In an April 13 story, The Wall Street Journal (WSJ) claimed that Omega Solutions, a California-based physician-owned distributorship (POD), “sometimes pays surgeons to use its products.” We took the Journal to task for citing poor evidence in accusing a company of committing a felony in our own story on April 15.
On April 27, OTW received a “Letter to the Editor” (reprinted below) from attorneys at the Hogan Lovells law firm. The firm represents device manufacturers and issued a widely published White Paper in 2009, arguing that physician-owned distributorships ran afoul of federal kickback statutes and potentially clouded a physician’s ability to choose the best implant for his or her patient.
Omega Shuts Warehouse, Inventory in Limbo
On May 5, OTW learned from the CEO of Omega that the company has shut its doors. According to the CEO, device companies that had been selling implants to the Omega POD, notified the company that due to the publicity generated by the WSJ article, they would no longer be selling product to the POD. The CEO told us that he’s looking at a warehouse full of implants that he and his physician partners will not be able to sell. He says they followed the letter of the law and now their significant investment is in danger of being lost.
Hogan Lovell: PODs Run Afoul of Kickback Statutes
Below is the Hogan Lovell letter to OTW, [slightly edited for brevity]. Following the Lovell letter, we share 19 legal requirements for a POD sent to us by the CEO of Omega and prepared by the law firm of Hooper, Lundy and Bookman. Hooper represents PODs and wrote the legal paper cited by many PODs as the opinion they relied on to structure their business.
Dear Editor:
We read with interest Walter Eisner’s April 15 response to the Wall Street Journal’s April 13 article on…physician-owned medical device distributorships.
As described, the POD relationship with…(any participating hospitals and implant manufacturers) on its face implicates the federal health care programs antikickback law.
This law prohibits payment for the referral of business reimbursable by Medicare and other federal health care programs. The law has long been interpreted to be violated if even “one purpose” (as opposed to a sole or primary purpose) of a payment arrangement is to induce the purchase of products or referrals for patient services reimbursable under a federal health care program.
Where this improper intent was present, courts have found unlawful remuneration in the giving of an opportunity to earn a profit, and in earning a return on an investment.
It is difficult to argue that the one-purpose test is not violated by the POD business model. Plainly, at least one purpose of a hospital’s agreement to purchase products through a POD is that it provides the physician owners with a direct financial return for each hospital referral, a return that could not be achieved (and a referral that could not be secured) if the hospital bought direct from the manufacturer or from a distributor without physician owners.
Likewise, manufacturers agree to sell through a POD because they believe that this direct financial return will lead the owner physicians to order their products in lieu of products that that do not generate profits for the doctors performing the procedures.
There is no business risk to anyone involved, since the owner physicians control both product choice and patient referral. The direct financial return that results from both of those discretionary decisions protects the hospital, the suppliers, and the doctors from any business risk. [our emphasis]
Federal agencies charged with enforcing the health care “fraud and abuse” laws apparently share the concern that a business model whose profits are generated primarily by physician referrals creates the risk of abuse that run afoul of those laws.
The HHS Office of Inspector General (OIG) has said that it has “serious kickback concerns when companies link investment opportunities to the ability to generate business and offer returns on investment that are disproportionate to business risk.” It believes that POD arrangements “should be closely scrutinized under the fraud and abuse laws because they raise the type of risks that [those statutes] were designed to address.”
The OIG also has affirmed that “the fact that a substantial portion of a venture’s gross revenues is derived from participant-driven referrals is a potential indicatorof a problematic joint venture.” And the OIG has reminded industry on many occasions that “increased costs to the Medicare and Medicaid programs and harm to beneficiaries” are not necessary in order for an arrangement to violate the law.
The Centers for Medicare and Medicaid Services (CMS) has echoed this concern, stating its belief that POD arrangements “may serve little purpose other than providing physicians the opportunity to earn economic benefits in exchange for nothing more than ordering medical devices” from their POD. “When physicians profit from the referrals they make to hospitals through physician-owned implant and medical device companies (‘POCs’), we are concerned about possible program or patient abuse.”
So why do PODs continue to proliferate?
In part, the arrangements are so beguilingly free of business risk and full of profit potential that it is difficult for physicians to resist their allure in the absence of visible enforcement proceedings. Add to this that federal enforcers appear to be biding their time, waiting for just the right case, and the short-term opportunities may appear to outweigh the long-term negatives. But as hospitals who lived through the government’s enforcement campaigns against billing for medical residents will recall, it is little help when faced with such proceedings to plead that “we thought it was ok at the time because nobody tried to stop us.”
Responsible implant manufacturers, hospitals, and physicians should pay close attention lest they become poster children for a new wave of enforcement.
Sincerely,
Thomas N. Bulleit
Sara Kraner
Hooper, Lundy: The Indirect Compensation Exception
The Hooper, Lundy and Bookman website offers the following February 2011 Health Law Perspectives titled, “Regulatory and Structural Considerations for Physician-Owned Medical Device Companies, ” by Eugene Ngai and Charles Oppenheim.
“The physician-owned device company arrangement is likely to create an indirect compensation arrangement between the physician-investor and each hospital to which that physician-investor refers Medicare patients for hospital services.
However, a properly structured physician-owned device company may rely on the indirect compensation arrangements exception. This exception is met if the agreement between the physician-owned device company and the hospital provides for the medical devices to be sold at fair market value, and at a price that does not vary during the term of the agreement based on referrals or other business generated by the referring physician-investor. In addition, the agreement must be set out in writing and signed by the parties, and must not violate the federal anti-kickback statute.”
http://health-law.com/health-law-perspectives/february-2011/#3
POD Legal Requirements
The following “Legal Requirements for Medical Distributorship, ” prepared by Hooper Lundy was shared with OTW by the CEO of Omega:
The company will hire and employ its own personnel.
The company will purchase products directly from manufacturers/distributors under its own contracts.
The company will sell products directly to its own customers such as hospitals or surgery centers under its own contracts.
The company will manage its own inventory.
The company will have its own distinct office and warehouse space for operation of its own business.
Products will be shipped to the company by the manufacturer/distributor and will be separately warehoused by the company before resale to hospitals or surgery centers.
The company will hold any and all licenses or governmental approvals necessary for operation of its business.
The investment price offered to physicians will not be based on the projected referrals from the physicians, nor will the amount being offered to physicians reflect the anticipated referrals generated from the physicians procedures.
No physician’s investment interest will be subject to repurchased for failure to use the company’s devices in their surgeries.
The investing physicians will not be pressured in any way to utlize the company’s devices in their surgeries.
The investing physicians will not exert pressure on the hospitals or surgery centers to purchase the devices from the company.
The company will be adequately capitalized for its operations through the initial capital contributions of its members and that the physician investments will not be nominal. The members’ capital contributions will not come from the manufacturers/distributors that sell devices to the company, nor will the managers or its affiliates loan funds to the physician investor for their capital contributions.
The use of the devices will at all times be medically necessary.
The company will not bill patients or payors (including Medicare and Medi-Cal) for the devices.
The company will have written agreements with the manufacturers/distributors for purchase of the devices.
The company will have written agreements with the purchasers, hospitals or surgery centers, for the sale of the devices.
The purchasers, hospitals or surgery centers will be charged a fixed price based on negotiations, which will not increase with the use of more devices.
The company will generally have a fixed list of prices that will be generally available to all purchasers, hospitals or surgery centers.
However, the company may be willing to accept lower pricing if the purchaser dictates lower fixed pricing. The payments by the purchasers will not be higher than fair market value for the devices.
The CEO of Omega told OTW that he and the physician owners followed all these rules and risked a significant amount of capital. That risk is now in danger of becoming a loss. The sooner the government acts to advise physicians, manufacturers and distributors about the legality of PODs, the better. There are too many implants in warehouses in limbo.
My partners and I are attempting to start a Spine and Neuro Implant Distributorship Company. Is it okay to have Physicians part of the company or would it be wise to be totally free of any Physician ownership?