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





                                                        S. Hrg. 114-356

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

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

                                HEARING

                               before the

                          COMMITTEE ON FINANCE
                          UNITED STATES SENATE

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 17, 2015

                               __________

  [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
                                   
                                     

            Printed for the use of the Committee on Finance
                                   ______

                         U.S. GOVERNMENT PUBLISHING OFFICE 

21-472-PDF                     WASHINGTON : 2016 
-----------------------------------------------------------------------
  For sale by the Superintendent of Documents, U.S. Government Publishing 
  Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; 
         DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, 
                          Washington, DC 20402-0001

















                          COMMITTEE ON FINANCE

                     ORRIN G. HATCH, Utah, Chairman

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

                     Chris Campbell, Staff Director
              Joshua Sheinkman, Democratic Staff Director

                                  (ii)


























                            C O N T E N T S

                              ----------                              

                           OPENING STATEMENTS

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

                               WITNESSES

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

               ALPHABETICAL LISTING AND APPENDIX MATERIAL

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

                             Communications

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

                                 (iii)

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

                              ----------                              


                       TUESDAY, NOVEMBER 17, 2015

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                            A P P E N D I X

              Additional Material Submitted for the Record

                              ----------                              


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

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

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

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

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

      1.  The size of the investment offered to each physician varies 
with the expected or actual volume or value of devices used by the 
physician.
      2.  Distributions are not made in proportion to ownership 
interest, or physician-owners pay different prices for their ownership 
interests, because of the expected or actual volume or value of devices 
used by the physicians.
      3.  Physician-owners condition their referrals to hospitals or 
ASCs on their purchase of the POD's devices through coercion or 
promises, for example, by stating or implying they will perform 
surgeries or refer patients elsewhere if a hospital or an ASC does not 
purchase devices from the POD, by promising or implying they will move 
surgeries to the hospital or ASC if it purchases devices from the POD, 
or by requiring a hospital or an ASC to enter into an exclusive 
purchase arrangement with the POD.
      4.  Physician-owners are required, pressured, or actively 
encouraged to refer, recommend, or arrange for the purchase of the 
devices sold by the POD or, conversely, are threatened with, or 
experience, negative repercussions (e.g., decreased distributions, 
required divestiture) for failing to use the POD's devices for their 
patients.
      5.  The POD retains the right to repurchase a physician-owner's 
interest for the physician's failure or inability (through relocation, 
retirement, or otherwise) to refer, recommend, or arrange for the 
purchase of the POD's devices.
      6.  The POD is a shell entity that does not conduct appropriate 
product evaluations, maintain or manage sufficient inventory in its own 
facility, or employ or otherwise contract with personnel necessary for 
operations.
      7.  The POD does not maintain continuous oversight of all 
distribution functions.
      8.  When a hospital or an ASC requires physicians to disclose 
conflicts of interest, the POD's physician-owners either fail to inform 
the hospital or ASC of, or actively conceal through misrepresentations, 
their ownership interest in the POD.

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

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

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

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

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

                                Exhibits

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

                                 ______
                                 
                Department of Health and Human Services

                      Office of Inspector General

                          Washington, DC 20201

_______________________________________________________________________

             Special Fraud Alert: Physician-Owned Entities

March 26, 2013

I. Introduction

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

II. The Anti-Kickback Statute

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

III. Physician-Owned Distributorships

Longstanding OIG guidance makes clear that the opportunity for a 
referring physician to earn a profit, including through an investment 
in an entity for which he or she generates business, could constitute 
illegal remuneration under the anti-kickback statute. The anti-kickback 
statute is violated if even one purpose of the remuneration is to 
induce such referrals.

OIG has repeatedly expressed concerns about arrangements that exhibit 
questionable features with regard to the selection and retention of 
investors, the solicitation of capital contributions, and the 
distribution of profits. Such questionable features may include, but 
are not limited to: (1) selecting investors because they are in a 
position to generate substantial business for the entity, (2) requiring 
investors who cease practicing in the service area to divest their 
ownership interests, and (3) distributing extraordinary returns on 
investment compared to the level of risk involved.

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

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

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

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

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

      The size of the investment offered to each physician varies with 
the expected or actual volume or value of devices used by the 
physician.

      Distributions are not made in proportion to ownership interest, 
or physician-owners pay different prices for their ownership interests, 
because of the expected or actual volume or value of devices used by 
the physicians.

      Physician-owners condition their referrals to hospitals or ASCs 
on their purchase of the POD's devices through coercion or promises, 
for example, by stating or implying they will perform surgeries or 
refer patients elsewhere if a hospital or an ASC does not purchase 
devices from the POD, by promising or implying they will move surgeries 
to the hospital or ASC if it purchases devices from the POD, or by 
requiring a hospital or an ASC to enter into an exclusive purchase 
arrangement with the POD.

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

      The POD retains the right to repurchase a physician-owner's 
interest for the physician's failure or inability (through relocation, 
retirement, or otherwise) to refer, recommend, or arrange for the 
purchase of the POD's devices.

      The POD is a shell entity that does not conduct appropriate 
product evaluations, maintain or manage sufficient inventory in its own 
facility, or employ or otherwise contract with personnel necessary for 
operations.

      The POD does not maintain continuous oversight of all 
distribution functions.

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

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

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

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

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

IV. Conclusion

OIG is concerned about the proliferation of PODs. This Special Fraud 
Alert reiterates our longstanding position that the opportunity for a 
referring physician to earn a profit, including through an investment 
in an entity for which he or she generates business, could constitute 
illegal remuneration under the anti-kickback statute. OIG views PODs as 
inherently suspect under the anti-kickback statute. Should a POD, or an 
actual or potential physician-owner, continue to have questions about 
the structure of a particular POD arrangement, the OIG Advisory Opinion 
process remains available. Information about the process may be found 
at:
http://oig.hhs.gov/faqs/advisory-opinions-faq.asp.

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

                                 ______
                                 

Physician-Owned Entities Financial Arrangements Policy

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

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

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

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

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

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

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

    1.2.1   is in writing;

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

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

          The size of the investment offered to each Physician varies 
with the expected or actual volume or value of devices used by the 
Physician.

          Distributions are not made in proportion to ownership 
interest, or 
Physician-owners pay different prices for their ownership interests, 
because of the expected or actual volume or value of devices used by 
the Physicians.

          Physician-owners condition their referrals to hospitals or 
ambulatory surgical centers (ASCs) on their purchase of the POE's 
devices through coercion or promises, for example, by stating or 
implying they will perform surgeries or refer patients elsewhere if a 
hospital or an ASC does not purchase devices from the POE, by promising 
or implying they will move surgeries to the hospital or ASC if it 
purchases devices from the POE, or by requiring a hospital or an ASC to 
enter into an exclusive purchase arrangement with the POE.

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

          The POE retains the right to repurchase a Physician-owner's 
interest for the Physician's failure or inability (through relocation, 
retirement, or otherwise) to refer, recommend, or arrange for the 
purchase of the POE's devices.

          The POE is a shell entity that does not conduct appropriate 
product evaluations, maintain or manage sufficient inventory in its own 
facility, or employ or otherwise contract with personnel necessary for 
operations.

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

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

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

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

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

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

42 CFR Sec. 411.354(b)

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

Disruptive Technologies Exception Guideline

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

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

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

Contact Intermountain Healthcare's Legal Department for questions.

                                 ______
                                 

Intermountain Healthcare

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

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

To Whom It May Concern:

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

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

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

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

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

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

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

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

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

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

Sincerely,

Suzie Draper
Vice President of Business Ethics and Compliance
Intermountain Healthcare

cc:  Jeramy Green, Esq., Intermountain Healthcare

                                 ______
                                 

                 ATTESTATION AND COMPLIANCE CERTIFICATE

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

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

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

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

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

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

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

Please return a signed copy electronically to [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]