Inside HSCA Guest Blog, Tom Bulleit: OIG’s Bad News for PODs: Whither (or Wither) the Physician-Owned Supply Chain?

2013 was not a good year for physician-owned distributors of implantable medical devices (“PODs”).  In March, the Office of Inspector General of the Department of Health and Human Services (“OIG”) published a Special Fraud Alert on Physician-Owned Entities, the essential conclusion of which was that physician-owners ordering implantable devices for their patients through their PODs is “inherently suspect” under the Federal health care programs antikickback law (“AKL”). In October, OIG released a report reviewing the prevalence and use of spinal devices supplied by PODs, the essential conclusions of which took the wind out of the sails of POD proponents by demonstrating that PODs (i) do not result in cost savings and (ii) do lead to increased utilization of implantable devices. In the course of the year, several large hospital chains, including Tenet, Ascension, and Intermountain Health, adopted policies prohibiting purchasing from PODs owned by the ordering physicians. While the proponents of PODs have continued to scrounge for arguments that support the POD business model (see links below), it is increasingly clear that there is little to be said in favor. 

These points are made in greater detail in a recent article that I co-authored in Compliance Today (the leading periodical for hospital compliance officers, published by the Health Care Compliance Association) and in a letter to the editor of Orthopaedics This Week (perhaps the most widely-read publication in the orthopaedics industry).

These developments should not come as a surprise to anyone who has followed the steady defeat of each new physician ownership vehicle over the last twenty years.  Beginning with the publication of OIG’s Special Fraud Alert on Joint Venture Arrangements in 1989, the federal government has moved to restrict self-referrals by passive physician owners in ancillary lines of business. In the early 1990s the government settled cases involving physician-owned laboratories, imaging and radiation therapy centers.  See, e.g., SmithKline Lab To Pay Record $1.5-Million Fine, Los Angeles Times, Dec. 29, 1989; DOJ Press Release, T2 Medical, Inc. Agrees to Pay $500,000 and Discontinue Improper Practices (Sept. 26, 1994), ; Shalala v. T2 Medical, No. 1-94-CV-2549-ODE, 1994 WL 686949 (N.D. Ga. 1994); Shalala v. RadiationCare, No. 1 :94-CV-3339-RCF, 1995 U.S. Dist. LEXIS 749 (N. D. Ga. 1995). 

In the course of 7 years of litigation against the Hanlester laboratory network that yielded only a partial victory – investment interests are remuneration under the AKL, but some defendants were acquitted – OIG convinced Congress to act against physician self-referral more directly, and the Stark law was born.  See, e.g., Office of Inspector General (OIG),Financial Arrangements Between Physicians and Health Care Businesses: Report to Congress (May 1989); General Accounting Office,Referrals to Physician-Owned Imaging Facilities Warrant HCFA’s Scrutiny; Report to the Chairman, Subcommittee on Health (Oct. 1994). 

Stark effectively stopped, or at least severely regulated and restricted, physician self-referral for certain “designated health services.”  Where self-referral crept back in to exempt certain services from Stark (e.g., physician-owned mobile providers), the government continued to pursue cases under the antikickback law, and obtained a settlement against a physician-owned mobile laser provider as recently as 2010.  See OIG Press Release, OIG Enters into $7.3 Million Civil Monetary Penalty Settlement with Physician-Owned Enterprise (July 8, 2010). See also, American Lithotripsy Society v. Thompson, 215 F.Supp.2d 23 (2002) (holding that lithotripsy is not a Stark DHS); 69 Fed. Reg. 16054, 16105 (Mar. 26, 2004) (“in light of the unique legislative history regarding the application of [the Stark law] to lithotripsy, we will not consider lithotripsy an ‘inpatient or outpatient service’ for purposes of [the Stark law].”).

PODs are easier to disapprove than any of these earlier models, since at least those involved regulated providers furnishing healthcare services. And as CMS has made clear, PODs also raise concerns under the Stark law.  See, e.g., 73 Fed. Reg. 23527, 23694-23695 (April 30, 2008) (concern that PODs “may serve little purpose other than providing physicians the opportunity to earn economic benefits in exchange for nothing more than ordering medical devices . . . that the physician-investors use on their own patients” and in many instances would not qualify for an exception from the Stark law’s self-referral prohibition).  Accordingly, as OIG’s recent pronouncements make clear, the physician-owned supply chain is doomed to wither under the continued scrutiny of  enforcers, whistleblowers, and perhaps most important, hospital customers who will not want to put themselves at risk by purchasing from a self-referring POD.  But these developments do beg the question, what next?  In this regard, I offer a few possibilities:

  •  Gainsharing Makes a Comeback. Hospital-physician gainsharing never really went away, and OIG has approved numerous programs that allow procedural physicians to share in the concrete savings to which they contribute by adopting cost-reducing treatment protocols. The withering of the physician-owned supply chain will re-invigorate interest in these programs.
  • ACO Waivers Arrive. As the Affordable Care Act continues to encourage hospitals and physicians to work together to control costs through bundled payment arrangements, there will be an increasing array of physician-incentive plans tested.  For recognized ACO’s, some of these will be protected at least temporarily under waivers from the AKL and the Stark law.
  •  ACO-type Arrangements Proliferate. Even outside the context of CMS-recognized ACOs, hospitals and physicians will explore shared savings arrangements that are based on similar principles. Providers, drug/device companies, and payors will work more closely to achieve arrangements that properly incentivize physicians through the existing managed care safe harbors: 42 C.F.R. 1001.952(m) (“price reductions offered to health plans”), (t) (“price reductions offered to eligible managed care organizations”), and especially (u) (“price reductions offered by contractors with substantial financial risk to managed care organizations”).
Now that OIG’s pronouncements have made clear that PODs are not an acceptable or lawful answer to rising healthcare costs, hospitals, physicians, and implantable device makers can be expected to begin more serious efforts at shared savings and other arrangements that will at once bring about greater cost control and continue to encourage the product and service innovation that represent the best of American medicine.

- Tom Bulleit, Partner, Ropes & Gray