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

[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?

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HEARING

before the

COMMITTEE ON FINANCE
UNITED STATES SENATE

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

__________

NOVEMBER 17, 2015

__________

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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

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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?

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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 [email protected] 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;
[email protected].

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 [email protected]

______

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
[email protected].
---------------------------------------------------------------------------
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: [email protected]

_______________________________________________________________________

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

[all]