Physician Owned Distributorships, What You Should Know

March 26, 2015

A False Claims Act case brought by the Department of Justice highlights the importance of these arrangements.

In November 2014, "[t]he United States has filed two complaints under the False Claims Act against Michigan neurosurgeon Dr. Aria Sabit, spinal implant company Reliance Medical Systems, two Reliance distributorships - Apex Medical Technologies and Kronos Spinal Technologies - and the companies' owners, Brett Berry, John Hoffman, and Adam Pike, the Justice Department announced today. The complaints allege that Apex Medical and Kronos Spinal paid physicians, including Sabit, to induce them to use Reliance spinal implants in the surgeries they performed." A False Claims Act lawsuit is also known as a whistleblower or qui tam lawsuit and can be brought either directly by the government or by a person with original information that is not publically available.

Before this case was filed, there was a lot of emphasis given in Congress and at HHS about the concern over physician owned distributorships (PODs) due to the conflicts of interest and patient safety concerns. In its Fraud Alert Bulletin, the OIG set forth the following key areas of concern:

• Selecting investors because they are in a position to generate substantial business for the entity;

• Requiring investors who cease practicing in the service area to divest their ownership interest; and

• Distributing extraordinary returns on investment compared to the level of financial risk involved.

The OIG deemed these three items as "questionable features," which, if answered in the affirmative, present four "major concerns" that are typical of kickbacks: (1) corruption of medical judgment; (2) overutilization; (3) increased costs to federal healthcare programs and beneficiaries; and (4) unfair competition. The OIG goes on to provide a more detailed series of POD characteristics that elevate the level of fraud and abuse risk in the OIG's view. The OIG adds that a POD "exclusively" serving its physician-owners' patient base poses a higher risk of fraud and abuse than "a POD that sells to hospitals and ASCs on the basis of referrals from non-owner physicians."

When structuring different types of business ventures, physicians should ask themselves and the prospective business partners the following questions:

• Am I (the physician) being selected because I can generate substantial business for the entity?

• Is there a requirement that if I do not meet certain "benchmarks" then I would have to divest my interest?

• What are the typical rates of return in both public and private companies to shareholders?

• What is the percentage of my ownership interest?

• What percentage of my business contributes to the overall revenues?

From here, the physician can ask more probing questions and, in turn, potentially avoid civil and criminal penalties.