[Federal Register Volume 78, Number 61 (Friday, March 29, 2013)]
[Notices]
[Pages 19271-19273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-07394]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Inspector General

[Docket Number OIG-1302-N]


Special Fraud Alert: Physician-Owned Entities

AGENCY: Office of Inspector General (OIG), HHS.

ACTION: Notice.

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SUMMARY: 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).

DATES: These regulations are effective on March 29, 2013.

FOR FURTHER INFORMATION CONTACT: Patrice S. Drew, Department of Health 
and Human Services, Office of Inspector General, Congressional and 
Regulatory Affairs, at (202) 619-1368.

[[Page 19272]]

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 of guidance 
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.
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    \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 FR 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.
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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 health care 
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 FR 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.

[[Page 19273]]

     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 purchased for 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).

    Dated: March 26, 2013.
Daniel R. Levinson,
Inspector General.
[FR Doc. 2013-07394 Filed 3-28-13; 8:45 am]
BILLING CODE 4152-01-P