Adam Pike and Bret Berry would not seem like the most obvious choices to lead a constitutional challenge to physicians being discouraged from having ownership in their own production and distribution businesses.
But on October 9, 2013, Pike and Berry announced they had gone to federal court in California to argue that a March 2013 special order from the Office of Inspector General (OIG) regarding physician-owned distributorships (PODs) is unconstitutional because it prevents them from speaking to physicians about physician-owned businesses.
In their claim, Pike and Berry argue that the OIG order states that physician-owned businesses are “inherently suspect, ” and therefore discourages them from speaking to physicians about doing business together. This chilling of speech, they claim, violates the freedom of speech provision of the First Amendment.
Pike, Berry and Reliance
Pike is a former Synthes, Inc. sales rep, while Berry was an engineer at Medtronic, Inc. with over 70 patents and patent applications. Both ended up at Amedica Corporation in Utah. In 2006, the two founded Reliance Medical Systems, LLC, in Bountiful, Utah. From its inception through 2012, Reliance and its related companies included physicians as owners to design and distribute orthopedic devices.
In one such company, Apex Medical Technologies LLC, according to a sensational Wall Street Journal article on July 26, 2013, two surgeons bought a 20% interest in the company, with 60% going to Pike and Berry and one of their business associates. According to public records, there are, or were, at least 11 such related companies across six states.
The Wall Street Journal article, “Surgeons Eyed Over Deals With Medical-Device Makers”, described a federal investigation of one of the Apex surgeons, Aria Sabit, M.D., over potential improper use of devices designed and distributed by Apex. Reliance claims the government “inappropriately leaked” details of the OIG investigation.
Pike and Berry had already moved away from a physician ownership model in 2012. But now, they want to return to physician ownership and structure a business model that, like its prior business model, fully complies with federal law, including the anti-kickback statute,
However, the OIG is currently investigating Reliance and physicians with whom Reliance previously communicated, in connection with Reliance’s prior formation of physician-owned entities.
Chilled Speech, Chilled Business
Reliance claims it cannot exercise its First Amendment rights to communicate with physicians about forming new physician-owned entities out of fear that any such entities are instantaneously cloaked with a presumption of guilt, in violation of Reliance’s due process rights, since these entities are presumed by the OIG to be “inherently suspect, ” according to their lawsuit against the government.
The federal pressure has presumably also had an effect on the growth of physician-owned distributorships. After the most recent annual meeting of the North American Spine Society, a number of Wall Street analysts reported that the POD challenge to large spine instrument suppliers has eased.
Hospitals, which either have purchased or are considering purchasing products from PODs, have apparently gotten the message.
In May 2013, Intermountain Health care system, (with 160 healthcare institutions in Utah and Idaho and insures about 19% of Utah’s residents) issued a policy statement, saying that, with some exceptions, it will not enter into any agreement to purchase from a POE (physician-owned entity). Others have followed with outright bans or restrictions, citing “legal entanglements.”
“Big Corporations, ” Big Government Crusade
Reliance alleges that “Big Corporations” are behind the government’s crusade.
Kevin Booth, M.D., an owner of a POD in Northern California told OTW in an August article that ePODs (ethical PODs) easily cut implant costs by 40% and that thesephysician-owned businesses are “causing great consternation with the major companies. They stand to lose billions of dollars if third party distributors are widely embraced.”
According to Reliance’s Complaint for Declaratory Relief, “Big Corporations” were losing business to physician-owned businesses and undertook a “crusade” against such businesses. They claim a major international law firm was hired to advocate for stronger legislative and regulatory action to halt the proliferation of physician-owned businesses. They then, allegedly, financed a lobbying effort with substantial contributions and successfully lobbied for congressional hearings in 2011, resulting in the OIG’s special order.
Competition by Regulation
This crusade, claims the lawsuit, has caused a “substantial number of hospitals” to stop doing business with physician-owned businesses.
Because current laws allow physician-owned entities to manufacture and distribute devices, the “Big Corporations” were forced to compete in the marketplace.
“Unable to win in the marketplace, the Big Corporations embarked on a multi-year effort to win at the legislative/agency level through substantial lobbying efforts, ” claims Reliance.
Ignoring Precedent
The Reliance complaint argues that the OIG special order clashes with previous OIG guidance and court decisions.
The leading court case which considered the limitations that the anti-kickback statute imposes on physician-owned entities is Hanlester Network v. Shalala, 51F.3d 1390 (9th Cir. 1995).
The court addressed whether appellants violated the provisions of the Medicare-Medicaid anti-kickback statute by:
- Offering or paying remuneration to physician limited partners to induce the referral of program-related business to limited partnership laboratories, or
- Soliciting or receiving remuneration “in return for” referrals by virtue of their management agreement.
- The court found that “mere encouragement would not violate the statute.”
Permissible Conduct
The court further found that the following conduct was permissible under the anti-kickback statute:
- Enlisting physician investors who were in a position to refer substantial quantities of tests to the joint venture laboratories;
- Intending to encourage limited partners to refer business to the joint venture laboratories;
- Offering physicians the opportunity to profit indirectly from referrals by referring patients to laboratories they owned when they could not profit directly;
- Telling potential investors that the success of their investments depended upon referrals from investors, with the practical effect of low referral rates being failure of the business;
- Making substantial cash distributions to investors based on each individual’s ownership interest, and not on the volume of their referrals; and
- Offering a potentially high rate of return on investment if the investors made a large number of referrals.
“By approving this conduct, the court held that the foregoing are insufficient to prove that appellants offered or paid remuneration to induce referrals, ” stated the Reliant Complaint.
Illegal Conduct
According to the Reliance suit, after approving those six kinds of conduct, the court then underscored specific actions which the court held were violations of the anti-kickback statute and constituted an offer of payment to induce referrals of program-related business.
- Implying that eligibility to purchase an investment interest in a business depends on an agreement to make referrals;
- Telling prospective investors that the size of the investment interest they would be permitted to purchase depends on the volume of business that the investor referred to the laboratories;
- Stating that investors who did not refer business to the laboratories would be pressured to leave the business; and
- Telling potential investors that the investors’ return on their investment would be virtually guaranteed.
After Hansler, the California Attorney General issued an opinion on February 27, 2006 establishing the lawfulness of physician-owned entities after being asked to answer two questions by a legislator.
First, may a physician prescribe for a patient a medical device that is distributed by a company in which the physician has an ownership interest? And, second, if the physician may prescribe for a patient a medical device that is distributed by a company in which the physician has an ownership interest, may the company solicit physicians as investors in the company?
The California Attorney General said:
- A physician generally may prescribe for a patient a medical device that is distributed by a company in which the physician has an ownership interest, provided that any return on investment is based upon the physician’s proportional ownership share and requisite disclosures are made; and
- Where a physician may prescribe for a patient a medical device that is distributed by a company in which the physician has an ownership interest, the company generally may solicit physicians as investors in the company.
Where’s the Calvary?
One might think that other physician-owned distributors would be eager to join Reliance in fighting the government.
Surprisingly, they have found few allies so far.
We put the question to John Steinmann, D.O., one of the founders of the American Association of Surgeon Distributors (AASD).
Steinmann told us that until there are well-accepted and enforced standards that clearly identify proper conduct, the healthcare community will continue to be frustrated by the lack of clarity that suppresses beneficial, ethical distribution models and facilitates the presence of models with unacceptable conduct.
Well-Intentioned ePODs
“The AASD has provided well-intentioned physician-owned distributorships the ePOD certification process to systematically address suspect characteristics by requiring transparency, disclosure, cost savings, product quality assurance, utilization tracking and adherence to all state and federal Anti-kickback and Fraud and Abuse Laws. AASD confers upon its members the designation of ePOD in recognition that there is a distinction between the appropriate use of the physician distributorship model by ethical individuals, and the inappropriate use of the model.”
Steinmann added that the AASD is supportive of an enforcement regimen that eliminates POD’s whose conduct does not demonstrate the highest ethical and legal standards. “Instead of attacking the government for their use of words, Reliance should instead focus on proving proper conduct, patient protection, and merit.”
Pike and Berry have been short on transparency with their privately held companies. They don’t have a web site and have not authored papers documenting cost savings at medical conferences as some other physician-owned businesses have done.
Judge’s Declaration Sought
Reliance wants the federal judge to enter a judgment declaring that physician-owned entities that comply with the law are not “inherently suspect under the anti-kickback statute, ” and hospitals and ambulatory surgery centers are not “at risk” if they enter into arrangements with physician-owned entities.
The First Amendment, concludes the Reliance Complaint, protects Pike’s and Berry’s right to speak to physicians about doing business together.
