On May 17, we reported that the U.S. Senate was looking into Physician-Owned Distributorships (PODs).
On June 9, a bipartisan group of Senators officially called for an investigation by the Office of Inspector General (OIG) into the structure of PODs and the, “lack of guidance being provided to physicians, patients and the health care community.” Their call comes on the same day the American Association of Surgeon Distributors (AASD) announced the formation of their trade association.
POD Physicians Applaud
John Steinman, D.O.“I applaud the Senators’ interest in obtaining regulatory clarity and necessary oversight for this model and look forward to the opportunity to meet with members of interested Senate committees to convey a balanced perspective on this model, ” said John Steinmann, D.O., widely regarded as one of the founders of the POD movement, in a statement to OTW.
Steinmann says he also applauds the efforts of the AASD, “which has worked very hard to establish standards governing the ethical and legal operation of this model. Accreditation by AASD provides recognizable assurance of compliance, quality, and protection of patient interest, similar to accreditation for hospitals and surgery centers.”
The AASD told OTW on June 9 that is also supports the Senators’ action.
The POD Market
PODs have captured somewhere between 10-15% in the U.S. of the $9.6 billion spinal hardware market, according to Wells Fargo analyst Larry Biegelsen in a June 9 investor note.
Senators Charles Grassley, Orrin Hatch and Max Baucus
A Senate Finance Committee analysis for Republican Senator Orrin Hatch, the Ranking Member of the committee, identified at least 20 states with multiple PODs that appear to be operational. Over 40-plus PODs have been identified in California alone. “In particular, there seems to be a marked increase in rural areas where the POD distributor model is being used very aggressively, ” said the analysis.
The request for the investigation was in the form of two letters to Donald Berwick, M.D., Administrator of the Centers for Medicare and Medicaid Services (CMS) and the U.S. Department of Health and Human Services (HHS) Inspector General Dan Levinson, JD. The requests came after the Hatch analysis was released on June 9.
Hatch Analysis: Overutilization and Unnecessary Surgeries
The Hatch analysis claims to have identified several instances where the utilization for spine refusions or total joint surgeries spiked significantly in areas after the PODs were established.
Hatch’s analysis cites anecdotal evidence about unnecessary surgeries, including a surgeon who “provided examples to the Committee of elderly patients in a POD area who were receiving eight to 10 fusions in their back despite the serious health risks posed by these procedures.” Hatch also noted patients who “died from multiple operations” and a more than 300% increase in spinal re-operation rates at one hospital following the creation of a POD in the area.
The letters requesting the investigation were signed by Democratic Senators Max Baucus, the Chairman of the Senate Finance Committee, Herb Kohl, Chairman of the Special Committee on Aging and Republican Senators Hatch, Bob Corker (Ranking Member of the Special Aging Committee), and Chuck Grassley (Ranking Members of the Judiciary Committee).
The Confusion Conundrum
The letter to Inspector General Levinson said, “There is much confusion in your office’s stance on PODs as there is confusion in the health care community about how to arrange these in a legal manner. Until there is clarity, inappropriate versions of these entities could continue to proliferate, potentially driving up medical device costs to the Medicare and Medicaid programs putting patient safety at risk.”
Lawyers for PODs say there is no confusion and the government has already chosen not to ban PODs.
On August 19, 2008, CMS, in 73 Fed. Reg. 48, 727, wrote, “We are not adopting the position that physician-owned implant or other medical device companies [are entities to which physician may not refer if they have an ownership interest]”).
“Accordingly, ” wrote Hooper Lundy attorney Charles Oppenheimer in a May 20, 2011 letter to OTW (after we called for more regulatory clarity on the subject), “PODs remain permissible under the Stark law, if properly structured and operated, so as to satisfy the indirect compensation arrangement exception.” Oppenheim wrote the 2008 CMS statement was given in response to a comment from, “a ‘large medical device manufacturer’ effectively seeking to ban PODs under the federal physician self-referral statute (the ‘Stark law’).”
Oppenheim wrote the government has “chosen not to ban PODs, despite the efforts of [the law firm] Hogan Lovells, on behalf of the large medical device companies it represents, to shut down healthy competition from PODs, because these large device companies are threatened by the POD business model, which is saving hospitals millions of dollars compared to more traditional medical device distribution channels.”
The OIG Letter
The Senators tell Levinson that it appears that over the last 18-24 months there has been a “substantial” growth of PODs.
“Curiously, this follows…a marked fifteen fold increase in the number of spinal fusion surgeries from 2002-2007.” The Senators say further analysis is required to determine whether these developments are related.
In spite of POD attorney Oppenheim’s assertion that there is no confusion about the government’s position on PODs, the Senators say, “there is confusion…about how to arrange these in a legal manner.” Until then, “inappropriate versions of these entities could continue to proliferate.”
The Senators worry that the government’s existing OIG guidance, “which is largely focused on physician-owned providers of ancillary healthcare services…is not adequate to protect against the risk of PODs abuse.” As a result, the letter says some PODs are being structured “in very haphazard ways.”
August 12 Deadline
The Senators want Inspector Levinson to report back to them by August 12 on the results of his inquiry looking into current POD structures and activities, along with recommendations for further action and whether or not the issue requires further legislation.
They are especially interested in an analysis of operational and legal issues.
POD Models
Some PODs, according to the letter, “appear to have appropriate frameworks, ” but there are, “far more which are operating in a manner that appears to be unethical and illegal…We are most concerned about allowing such activities to operate without additional guidance and oversight.”
The Hatch analysis cites, as an example, “if a POD was not permitted to do business with its own investors, their partners, or affiliated hospitals, presumably they would be acting as a traditional distributor and not be able to profit from their usage or the usage of other physician investors. However, even this structure would not prevent two separate PODs from using each other’s products as a means to circumvent these rules.”
The analysis also notes there are many different structural twists on POD models and the following are some of the many examples of the variations on the POD models identified by the Committee:
Every physician investor receives a percentage of the money that their surgeries generate for the POD;
Each physician investor is compensated equally, irrespective of his or her individual usage;
An individual physician investor’s usage is carved out from the profits he or she receives, but receives profit from the other physician investors’ usage;
The POD’s product use is limited to procedures that are not federally reimbursable;
The POD is organized to sell devices designed by the physician investors;
The POD includes a shell, or second corporation/entity (i.e., a construction company), which is used to facilitate payment to the physician investors so as to avoid direct payment from the POD that is selling the products to its physician investors; and
PODs that span multiple states such that physician investors from each state only profit from physician investor usage in the other state.
The letter includes over 30 specific questions that asked about the background of PODs, legal and investment issues.
Self Compliance and Standards
Steinmann said he and his colleagues have reviewed Hatch’s analysis and subsequent letters to CMS and HHS and are confident they have addressed each of the issues identified by the Senators.
Steinmann concluded, “Despite the large orthopedic companies’ fierce and well-funded opposition, our distributors have created millions in annual savings that could not have been obtained by the hospitals without this model, achieving this result with FDA cleared, quality medical devices from U.S. manufacturers and without a shred of evidence of inappropriate utilization. Our model embodies exactly what the U.S. government is asking of physicians in healthcare reform—which is to align with hospitals and innovate means to reduce healthcare costs while preserving quality and safety.
“Our compliance program along with the Standards set forth by the AASD should go a long way in providing government protection against abuse while preserving what has proven to be the most effective method to control costs associated with medical devices.”
Senator Hatch says his analysis of the financial incentives created by PODs, show a “dangerous precedent [that] can lead to serious overutilization and force unnecessary, invasive procedures for patients. This arrangement demands further scrutiny and should be investigated.”
We’d like to introduce Dr. Steinmann to Senator Hatch when the doctor comes to Washington. Sounds like they agree to the need for POD clarity.
Click here to read the Levinson letter.
