Summary

Physician-owned distributorships continue to attract federal scrutiny. A new OIG Alert highlights health care transactions that make these distributorships vulnerable to enforcement activity.

On March 26, 2013, the U.S. Department of Health and Human Services Office of Inspector General (OIG) released a special fraud alert (the "Alert") relating to so-called physician-owned distributorships (a "POD").

The Alert noted that, "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 [federal] anti-kickback statute."

The Alert highlighted three elements of any health care transaction that may generate scrutiny:

• selecting investors because they are in a position to generate substantial business
• requiring investors who cease practicing in the service area to divest themselves of ownership interests
• distributing "extraordinary returns" on investment compared to the risk level

PODs are not a new phenomenon, and this is not the first time they have been the focus of regulatory or congressional scrutiny. A 2010 OIG settlement that included a POD resulted in the parties agreeing to pay approximately $7.4 million to the federal government. The U.S. Senate Finance Committee released a report in June 2011 focusing on potential congressional oversight of PODs. In 2011, a group of U.S. senators asked the OIG to investigate PODs, and the 2012 OIG Work Plan included PODs as the subject of an OIG study.

The Alert noted that "PODs are inherently suspect under the [federal] anti-kickback statute" and highlighted eight (8) characteristics that raise OIG concerns. These include: size of investment offered to a 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; and, physician-owners conditioning referrals to a hospital or ambulatory surgery center based on the purchases of devices through the POD.

The OIG is concerned about the dramatic increase in the number of PODs in the marketplace because of the potential for increased costs for federal health care programs and the potential for impaired judgment by physicians who are investors in a POD. The Alert noted that mere disclosure to a patient of the physician’s financial interest in a POD is not sufficient to address these concerns.

There are several steps that should be taken with respect to the OIG Alert and ensuring POD compliance. Physician investors who are already part of a POD should carefully consider their investment interest and ensure that the POD is acting appropriately. Physicians who are approached about investing in a POD as a means to diversify an income stream should be prepared to ask specific questions of the POD owners and get clear answers before making an investment in the POD. Hospitals and ambulatory surgery centers that have relationships with PODs that include referring physicians to their facility must also proceed with caution; they need to be sure the arrangement complies with the federal anti-kickback statute because there is potential liability on both sides of an impermissible transaction.

Saul Ewing can help providers keep apprised of issues related to PODs. If you would like more information about this topic or your own unique situation, please contact Bruce D. Armon, or any member of the Health Practice, or the attorney in the firm with whom you are regularly in contact.