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Owning the Supply: Physician Owned Distributorships and Regulatory Concerns

Can a physician own a company which distributes medical hardware for implantation during surgery he will be performing on patients?

Many physicians seek to own a physician owned distributorship (“POD”) company which will supply the necessary hardware for the surgeries. There are many good reasons for a physician to do this, to include lowering the cost of treatment for patients and to ensure quality of the materials used.

PODs are not expressly prohibited under the Start Law (42 U.S.C. § 1395nn), Federal Anti-Kickback Law (42 U.S.C. § 1330a-7b(b)), or the Health Care Fraud Statute (18 U.S. § 1347). However, the consensus among legal commentators is that a physician who utilizes his own POD is almost certainly violating the AKL and is also likely violating the Stark Law.

A.      The Anti-Kickback Law Issues

The Anti-Kickback law (“AKL”) prohibits a practitioner from “knowingly and willfully” offering, paying, soliciting, or receiving remuneration, either “directly or indirectly, overtly or covertly, in cash or in kind” for referring a patient or in return for purchasing any good or item when payment “may be made in whole or in part under a Federal health care program.” 42 U.S.C. § 1320a-7b(b).

If even one purpose of the transaction is for a physician to order the hardware through his or her POD, even if it is not the sole or main purpose, the AKL is implicated and would open a practitioner up to scrutiny by the Office of the Inspector General (“OIG”). Thomas N. Bulleir & Sara A. Kraner, Why Physicians Should Not Be Permitted to Profit from Self-Referral to Physician-Owned Implant Distributors: A Response to Joseph Truhe’s Should Surgeons Be Encouraged to Take an Active Role in the Implantable Medical Device Supply Chain Through Physician Owned Entities? FDLI’S Food & Drug Pol’y F., at 4 (Sept. 12, 2012). Many commentators have suggested that cost savings per patient is less important if there is increased overutilization of this hardware.

The fact that the AKL is implicated does not mean a practitioner would have any liability. There are numerous safe harbor exceptions and even if the transaction does not fit into one of those exceptions, appropriate safeguards can prevent a practitioner from being found to be civilly or criminally liable. With PODs, however, there is a “strong potential for improper inducements” such that OIG will “closely scrutinize” transactions between a POD and the referring physician for violations of the fraud and abuse laws. OIG Response to Request for Guidance Regarding Certain Physician Investments in the Medical Device Industries (Oct. 6, 2006). However, despite the government stating there will be additional scrutiny of PODs, there is no governmental guidance as to what might be necessary for a POD to be lawful, nor is there any current belief that the government plans on providing any in the near future. OIG states they will scrutinize POD arrangements on a case-by-case basis.

Any POD arrangement is open for close and potentially costly scrutiny under the AKL.

B.      Stark Law Issues

The Stark Law prohibits a physician from referring a patient to an entity which performs designated health services (“DHS”) if the physician has a financial relationship with that entity and prohibits an entity from submitting a claim for DHS pursuant to a prohibited referral. 42 U.S.C. § 1395nn(a)(1). “Financial relationship” includes ownership “through equity, debt, or other means and includes an interest in an entity that holds an ownership or investment interest in any entity providing the [DHS]” or a compensation arrangement, direct or indirect, between the physician and the entity. § 1395nn(a)(2).

What constitutes DHS is enumerated and there is no express mention of implantable medical hardware. However, many commentators suggest that the supplies would be considered part of the inpatient or outpatient services, which are considered DHS. Bulleir & Kraner, at 14. Also, if the physician owns the practice performing those services, there is liability there as his practice would be performing DHS using the hardware provided by his POD. Furthermore, while CMS has not expressly prohibited POD arrangements, it has stated, “In many instances, the arrangement would not satisfy the requirements of the exception for indirect compensation arrangements in § 411.357(p), and would, therefore, run afoul of the physician self-referral statute.” 73 Fed. Reg. 23527, 23695.

Again, there are exceptions that could apply and if the POD arrangement were appropriately structured, it would not violate the Stark Law.

C.      Health Care Fraud Statute

One option that many practitioners think will work is to carve-out Medicare and Medicaid and to apply different price points and safeguards between private payers and government beneficiaries. OIG is often suspicious of these carve outs, because they can still result in overutilization. However, there is another concern as well: The Health Care Fraud statute (“HCF”).

The HCF makes it a criminal act punishable by a fine or up to ten (10) years in prison for a person to:

[K]nowingly and willfully execute[], or attempt[] to execute, a scheme or artifice (1) to defraud any health care benefit program; or (2) to obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any health care benefit program

18 U.S.C. § 1347.

Unlike the AKL or Stark Law, the HCF is not limited to government programs (i.e., Medicare, Medicaid, or Tricare), but to private insurers as well. Id. There is also what is called “honest services” fraud, which includes bribery or kickback schemes. See Skilling v. United States, 561 U.S. 368, 405-08 (2010). Most commentators have argued that “honest services” fraud requires there to be a breach of a fiduciary duty. Joan H. Krause, Skilling and the Pursuit of Healthcare Fraud, 66 U. MIAMI L. REV. 363, 382 (2012). Thus, in the case of POD, it would be the breach of the fiduciary duty to the patient that would establish health care fraud on an “honest services” theory. However, a person can be held liable for “honest services” fraud “[e]ven if the scheme occasioned a money or property gain for the betrayed party, [because] actionable harm lay in the denial of that party’s right to the offender’s ‘honest services.’” Id. at 400.

Thus, referring a patient to a POD when that referral could constitute a breach of fiduciary duties would violate the HCF.

Retaining attorneys that are knowledgeable about the various exceptions and defenses to Stark, AKL, and HCF is necessary for any physician that has created or is considering starting a POD to ensure that the practice is created in a way which is compliant with the numerous statutes and regulation implicated.