On July 29, 2013 Ascension Health, the largest Catholic and non-profit healthcare system in the U.S. serving 77 hospitals, issued a directive prohibiting its affiliates from purchasing items or services from PODs (physician-owned distributors) that are either owned or controlled by one or more physicians.
The reason? Too risky.
Ascension Health Concerns
Ascension cited the special fraud alert released March 26, 2013 by the Office of the Inspector General (OIG), which focused on the characteristics of PODs that the OIG believes pose a risk of fraud.
“The Alert reaffirms the OIG’s longstanding belief that POD arrangements have a strong potential for improper inducements between and among the physician investors, the entities, the device vendors, and the device purchasers and, as such, should be closely scrutinized under the fraud and abuse laws, such as the Anti-Kickback Statue (AKS) and Civil Monetary Penalties law (CPM), ” stated the Ascension directive.
The penalties for violating AKS and CMP, noted Ascension, include felony convictions and criminal and/or civil fines. The Department of Health and Human Services may also exclude individuals or entities that violate these laws from participating in the Medicare and Medicaid programs. (The health care “Death Penalty.”)
The directive also such further “heightened concerns” as:
- The Federal Stark Law, noting a U.S. Senate request to CMS (Centers for Medicare and Medicaid Services) to weigh in on the implications of POD arrangements under the Sunshine Act.
- Risk to tax-exempt organizations under the Internal Revenue Code, under which the IRS can impose sanctions on an “Excess Benefit Transaction” that involve “Disqualified Persons, ” such as physicians.
- Conflict of interest policies, which may be implicated by POD arrangements and would be subject to ongoing compliance review by a hospital or health system.
Given these risks, Ascension announced that it would no longer purchase from PODs.
Intermountain Healthcare POD Limitations
Before Ascension issued its directive, the large Utah-based Intermountain Healthcare system (160 healthcare institutions in Utah and Idaho which insures about 19% of Utah’s residents) issued a policy statement on May 2013, saying that, with some exceptions, it will not enter into any agreement to purchase from a POE (physician-owned entity).
The big exception is that the physician owner is not in a position to generate business for Intermountain. In Intermountain’s view, Utah physicians are in a position to generate business for the health system. In fact, 700 of Utah’s 4, 600 physicians work for Intermountain. Evidence of the exception must be approved by the system’s Anti-Kickback Statue Committee.
The POE must also demonstrate that it does not have any of the “eight suspect characteristics identified by the OIG Fraud Alert. (See box: POD Suspect Characteristics)
- The size of the investment offered to each 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, or Physician-owners pay different prices for their ownership interests, because of the expected or actual volume or value of devices used by the Physicians.
- Physician-owners condition their referrals to hospitals or ambulatory surgical centers (ASCs) on their purchase of the POE’s devices through coercion or promises, for example, by stating or implying they will perform surgeries or refer patients elsewhere if a hospital or an ASC does not purchase devices from the POE, by promising or implying they will move surgeries to the hospital or ASC if it purchases devices from the POE, or by requiring a hospital or an ASC to enter into an exclusive purchase arrangement with the POE.
- Physician-owners are required, pressured, or actively encouraged to refer, recommend, or arrange for the purchase of the devices sold by the POE or, conversely, are threatened with, or experience, negative repercussions (e.g., decreased distributions, required divestiture) for failing to use the POE’s devices for their patients.
- The POE retains the right to repurchase a Physician-owner’s interest for the Physician’s failure or inability (through relocation, retirement, or otherwise) to refer, recommend, or arrange for the purchase of the POE’s devices.
- The POE is a shell entity that does not conduct appropriate product evaluations, maintain or manage sufficient inventory in its own facility, or employ or otherwise contract with personnel necessary for operations.
- The POE does not maintain continuous oversight of all distribution functions.
- When a hospital or an ASC requires Physicians to disclose conflicts of interest, the POE’s Physician-owners either fail to inform the hospital or ASC of, or actively conceal through misrepresentations, their ownership interest in the POE.
Intermountain may also make an exception for “disruptive technologies.”
Tenet Healthcare POD Requirements
Then, this past June, Tenet Healthcare Corporation issued a policy stating that Tenet facilities can only enter into Purchase Arrangements with PODs that comply with applicable laws and regulations, including the Anti-Kickback law and the Stark law. Specifically, a Tenet affiliate may purchase from a POD if the POD is listed on a public stock exchange and the POD is not a referral source.
Lukianov Sees the End
On a conference call with analysts on July 30, 2013, Alex Lukianov, head of NuVasive, Inc. told analysts while it’s too early to declare the demise of the POD model, he clearly sees a decline.
“We are seeing a lot more attention being paid to PODs and we’re starting to see more pushback from the hospitals and from the networks, ” said Lukianov. He added that the company has seen a series of letters coming from some of the major networks. “Actually, we even received one ourselves, making sure that we are not a POD and making clear that they will not work with PODs. So I think the word is still slowly getting out to the surgeons, but it’s definitely having an impact.”
“I wouldn’t go so far as to say that there’s now market shifting taking place. Hopefully, we will later in the year and into next year.”
Lukianov told OTW that he has seen no less than five “won’t work with PODs” letters, notably from one of the biggest groups.
In terms of getting business back from PODs and his outlook of how long the POD model is going to stay afloat, Lukianov told analysts that companies don’t really pick up a POD’s business because a POD implies a cluster of surgeons working together.
Surgeon Movement?
“So the question is more, are we going to start to see individual surgeons move out of PODs and back to working with mainstream companies? And I believe the answer to that is yes. We have seen a little bit of that. Certainly, no major accounts or anything of that sort that would drive our expectations for more revenue. But I think that’s the trend that we’re going to see more and more of as we move into ’14 and ’15.”
Lukianov says he thinks the OIG warning “really ruffled the hospitals and got them riled up and have taken a very positive stance with regard to not working with PODs.”
PODs and Economics
Are PODs going away?
POD owners we spoke with say the pressure to drive down health care costs and the economics to squeeze out transactional costs will mean distribution disruption will continue. Whatever business model is allowed, those economic pressures won’t change. Add in increasing payer scrutiny and even insurance company purchases of health care systems and the recipe for further disintermediation is ripe.
The ePOD
Kevin Booth, M.D. is an owner of a POD in Northern California.
Booth told us that it is unfortunate that health care entities have misinterpreted the OIG warning.
“The OIG simply clarified some common sense activities that if breeched would clearly be unethical. We have worked with the OIG, and I believe their intentions were very straightforward. They simply highlighted some potential egregious activities. They neither endorsed nor overtly criticized the POD model.”
Booth has been part of what he calls an “ePOD” (ethical POD) for several years.
“Our ePOD business model is based on full disclosure, lowest hospital pricing, ‘brick and mortar’ permanence and financial risk. We have independent verification of our stable utilization (lack of inducement) and the hospital we work closely with has their own audits showing an average of nearly one half million dollars per year per surgeon savings vs. the best contracts they could negotiate with the major device companies.”
“In short we are open, ethical, valued and embraced by a progressive and savvy hospital. The money we save goes into hospital infrastructure, patient care and nursing jobs…not the profits of a large implant company or sales force. We have had ZERO implant related failures or adverse events attributed to any ePOD supplied product.”
Cutting implant costs easily by 40% is causing great consternation with the major companies, noted Booth. “They stand to lose billions of dollars if 3rd party distributors (ePODs) are widely embraced, ” added Booth
Sensational News Reports
Booth continued, “The recent New York Times article highlighted the obscene pricing of orthopedic implants in the U.S. vs. Europe. The public, hospitals, physicians, insurers, and government are increasingly aware of this overt ‘money grab’. I suspect pharmaceutical companies would love to ‘roll back time’ and do away with competitive generic cheaper medicines. Obviously, so would the major device manufacturers like to eliminate the competition of innovative, less marketed, functionally identical, and cheaper FDA approved orthopedic devices.”
Referencing a recent Wall Street Journal article, (“Surgeons Eyed Over Deals With Medical-Device Makers Justice Department Investigation Shines Light on Federal Authorities’ Broader Scrutiny of Physician-Owned Distributorships”), Booth said it is a sensational news story when a rare doctor “crosses the line, ” but this has little to do with PODs.
“Physicians are held to a higher standard (as they should be) and those who can’t maintain this and manage our numerous conflicts of interest deserve the appropriate punishment. However, those of us who have brought innovation, market pressure (competition), real value, cost savings, quality, integrity and enlightenment to this complex business deserve praise not vilification. This seems somewhat less news worthy, unfortunately.”
Orthopedic Marketplace
Booth says the public really doesn’t understand the complexity of the orthopedic device marketplace which he says is unlike any other major industry in that purchasing decisions are not made by the consumer.
“If we look at other commodities such as airline tickets, TVs, cars, etc. the purchaser drives manufacturer competition and the consumer benefits by lower prices. With orthopedic devices, the selection is up to the surgeon (who usually choses a familiar and comfortable brand he/she trained with), the hospital then directly pays for it (but can do little to direct the doctors selection) and the insurance company and patient indirectly pay.”
“Often the insurance company is ‘capped’ in their implant cost liability, as is the patient once their deductible is met. Thus, there are at least four parties in the transaction….none of whom are directly related or well positioned to exercise cost controls. In other countries, the patient is the consumer and prices clearly reflect a direct and competitive market.”
We are unlikely in the U.S. to engage patients in directly paying for their implants, said Booth, “thus, the current model is destined to prevail unless another interested party re-directs competition in this market. As of yet, the only entity capable of directly changing this entrenched paradigm is the ePOD.”
Down, but Not Out
So are PODs going away? Depends on who you ask. But the controversy continues as OIG promises lawmakers they will provide more guidance. While some health systems are tightening their rules for using PODs or banning them outright, physicians who own their own means of distribution aren’t throwing in the towel just yet.
“Our ePOD business model is based on full disclosure, lowest hospital pricing, ‘brick and mortar’ permanence and financial risk. We have independent verification of our stable utilization (lack of inducement) and the hospital we work closely with has their own audits showing an average of nearly one half million dollars per year per surgeon savings vs. the best contracts they could negotiate with the major device companies.”
Notice that this quote does not compare the savings to the next higher bid supplier just the “major device companies.”
How much REAL financial risk is involved when you purchase products you KNOW will be implanted?
How much financial risk is involved when you hire personnel based on a known profit margin and a historical volume number which is largely in your own control?
One thing for sure no matter which device it is you will get paid again for surgery – If the devices break- But how does one know which device out there has the best track record. Infact- I am not sure whether anybody knows the total number of defective device breakages that have happened. It has been concealed or hidden for some reason.