful.''

    Sabit claimed he used Zimmer Holdings, Inc.'s Transfacet Screw System.
    But post-operative X-ray and MRI examinations by other spine surgeons
    revealed that no medical device had been placed in or around the
    patient's spine.

    ``Subsequently, after continuing pain, all patients received second
    opinions from other doctors stating that no such spinal fusion had been
    performed and there was no evidence of any screw, or any medical device
    in the spinal column of the patient,'' Special Agent Peter Hayes of the
    FBI wrote in a court filing.

    In all, Sabit billed almost $33 million and was paid more than $1.8
    million, according to the criminal complaint. He performed surgery on
    almost everyone who walked through his office, an unnamed employee told
    an FBI agent.

    ``He had swagger off the charts,'' said Tonocca Scott, one of his
    former patients said of the 40-year-old Sabit in a published interview.
    ``His hair was pulled back. He could have been a guy in a James Bond
    movie. Why would I go to anybody else?''

    Sabit in California_PODS, Lawsuits and Kickback Charges

    This isn't the first time the Justice Department had dealings with
    Sabit or the first time OTW has reported on his activities.

    Between 2009 and 2010, Sabit was the subject of more than two dozen
    medical malpractice lawsuits in California. Special Agent Hayes
    testified at Sabit's detention hearing in Michigan that Sabit performed
    over 200 spinal fusion surgeries in California from June 2009 to
    December 2010 and that the DOJ had filed a Civil Complaint against him
    in September 2014.

    Hayes also said that DOJ presently has an ongoing criminal
    investigation of Sabit in California.

    Anti-POD Poster Child

    During Sabit's detention hearing prosecutors also told the judge that
    the DOJ's California investigation of Sabit was focused on his
    participation in a physician-owned-distributorship (POD), which owned a
    particular device--an Apex pedicle screw made by Reliance Medical.

    After buying into the POD, Hayes said Sabit began to use the Apex in 90
    percent of his surgeries, and earned over $400,000. He added that Sabit
    had been subject to civil kickback charges in September 2014 based on
    California kickback allegations and that Federal California criminal
    kickback charges are likely coming.

    A Flight Risk: From Dubai to Kabul to London

    Accusations of unnecessary surgeries and false claims are not uncommon.
    But here is where Sabit is different and the story turns into an
    international thriller.

    The government labeled Sabit a flight risk, noting that he was
    questioned in September in Atlanta while trying to fly to Dubai. There
    he allegedly told a customs officer that he owned a company involved in
    mining in Afghanistan. In his luggage, officers found a ruby and a 3.6-
    carat emerald, according to the complaint.

    Dubai Informant

    Special Agent Hayes testified that the FBI had information from an
    informant who was employed in Dubai, but had first met Sabit in
    Michigan in late 2013. The informant told the FBI that Sabit had asked
    him to help obtain a medical license in Dubai because he was
    considering practicing medicine there or in the United Arab Emirates.

    The informant also told Hayes that Sabit went to Afghanistan in
    December 2013 to set up a hospital in Kabul. When the FBI searched
    Sabit's house they found plans dated October 2014, for Aria
    International Community Hospital in Kabul. They also found emails dated
    around the same time indicating he had invested $300,000 to $400,000
    into the hospital with a profit hope of $30 million.

    London's Newcastle Upon Tyne

    Hayes testified that Sabit traveled to London in November 2013, and
    based upon papers seized in the home search, was in the process of
    applying for a position at a London area hospital: ``Newcastle Upon
    Tyne,'' application dated November 11, 2013.

    The application stated that Sabit was applying for the position of
    consultant spinal surgeon? ``I am moving to the U.K., as most of my
    family resides in the U.K.'' Hayes testified, and Sabit's wife's
    subsequent testimony confirmed, that none of Sabit's family resides in
    the U.K.

    Afghan Blue Bloods and Oil

    The informant, according to Hayes, traveled to Afghanistan to meet
    Sabit and his relatives, and government officials--Sabit's father, who
    was the former Attorney General of Afghanistan; his uncle, the Speaker
    of the House, the Minister of Mines; Abdullah Abdullah, an individual
    then running for President of Afghanistan, who lost the final election,
    but who is now the Chief Executive Officer of Afghanistan.

    The informant had an axe to grind. He claims that he had been
    ``stiffed'' out of money on a deal by Sabit.

    Sabit, according to Hayes, incorporated the American Mineral and Oil
    Company in August 2014, to extract natural resources in Afghanistan. E-
    mails from Sabit to his business partner regarding their proposed
    venture, said that Sabit had secured the rights to survey and extract
    the 2 billion barrels of oil available for drilling in northern
    Afghanistan.

    A Sabit August 4, 2014 email states:

            Through connections and talks with the Government, including
            the President and incoming Prime Minister, I am able to secure
            these and any other mineral rights for our companies, and
            ideally partner with an American company.

            The rights to the grounds and all mineral content are secured.
            I met with the Minister of Mining and Petroleum, as well as the
            President of the country. My first cousin is the Minister of
            Finance. My other cousin is the head of the Central Bank. My
            uncle is the Speaker of the Lower House. My father is a very
            influential politician. My point is that we have very
            significant pull in the Government.

    Sabit's Defense

    Sabit's wife, an RN, testified that she was willing to surrender her
    and her daughters' passports and offer the house as security. She also
    said that Sabit and his father are now estranged.

    Dr. Khusraw Sabit is Sabit's younger brother, who lives in Montreal,
    Canada. He testified on December 8, 2014 that Afghanistan is not safe
    for Sabit because their father, who has not been speaking to Sabit,
    also has made many enemies and was kidnapped and released for ransom in
    2011-2012.

    The Money Flow

    Hayes showed the court a flow chart showing some of Sabit's money
    movement of over $2 million from Michigan Brain and Spine into a joint
    account that he had with his wife at PNC Bank, and then over $1.7
    million was transferred out to six accounts: two held by his wife, and
    two each held in the name of each of his then-two children, 8 and 6
    years-old, respectively.

    A home search of Sabit's house revealed a proposed complaint for
    divorce, seeking sole custody of the children. The home search also
    showed that Sabit had been living in the basement.

    Hayes further testified that the informant said that Sabit had
    explained that the only reason he was still in the U.S. was because he
    had young children here, but that if he did leave, the U.S. ``would
    never get him back.''

    Sabit's ``Suspect'' Character

    After listening to the evidence, the detention hearing judge found that
    Sabit's character is ``suspect given his past conduct of leaving his
    medical license behind in California and not including that history in
    his curriculum vita in applying for future medical positions, and his
    transfer of a significant amount of funds to his wife and children as
    the investigations unfolded.''

    The judge noted that prosecutors offered proof that Sabit ``has
    transferred significant sums of money to two of his young children
    (allegedly around $1,000,000 each), that he claimed to have spent
    $300,000 on the Kabul hospital project already, that the government has
    already frozen $750,000 in one of his bank accounts, and that it has
    not been able to identify accounts into which other transfers may have
    been made.''

    The judge ruled that Sabit would remain imprisoned until his trial.

                                     ______

    Supplemental Statement for the Record, Submitted by Kevin Reynolds in
    Sentencing Proceedings for Dr. Aria Sabit in the U.S. District Court
    for the Eastern District of Michigan

    To the Honorable Judge Paul D. Borman  8/17/15

    I (Kevin Reynolds) am the son of victim in 2011 Lillian Kaulback. I'm
    writing to you about the Aria Sabit case.

    The butcher Sabit operated on my mother in California she died of so
    many complications from surgery and the unbearable grief of never
    walking again at the hands of Sabit. She had to take 25-30 pills a day
    because of his greed and infections.

    I am one of the few that have had him admit and settle a case of a
    wrongful death lawsuit against the evil Aria Sabit. I've spoken out
    against him in the local Ventura County Star, The Wall Street Journal,
    the CBS morning news broadcast and also the California Medical Board.
    In the last month I've spoken to Federal prosecutors representing
    California and Michigan.

    Please, please, on behalf of all the victims in California and
    Michigan. We beg you to hand down the maximum sentence against this
    MONSTER.

    There are hundreds of people mutilated, scarred and or DEAD because of
    Aria Sabit. Please make sure he receives the maximum prison sentence
    ``YOU'' can hand down and that he never leaves!

    On behalf of my mother and the tortured souls,

    Thank you for the Justice and your time.

    Kevin Reynolds

                                     ______

          Prepared Statement of John Steinmann, D.O., Board Advisor,
                 American Association of Surgical Distributors
        Chairman Hatch, Ranking Member Wyden, Honorable members of the
    committee,

        Thank you for this opportunity to offer testimony to the Senate
    Committee on Finance regarding physician ownership in medical device
    distribution.

        I am a practicing orthopedic spine surgeon, in practice for 25
    years, on faculty at two regional medical schools and residency
    training programs. I am a senior partner in one of California's largest
    orthopedic groups, Medical Director of the Spine and Joint Institute at
    Redlands Community Hospital and an elected Board member of the
    California Orthopedic Association. I am the proud father of six
    children and equally proud grandfather of nine.

        Along with several colleagues, I helped develop a model for surgeon
    ownership in medical device distribution that mitigates conflicts of
    interest found in unregulated PODs.\1\ The model I pursue is not aimed
    at unlimited personal financial benefit for physicians, but instead
    aligns with hospitals and restores market forces to an industry where
    costs were out of control--all while using tools such as transparency
    and accountability to ensure that patients are protected.
    ---------------------------------------------------------------------------
        \1\ More information about these standards can be found on the
    website of the American Association of Surgeon Distributors, http://
    aasdonline.org/.

        In our system today when it comes to choosing medical devices, the
    decisionmaker (surgeon) does not bear any of the financial burden of
    his or her decision, and hence has no incentive to create or support a
    competitive environment that could better control price in a
    sustainable manner. Furthermore, most orthopedic and spinal devices are
    standardized and multiple companies manufacture like, if not identical,
    quality products. Therefore, there is a missed opportunity to force
    ---------------------------------------------------------------------------
    these companies to compete on value.

        This economic problem is not a small one. In the United States, we
    generally pay twice as much as Europe does for our own American-
    manufactured products. In theory, this could translate to as much as a
    $9 billion dollar overpayment.\2\ In the U.S., 1.7 million Americans
    are affected by medically related bankruptcies every year with a few
    million more losing their life savings.\3\ We will continue to create a
    substantial financial burden to American citizens and businesses until
    we address the fundamental flaws of our healthcare system that can
    cause it to cost twice what others' cost. One of those flaws can be
    fixed by addressing how we acquire medical devices.
    ---------------------------------------------------------------------------
        \2\ ``$18 Billion Dollar Domestic Market,'' Orthopedic Network
    News, 2013. Subscription required.
        \3\ ``Medical Bills are the Biggest Cause of U.S. Bankruptcies:
    Study,'' by Dan Mangan, CNBC, June 25, 2013, http://www.cnbc.com/id/
    100840148.

        The current system we have in the U.S. for acquiring medical
    devices is what is known as a commissioned model, whereby the
    manufacturers acquire and hold a full inventory and provide product one
    at a time in response to surgeon's request. Then, manufactures hire
    well-compensated sales and marketing staff to ensure that surgeons
    continue to request their product. This process, where we buy one item
    at a time, yoke the manufacturer with the inventory costs, and the
    sales and marketing costs, can double the price we have to pay.
    Instead, if we would simply derive a consensus among surgeons, purchase
    in volumes, and hire our own product specialists, we could see the cost
    of implants go nearly in half without affecting manufacturers profit or
    ---------------------------------------------------------------------------
    R&D budgets.

        Instead of the commissioned model, I believe we are better served
    if we adopt and support a stocking distribution model where surgeons
    (along with their hospitals) prospectively derive a consensus on equal
    quality products, create a competitive environment, offer volume
    purchases consistent with historical use and employ product
    representatives so that we can drastically reduce sales and marketing
    expenses. This system should reduce the cost of these high quality
    products by 35-50 percent, thus providing the American public the value
    it deserves.

        A properly structured POD represents a valuable alignment between
    the surgeons and the hospital. In a stocking distributorship, the owner
    of the inventory--and hence the distributorship--can be the hospital or
    the surgeon group. In some circumstances it is reasonable for the
    hospital to own the inventory, such as hospital systems with an
    employed (and hence, aligned) staff. However, in most circumstances
    where there is not an employment relationship, hospitals will be very
    reluctant to purchase inventory for fear the surgeons will not continue
    to support that inventory investment.

        Furthermore, such as is the case in our distributorship, a surgeon-
    owned distributorship can support four hospitals with a single bank of
    inventory and a single representative. If these distributorships were
    hospital-owned, there would need to be four duplicative inventory
    expenses and four employed reps. Lastly, surgeons, who understand what
    supports product quality, control their schedules, and understand what
    is needed from the product rep, are far more suited to run the
    distributorship than the hospital. An alternate, very viable model is
    hospital ownership with surgeon management.

        It is an unfortunate fact that throughout the medical profession
    there will always be a few ``bad apples'' who can do serious damage to
    peoples' lives. We simply must have mechanisms that force physicians to
    be held to the high standards patients deserve. That is what the
    American Association of Surgeon Distributors (AASD) standards I helped
    develop do.

        The Standards published, audited and enforced by AASD ensure that a
    distributorship with surgeon ownership is structured in an ethical and
    legal manner. The Standards force AASD-compliant PODs to take many
    extra steps to ensure legitimacy and quality service, such as
    prohibiting the leveraging of referrals, submitting to monitoring, and
    disclosing to patients.

        The 12 published Standards require the distributorship to
    demonstrate:

           1.  Compliance with Self-Referral and Anti-kickback statutes
    (legal opinion).
           2.  Merit by proving to be the lowest average cost provider.
           3.  Annual price increases below 3 percent above the CPI.
           4.  All functions of a free standing stocking distributorship.
           5.  Adherence to the AASD Product Evaluation Policy.
           6.  Adherence to the AASD Employee Training Policy.
           7.  Adherence to the AASD Disclosure Policy.
           8.  Adherence to the AASD Investment and Distribution Policy.
           9.  Adherence to the Appropriate Use Monitoring Policy.
          10.  Written contracts with hospitals.
          11.  No leverage of referrals.
          12.  No leverage or pressure to physician owners.

        In addition, in order to ensure that physicians are appropriately
    involved in their distributorships, implementing a properly structured
    POD requires work and investment and specifically requires:

            Bringing together surgeons to derive a consensus on design
    features and like quality products and manufacturers.
            Critically evaluating these companies to ensure they meet all
    appropriate quality standards including testing results of the products
    being considered.
            Evaluating historical volumes and surgeon operative days to
    derive an understanding of implant and instrument volumes.
            Competitively negotiating with manufactures.
            Constructing the contractual relationship with the
    manufacturer.
            Obtaining healthcare legal opinions on the appropriate
    structure of relationship with the manufacturer and the hospital/
    surgery center.
            Developing an accepted vendor relationship with the hospital,
    inclusive of identifiable cost savings, disclosure of physician
    ownership, proof of appropriate legal structure and assurance of
    quality of good and services.
            Out of pocket investment to purchase inventory and often
    instruments.
            Hiring and training of a product rep and the identification
    and lease of a place of business.
            Procurement of a business license and insurance.

        Moving from a commissioned model to a stocking model offers the
    American public the value it deserves. In our experience, creating a
    system of effective competition reduces cost by 35-50 percent--all
    while giving patients the information they need to make informed
    decisions, and using accountability tools to ensure patients are not
    exposed to unnecessary procedures.

        Unfortunately, I believe the absence of clear, affirmative program
    guidance from the government has kept many honorable surgeons and their
    hospitals from sitting down to implement this very sensible model.

        At the heart of the debate on physician's ownership in medical
    device distribution is the issue of conflicts of interest. As with
    other conflicts of interest, such as our fee for service payment system
    or DRG and bundled payments, the potential conflict that surgeon
    ownership in medical device distribution can create should be managed
    through enforced transparency, accepted quality and community
    standards, and appropriate use monitoring. The Standards of the AASD
    ensure that this conflict is managed in the best interest of patients,
    hospitals and society.

        In summary, the healthcare industry is finally starting to innovate
    methods to increase value by finding means to enhance the patient
    experience and outcome at lower costs. It would be a shame for our
    country's leadership to not endorse in some manner a model that has
    proven to effectively produce these goals.

        We have structured a model of surgeon ownership in medical device
    distribution in a manner that ensures substantial cost savings, while
    protecting patient safety and complying with all existing healthcare
    laws. Our model has been proven to reduce the cost of implants by at
    least 35 percent while ensuring patient disclosure, hospital and public
    transparency and maintenance of product quality and services.\4\
    ---------------------------------------------------------------------------
        \4\ ``Surgeon Ownership in Medical Device Distribution; Does it
    Actually Reduce Healthcare Costs?'' Steinmann, et al. Expert Rev.
    Pharmacoeconomics 1-7 (2015).

        Conflicts of interest are a serious and valid concern. We have
    proven those real concerns can be countered--and patients can be
    protected--with high, clear, enforceable standards that bring
    ---------------------------------------------------------------------------
    accountability to Physician-Owned Distributorships.

        We should ask the Office of the Inspector General to offer
    affirmative program guidance along the lines of those standards
    outlined by the AASD so that patients can be protected and the American
    public can start to see the benefits of effective well structured
    innovations in healthcare delivery that result in better value.

                                     ______

                                 Expert Reviews

      Surgeon Ownership in Medical Device Distribution: Does it Actually
                            Reduce Healthcare Costs?

        Expert Rev. Pharmacoecon. Outcomes Res. Early online, 1-7 (2015)

       John C. Steinmann,i Charles Edwards II,* ii
                        Thomas Eickmann,iii
             Angela Carlson,iv and Alexis Blight ii
    ---------------------------------------------------------------------------
        i Arrowhead Orthopaedics, Redlands, CA, USA.
        ii The Maryland Spine Center, Mercy Medical Center,
    Baltimore, MD, USA.
        iii Cornerstone Orthopaedics and Sports Medicine,
    Louisville, CO, USA.
        iv Alliance Surgical Distributors, LLC, Redlands, CA,
    USA.
        * Author for correspondence: Tel.: 443-676-3757 Fax: 410-539-3434
    caedwards20@gmail.com.
    ---------------------------------------------------------------------------
    Background: Surgeon ownership in medical device distribution is a new
    model that proposes to reduce the costs associated with surgical
    implants. In surgeon-owned distributorships (SDs), the surgeon becomes
    the purchaser through ownership and management of a distributorship.
    The purpose of this study is to determine whether significant cost
    savings can result from SDs. Methods: Five existing SDs were
    retrospectively reviewed, and their implant pricing was compared with
    non-SDs. The hospital pricing for implants supplied by the SDs was
    compared with 2010 pricing from the best contract/capitated rate for
    like implants from non-SDs. Results: The average first-year cost
    savings for the SDs was 36 percent, with U.S. $2,456,521 total savings
    in 2010. For distributorships in business for over 2 years, the average
    annual price from the SDs actually decreased by 1.41 percent.
    Conclusions: This study demonstrates that SDs are capable of providing
    substantial healthcare savings through lower implant costs and reduced
    annual price escalations.

      KEYWORDS:  cost-savings  healthcare costs  orthopedics  surgeon-
                             owned distributorships
                               surgical implants

    Healthcare costs in the USA continue to place an overwhelming burden on
    individuals, businesses and local and federal governments. In 2011,
    national health expenditures reached U.S.$2.7 trillion.\1\ Although the
    rise in healthcare costs can be attributed to many factors, including
    technological advances and an aging population, significant costs are
    also attributable to fundamental flaws in the economics of healthcare
    delivery in the USA.\2\ One prominent flaw results from separation
    between the decision maker (e.g., a healthcare provider) and the
    purchaser (e.g., a hospital, government or insurance company). This
    creates a ``market failure,'' whereby typical market forces, such as
    competition and market equilibrium, are not available to control
    costs.\3\ Market failure due to separation of the decision maker and
    purchaser is intrinsic to many facets of our current healthcare system.
    ---------------------------------------------------------------------------
        \1\ National center for health statistics. Health, United States.
    2013. Available from: www.cdc.gov/nchs/data/hus/hus13.pdf#112 [last
    accessed 10 July 2014].
        \2\ Kuttner R. Market-based failure--A second opinion on U.S.
    health care costs. N Engl J Med 2008;358:549-51.
        \3\ Mirmirani S, Spivack R. Health care system collapse in the
    United States: Capitalist market failure. Economist 1993;141:419-31.

    A visible example of this market failure is the orthopedic and spinal
    implant marketplace. With these types of implants, the surgeon
    typically selects the specific product to be used based on his/her
    determination of which implant is best for the patient, usually on a
    case-by-case basis. Occasionally, a patient will have such a unique
    condition that only one or two products will meet their needs. For the
    majority of patient conditions, however, several competitive products
    are available. When there are multiple appropriate product options, the
    surgeon will make a selection based on a combination of factors
    including personal experience, preference for product features, sales
    relationships, marketing and company loyalty. Once the surgeon selects
    a specific implant, it is purchased by a hospital or surgery center.
    The costs of the implants are then borne by the hospital or reimbursed
    by third-party insurers, including Medicare in certain circumstances.
    Under the current healthcare paradigm, the purchasing hospital is given
    an order from the surgeon for a specific implant. The purchasing
    hospital is left with very little leverage in creating competition or
    ---------------------------------------------------------------------------
    in negotiating the price for a specific implant.

    Hip implants were introduced in the 1960s, knee implants in the 1970s
    and pedicle screws in the 1980s. In their early days on the market,
    these implants were considered state of the art and were patent-
    protected. At that time, there were a few manufacturers for these
    implants. As hip, knee and spine implant development slowed,
    breakthrough implant designs gradually lost their patent-protection.
    Today, the intellectual property incorporated into contemporary
    implants is for the most part public domain. The implant marketplace
    has become well populated, with manufacturers providing nearly
    identical implants. While the implants used in a large majority of hip,
    knee and spine surgeries have common designs, the implant pricing
    levels remain surprisingly high.

    The similarity of contemporary implant designs is highlighted by the
    process by which all current hip, knee and pedicle screw implants were
    submitted to the U.S. FDA for approval. Under the 510K approval
    process, a manufacturer must demonstrate to the satisfaction of the FDA
    that their proposed implant is substantially equivalent to a device
    currently marketed in the USA.

    One solution to the market failure in surgical implants is to place the
    surgeon in a purchasing position. Restoring the roles of decision maker
    and purchaser to a single entity would reestablish normal market forces
    to, in theory, reduce surgical implant costs. The paradigm shift would
    align the surgeon's decision-making algorithm with the priorities of
    the patient and society--to provide the optimal implant for each
    patient while eliminating unnecessary expense.

    The need for effective market forces in orthopedics is underscored by
    the growing cost burden of orthopedic procedures and the
    disproportionate impact of implant costs. Orthopedic implants and
    procedures are considered a major cost contributor to the overall rise
    in healthcare costs.\4\ By 2030, the demand is projected to increase by
    173 percent for total hip arthroplasties and by 673 percent for total
    knee arthroplasties, representing over 4 million primary hip and knee
    replacements.\5\ Implant costs account for the largest single expense
    in total hip and knee replacement operations.\6\ Measurable implant
    cost savings, therefore, could result in the most significant reduction
    in the cost for these procedures.
    ---------------------------------------------------------------------------
        \4\ Jain N. Joint replacement costs in the era of healthcare
    reform. J Bone Joint Surg Am 2012;94(18):e140(1-2).
        \5\ Kurtz S, Ong K, Lau E, et al. Projections of primary and
    revision hip and knee arthroplasty in the United States from 2005 to
    2030. J Bone Joint Surg Am 2007;89:780-5.
        \6\ Scott WN, Booth RE Jr, Dalury DF, et al. Efficiency and
    economics in joint arthroplasty. J Bone Joint Surg Am 2009;91:33-6.

    Surgeon ownership of medical device distribution is a novel model that
    places the surgeon in the position of value-driven implant purchasing,
    which creates competition, and has the potential to result in
    substantial healthcare savings. The purpose of this study is to
    determine whether there is evidence of significant cost savings
    resulting from surgeon ownership of medical device distribution. A
    secondary goal is to determine whether any cost savings achieved with a
    surgeon-owned distributorship model is sustained over time. Our null
    hypothesis is that surgical implant costs to the hospital are the same
    regardless of whether the implants are provided by a surgeon-owned
    distributor or the conventional paradigm. Given the historical trend
    for annual inflation of surgical implant costs, we also hypothesize
    that the cost of implants sold by surgeon owned distributorships (SD)
    will increase each year.

    Materials and Methods

    To test this hypothesis, a study sample was selected from the American
    Association of Surgeon Distributors (AASD) member database. The AASD is
    a nonprofit public benefit company that has established recognized
    compliance standards for certifying distributorships with physician
    ownership. Surgeon-owned distributors may become members of the
    association by satisfying all requirements of membership, which include
    the submission of a 12-month log of consecutive surgical cases. The
    submitted case data are deidentified for any patient-specific
    information prior to submission. Permission was received from each SD
    for their data to be used in the analysis. Institutional Review Board
    approval for this study was waived because no individual patient-
    specific information was used in this study.

    Criteria for inclusion were availability of a 12-month interval of data
    ending in July 2011, and hospital willingness to provide independent
    verification of implant pricing for the SD and the next lowest cost
    contracted provider of like implants to the hospital. On the basis of
    these criteria, we selected a sample population of five SD.

    The hospital pricing for implants supplied by the SD was compared with
    the best current contract pricing for implants of like quality and
    function supplied by non-surgeon-owned distributorships (NSD) to the
    same hospital. Current hospital pricing for the NSD was provided by
    hospital purchasing departments and published hospital capitated
    rates.\7\ The prices obtained were the price paid to the vendor, not
    the list price and not the price that was necessarily reimbursed by
    insurance carriers. This case versus control model represents an
    optimal apples to apples comparison due to the data coming from the
    same hospital, at the same time periods, for the same implant type.
    ---------------------------------------------------------------------------
        \7\ 2010 Hip and Knee Implant Price Comparison. Orthopedic Network
    News 2010;21:9-12.

    For those distributorships that have been operational for 2 or more
    years, annual and cumulative data were reported. Comparison of the
    year-to-year pricing for each SD would provide data on surgical implant
    ---------------------------------------------------------------------------
    price inflation under the SD model.

    One hundred percent of surgical cases from the SD inception through the
    study date were included in the data set analyzed.

    Sources of Funding

    The authors did not receive any outside funding or grants in support or
    preparation of this manuscript. One or more of the authors has an
    investment interest in a medical commercial entity (Inland Surgical
    Products, Specialty Spine Products, Mesa Surgical, Millennium Spine,
    Calvary Spine, Alliance Surgical Distributors, Renovis Surgical
    Technologies).

    Results

    Five distributorships fulfilled the eligibility for inclusion. The
    distributorships represented 18 surgeons in four States and are
    profiled in Table 1. Twelve of the surgeons specialize in general
    orthopedics and total joint arthroplasty and six of the surgeons are
    principally specialized in the treatment of spinal disorders. At the
    time of study data acquisition, the distributorships had been in
    continuous operation for an average of 2.3 years (range, 1.0-4.4
    years).

                                         Table 1. Five Distributorships Profiled
    ----------------------------------------------------------------------------------------------------------------
                                                                                    Number of
                                    Start of operation           Number of       surgeons-- TJA/    Total  Surgeons
                                                              Surgeons--spine       Gen ortho
    ----------------------------------------------------------------------------------------------------------------
    SD1                       February 2006                                 3                  2                  5
    SD2                       March 2007                                    2                  2                  4
    SD3                       November 2009                                 0                  1                  1
    SD4                       June 2010                                     1                  0                  1
    SD5                       July 2010                                     0                  7                  7
    ----------------------------------------------------------------------------------------------------------------
    SD: Surgeon-owned distributorship; TIA: Total joint arthroplasty.

    The study sample represents 1,366 surgical procedures (total knee
    replacement: 487, total hip replacement: 231, anterior cervical fusion:
    154, posterior lumbar fusion: 247). The volume of cases varied
    according to the number of surgeons served by the distributorship and
    the practice complexions represented. The minimum number of a specific
    procedure performed by a SD in the study sample was 20 (anterior
    cervical fusion by SD4). The maximum number of procedures was 189
    (total knee replacement by SD5) (Table 2).

           Table 2. Hospital Implant Prices Surgeon Versus Non-Surgeon
                                Distributorships
    ------------------------------------------------------------------------
                                                                   Average
                       Procedures      SD cost      NSD cost     annual cost
    ------------------------------------------------------------------------
    Total knee
     replacement

    SD1                        90        $3,588        $5,385      $161,730
    SD2                       116        $3,889        $6,573      $311,344
    SD3                        92        $3,285        $5,568      $210,036
    SD5                       189        $3,817        $4,288       $92,799

    Total hip
     replacement

    SD1                        35        $5,128        $7,295       $75,845
    SD2                        78        $4,630        $7,117      $193,986
    SD3                        52        $4,250        $6,900      $137,800
    SD5                        66        $4,288        $4,694       $29,370

    Anterior
     cervical fusion

    SD1                        91        $2,092        $2,651       $50,869
    SD2                        43        $2,140        $2,230        $3,870
    SD4                        20        $1,345        $3,861       $50,320

    Posterior lumbar
     fusion

    SD1                       118        $6,410       $11,007      $542,446
    SD2                        83       $13,564       $14,628       $88,312
    SD4                        46        $4,892       $15,931      $507,795
    ------------------------------------------------------------------------
    NSD: Non-surgeon owned distributorship; SD: Surgeon-owned
      distributorships.

    The types of implants sold by each of the five SDs varied, as did their
    pricing structure. The pricing structure of each SD, however, remained
    the same for each of the hospitals and surgery centers that it served.
    For the NSD control group, implant cost was determined as an average of
    the costs for same type implants provided by the NSD's at the
    hospitals/surgery centers served by the corresponding SD (Table 2).

    For each distributor, across all implant classes; the SD price was less
    than the NSD cost. For total knee replacement, the mean implant cost
    was U.S.$1,814 (33 percent) less for the SD (U.S.$3,640 vs. $5,453).
    Hip replacement implant costs were U.S.$1,937 (30 percent) less on
    average for the SD compared with the NSD (U.S.$4,564 vs. $6,501). For
    anterior cervical fusion cases, the SD implant cost was U.S.$1,055 less
    for the SD (36 percent; U.S.$1,859 vs. $2,914). The lumbar fusion
    implant costs were U.S.$5,567 (40 percent) less on average for the SD
    (U.S.$8,289 vs. $13,855). Across each of the implant lines studies, the
    SD implant cost was on average U.S.$2,589 (32 percent) less than the
    NSD cost. Considering the 1,366 cases included in the sample
    population, the 1-year cost savings to hospitals/surgery centers and
    society was U.S.$2,456,521 (Table 2).

    There was a variation of aggregate cost savings among the five
    distributorships (Table 3). The cost savings provided by the SDs ranged
    from 11 to 69 percent, with a mean aggregate annual savings of
    U.S.$490,304 per distributorship. Following the trend for the
    distributorships, there was also marked variation in the cost savings
    per surgeon. The greatest cost savings occurred for a single surgeon
    spine implant distributorship (SD4: U.S.$558,109). The least cost
    savings came from a total joint arthroplasty distributorship serving
    seven general orthopedists (U.S.$17,453 per surgeon over 12 months).
    While not specifically studied, the variation may be explained at least
    in part by differences in practice emphasis (general orthopedics vs.
    spine), geographic market price differences (four States represented),
    and distributorship scale (Table 3).

                   Table 3. Aggregate Annual Savings for All Procedures and Percentage Cost Reduction
    ----------------------------------------------------------------------------------------------------------------
                                                                                            Total          Annual
                       Distributorship                       Surgeons    Percent cost     aggregate      savings per
                                                                            savings     annual savings     surgeon
    ----------------------------------------------------------------------------------------------------------------
    SD1                                                              5           36%         $830,890      $166,178
    SD2                                                              4           23%         $597,512      $149,378
    SD3                                                              1           40%         $347,836      $347,836
    SD4                                                              1           69%         $558,109      $558,109
    SD5                                                              7           11%         $122,169       $17,453
                                                                        --------------------------------------------
        Average:                                                                 36%         $490,304      $247,792
    ----------------------------------------------------------------------------------------------------------------
    SD: Surgeon-owned distributorship.

    For those distributorships with greater than 1 year of data, annual
    changes in implant pricing are reported in Table 4. Three
    distributorships (SD1, SD2 and SD3) have been in existence for 2 or
    more years and thus have multi-year pricing data available (5, 4, and 3
    years, respectively). These three distributorships have carried a
    combined total of 10 product lines since inception. Over this 12-year
    combined experience, only one product line for one distributorship has
    seen a price increase (1 percent increase in total knee replacement
    implant prices for SD3 over a 3-year time course). Each of the other
    nine product lines has not had a price increase. Seven product lines
    for two distributorships received a price decrease and two were
    unchanged. The combined aggregate price change of the three
    distributorships was -1.41 percent.

                                    Table 4. Average Annual Change in Implant Pricing
    ----------------------------------------------------------------------------------------------------------------
                                                                                                          Posterior
                       Distributorship                      Total knee     Total hip       Anterior        lumbar
                                                            replacement   replacement  cervical fusion     fusion
    ----------------------------------------------------------------------------------------------------------------
    SD1 (5 year average)                                         -0.6%         -2.4%            -1.6%         -1.0%
    SD2 (4 year average)                                            1%           -2%              -4%           -3%
    SD3 (3 year average)                                            0%            0%              n/a           n/a
    Average price change                                         0.24%        -1.40%           -2.70%        -1.76%
    ----------------------------------------------------------------------------------------------------------------
    SD: Surgeon-owned distributorship.

    From July 2007 to July 2011, the average cost of goods in the USA rose
    by +8.34 percent.\8\ On the basis of this index, the actual price of
    the implants sold by the SD decreased by 9.75 percent over the 4 years
    in constant dollars (8.34 percent to [-1.41 percent]).
    ---------------------------------------------------------------------------
        \8\ Bureau of Labor Statistics. CPI detailed report--Data for July
    2011. Available from: www.bls.gov/cpi/tables.html [last accessed 1
    September 2011].
    ---------------------------------------------------------------------------

    Discussion

    Market failure associated with the current model of medical device
    distribution is evidenced by the persistence of elevated implant prices
    despite increases in volume and increases in the number of companies
    producing nearly identical products. The current medical implant
    economy runs counter to the economic principal of commoditization. In a
    reactive economy, purchasers increasingly view similar products as
    commodities and become less willing to pay premium prices for what are
    viewed as generic products.\9\
    ---------------------------------------------------------------------------
        \9\ Reimann M, Schilke O, Thomas J. Toward an understanding of
    industry commoditization: Its nature and role in evolving marketing
    competition. Int J Res Mark 2009;27:188-97.

    In industries where market justice forces act, commoditization will
    result in dramatically reduced costs to society.\10\ The medical device
    industry has been shielded from such reductions because of the unique
    circumstance, whereby separation exists between the individual
    selecting the implant and the party purchasing the implant. Surgeon
    ownership in medical device distribution proposes to remove such
    separation and establish more effective competition.
    ---------------------------------------------------------------------------
        \10\ Budetti P. Market justice and U.S. health care. JAMA
    2008;299:92-4.

    In 2009, there was an initial report from a single distributorship
    finding a 34 percent reduction in implant costs across three hospital
    systems.\11\ No other studies have validated the cost savings
    associated with this model. This article represents the first study of
    multiple SD in multiple States, using many different manufacturers and
    presents the effect of this model on the costs of medical devices to
    all contracted hospitals.
    ---------------------------------------------------------------------------
        \11\ Steinmann J, Hopkins G, Burton P, Skubic J. Surgeon Ownership
    in Medical Device Distribution: Economic Analysis of an Existing Model.
    American Academy of Orthopedic Surgeons Annual Meeting; Feb 2009, Las
    Vegas, NV.

    It is notable that cost savings were achieved in all products across
    all studied distributorships. In addition, these savings were
    significant, ranging from 11 to 69 percent and totaling U.S.$2,456,521,
    with an average cost savings of 36 percent across all five SD,
    averaging U.S.$136,473 per surgeon. These savings are of importance for
    the years ahead when considering the anticipated increased demand for
    hip, knee and spine surgery and the annual cost increases that have
    ---------------------------------------------------------------------------
    been the norm for this industry.

    The 2010-2011 Orthopaedic Industry Annual Report cited total U.S.
    orthopedic product sales of $23.7 billion, with total joint
    reconstruction sales at $7.3 billion.\12\ The escalation in total joint
    implant price over the 14-year period from 1994 to 2006 was reported to
    be 171 percent (average 13 percent).\13\ In contrast, SD in this study
    have shown the ability to save 37 percent the first year and to keep
    annual escalations at or below 1.0 percent.
    ---------------------------------------------------------------------------
        \12\ The 2010-2011 Orthopaedic Industry Annual Report. Chagrin
    Falls (OH): OrthoWorld 2011 July.
        \13\ Healy WL. Gainsharing: A primer for orthopaedic surgeons. J
    Bone Joint Surg Am 2006;88:1880-7.

    The substantial first-year reductions in implant prices and sustained
    downward pressure on annual price changes that result from surgeon
    ownership in medical device distribution have the potential to
    profoundly affect healthcare costs associated with orthopedic implants.
    The magnitude of cost savings in total joint reconstruction is
    projected in Figure 1. Here, it is optimistically assumed that the 13
    percent annual escalations \13\ associated with NSD would decrease for
    the next 20 years to 7.5 percent. It is further assumed that the SD
    model, with a first-year reduction in cost of 36 percent, would
    demonstrate a 1.5 percent annual escalation in price as opposed to the
    1.41 percent reduction currently demonstrated. Figure 2 uses the same
    assumptions but includes all orthopedic implants, to demonstrate the
    broader potential cost savings associated Reconstruction devices with
    ---------------------------------------------------------------------------
    the SD model.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    This calculation reveals that over the next 20 years, the SD model has
    the potential to save U.S.$229 billion in total joint reconstruction
    costs alone (Figure 1). This figure does not take into account the
    expected substantial increase in demand that was discussed previously,
    thus significantly understating the potential long-term savings
    associated with this model. In terms of the entire orthopedic medical
    device industry, the potential savings exceed U.S.$734 billion over 20
    years (Figure 2). The present study's model may also be applied to
    other implant types and medical specialties. The SD model, thus, has
    the potential to be more broadly applied to the healthcare system,
    allowing for even more profound cost savings.

    Concern exists for the financial feasibility of total joint procedures
    since the demand will increase by 673 percent for total knee
    replacements and by 174 percent for total hip replacements over the
    next 20 years,\5\ and payments made to hospitals for total joint
    arthroplasties are not enough to keep up with inflation.\6\ With fewer
    surgeons to provide total joint procedures \14\ and the economic
    disincentive for hospitals to provide total joint reconstruction
    services, continued access to these valuable surgical procedures may be
    threatened, particularly for seniors who represent the majority of
    total joint reconstruction patients. This threat to access further
    intensifies the need for significant change in the methods in which
    these products are acquired.
    ---------------------------------------------------------------------------
        \14\ Fehring TK, Odum SM, Troyer JL, et al. Joint replacement
    access in 2016: a supply side crisis. J Arthroplasty 2010;25:1175-81.

    Legitimate concerns exist regarding the SD model. Critics question if
    the model will incentivize overutilization. Although not directly
    analyzed in this study, utilization in SDs is the focus of a separate
    ongoing study by the authors of this article. This other study looks at
    the utilization of orthopedic implants by seven different SD compared
    with each distributor's utilization for a 12-month period prior to the
    initiation of the distributorship, to analyze whether there is evidence
    to support that utilization is influenced by the SD model. This concern
    is also addressed by the AASD in its standards and procedures.
    Distributors accredited by the AASD are required to submit annual
    surgical volumes data for its surgeons, allowing for independent review
    ---------------------------------------------------------------------------
    and audit when indicated.

    It is important to note the SD model does not introduce any new
    conflicts of interest. Financial conflicts of interest are already
    inherent to the fee-for-service healthcare system in the USA and are
    best managed through disclosure and transparency. Although physicians
    and surgeons may financially benefit by providing additional services,
    they are required to hold true to recommending and performing only what
    is truly best for the patient. It is unethical for healthcare providers
    to bias their decision-making process by opportunities for financial
    gain. The AASD, an organization strongly supported by the authors, has
    been very diligent in establishing standards that promote ethical and
    legal medical practice under the SD model. Membership in the AASD
    ensures this inherent conflict of interest is properly managed by
    requiring disclosure and transparency to patients, hospitals and
    colleagues.

    Concerns have also been raised that SDs may use inferior materials and
    less quality control to reduce cost. Such concerns, although reasonable
    to raise, are mitigated by the fact that all implants used in the USA
    must be FDA approved and are subject to an FDA-approved quality
    program. Furthermore, the FDA 510K approval process used for all
    commonly used hip, knee and spine implants is based on the
    establishment of equivalency to other implants already in the
    marketplace.

    A promising response to these concerns regarding the surgeon-owned
    distribution model has been the development of standards established by
    the AASD (Box 1).\15\ Although not all SD belong to the AASD and are
    subject to its standards, our findings show that the SD model can yield
    significant cost-savings in a regulated and ethical manner. The AASD's
    standards ensure an accredited SD demonstrates legal compliance, cost
    savings, transparency, product quality evaluations, appropriate
    employee training and utilization reporting. The present study only
    examined SD belonging to the AASD. Future studies should seek to
    eliminate this selection bias by including both AASD and non-AASD
    surgeon-owned distributorships.
    ---------------------------------------------------------------------------
        \15\ American Association of Surgeon Distributors (AASD). Standards
    and Policies: Distributor Members. Available from: www.aasdonline.org/
    MembershipandePODCertification/Standards
    andPolicies.aspx [last accessed 10 July 2014].

    Box. 1 Standards and Criteria for Membership: American Association of
    ---------------------------------------------------------------------------
    Surgeon Distributors

      Distributorship must maintain a business structure consistent with
    all Federal Stark and Anti-Kickback statutes, and report under the
    Physician Payment Sunshine Act.
      Distributorship must demonstrate merit by proving to be the lowest
    average cost vendor of like implants during a comparable contract
    period.
      Annual price increases must not exceed 3 percent above the consumer
    price index (CPI).
      Distributorship must demonstrate adherence to the AASD Product
    Evaluation Policy.
      Distributorship must demonstrate adherence to the AASD Employee
    Training Requirements.
      Distributorship must demonstrate adherence to the AASD Disclosure
    Policy.
      Distributorship must demonstrate investment risk and compliance with
    the AASD Investment and Distribution Policy.
      Distributorship must submit utilization data annually and is subject
    to audit.
      Distributorship must not leverage referrals to any hospital or
    surgery center.
      Distributorship must be a legitimate free standing stocking
    Distribution Company with employees, contracts, address, business
    license and insurance.
      Distributorship must have written contracts with hospitals and
    vendors for at least 1 year.
      Distributorship pricing must not vary between hospitals.

    As surgeons, we have an obligation to the highest level of care to the
    patient with whom we have a relationship. Given the reality of limited
    resources, surgeons need to be mindful of ways to continue to provide
    the highest quality of care to their patients at prices that our
    society can afford. Failure to do so will result in a threat to
    sustained access to important medical technologies that have the
    ability to improve the quality of life. Although this is not the focus
    of our article, it is our hope hospitals, along with surgeons, will
    uphold their social duty to pass along these significant cost-savings
    to benefit their patients and society as a whole.

    The SD model is a tested and viable model with great promise to re-
    establish market forces and reduce healthcare costs and preserve access
    to valuable healthcare services. The present study obtained data on
    multiple implant types from multiple distributorships belonging to the
    AASD. The results reveal SD are capable of providing substantial
    healthcare savings through lower implant costs and reduced annual price
    escalations when compared with traditional implant distributor-ships.
    Safeguards, such as those established by the AASD, will serve to
    protect the best interest of patients and society on an ongoing basis.

    Financial and Competing Interests Disclosure

    J.C. Steinmann is currently employed as a physician with Arrowhead
    Orthopedics. He owns stock in Alliance Surgical Distributors, Inland
    Surgical Products--companies related to those mentioned in this paper.
    C. Edwards has a minority interest in a surgical implant distribution
    company but was not one of those included in the present study. The
    results of this study in no way affect the profitability/prospects of
    this company. T. Eickmann is currently employed as an orthopedic
    surgeon with Cornerstone Orthopedics. He serves as a board member of
    the American Association of Surgeon Distributors. He works for Aesculap
    as a surgeon training consultant and receives compensation from
    Speciality Surgical for giving lectures on the ``Quill'' Suture. He
    also has a pending patent regarding the tibia and receives royalties
    from Innomed and Renovis. He owns stock/stock options in Renovis. He
    was a previous owner in Mesa Surgical, a Physician-Owned
    Distributorship. Currently, T. Eickmann is an owner in Alliance
    Surgical Distributors, LLC, which helps to start
    Physician-Owned Distributorships. A. Carlson has stock/stock options in
    Alliance Surgical Distributors, LLC and Renovis Surgical Technologies,
    Inc. The authors have no other relevant affiliations or financial
    involvement with any organization or entity with a financial interest
    in or financial conflict with the subject matter or materials discussed
    in the manuscript apart from those disclosed.

    Key Issues

     Surgeon ownership in medical device distribution is a new model that
    may effectively reduce costs associated with surgical implants by
    establishing a legal framework for the surgeon to function as both the
    decision maker and purchaser.
     In the present study, involving 18 surgeons, the average first-year
    cost savings associated with the surgeon owned distributorships was 36
    percent, totaling $2,456,521, with the average annual implant price
    decreasing by 1.41 percent for those distributorships in business for
    >2 years.
     This study demonstrates that surgeon ownership in medical device
    distribution has the potential to provide significant healthcare
    savings through substantial first-year reductions in implant prices and
    sustained downward pressure on annual price changes thereafter.

                                     ______

                     Prepared Statement of Hon. Ron Wyden,
                           a U.S. Senator From Oregon
        When you walk into a doctor's office, you're putting an
    extraordinary level of trust--and maybe even your life--in your
    physician's hands. Today the Finance Committee will hear about one type
    of business called a Physician-Owned Distributorship that in some cases
    might violate that trust with dangerous and life-
    threatening consequences.

        Here's how they work: a doctor sets up a distributorship company,
    which is often a middleman between a medical device manufacturer and a
    hospital or surgical center. The doctors then get an extra financial
    reward for every device used in treatment. That comes in addition to
    the payment they get from insurers or from taxpayers through Medicare
    or Medicaid. In theory, the more surgeries implanting devices into
    patients, the more money in the bank. That's what makes some of these
    arrangements so deeply concerning. In the worst cases, scam-artist
    doctors have left long trails of patients to recover from unnecessary
    or complicated procedures involving invasive and painful surgeries.

        In fact, the Inspector General of the Department Health and Human
    Services issued a special fraud alert about these companies.
    Referencing the laws that are designed to protect against what seem to
    be serious conflicts of interest, the IG wrote that it, ``views
    [distributorships] as inherently suspect under the anti-
    kickback statute.''

        This week, Dr. Aria Sabit is being sentenced for conducting
    unnecessary surgeries. Some resulted in direct harm to his patients.
    Dr. Sabit was an active participant in a Physician-Owned
    Distributorship that allowed him to profit directly from the spinal
    fusion surgeries he performed, and he is not the only one.

        In 2013, Dr. Atiq Durrani, a surgeon in Ohio who was also reported
    to be a part of a distributorship, fled the country after being
    arrested for unnecessary surgeries. The hospital where he practiced
    just reached a $4.1 million settlement with the U.S. Department of
    Justice for unnecessary spine surgeries.

        In my own State of Oregon, Dr. James Makker had his medical license
    revoked in 2012 after a long string of questionable surgeries and
    malpractice lawsuits. According to news reports, Dr. Makker was also
    affiliated with a Physician-Owned Distributorship. Before he lost his
    license, Dr. Makker had one of the highest number of spinal fusion
    surgeries of any surgeon in the country. He would sometimes operate six
    or seven times on the same patient.

        A few bad apples don't mean the whole bushel is rotten. But the
    fact is, this type of business operates too often in the dark.
    Frequently, neither patients nor hospitals nor regulators know when a
    doctor is part of a distributorship.

        Two years ago, the Health and Human Services Inspector General
    asked hospitals whether they did business with these distributorships.
    Only 60 percent of the hospitals buying from distributorships reported
    correctly. The IG found the rest by digging into invoice data.
    According the IG's report, less than two-thirds of the hospitals
    surveyed even had a policy requiring doctors to disclose ownership
    interests in a distributorship. Only 8 percent of the hospitals that
    purchased from distributorships required that patients be told about
    these potentially serious conflicts of interest.

        One of the claims made in favor of these distributorships is they
    lower costs of treatment by reducing the price of devices that they
    sell. The IG found no such savings. And when hospitals don't even know
    they're dealing with distributorships, it's difficult to imagine how
    they can tally up any savings.

        The Finance Committee has also received some extremely troubling
    information from industry sources. Under the Sunshine Act,
    distributorships are required to report doctors' ownership interests,
    as well as their own payments to doctors. But neither is happening when
    it comes to many distributorships. Furthermore, the committee has
    received one report of a device manufacturer offering to make payments
    to doctors through a third party to avoid disclosure. Senator Hatch and
    I will be referring information about this allegation and about
    possible Sunshine Act violations to the Inspector General, and I hope
    to work with Chairman Hatch and the committee on a bipartisan basis to
    shed a lot more light on this issue.

        Transparency might not prevent every unnecessary surgery, but it's
    a good place to start. And right now, in my view, this part of our
    health care system is buried far too deep in the shadows. The bottom
    line is that patients should be getting care designed to help them--not
    to pad a physician's bank account.

                                     ______

                                 Communications

                                  ----------

                                    AdvaMed

             AdvaMed Recommendations--Physician-Owned Distributors

    AdvaMed supports the government's continuing commitment to addressing
    the issue of Physician-Owned Distributorships (PODs). PODs create
    inherent risks under the Anti-Kickback Statute and Stark Law, pose
    dangers to patients by incentivizing physicians to perform unnecessary
    procedures, drive overutilization of products and procedures, and cause
    inefficiencies and overpayments by Federal Health Care Programs. PODs
    are physician-owned supply-chain entities that sell or arrange for the
    sale of medical devices and allow physician owners to profit from the
    sale to hospitals and surgery centers of the devices they order and
    implant in their own patients. The U.S. Department of Health and Human
    Services Office of Inspector General (OIG) has investigated PODs and in
    2013 issued a Special Fraud Alert (SFA) to the public, stating that
    PODs ``pose dangers to patient safety,'' ``produce substantial risk of
    fraud and abuse,'' and are ``inherently suspect'' under the Anti-
    Kickback Statute. In any of its efforts to address PODs, AdvaMed urges
    policymakers to distinguish between (i) PODs that serve no purpose
    other than to inappropriately incentivize physician owners and (ii)
    genuine innovator medical technology companies that may have an element
    of physician ownership.

        1.  AdvaMed recommends that the Senate Finance Committee, the OIG,
    and other key policymakers reaffirm, strengthen, and enforce the policy
    that PODs are inherently incompatible with the Anti-Kickback Statute
    and Stark Law and distinguish illicit PODs from legitimate innovator
    companies.

             To stem the growing proliferation of illicit PODs,
    AdvaMed urges the Senate Finance Committee and OIG to issue a clear
    reaffirmation that PODs exhibiting the characteristics in the 2013 SFA
    pose a clear risk under the Anti-Kickback Statute and the Stark Law.

             AdvaMed urges the Senate Finance Committee and OIG to
    distinguish between illicit PODs and legitimate innovator companies
    that might have some physician ownership. A majority of a suspect POD's
    revenue is derived from its physician owners, their referrals, and/or
    the procedures they perform using POD-distributed devices. This
    implicates the Anti-Kickback Statute and the Stark Law. Conversely,
    innovator medical device manufacturers, which are subject to FDA
    regulation and state distributor/wholesaler licensure, may also have an
    element of physician ownership (e.g., as a result of a founding
    investment or a contribution of novel, significant, or innovative
    intellectual property, etc.). An innovator manufacturer's revenue,
    however, is not tied to physician owners, their referrals, or the
    procedures they perform using the manufacturer's products. Rather,
    these manufacturers (even with some physician ownership) market and
    sell (or expect to market and sell) products widely rather than
    primarily to health care facilities where the physician-owners refer
    patients or perform procedures. Physician ownership interests in these
    innovator manufacturers form an insignificant portion of the
    manufacturer's shareholders. Accordingly, unlike illicit PODs,
    innovator manufacturers do not implicate the Anti-Kickback Statute or
    Stark Law.

        2.  AdvaMed urges the government to leverage the U.S. Physician
    Payments Sunshine Act (Sunshine Act) in its efforts to help ensure
    appropriate transparency regarding PODs.

             AdvaMed encourages the SFC to require CMS and OIG to
    conduct a detailed review and audit of the Sunshine Act data to
    determine whether PODs are reporting under the Sunshine Act and, if so,
    whether any payments disclosed by PODs implicate the Anti-Kickback
    Statute or Stark Law. The time is now for Congress to issue a stronger
    directive to CMS and OIG to take action on the 17 months' worth of
    Sunshine Act data available for review.

             AdvaMed supports clarifying that the Sunshine Act
    requires all PODs to submit data regarding payments and transfers of
    value to physicians, including ownership information, regardless of the
    number of entities with which the POD does business. This does not
    create an implied acknowledgement that PODs are legally appropriate.
    Rather, clarifying the Sunshine Act's applicability simply makes
    explicit that PODs must file annual reports under the Sunshine Act.
    Whether the payments disclosed on these reports reflect illicit
    activity is a separate question. According to the OIG, a lack of
    transparency raises concerns about the OIG's ability to ensure that
    providers do not violate the Anti-Kickback Statute and the Stark Law as
    well as protecting patient safety and quality of care. Indeed, Senator
    Grassley (R-IA), author of the Sunshine Act, on numerous occasions has
    quoted Justice Louis D. Brandeis's line--``Sunshine is the best
    disinfectant''--in describing the purpose of the Sunshine Act.
    Transparency of PODs' relationships with physicians would enable
    providers and patients to identify more clearly unlawful PODs and
    conflicts of interest of their treating physicians.

        3.  AdvaMed recommends enhancements to the OIG's Compliance Program
    Guidance (CPG).

             First, revised CPG should clearly state that POD
    arrangements pose a substantial risk to patient safety and a risk of
    causing health care providers to run afoul of fraud and abuse laws, and
    that an effective compliance program incorporates due diligence to
    determine whether a potential vendor/supplier is a POD.

             Second, CPG documents should state that an effective
    compliance program should not be overly broad and should explicitly
    permit business with legitimate innovator medical technology companies
    that may have an element of physician ownership. Providers cannot
    simply prohibit doing business with any company with some physician
    ownership or legitimate risk sharing or other innovative arrangement.
    The mark of an effective compliance program is undertaking nuanced due
    diligence in engaging suppliers. As a baseline compliance control for
    providers, CPG documents should require a determination expressly based
    upon the SFA as to whether any physician-owned vendors/suppliers are
    potentially unlawful POD arrangements for the exclusive benefit of
    physician owners.

             Third, revised CPG should explicitly instruct health care
    facilities to adopt policies that require physicians to disclose all
    ownership interests in any vendor/supplier with which the facility does
    business.

             Finally, the OIG should update its CPG to require health
    care facilities' diligence of vendors and suppliers to include a review
    of compliance with all applicable FDA and state regulations.

        4.  AdvaMed suggests that policymakers consider a longer-term
    solution to redefine the Stark Law to protect legitimate innovator
    companies while prohibiting inappropriate PODs.

             AdvaMed acknowledges that there may be room to draw
    clearer distinctions between minor or technical violations of the Stark
    Law (for example, missing signatures on documentation) and violations
    that pose a clear self-
    referral conflict of interest (for example, PODs) that the Stark Law
    was originally intended to prohibit. This longer-term approach is
    deliberate and time-consuming and requires significant contemplation of
    the issues and a carefully crafted solution. The time is now, however,
    for the government to generate more immediate recommendations to
    prohibit POD arrangements.

                                     ______

              American Association of Surgeon Distributors (AASD)
    Honorable members of the Senate Finance Committee

    Re:  Physician-Owned Distributors

    I have served as Chairman to the Board of the American Association of
    Surgeon Distributors (AASD) since its inception in 2010. This
    organization is a public benefit nonprofit association whose purpose is
    to provide recognized standards to ensure ethical and legal conduct for
    surgeon owned distributorships. The AASD's mission is to protect
    patients, promote healthcare savings, and develop, audit, and enforce
    standards for the operation of surgeon owned distributorships. The
    AASD's strict standards have demonstrated our member's commitment to
    transparency, full disclosure to hospitals and patients, documented
    cost savings, and strict legal compliance.

    Applicants for membership must submit detailed practice and utilization
    data, obtain a legal opinion that will meet all state and federal
    statutes, and utilize only FDA approved quality products. Membership is
    granted only to those distributorships that demonstrate and maintain
    full compliance with standards and criteria that include the following:

        1.  Distributorship maintains a business structure consistent with
    Federal Self-
    Referral and Anti-Kickback statutes and reports in compliance with the
    Physician Payment Sunshine Act.

        2.  Distributorship demonstrates merit by being the lowest cost
    provider of like implants.

        3.  Distributorship annual price increases to customers do not
    exceed 3 percent above the CPI.

        4.  Distributorship is a legitimate free standing stocking
    distribution company with employees, contracts, an address, a business
    license and insurance.

        5.  Distributorship demonstrates strict adherence to policies on
    product evaluation, employee training, disclosure, investment and
    distribution and appropriate use and monitoring.

        6.  Distributorship has written contracts with hospitals, with
    consistent pricing and contract periods of at least one year.

        7.  Distributorship does not leverage referrals to any hospital or
    surgery center and does not require, pressure or otherwise leverage
    physician owners' use of the Distributorship devices.

    The AASD disclosure policy requires that all in office patients receive
    written disclosure and ownership disclosure must be displayed in a
    visible area in the office. All contracted hospitals and all colleagues
    are informed that the distributorship has surgeon ownership.

    The AASD has also established an Appropriate Use Monitoring Policy to
    closely monitor any inappropriate increase in utilization. As part of
    the initial application and certification and annual review, each
    distributorship has to submit a practice profile for each physician
    member, which consists of the previous years data elements including
    patients visits and commonly accepted procedure codes (CPT codes). The
    baseline profile and subsequent years are monitored and a net change of
    greater than 15 percent that is not proportionate to non-implant
    related practice predictors (e.g., total patients visits) initiates a
    series of audits that may result in probation, denial of the
    application, or revocation of the distributorship's AASD certification.

    The AASD has conferred membership to 11 Distributorships as members and
    all have demonstrated clear substantial cost savings, while operating
    in a legal, ethical and professional manor. The strict standards that
    the AASD has established and have enforced have demonstrated this
    model, when operated correctly, offers immense benefit to hospitals and
    the public through improved efficiency and competition and can help
    control spiraling healthcare costs.

    Paul Burton, D.O.

                                     ______

                  American Physical Therapy Association (APTA)

                           1111 North Fairfax Street

                           Alexandria, VA 22314-1488

                                  703-684-2782

                                703-684-7343 fax

                                  www.apta.org

         Statement for the Record for Senate Finance Committee Hearing:

     Physician-Owned Distributors: Are They Harmful to Patients and Payers?

                               November 17, 2015

    The Honorable Orrin Hatch           The Honorable Ron Wyden
    Chairman                            Ranking Member
    Committee on Finance                Committee on Finance
    U.S. Senate                         U.S. Senate
    219 Dirksen Senate Office Building  219 Dirksen Senate Office Building
     Washington, DC 20510               Washington, DC 20510

    Dear Chairman Hatch and Ranking Member Wyden:

    On behalf of more than 90,000 physical therapists, physical therapist
    assistants, and students of physical therapy, the American Physical
    Therapy Association (APTA) is pleased to provide this statement to the
    Senate Finance Committee for the hearing ``Physician-Owned
    Distributors: Are they Harmful to Patients and Payers?''

    APTA's vision is to transform society by optimizing movement to improve
    the human experience. Physical therapists (PTs) diagnose and manage
    individuals across the life span who have conditions that limit their
    ability to move or function in their daily lives. We are committed to
    protecting and preserving resources within the health care system, and
    continue to strive for the highest levels of ethics, professionalism,
    and evidence-based practices for its members. APTA's own Integrity in
    Practice campaign is aimed at educating not only current and future
    physical therapists on methods and reasons to prevent fraud, but also
    educating the public on questions they should ask to make wise
    decisions on care. APTA applauds the committee's interest in
    investigating different areas of the Medicare system for potential
    abuses of physician ownership. As the committee continues to root out
    fraud and abuse in the Medicare system, we strongly urge you to
    consider reform of the in-office ancillary services (IOAS) exception.

    Physician-Owned Distributorships and the IOAS exception both exhibit
    true conflicts of interest to physicians. Opponents of PODs claim that
    many of these setups consist of physicians holding an ownership-
    interest in a medical device company, which could in turn generate
    financial benefits based on the devices used. The IOAS exception allows
    physicians to bill the Medicare program for several designated health
    services that are self-referred. The intent of the IOAS exception was
    to allow for the provision of certain non-complex ancillary services,
    such as x-rays or simple blood tests, deemed necessary by the clinician
    to help inform the diagnosis and treatment of a beneficiary during an
    initial office visit, primarily for beneficiary convenience. Over the
    years, however, abuse of the IOAS exception has substantially diluted
    the self-referral law and its policy objectives, allowing Medicare
    providers to avoid the law's prohibitions by structuring arrangements
    meeting the technical requirements, while violating the true intent of
    the exception. In most instances physical therapy services cannot be
    provided to beneficiaries during an office visit. Even MedPAC found, in
    2008, that only 3 percent of outpatient therapy services were provided
    on the same day as an office visit. Although the self-referral law was
    designed to prevent clinicians from basing clinical decisions on
    financial gain, at this point in time, there is significant evidence
    that the IOAS exception is being regularly exploited, which costs the
    Medicare program millions each year, with no proof of improved outcomes
    for beneficiaries.

    There is evidence that beneficiaries may actually receive higher-
    quality care--and therefore better outcomes--when self-referral is not
    involved. A recent study on low back pain episodes of care, published
    in the July 2015 issue of the Forum for Health Economics and Policies
    by Dr. Jean Mitchell of Georgetown University, found that non-self-
    referred episodes of care were far more likely, 52 percent as opposed
    to 36 percent for self-referrers, to provide ``active,'' or hands-on,
    services. This, according to the study's authors, suggests the care
    delivered by physical therapists in non-
    self-referred episodes is more tailored to promote patient independence
    and a return to performing routine activities without pain. It is
    important to note that ``passive'' treatments, which are more likely
    found in self-referring episodes, can be performed by a person who is
    not a licensed physical therapist (PT). The authors of this paper also
    cite evidence that these passive physical therapy modalities are
    ``ineffective'' in treating low back pain.

    Also striking about the study is the difference in overall expenditures
    for episodes of care provided by self-referring or non-self-referring
    physicians. Dr. Mitchell was able to look at total insurer allowed
    amounts for low back pain episodes of care and parse out expenditures
    on physical therapy only. On average, spending for self-
    referring providers was $144 as opposed to only $73 for non-self-
    referring providers. This is a significant difference for a very common
    episode of care. Even more, when the expenditures for the entire
    episode of care is calculated--not just physical therapy, but all care
    for the episode--self-referral episodes averaged $889 compared with
    only $602 for non-self-referral episodes. So not only is this a problem
    for physical therapy, it has spread far beyond.

    These are just a few reasons APTA recommends the removal of physical
    therapy, advanced diagnostic imaging, anatomic pathology, and radiation
    therapy from the list of designated health services permitted to be
    rendered to beneficiaries during an office visit. This change would
    narrow the IOAS exception, but not eliminate it completely. APTA would
    like to see the rural exception kept in place, and an exception for
    truly integrated care providers instituted. This would keep the true
    intent of the exception while helping to eliminate Medicare abuse. The
    Congressional Budget Office estimates that narrowing the IOAS exception
    in this way will reduce inappropriate utilization of these four health
    care services and save the Medicare program upwards of $3.5 billion.

    We look forward to working with the Senate Finance Committee and the
    Subcommittee on Health in the coming months to help eliminate Medicare
    abuse and save the health system and taxpayers billions of dollars.
    APTA appreciates the opportunity to submit this statement and
    respectfully recommends that the committee consider holding additional
    hearings on Medicare fraud and abuse, specifically examining the IOAS
    exception to the Stark laws.

    APTA would like to thank Chairman Hatch and Ranking Member Wyden for
    holding this important hearing, and for APTA to share its comments. We
    look forward to being a partner in rooting out Medicare fraud and abuse
    and establishing an efficient, patient-centered health care system.

                                     ______

                   Letter Submitted by Bruce Le'Roy Gaines II
    Dear Mr. Reynolds,

    First. My family and I would like to send a heartfelt deep sincere
    sympathy to you and your family regarding the ordeal with your beloved
    mother.

    Second. Thank you for your fight for justice and for humanity. Through
    your hurt and pain, we as victims are grateful that God has allowed you
    to be a guiding light for those who have suffered this dishonesty.

    My name is Bruce Le'Roy Gaines II, February 29, 2012, Pre/Post
    Operative Diagnosis: Lumbar Radiculopathy, Low back pain, Degenerative
    disc surgery, left me with an injury that has been devastating with
    traumatic consequences on my life, my family, and my financial
    situation. The ability to earn a living has been lost, as well as sky-
    high medical bills, which have accumulated day after day, from the
    surgeon at the time: Dr. Aria Sabit.

    Henry Ford Health System imaging reports, display legitimate imaging
    reports: NO Expensive Metal Device is located in my spine, there is NO
    Bone Dowel either! I was cut open and literally sewed back together. I
    was 38 years old, when I had my surgery at Doctor's Hospital, February
    29, 2012. I arrived at the hospital with 2 legs, now, hypothetically, I
    have 3--(with the walking cane I am dependent on at present.)

    My situation has been egregious with pain and suffering, as well as my
    wife and family. The biggest and most hurtful ordeal is having on
    RECORD of BEING INSTITUTIONALIZED IN A PSYCHIATRIC MENTAL HOSPTIAL FOR
    TREATMENT! I was a hardworking man, with a wife and family that I was
    committed to. I was employed for 15 years, now I will never have the
    opportunity to work.

    I am saddened by this incident, but a beautiful life, victims,
    infections, could have been avoided due to GREED! Doctors and all
    medical boards take oaths to hold superior ethical standards. I was
    unfortunate in choosing a medical team I STRONGLY BELIEVED IN.

    Thank you very much for your fight for justice! Thank you for
    submitting our e-mails to be read to the Finance Committee in
    Washington, DC, before the Chairman and 26 senators.

    Sincerely,

    Bruce Le'Roy Gaines II

                                     ______

                              Globus Medical, Inc.

                          Valley Forge Business Center

                2560 General Armistead Avenue, Audubon, PA 19403

                      Phone: 610-930-1800 Fax: 610-930-2042

                            Order Fax: 610-930-2041

                             www.globusmedical.com

                            Statement for the Record

       ``Physician-Owned Distributors: Are They Harmful to Patients and
                                   Payers?''

                          Senate Committee on Finance

                               November 17, 2015

             David C. Paul, Chairman and CEO, Globus Medical, Inc.

                                      and

              Anthony L. Williams, President, Globus Medical, Inc.

        Globus Medical, Inc. appreciates the opportunity to submit this
    written statement for the record of the Senate Finance Committee
    hearing on November 17, 2015. Globus strongly endorses additional
    transparency regarding Physician-Owned Distributorships (PODs) in order
    to protect the safety of patients--a proposition that was universally
    acknowledged during the hearing.

    Globus Medical, Inc.

        Globus Medical, Inc. is a spinal implant manufacturer based in
    Audubon, PA. The company was founded in 2003 by an experienced team of
    spine professionals with a shared vision to create products that enable
    spine surgeons to promote healing in patients with spinal disorders.
    Globus and its distributors employ over 1,400 people worldwide,
    including more than 1,200 employees in the United States. To date,
    Globus has launched over 150 products, with more than 30 products
    currently in our pipeline.

    Finance Committee Involvement

        We commend the Committee for its ongoing bipartisan efforts to
    tackle this critical patient safety issue head-on. Beginning with the
    Finance Committee minority staff investigation and report in 2011,
    followed by the June 2011 bipartisan letters to the Administrator of
    the Centers for Medicare and Medicaid Services (CMS) and the Health and
    Human Service Inspector General (HHS OIG), and culminating in the
    November 17, 2015 hearing, the consistent theme has been the need for
    strict legal scrutiny of the ownership structures of PODs and, in the
    wake of the Physician Payment Sunshine Act [Section 6002 of the Patient
    Protection and Affordable Care Act (``Sunshine Act'')], to assure
    robust reporting by these entities of their ownership interests.

        The comprehensive study by HHS OIG in response to the June 2011
    congressional letter focused on patient safety/utilization and alleged
    cost savings associated with PODs. The data squarely debunked any
    notion of Medicare savings and found alarmingly higher than average
    utilization rates for PODs--confirming the notion that physician
    ownership fuels potentially unnecessary surgeries.

        In the midst of the Finance Committee's efforts, HHS OIG issued a
    Special Fraud Alert in March 2013 labeling PODs as ``inherently suspect
    under the anti-kickback statute'' resulting in ``corruption of medical
    judgment, overutilization, increased costs to Federal health care
    programs and beneficiaries, and unfair competition.'' The Alert
    identified core characteristics of ``suspect'' ownership structures,
    which should have put PODs on notice that they faced legal exposure.
    These findings underscore the imperative to uncover the physician-
    ownership structures of PODs and shine sunlight on their activities.

    Marketplace Experience

        Over the past decade, Globus has witnessed firsthand both the
    explosive growth of PODs and the detrimental effects that PODs have had
    on patient safety, specifically with respect to spinal surgeries. Our
    salesforce personnel have observed multiple instances of surgeons whose
    medical judgment appears to have been compromised by the lure of
    ``double dipping'' on earnings from the use of a device sold by a POD
    in which they are an investor, and payments from Medicare or private
    insurers for the procedure in which they use the device. The structures
    of PODs perversely incentivize physicians to perform more surgeries
    than are medically necessary or even advisable. We have experienced
    pervasive exaction of hospitals and surgery centers wherein PODs demand
    exclusive arrangements under the threat of surgeons' desertion, an
    outcome that is especially harmful for rural and community healthcare
    centers.

        Along with many in the device manufacturing industry, we welcomed
    the HHS OIG alert, and expected the strong and unambiguous notice to
    significantly modify the behavior of PODs. Although the growth rate may
    have slowed, the Alert clearly has not had the expected corrective
    impact. Nor has the clear obligation for PODs to disclose their
    ownership interests under the Sunshine Act served to ``shine a light''
    on these operations to enable the enforcement authorities to target
    potential bad actors, and patients to make informed judgments about
    which surgeons they choose. As detailed below, notwithstanding the
    legal obligation to report, PODs have chosen to ignore this mandate and
    gamble that their relative anonymity leaves them safe from prosecution.

        For these reasons, we applaud the Committee's continuing efforts to
    tackle this serious issue. To assist the Committee's efforts, we have
    identified three areas (discussed further, infra) that we believe will
    increase transparency into POD ownership arrangements and attendant
    potential conflicts of interest. The first is to encourage HHS OIG to
    use the resources at its disposal to investigate known PODs suspected
    of fraud and abuse, and, where applicable, refer them to the Department
    of Justice (DOJ) for prosecution. The second involves ensuring that
    PODs are properly reporting their ownership interests under the
    Sunshine Act. Finally, we recommend adjusting the de minimis threshold
    under the Sunshine Act from the current $10 to $20 in order to de-
    clutter the payment reporting system and focus on the payments from
    manufacturers to physicians that truly are potential conflicts of
    interest.

    Increased Enforcement

        In the 2013 Special Fraud Alert, HHS OIG stated that PODs by their
    structure pose ``substantial fraud and abuse risk and pose dangers to
    patient safety.'' The egregious violations of the anti-kickback and
    healthcare fraud statutes that came to light in the recent prosecution
    of Dr. Aria Sabit underscore HHS OIG's findings and highlight the need
    for robust enforcement in this area. Although, as discussed below, the
    full universe of PODs is unknown due to the PODs' non-compliance with
    Sunshine Act reporting obligations, CMS has estimated that as of
    February 2013, there were approximately 260 PODs in the United States,
    with at least 160 additional non-POD GPOs that have some form of
    physician ownership or investment.\1\ Information about the identity of
    at least some of these PODs is ascertainable from media reports,
    anecdotal information from hospitals and device manufacturers, state
    business registration websites, and other publicly available sources.
    ---------------------------------------------------------------------------
        \1\ See Final Rule, ``Medicare, Medicaid, Children's Health
    Insurance Programs; Transparency Reports and Reporting of Physician
    Ownership or Investment Interests,'' 78 Fed. Reg. 9458, 9512 (February
    8, 2013).

        We encourage the Committee to prioritize enforcement of existing
    fraud and abuse laws against known PODs that display the ``suspect
    characteristics'' identified by HHS OIG. The prosecution of Dr. Sabit
    is a laudable first step, however there are many PODs across the
    country engaging in less extreme conduct, but conduct that was
    identified at the hearing as unethical, who feel as if they are immune
    to prosecution. Vigorous criminal prosecution and civil enforcement by
    HHS OIG and DOJ addressing the more commonplace PODs will improve
    patient safety and reduce healthcare costs in the near term, and
    ultimately incite a voluntary correction to the structures and
    practices of PODs that will bring the industry into compliance.

    Ownership Interest Reporting

        Under the statute and the final rule issued by CMS implementing the
    Sunshine Act, Physician-Owned Distributorships, which are a subset of
    GPO's, are required to report to CMS on an annual basis all ownership
    and investment interests that were held by a physician or immediate
    family member thereof in the preceding calendar year. This was an
    integral aspect of the statute and regulations, intended to capture
    important information regarding potential conflicts of interest and
    self-
    dealing by physicians with interests in manufacturers and GPO's. As
    discussed in the explanation to the final rule:

            [. . .] we also interpreted the statute to encompass not only
            the more traditional GPO's that negotiate contracts for their
            members, but also entities that purchase covered drugs,
            devices, biologicals and medical supplies for resale or
            distribution to groups of individuals or entities. These
            interpretations would include, for example, Physician-Owned
            Distributors (PODs) of covered drugs, devices, biologicals, and
            medical devices.\2\
    ---------------------------------------------------------------------------
        \2\ See Final Rule at 9493.

        Unfortunately, a review of the initial data set released by CMS on
    September 30, 2014 and the subsequent calendar year 2014 data set
    released in June 2015 reveals that GPOs, and specifically PODs, have
    willfully ignored this requirement and, with few exceptions, have
    failed to provide any ownership information vis-a-vis their physician
    ---------------------------------------------------------------------------
    owners.

        We urge the Committee to encourage CMS to issue definitive guidance
    to physician-owners of PODs outlining their clear requirement to report
    their ownership interests in accordance with the statute. Although we
    believe this requirement is already explicit in the existing statutes
    and regulations, it is possible that not all PODs are aware of their
    reporting requirements. Unambiguous guidance from CMS coupled with an
    education campaign would clear any confusion in the industry and
    hopefully result in the robust reporting that Congress intended when it
    enacted the Sunshine Act. Transparency into these POD ownership
    structures will allow patients to better understand the incentives and
    potential conflicts of interest that may be driving their physicians'
    recommendations and will permit CMS, HHS OIG and DOJ to carry out their
    audit, enforcement and prosecutorial functions.

        In the event such guidance is not forthcoming and/or does not yield
    increased reporting, CMS and OIG should be encouraged to exercise their
    audit and enforcement authority to identify PODs that are failing to
    report their ownership interest information. Because there is no other
    registry of PODs in existence against which to compare the Sunshine Act
    data, PODs are relying on their relative obscurity in hopes of evading
    enforcement authority. As a case in point, HHS OIG released a report in
    August 2015 focusing on overlaps between physician-owned hospitals and
    physician-owned PODs, HHS OIG was forced to rely on information gleaned
    from POD websites, state business registration websites and other
    publicly available information to determine the universe of ownership
    interests. In the executive summary to the report, HHS OIG states
    ``[a]vailable information about ownership interests in limited and
    raises concerns about a lack of transparency.''

        To bolster the ability of CMS and HHS OIG to enforce the law, we
    propose statutory language that would add to the current definition of
    ``Covered Recipient'' an additional category of covered recipients,
    specifically, ``An Applicable Group Purchasing Organization.'' The
    draft amendatory language is included below. This addition would close
    the existing loophole through which payments that are ultimately
    funneled to physicians are provided through third party Group
    Purchasing Organizations (GPO's).

        This statutory change would expand the obligations of manufacturers
    of pharmaceutical products and medical devices to disclose payments and
    transfers of value they make to GPOs. Similar to the payments they are
    currently required to report with respect to physicians and teaching
    hospitals, manufacturers are in a good position to know and track which
    payments they have made to GPOs. By reporting such payments, it would
    create a dataset of existing GPO's, as well as payments made thereto
    that are effectively indirect payments to their physician owner-
    investors. This data set would provide a critical cross-reference point
    and ultimately an enforcement mechanism for CMS, HHS OIG and DOJ.

    De Minimis Exclusion

        The national disclosure program enacted under the Sunshine Act was
    intended, as is clear from a review of the legislative history, to
    provide transparency into certain payments made by ``applicable
    manufacturers'' of pharmaceutical products and medical devices to
    physicians and teaching hospitals in order to shine light on conflicts
    of interest that could ultimately affect treatment decisions. The
    statue as currently enacted sets forth a $10 exclusion, to be indexed
    annually for inflation, from the universe of reportable payments. This
    low exclusion threshold has the effect of not only unduly burdening
    manufacturers by requiring them to collect and report data regarding
    low-dollar payments that do not pose a realistic threat of impropriety,
    it also severely dilutes the dataset and makes it more much difficult
    to pinpoint more material payments that the statute was generally
    intended to expose. Accordingly, we propose an incremental increase of
    the $10 threshold to $20, while preserving the $100 annual aggregate
    limit. The draft amendatory language is included below.

        At this point in time, the data from two reporting periods is
    available: the August 2013-December 2013 data, and data from all of
    calendar year 2014. A review of this data shows that for both periods,
    an astounding approximately 66 percent of the reported payments were
    under $20 (versus 21 percent between $20 and $100 and 13 percent over
    $100). The risk for potential conflicts of interest by physicians and
    teaching hospitals clearly lies with these larger payments; it is
    implausible to believe that a health provider would be swayed by an $18
    sandwich or an $11 cab ride. There is strong precedent for a $20 de
    minimis standard--the Office of Government Ethics, in implementing the
    Ethics in Government Act, established a gift limit of $20 for all
    federal executive branch employees.

        Raising the threshold from $10 to $20 would eliminate the
    burdensome reporting of these inconsequential payments while still
    preserving the original statutory intent.

        The existing $100 annual aggregate in the Sunshine Act already
    serves to prevent exploiting the de minimis payment scheme in
    circumvention of the statute. Moreover, the $10 threshold imposes an
    enormous burden on the Centers for Medicare and Medicaid Services
    (CMS), which is responsible for collecting, reviewing and publishing
    the vast amounts of data currently required under the statute. The
    millions of entries between $10 and $20 are not material to the
    transparency goals of the Act, but instead detract and distract from
    spotlighting the truly concerning payments that may pose a legitimate
    potential conflict. The modest threshold increase would unclutter the
    database without undermining the integrity of the statute.

        Finally, we would recommend amending the statute to require
    indexing every 3 years rather than every year. This would be less
    burdensome for CMS and will impose more consistency among regulated
    manufacturers.

    Proposed Amendment Language

    Part A of title XI of the Social Security Act:

    Sec. 1128G(e)(6) COVERED RECIPIENT.--

          (A) IN GENERAL.--Except as provided in subparagraph (8), the term
    ``covered recipient'' means the following:

            (i) A physician.
            (ii) A teaching hospital.
                (iii) An applicable group purchasing organization.

    Sec. 1128G(e)(10) PAYMENT OR OTHER TRANSFER OF VALUE.--

          (B) EXCLUSIONS.--An applicable manufacturer shall not be required
    to submit information under subsection (a) with respect to the
    following:

            (i) A transfer of value of anything the value of which is less
    than [$10] $20, unless the aggregate amount transferred to, requested
    by, or designated on behalf of the covered recipient by the applicable
    manufacturer during the calendar year exceeds $100. [For calendar years
    after 2012,] On October 1, 2016, and at 3 year intervals thereafter,
    the dollar amounts specified in the preceding sentence shall be
    increased by the same percentage as the percentage increase in the
    consumer price index for all urban consumers rounded to the nearest $5
    (all items; U.S. city average) for the [12-month period ending with
    June of the previous year.] subsequent 3 calendar years.

    Conclusion

    As discussed above, Globus is grateful to the Committee for its
    bipartisan efforts to resolve the very serious concerns raised by the
    POD model. If we can provide any additional information to assist the
    Committee, we would be pleased to do so.

                                     ______

                Medical Device Manufacturers Association (MDMA)

                         1333 H Street, NW, Suite 400W

                              Washington, DC 20005

                              Phone (202) 354-7171

                               Fax (202) 354-7176

                            www.medicaldevices.org

            Statement for the Record, Mark Leahey, President and CEO

                   United States Senate Committee on Finance

                                December 1, 2015

    Senate Committee on Finance
    Attn. Editorial and Document Section
    Rm. SD-219
    Dirksen Senate Office Bldg.
    Washington, DC 20510-6200

    Re: Hearing on Physician-Owned Distributors: Are They Harmful to
    Patients and Payers?

        On behalf of the Medical Device Manufacturers Association (MDMA), a
    national trade association representing hundreds of innovators in the
    field of medical technology, we welcome the opportunity to submit a
    statement for the record in response to your November 17, 2015 hearing
    entitled, ``Physician-Owned Distributors: Are They Harmful to Patients
    and Payers?'' MDMA's mission is to ensure that patients have timely
    access to safe and effective products. Our members, the majority of
    which are small to mid-sized, research-driven medical device companies,
    have a strong record of delivering innovative therapies to treat
    chronic disease and life-threatening conditions while lowering the cost
    of care.

        MDMA appreciates the Senate Finance Committee and the Health and
    Human Services Office of Inspector General (``HHS IG'') for your
    efforts to shine a light on the troubling concerns with Physician-Owned
    Distributors (``PODs''). It has been well documented that these PODs
    have placed profits in front of patient care, and additional steps are
    needed to protect patient care and competition in the healthcare
    marketplace. MDMA looks forward to working with the Committee, the IG
    and others on additional reforms to achieve these objectives.

        While MDMA strongly supports the scrutiny given to PODs, we are
    very concerned that some in the healthcare ecosystem have incorrectly
    and inappropriately deemed all physician relationships with the medical
    device industry as problematic. For example, some hospitals and health
    systems appear to be taking the position that any physician ownership
    interest in a medical device company is reason to exclude companies
    from access to their hospitals. This is a very troubling development
    that is denying patient access to novel medical technologies.

        Some hospitals and hospital systems reference the March 26, 2013
    Health and Human Services Office of Inspector General (``HHS IG'')
    ``Special Fraud Alert'' which ``focuses on certain Physician-Owned
    Entities that derive revenue from selling, or arranging for the sale
    of, implantable medical devices.'' \1\ It is important to note that the
    HHS IG does not identify all Physician-Owned Entities as problematic.
    Specifically, the March HHS IG Special Alert states, ``This Special
    Fraud Alert focuses on the specific attributes and practices of PODs
    that we believe produce substantial fraud and abuse risk and pose
    dangers to patient safety.'' \2\ The Special Alert includes eight
    ``suspect characteristics'' that the HHS IG indicates are particularly
    concerning, none of which include simply a financial interest in a
    medical device company.\3\ The fact that these characteristics are
    included in the Special Alert support the position that the HHS IG does
    not intend to limit all physician ownership in medical device
    companies, just those that exhibit certain ``suspect characteristics''
    found with PODs.
    ---------------------------------------------------------------------------
        \1\ Prohibition on Purchasing Certain Products from Physician-Owned
    Businesses Policy, LL. 029.
        \2\ OIG Special Fraud Alert: Physician-Owned Entities (March 26,
    2013).
        \3\  Ibid.

        The March HHS IG Special Fraud Alert was followed up by a
    comprehensive report issued in October 2013 entitled, ``Spinal Devices
    Supplied by Physician-Owned Distributors: Overview and Prevalence of
    Use.'' As the title indicates, the sole focus of this report is on
    spinal devices sold through PODs. Nowhere in the report does the HHS IG
    raise any concerns with medical device companies who have physician
    ownership but are not structured as a POD. The fact that the HHS IG
    states certain physician-owned and not all physician-owned demonstrates
    that the HHS IG draws a distinction among different types of
    ---------------------------------------------------------------------------
    relationships and structures.

        Some hospital policies permit physicians to have a large stake in a
    publicly traded company but not private companies. Beyond these
    inconsistencies, some policies fail to appreciate how the medical
    technology innovation ecosystem operates. The overwhelming majority of
    medical technology innovations are developed based upon experience at
    the bedside by physicians. Therefore, it is often reasonable and
    appropriate for the physicians who are involved with the development of
    the technology to have an ownership position in the company. As the
    company advances the technology and seeks venture capital, investors
    take equity in the company in exchange for financing, often reducing
    the ownership stake of the founding physician or physicians. By the
    time the company is ready to launch a commercial product, most
    companies have very little physician-ownership, certainly far below the
    40 percent threshold with PODs that the HHS IG raised concerns about in
    their March 2013 Alert and subsequent October 2013 report.

        Another complicating factor of these policies is that they impact
    companies that received angel or venture capital investment from firms
    in which some of the partners may include physicians. In these cases,
    the policy would preclude their hospitals from utilizing these devices.
    From a patient care standpoint, this would be devastating because most
    of the medical innovations are developed by smaller, privately held
    companies, which rely upon venture capital investment to fund the
    product development process.

        The issue of disclosure is an area worthy of further clarification
    as well. Some hospitals require companies seeking to do business with
    them to disclose the financial relationships with any physicians who
    have an ownership position in a medical device company, regardless if
    that physician practices in their system. For the purposes of
    compliance, it is not reasonable for hospitals to seek disclosure of
    physician relationships outside of their system.

        To further enhance transparency, MDMA recommends that greater
    scrutiny is placed on PODs to ensure compliance with the U.S. Physician
    Payment Sunshine Act. Currently, it is unclear if PODs are satisfying
    the requirements under the Sunshine Act.

        In closing, we support efforts to address the troubling POD
    practices outlined by the HHS IG. It is clear that certain companies
    and physicians have abused their positions and compromised the trust
    with patients and their institutions. However, implementing a sweeping
    policy that prohibits any physician ownership in a medical technology
    company, regardless of circumstances surrounding the relationship or
    whether the physician is part of the hospital network, is unreasonable.
    It will also have a chilling effect on the valid and appropriate
    engagement of physicians to develop the medical breakthroughs of
    tomorrow. We strongly encourage the Committee to work with the HHS IG
    and all stakeholders in the healthcare ecosystem to ensure that the
    ongoing abusive practices of PODs are addressed while clarifying
    appropriate physician relationships that are permitted.

    Sincerely,

    Mark B. Leahey

    President and CEO, MDMA

                                     ______

                                    Neospine

                                1519 3rd St. SE

                               Puyallup, WA 98372

    The Honorable Orrin G. Hatch
    Chairman
    Committee on Finance
    U.S. Senate
    219 Dirksen Senate Office Building
    Washington, DC 20510

    The Honorable Ron Wyden
    Ranking Member
    Committee on Finance
    U.S. Senate
    219 Dirksen Senate Office Building
    Washington, DC 20510

    Dear Senators Hatch and Wyden:

    As an active, Board certified neurosurgeon and lawyer with an M.B.A., I
    have observed the highly questionable behavior of Physician-Owned
    Distributorships (PODs) from multiple perspectives including medical,
    legal and business.

    Troubling me most is what I see from the patient perspective--the
    physical, financial and emotional harm PODs cause, as documented by the
    Inspector General of the Department of Health and Human Services.

    Profit-driven unnecessary surgeries have put patients' health at risk,
    directly cost families hard-earned dollars because of high deductibles
    and shatter the trust patients have that their physician will do the
    right thing for their patients and not their bank account.

    The fact is PODs represent an unavoidable conflict-of-interest that can
    lead physicians to choose implants and/or surgeries based on profit
    instead of on their patients' best interests. They have already been
    associated with patient harm, do not save money, and lead to increased
    utilization. Moreover, POD ownership is not transparent and disclosure
    is not sufficient to protect patients and the healthcare system.

    The manner in which PODs recruit, reward and remove investors reveals a
    POD's intended role in the spinal implant supply chain. I have seen
    PODs recruit investors because they are in a position to generate
    substantial business by selecting the POD's implants; they require
    investors who cease practicing in the service area to divest their
    ownership interests; and POD investors enjoy extraordinary returns on
    investment compared to the level risk incurred.

    Specifically, I have observed that:

          Size of investment offered to each physician varies with
    expected or actual volume or value of devices used.
          Distributions are not made in proportion to ownership interest,
    or physician owners pay different prices for their ownership interests,
    because of expected or actual volume or value of devices used.
          Physician-owners condition referrals to hospitals or ambulatory
    surgery centers (ASC) on their purchase of the POD's devices thru
    coercion or promises.
          Physician-owners are required, pressured, or actively encouraged
    to refer, recommend, or arrange for purchase of devices sold by PODs.
          The POD retains right to repurchase a physician-owner's interest
    for physician's failure to refer, recommend or arrange for 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 contract with personnel necessary for
    operations.
          The POD does not maintain continuous oversight of all
    distribution functions.
          When hospital or ASC requires physicians to disclose conflicts
    of interest, the POD's physician-owners often fail to inform the
    hospital or ASC of, or actively conceal thru misrepresentations, their
    ownership in the POD.
    Congress should pass legislation to eliminate PODs. Doing so will
    promote patient safety by eliminating the conflict of interest
    affecting physicians' choice of surgical procedures and spinal
    implants.

    Sincerely,

    Richard N.W. Wohns, M.D., JD, MBA

                                     ______

                      The Orthotic and Prosthetic Alliance

                          1501 M Street, NW, 7th Floor

                              Washington, DC 20005

                              Phone: 202-466-6550

                               Fax: 202-785-1756

                          E-mail: opalliance@gmail.com

    _______________________________________________________________________

                        Testimony for the Written Record

                   Senate Finance Committee Hearing entitled,

     ``Physician-Owned Distributorships: Are They Harmful to Patients and
                                   Payers?''

                               November 17, 2015

    Chairman Hatch, Ranking Member Wyden, and Members of the Committee:

        On behalf of the Orthotic and Prosthetic Alliance (the O&P
    Alliance), a coalition of the leading national organizations
    representing the orthotic and prosthetic profession, thank you for the
    opportunity to submit testimony for the written record with respect to
    the hearing entitled, ``Physician-Owned Distributorships: Are They
    Harmful to Patients and Payers?'', held by the Committee on November
    17, 2015.

        The five organizations listed on this letterhead comprise the O&P
    Alliance and represent the scientific, research, professional,
    business, and quality improvement aspects of the field. Collectively,
    the Alliance represents over 13,000 O&P professionals and 3,575
    accredited O&P facilities. The O&P Alliance advocates for federal and
    state policies that improve the practice and quality of orthotic and
    prosthetic care and maximize access to these services provided to
    patients in need of artificial limbs and orthotic braces. The
    Alliance's priorities include ensuring patients receive services from
    appropriately trained, educated, and credentialed practitioners, and
    promoting fair and equitable coverage and reimbursement policies.

        We are writing to echo the concerns that arose during the November
    17, 2015 hearing on the risks surrounding Physician-Owned
    Distributorships (PODs). Although this hearing focused specifically on
    PODs involving surgical supplies and instrumentation, we are concerned
    that if the Office of Inspector General (OIG) issues additional
    guidance with respect to PODs, it is unlikely to draw a distinction
    between surgical supply PODs and any other medical devices, including
    O&P items and related services.

        We maintain that Medicare and its beneficiaries are best served by
    licensed and/or certified orthotic and prosthetic clinicians acting on
    a referral from a physician or other healthcare provider who has no
    financial interest in the O&P practice. As we outline below, allowing
    for physician self-referral of O&P care and physician use of O&P items
    from PODs, whether it is through the in-office ancillary services
    (IOAS) exception to the Stark law or allowing for joint ventures, does
    not serve to improve beneficiary access or quality of care. With the
    exception of certain prefabricated off-the-shelf orthoses and supply
    items, allowing for the provision of most types of O&P care by
    referring physicians opens the door to overutilization, potentially
    compromised medical judgment, unfair competition, and increased costs
    to the Medicare program and its beneficiaries.

    Background

        Over the past few years, the O&P field has experienced an increase
    in Medicare-enrolled physicians and physician groups who have made
    arrangements with other enrolled suppliers in order to bill for durable
    medical equipment, prosthetics, orthotics, and supplies (DMEPOS) items,
    specifically custom O&P devices, from their own physician-owned
    laboratories. We are aware that the potential profitability of self-
    referring to physician-owned O&P laboratories is being presented at
    many medical business meetings. We also see entities marketing turnkey
    O&P laboratory services to physician groups.

        We note that these arrangements are not specifically prohibited
    under current laws or regulations and, while custom O&P devices
    constitute a small subset of DMEPOS, these arrangements may
    dramatically and negatively affect the way care is provided to the
    beneficiary. We have previously encouraged both OIG and the Centers for
    Medicare and Medicaid Services (CMS) to become involved, analyzing the
    effect of physician-owned O&P laboratories, custom O&P services
    provided under the IOAS exception to the Stark law, and contractual
    joint ventures formed for the provision of custom O&P care. To shed
    additional light on these types of arrangements, we set forth our
    position on these types of arrangements below.

    POD Special Fraud Alert--March 2013

        As you are aware, on March 26, 2013, the OIG issued a Special Fraud
    Alert addressing 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 (ASCs). The focus of these PODs tends to be in the
    surgical arena, with a particular emphasis on orthopedic implants
    (spine and joint prostheses) and cardiac implants (pacemakers and
    defibrillators).\1\ However, within a footnote to this Fraud Alert, the
    OIG notes that ``. . . Although this Special Fraud Alert focuses on
    PODs that derive revenue from selling, or arranging for the sale of,
    implantable medical devices, the same principles would apply when
    evaluating arrangements involving other types of Physician-Owned
    Entities.'' \2\
    ---------------------------------------------------------------------------
        \1\ See Deyon TA, Mirza SK, Martin BI; et al. ``Trends, major
    medical complications, and charges associated with surgery for lumbar
    spinal stenosis in older adults.'' JAMA 2010; 303 (13); 1259-1265
    (noting a marked 15-fold increase in the number of spinal fusion
    surgeries from 2002 to 2007 and highlighting the significant financial
    incentive to both hospitals and surgeons to perform such complicated
    surgeries).
        \2\ OIG, ``Special Fraud Alert: Physician-Owned Entities,'' March
    2013, available at https://oig.hhs.gov/fraud/docs/alertsandbulletins/
    2013/POD_Special_Fraud_Alert.pdf.

        We contend that many of the concerns that the OIG delineated in the
    Special Fraud Alert regarding implantable prosthetics apply equally to
    external prostheses (in the form of artificial limbs) and to custom
    orthopedic bracing (orthoses). We believe that the fraud and abuse
    risks, as well as (and more importantly) the patient safety concerns
    related to PODs, are equally applicable to physician-owned O&P
    ---------------------------------------------------------------------------
    laboratories.

        While it might not appear that there are significant opportunities
    for fraud or abuse when a physician either owns or joint ventures with
    an O&P laboratory that is not necessarily the case. Overutilization of
    O&P services may occur through ordering a replacement device when
    repairs to an existing orthosis or prosthesis are indicated; ordering a
    more expensive or complex device when a less expensive or complex
    orthosis or prosthesis is medically appropriate; or coding and billing
    for a more expensive device while providing a less expensive orthosis
    or prosthesis to the patient. These avenues to overutilization of O&P
    services are similar to those described by Senators Hatch and Wyden
    during the November 17 hearing, as they relate to medically unnecessary
    surgical procedures.

        Further, the fact that physicians are exempt from the O&P
    accreditation requirement and related Medicare quality standards
    creates a circumstance that could result in the physician opting to
    replace devices that otherwise would be repaired by an O&P facility
    that has the necessary equipment and laboratory to effect such repairs.
    This is because an accredited O&P practice is required to offer
    repairs, while an unaccredited practice is not.\3\ In addition to
    fraud, abuse, and overutilization, the Special Fraud Alert raises other
    concerns--corruption of medical judgment, increased costs to Federal
    healthcare programs, and unfair competition. Each of these concerns
    exists when discussing physician-owned O&P laboratories.
    ---------------------------------------------------------------------------
        \3\ http://www.cms.gov/Medicare/Provider-Enrollment-and-
    Certification/MedicareProviderSup
    Enroll/Downloads/DMEPOSAccreditationStandardsCMB.pdf.

        Due to the similarities that exist between the two entities, we
    maintain that the suspicion with which PODs are viewed should be
    applied equally to physician ownership of O&P laboratories. We further
    believe that insufficient attention has been paid to physician
    relationships with O&P laboratories that are essentially the equivalent
    of PODs, and we support the application of the same principles when
    considering the legality of physician-owned O&P laboratories going
    forward.

    IOAS Exception to the Stark Law

        The IOAS exception set forth to the prohibition on physician self-
    referral (the Stark Law) \4\ was implemented to provide patients the
    opportunity to receive designated health services (DHS), including O&P,
    during the time of their physician office visit and was intended to
    accommodate certain legitimate physician business arrangements. We
    believe that the IOAS exception and other loopholes in Medicare
    regulations related to O&P services are being exploited and foster
    physician business arrangements that do not conform to the IOAS
    exception's original intent.
    ---------------------------------------------------------------------------
        \4\ 42 U.S.C. Sec. 1395nn.

        Custom O&P services are rarely, if ever, completed at the time of
    an office visit and certainly do not meet the criteria for being
    provided ``ancillary to physician services.'' The provision of such
    custom O&P care is rarely accomplished during a single office visit;
    rather, the patient assessment, casting, measurement, fabrication,
    fitting, adjustment, and follow-up care may take several weeks--or even
    months--to complete. We maintain that the current regulatory and legal
    exceptions, as they apply to all of DMEPOS, opens a door for
    prescribing physicians to over-order or upcode in the specific area of
    custom O&P devices and related services. Therefore, the loophole
    allowing physicians to refer services to O&P laboratories which they
    ---------------------------------------------------------------------------
    own or have a financial interest in should be eliminated.

        We do acknowledge that it can be in the interest of improved
    patient access or quality of care to allow for the provision of off-
    the-shelf orthotic (prefabricated) items, some custom fit
    (prefabricated) orthotic devices or prosthetic supply items during a
    physician office visit. We will not argue that it can be convenient for
    the patient to obtain simple prefabricated orthotic items, supplies, or
    items such as a cane or a sling during the course of a physician visit;
    in fact, we believe such scenarios were the original intent of the IOAS
    exception.

        However, to allow for the provision of custom fabricated and
    certain custom fit orthoses and prostheses under the IOAS exception
    simply serves as a mechanism to maximize physician profits, with no
    corresponding benefit to patients. In the design, manufacture, fitting,
    adjustment, and training on the use of a custom O&P device, the patient
    must return on multiple occasions. Unlike with a one-time dispensing or
    pick-up of an off-the-shelf prefabricated product associated with a
    physician visit, it is not more convenient for a patient to have to
    return to a physician's medical office than to go to a specialized,
    accredited O&P facility. However, when a physician has a financial
    interest in the O&P facility, that physician's patients surely will
    feel some obligation or possibly pressure to return to that physician's
    O&P laboratory--even if the services are not the most appropriate.

        Although lawmakers have progressively tightened the IOAS loopholes
    in recent years, even a narrow loophole affords ordering physicians the
    opportunity to improperly self-refer. CMS acknowledged this in 2010,
    when it required physicians who self-refer under the IOAS exception to
    disclose when they were self-referring patients for advanced imaging
    services.\5\ Simply put, allowing payment for custom O&P care under the
    IOAS exception could lead to overutilization and self-referral abuses,
    and does not contribute to patient access to appropriate and quality
    O&P care.
    ---------------------------------------------------------------------------
        \5\ MLN Matters Number: SE1023, ``Provisions in the Affordable
    Care Act of 2010 (ACA),'' (rev. Aug. 12, 2012), available at http://
    www.cms.gov/Outreach-and-Education/Medicare-Learning-Network-MLN/
    MLNMattersArticles/downloads/SE1023.pdf.
    ---------------------------------------------------------------------------

    Contractual Joint Ventures

        Contractual joint ventures have long been of concern to the OIG,
    dating back as far as August 1989 when it released its Special Fraud
    Alert on joint venture arrangements.\6\ The OIG followed this Fraud
    Alert by a Special Advisory Bulletin addressing contractual joint
    ventures in April 2003.\7\
    ---------------------------------------------------------------------------
        \6\ OIG, ``Special Fraud Alert: Joint Venture Arrangements,''
    August 1989, available at http://oig.hhs.gov/fraud/docs/
    alertsandbulletins/121994.html.
        \7\ OIG, ``Special Advisory Bulletin: Contractual Joint Ventures,''
    April 2003, available at https://oig.hhs.gov/fraud/docs/
    alertsandbulletins/042303SABJointVentures.pdf.

        The 1989 Fraud Alert addressed arrangements between those in a
    position to refer business (e.g., physicians) and those who provide
    items for which the Medicare and Medicaid programs make payment. The
    OIG contended that certain of those arrangements may violate the anti-
    kickback statutes. The April 2003 Advisory Bulletin focused more
    narrowly on arrangements where a health care provider in one line of
    business (referred to by the OIG as the ``Owner'') expands into a
    related health care business by contracting with an existing provider
    or supplier (referred to as the ``Manager/Supplier'') of the related
    item or service in order to provide the new item or service to the
    Owner's existing patient base. In these arrangements, the Manager/
    Supplier would otherwise be a potential competitor in the provision of
    the Owner's new business line. The Manager/Supplier manages the new
    line of business on behalf of the Owner, and may go so far as to supply
    the Owner's new line of business with employees, inventory, space, and
    billing or other related services. The Owner receives the profits of
    the business as remuneration for his/her referrals. Many PODs are
    ---------------------------------------------------------------------------
    structured in this fashion.

        These joint venture arrangements can contribute to self-referral
    abuses and overutilization. Some might attempt to make the argument
    that such arrangements improve patient access to service; however,
    these arrangements instead may limit access by removing the Manager/
    Supplier's ability to serve patients in its own right. We encourage
    increased enforcement activities and regulation as they relate to these
    often-abusive arrangements.

    Documentation for Custom O&P Services

        In recent years, O&P clinicians engaged in providing services to
    Medicare beneficiaries have seen an increase in the amount and type of
    documentation required to support the medical necessity for the
    services they provide. In addition to a detailed physician
    prescription, certain circumstances require that the ordering
    physician's contemporaneous clinical documentation support the
    patient's diagnosis and the medical necessity for the O&P services
    ordered.

        This issue raises several important questions. When a medical
    doctor self-refers for O&P services under one of the above scenarios,
    he/she becomes the supplier of record when billing Medicare. When
    acting as the O&P supplier as well, will the medical doctor's own
    clinical documentation be considered sufficient to support the medical
    necessity for O&P services? If a licensed and/or certified O&P
    clinician's documentation must be additionally supported by a third-
    party in the form of the referring physician's prescription, clinical
    notes, and in some instances letters of medical necessity, will the
    same standard be applied when a medical doctor acts as a supplier of
    O&P services?

        These questions illustrate one of the inherent problems in allowing
    for the self-referral of O&P services--under the typical model for
    providing O&P, the O&P clinician is financially independent of, but
    coordinates clinically with, the physicians from whom he/she receives
    referrals. The referring physicians act as ``gatekeepers'' of sorts, by
    providing the required prescriptions and documenting the need for any
    ordered O&P devices. Without this gatekeeper's prescription and
    clinical validation, the O&P clinician cannot be paid for the services
    provided to Medicare patients. In a self-referral situation, no
    gatekeeper exists; no one independent of the supplier of record (who is
    also the ordering physician) has responsibility for supporting the
    medical necessity of the O&P care provided. In these self-referral
    situations the checks and balances that are generally in place no
    longer exist.

    Conclusion

        In order to ensure that the interests of both the Medicare program
    and beneficiaries continue to be served, that access to quality O&P
    care is maintained, and to mitigate the potential for fraudulent and
    abusive activities, we believe:

            The suspicion with which PODs are viewed should be applied
    equally to physician ownership of O&P laboratories.

            Billing of custom fabricated and certain custom fit orthoses
    and prostheses should be eliminated from the IOAS exception. The IOAS
    exception, when applied to custom O&P, does not serve any ancillary
    care advantages and simply serves as a mechanism to maximize physician
    profits, with no corresponding benefit to patients. Allowing payment
    for custom O&P devices and related services under the IOAS exception
    can lead to overutilization and self-referral abuses, and does not
    contribute to patient access to appropriate O&P care.

            Enforcement activities should be increased as they relate to
    often-abusive contractual joint venture arrangements wherein a
    referring physician realizes the profits gained by referring his or her
    patients to an O&P laboratory in which he or she has ownership
    interest, with little or no professional or clinical oversight.

            The requirement should be maintained for all suppliers of O&P
    care, including physicians and physician practices, that a third-party
    referral source must prescribe and support the medical necessity for
    custom O&P devices and related services provided to Medicare
    beneficiaries.

        Thank you for the opportunity to submit this statement for the
    written record.

                                     ______

                                   RetireSafe

                       Standing Up for America's Seniors!

    _______________________________________________________________________

                                                      November 13, 2015
    The Honorable Orrin G. Hatch
    Chairman
    Committee on Finance
    U.S. Senate
    219 Dirksen Senate Office Building
    Washington, DC 20510

    The Honorable Ron Wyden
    Ranking Member
    Committee on Finance
    U.S. Senate
    219 Dirksen Senate Office Building
    Washington, DC 20510

    Dear Chairman Hatch and Ranking Member Wyden,

    All Americans deserve quality healthcare throughout their lives. Since
    1991, RetireSafe has worked tirelessly to maintain the safety and
    personal freedoms of older Americans. RetireSafe works to preserve
    treatment choices and access for doctors and patients while maintaining
    their safety. We believe that a strong and trusting relationship
    between physician and patient is the foundation of good healthcare. We
    think that Physician-Owned Distributors of implantable medical devices
    (PODs) undermines this relationship by creating financial incentives
    for physicians who unduly influence medical decision-making, putting
    patient health at risk.

    In 2011, the Wall Street Journal reported on the death of a patient
    during a spinal-fusion surgery performed by neurosurgeon Dr. Adam Lewis
    in Jackson, Mississippi; for the surgery, Dr. Lewis had chosen implants
    sold by a company he partially owned, Spinal USA, and he profited from
    the sale. According to the Wall Street Journal, two spine surgeons who
    later reviewed the patient's records said that the patient was a poor
    candidate for the surgery that Dr. Lewis performed.

    RetireSafe was alarmed at the finding in the 2013 U.S. Department of
    Health and Human Services Office of Inspector General (HHS OIG) that
    PODs may encourage unnecessary surgeries. We implore the members of
    this Committee to not let this stand. Not only do PODs lead to
    unnecessary patient suffering but they also waste scarce Medicare
    dollars on unnecessary surgeries. The use of PODs and its negative
    influence on the physician's decision making process is indirect
    opposition to RetireSafe's mission to ensure that seniors are safe. It
    seems that any good physician would avoid even the appearance of an
    adverse influence that would exist by their participation in a POD.

    We applaud the Senate Finance Committee for its continuing
    investigation into these inherently suspect entities and hope that
    serious, concrete measures will be taken to hold PODs to account and,
    ultimately, in our view, be eliminated. We urge the committee to take
    the necessary steps to ensure that Medicare remains a safe and secure
    healthcare system for our senior citizens.

    Sincerely,

    Thair Phillips
    President/CEO, RetireSafe

                                     ______

                               Ropes and Gray LLP

                         2099 Pennsylvania Avenue, NW.,

                           Washington, DC 20006-6807

                               www.ropesgray.com

    November 30, 2015

    Re:   Senate Finance Committee Hearing on ``Physician-Owned
    Distributors: Are They Harmful to Patients and Payers?''

    Dear Senate Finance Committee:

    The Quality Implant Coalition (``QuIC'') is a coalition of
    manufacturers of implantable medical devices that is concerned with the
    potential for harm to patients and the Medicare program that results
    when physicians have a financial interest in the devices they order for
    implantation in their own patients. QuIC appreciates the opportunity to
    provide a statement for the record for the Senate Finance Committee's
    November 17, 2015 hearing entitled ``Physician-Owned Distributors: Are
    They Harmful to Patients and Payers?''

    At this hearing, three of the four witnesses--Dr. Scott Lederhaus, MD,
    President of the Association for Medical Ethics; Ms. Suzie Draper, Vice
    President of Business Ethics and Compliance, Intermountain Healthcare;
    and Mr. Kevin Reynolds, son of Lillian Kaulback, who died as a result
    of surgery from a POD-involved surgeon--expressed the concern that PODs
    were harmful to patients and payers. The fourth witness, Dr. John
    Steinmann, DO, of the American Association of Surgical Distributors
    (``AASD''), conceded that PODs presented a conflict of interest, but
    argued that this conflict could be managed using AASD standards.

    In this statement, we review the 12 standards set out by AASD, and
    conclude that the standards do not adequately address the harms created
    by PODs. These harms include the fact that the strong personal profit
    incentive created by PODs can lead to physician-owners performing more
    and/or unnecessary surgeries that use their own medical devices,
    raising serious patient safety and ethical questions. These unnecessary
    surgeries or revisions also add substantial costs to patients and
    payers. The AASD standards do not address these harms; rather, they
    either merely restate that compliance with law is required (without
    giving guidance as to how); are irrelevant to the harms; are
    insufficient; or are unrealistic.

    Therefore, we urge the Committee to take further steps, beyond
    requiring disclosure, to prohibit PODs from causing further harm. While
    disclosure is important, it is insufficient to address the fundamental
    legal and ethical issues posed by PODs, and it is insufficient to
    protect patients, payers, and the public from PODs.

    AASD Standards and QuIC Response:

    As an initial matter, we note that the 12 AASD standards do not affect
    POD obligations for Physician Payment Sunshine Act reporting, do not
    affect analysis under the physician self-referral law (the ``Stark
    Law''), and likely do not affect analysis under any state self-referral
    laws.

    Below, we discuss the relevance of each of the standards to an anti-
    kickback statute analysis and to the conflict of interest:

    Standard One: Distributorship maintains a business structure consistent
    with Federal Self-Referral and anti-kickback statutes, and reports in
    compliance with the Physician Payment Sunshine Act.

                    Response: This states the obvious, that applicable laws
                    must be complied with, but by itself it provides no
                    guidance to such compliance. This is an apple pie
                    statement, not a ``standard.''

    Standard Two: Distributorship demonstrates merit by proving to be the
    lowest average cost vendor of like implants during a comparable
    contract period.

                    Response: Lower cost is not relevant to whether the
                    anti-kickback statute is violated, or whether a
                    conflict of interest inappropriately influences a
                    physician's choice of whether to perform a procedure,
                    where to perform it, or what implant to use. Guidance
                    by the Department of Health and Human Services Office
                    of Inspector General (``OIG'') has long made clear that
                    where an investment interest is motivated by the intent
                    to induce (or to be induced to make) referrals, the
                    anti-kickback statute is violated. We also note that
                    OIG's own report concluded that purchasing from PODs
                    does not have a lower cost, and in some cases a
                    measurably higher cost.

    Standard Three: Distributorship annual price increases to customers do
    not exceed 3 percent above the consumer price index (CPI).

                    Response: Like Standard Two, this is another cost
                    element, not relevant to whether the anti-kickback
                    statute is violated or whether a conflict of interest
                    exists.

    Standard Four: Distributorship is a legitimate, free-standing stocking
    distribution company with employees, contracts, an address, a business
    license, and insurance.

                    Response: The absence of these factors--a business that
                    is a ``shell'' outsourcing all of its operations,
                    placing no financial risk on the investor-physicians--
                    obviously would present a greater risk of fraud and
                    abuse under even the oldest OIG investment guidance.\1\
                    However, being a ``shell'' entity has never been a
                    necessary component of an unlawful investment
                    relationship. The conflict of interest still exists
                    with a stocking distributor.
    ---------------------------------------------------------------------------
        \1\ OIG, Special Fraud Alert: Joint Venture Arrangements (August
    1989), reprinted at 59 Fed. Reg. 65,372, 65,374 (Dec. 19, 1994).

    Standard Five: Distributorship demonstrates adherence to the AASD
    Product Evaluation Policy (e.g., vendors maintain insurance, meet FDA
    requirements, not debarred; products cleared by FDA, selected by
    ---------------------------------------------------------------------------
    surgeons based on comparison to other products).

                    Response: This also is not relevant to the anti-
                    kickback statute legal analysis, or to the corrupting
                    effects of the conflict of interest.

    Standard Six: Distributorship demonstrates adherence to the AASD
    Employee Training Policy (e.g., product rep trained in sterile
    techniques and sterilization, HIPAA, compliance, and the products s/he
    reps).

                    Response: Again, this is not relevant to anti-kickback
                    statute legal analysis or the existence of the conflict
                    of interest.

    Standard Seven: Distributorship demonstrates adherence to the AASD
    Disclosure Policy (e.g., hospitals, patients, colleagues all receive
    notice of physician-ownership).

                    Response: This is not relevant to the anti-kickback
                    statute legal analysis and has specifically been noted
                    by OIG not to be a sufficient protection.\2\ Disclosure
                    is only effective if patients can adequately assess
                    this information; we note that there is sound social
                    science evidence that disclosure to patients of a
                    physician conflict of interest is apt to be perceived
                    as an endorsement rather than a warning.\3\
                    Furthermore, patients ought to be able to trust that
                    their physicians act in their patients' best interests.
                    Stating that physicians should tell their patients they
                    have other interests (i.e., a personal profit motive)
                    is far from actually resolving the conflict of
                    interest.
    ---------------------------------------------------------------------------
        \2\ As we noted in the preamble to the final regulation for the
    safe harbor relating to ASCs: ``. . . disclosure in and of itself does
    not provide sufficient assurance against fraud and abuse . . .
    [because] disclosure of financial interest is often part of a
    testimonial, i.e., a reason why the patient should patronize that
    facility. Thus, often patients are not put on guard against the
    potential conflict of interest, i.e., the possible effect of financial
    considerations on the physician's medical judgment.'' See 64 Fed. Reg.
    63,518, 63,536 (Nov. 19, 1999). Although these statements were made
    with respect to ASCs, the same principles apply in the POD context.
    OIG, Special Fraud Alert on Physician-Owned Entities (March 2013).
        \3\ See, e.g., Jason Dana and George Lowenstein, A Social Science
    Perspective on Gifts to Physicians from Industry, 290 JAMA 252, 254
    (July 9, 2003).

    Standard Eight: Distributorship demonstrates adherence to the AASD
    Investment and Distribution Policy (e.g., ownership based on investment
    interest, return not vary based on referrals, no mandatory terminations
    ---------------------------------------------------------------------------
    based on failure to use).

                    Response: Like Standard 4, this standard sounds good
                    without meaning anything. As noted above, the test for
                    whether an investment interest violates the anti-
                    kickback statute is whether it is motivated by the
                    intent to induce (or to be induced to make) referrals.
                    Even a proportional return on investment will violate
                    that standard where, as here, the obvious and primary
                    purpose of a POD is to give the ordering physician a
                    financial reward for using certain products at
                    facilities that agree to buy them in order to obtain
                    the physician's referrals. Moreover, because most PODs
                    represent a small number of doctors, and because in
                    most PODs most of the users are the owners, even a
                    proportional investment will correlate closely to the
                    owners' own referrals, and/or to their collective
                    referrals.

    Standard Nine: Distributorship submits utilization data annually and
    demonstrates adherence to the AASD Appropriate Use Monitoring Policy
    (e.g., surgical procedure volume and implant usage base-lined and
    tracked, with more than 15 percent change requiring independent audit
    that will re-set baseline or result in disciplinary action).

                    Response: While not relevant to an anti-kickback
                    statute legal analysis or to the conflict of interest,
                    utilization review and management is of course an
                    important tool, and one that hospitals should have
                    physicians engaged in through hospital committees. But
                    putting doctors with a financial interest in the
                    outcome in charge of such reviews makes little sense.
                    Moreover, this standard does not appear to subject a
                    change in choice of implant to this tracking, which is
                    of course a key indicator in the POD conflict of
                    interest.

    Standard Ten: Distributorship has written contracts with hospitals,
    with pricing that is consistent among hospitals, and contract periods
    of at least 1 year.

                    Response: This is not relevant to the anti-kickback
                    statute legal analysis or to the conflict of interest.

    Standard Eleven: Distributorship does not leverage referrals to any
    hospital or surgery center.

                    Response: While clearly relevant to the anti-kickback
                    statute legal analysis and to the conflict of interest,
                    it is a fanciful standard. It is impossible to think
                    that POD owners will not leverage their ability to make
                    referrals to hospitals to require those hospitals to
                    purchase from their POD.

    Standard Twelve: Distributorship does not require, pressure, or
    otherwise leverage physician owners' use of the Distributorship
    devices.

                    Response: Again, this is probably fanciful: it is hard
                    to believe that the owners of a POD would not pressure
                    the other owners to use the POD's implants. But in any
                    event, the existence of pressure on the owners is
                    secondary to the conflict of interest that already
                    creates all the incentive necessary to influence the
                    choice of whether to perform a procedure, what implants
                    to use, and where to perform the procedure.

    In sum, AASD's standards fail to resolve the legal and ethical issues
    presented by PODs. None of the standards are sufficient to resolve the
    conflict of interest or to ensure that PODs do not violate the anti-
    kickback statute. The standards are also irrelevant to Stark Law
    analysis; to state self-referral laws; and to reporting obligations
    under the Physician Payment Sunshine Act.

    Therefore, we urge the committee to take decisive steps, beyond
    transparency, to protect patients, payers and the public from the well-
    documented harms created by PODs.

    Respectfully submitted,

    Thomas N. Bulleit

    Lisa Q. Guo

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