On Sept. 8, 2014, the United States Department of Justice (DOJ) filed a 98-page civil complaint alleging that investment returns, paid to a Michigan spinal surgeon and other physicians by a spinal implant company partially owned by them and persons affiliated with Reliance Medical Systems, LLC, were improper under the Federal Anti-Kickback Statute (AKS), therefore automatically making Medicare claims by the physicians and the hospitals where procedures were performed violations of the False Claims Act (FCA). Also on Sept. 8, the DOJ intervened in an existing qui tam case filed against the same Michigan surgeon, alleging that he improperly billed for medically unnecessary spinal surgical procedures. The DOJ’s press release is available here.

Notably, the DOJ’s complaint appears to be the first FCA action by the government against the type of entity commonly known as a “physician-owned distributorship” or “POD.” Continuing its heavy scrutiny of such physician-owned entities, the DOJ’s case against Reliance alleges that the returns on investment paid to physicians in a position to make referrals to a company they own violates the AKS and the FCA. In doing so, the government relies heavily on a Special Fraud Alert published by the Office of Inspector General of the U.S. Department of Health and Human Services (HHS-OIG) in March 2013, after the bulk of the conduct at issue in the DOJ lawsuit. The 2013 Special Fraud Alert declared PODs to be “inherently suspect,” and stakes out a broad position about the types of POD arrangements that will be deemed to violate the AKS. The DOJ also noted in the complaint that the business arrangements set up by Reliance did not fall within the OIG’s “safe harbor” regulations, 42 C.F.R. § 1001.952.

The defendants in the Reliance case, except for the Michigan spinal surgeon, moved to dismiss the DOJ’s complaint on numerous grounds, including that the DOJ’s theories and its reliance on the 2013 Special Fraud Alert are inconsistent with the 9th Circuit Court of Appeals’ 1995 decision in Hanlester Network v. Shalala, 51 F.3d 1390 (9th Cir. 1995). The Hanlester court found that the business arrangement at issue in that case did not violate the AKS because, among other reasons, “[t]he fact that a large number of referrals resulted in the potential for a high return on investment... is insufficient to prove that appellants offered or paid remuneration to induce referrals.”  The court defined an “inducement” that would violate the AKS as “an intent to exercise influence over the reason or judgment of another in an effort to cause the referral of program-related business.”

In its complaint, the DOJ claimed that the business arrangements established by Reliance included illegal remuneration to induce referrals because, among other things, (1) physicians could only become investors if hospitals where procedures would be performed agreed to use Reliance devices; (2) only physicians in a position to make high volumes of referrals could become investors; (3) physicians who did not use Reliance devices surrendered their investments or were bought out; (4) physicians who invested with Reliance over-utilized the spinal implants after investing; and (5) physicians who invested made minimal or non-existent capital contributions. The DOJ also alleged that the defendants concealed and misrepresented the fact and nature of the physicians’ investments, and received returns on investment that were disproportional to their capital contributions.

The DOJ’s lawsuit against Reliance and other defendants, along with its qui tam intervention, follows a pattern of increased investigation and enforcement activity relating to physician-owned entities in general, and spinal surgery claims in particular, that we have seen over the past few years. PODs and the providers that deal with them should carefully assess the OIG’s and DOJ’s positions and enforcement postures in determining whether and if so, how, to structure their business relationships.