In the wake of a recent U.S. Department of Health and Human Services Office of Inspector General ("OIG") investigation, physicians with ownership interests in medical device distributorships and hospitals should prepare for an uptick in the scrutiny of physician-owned distributorships ("PODs"). The OIG investigation generated a report, Physician-Owned Distributors of Spinal Devices: Overview of Prevalence and Utilization and follows the Special Fraud Alert on Physician-Owned Entities that OIG issued in March 2013.

For some time, OIG and Congress have expressed concern that PODs not only present a substantial fraud and abuse risk, but they also pose dangers to patient safety. The recent report found that:

• Devices supplied by PODs were used in 19% of the spinal fusion surgeries billed to Medicare in fiscal year 2011.
• In spinal fusion surgeries that used POD devices, surgeons implanted fewer devices, but the surgeries did not have lower per-device costs than surgeries using non-POD devices.
• Over 1/3 of hospitals participating in the report sample purchased spinal devices from PODs.
• When hospitals began buying devices from PODs, their rates of spinal surgery grew faster than the rate for hospitals overall. The report did not review whether the surgeries were medically necessary.
• Few hospitals in the sample required physicians to disclose their ownership in device companies, such as PODs, to their patients. Some did not even require physicians to disclose their ownership to the hospital.

OIG said its findings "raise questions about PODs' claims that their devices cost less than those of other suppliers." According to OIG, hospitals' inconsistent requirements regarding physician disclosure of ownership in PODs reduces the ability of hospitals to identify potential conflicts of interest among providers. OIG noted that the Physician Payments Sunshine Act may improve the ability of hospitals and patients to identify physicians' investments in device companies, because the Act will require most PODs to report to CMS all physician ownership and investment interests, and those organizations and payments to physicians will be listed on a publicly available Web site.

Following release of the report, a group of senators issued a press release in which they questioned whether patients are undergoing surgeries based on medical need or because of the financial incentives for physicians. The senators suggested that "as a start" hospitals examine "whether their physicians are participating in and benefitting from these arrangements and what that means for patients."

Hospitals should heed the senators' "suggestion," and physicians should be prepared for greater transparency regarding their investments in PODs. Additionally, in anticipation of future scrutiny, hospitals and physicians should review their documentation procedures to ensure that all elements of medical necessity for spinal fusion procedures are routinely and timely charted. While much is changing in healthcare, the focus on PODs will continue.