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Health Law Scan

Legal Insights and Perspectives for the Healthcare Industry

In a March 19 letter to CMS and HHS-OIG, Senators Chuck Grassley (R-IA) and Ron Wyden (D-OR) continued their oversight efforts regarding physician-owned distributorship (POD) relationships by raising questions about US Sunshine compliance by PODs. PODs involve the ownership of medical device distributorships by surgeons who use or recommend those products in their surgical procedures. The senators are critical of CMS and OIG efforts to expose and deter POD arrangements, citing long-held concerns that POD arrangements are, as the OIG has suggested in a prior Fraud Bulletin, "inherently suspect” and abusive arrangements that promote medically unnecessary services. The March letter raises an often debated question regarding POD compliance with Physician Sunshine Rules and whether CMS or the OIG have taken sufficient steps to assure transparency compliance with these particular arrangements.

For Senators Grassley and Wyden, PODs first surfaced as a concern in 2011 prompting the Senate Finance Committee to ask OIG to assess whether such arrangements are legal under the anti-kickback statute. The Senate Finance Committee subsequently issued a report recommending that law enforcement take action against PODs and the physicians associated with them. In 2013, the HHS-OIG issued a “Special Fraud Alert,” identifying PODs as problematic under the anti-kickback statute. Notably, OIG at that time explained that “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.” Of course, all kickbacks take at least two to tango but in POD arrangements there are often more than two parties potentially benefitting from the surgeon’s financial conflict of interest-medical device company and the hospital or ASC that purchased the product from a POD owned by one of their surgeons. Not surprisingly, OIG’s report also found that surgeons and hospitals associated with PODs performed significantly more spinal surgeries and had higher costs for the devices used in those procedures.

We have been following the POD legal and compliance issues closely over the past decade, authoring a white paper on behalf of AdvaMed that examined the questionable legality of POD arrangements and focusing significantly on the conflict of interests and potential exposure of the hospital and ASC communities. Over the past several years multiple physicians and other parties associated with POD arrangements have been prosecuted for healthcare fraud-related crimes due to their involvement in PODs. As noted in a 2015 Senate Finance Report, however, while the risks of these arrangements have grown with predictable enforcement activity, POD arrangements are lucrative and have continued to grow in large health systems and smaller rural hospitals. We predict more oversight activity regarding this controversial business model.