A recent Senate Finance Committee hearing investigated the effects of physician-owned distributorships (“PODs”) on costs of care and patient safety, suggesting that the momentum for greater oversight of such business arrangements continues to build.[1]

Existing in many forms, the basic structure of a POD is a physician-owned entity that derives revenue from the sale of medical devices, drugs, biologicals and supplies to physicians. They are especially active in the orthopedic implant device market. Significantly, it has been common for a POD to largely (or even exclusively) deal with its physician-owners. It is this aspect of the landscape, however, that is most rapidly evolving.

The evolving landscape reflects federal investigation and enforcement efforts preceding November’s Finance Committee hearing. Chairman Hatch, serving at the time as ranking minority member, published a report on issues associated with PODs and areas for legislative oversight in 2011.[2]  In 2013, a Department of Health and Human Services Office of Inspector General (“OIG”) Special Fraud Alert on physician-owned entities expressed particular concern with PODs and identified them as “inherently suspect” under the federal Anti-Kickback Law.[3] Revisiting the topic earlier this year, the OIG identified a general lack of transparency in ownership information and rearticulated a primary criticism. “[O]wnership may affect physicians’ clinical decisionmaking, such as influencing them to perform unnecessary surgeries or to choose a device in which they have a financial interest rather than another device that may be more appropriate for the patient.”[4]

Perhaps unsurprisingly, the testimony before the Finance Committee widely encouraged legislative clarity and standard-setting but offered a mix of perspectives on the substance of any such oversight. Dr. John Steinmann, an advisor to the American Association of Surgical Distributors and a vocal advocate of PODs, called for an environment that supports ethically structured arrangements. In stark contrast, Dr. Scott Lederhaus of the Association for Medical Ethics insisted that there can be no such thing as an ethically structured POD—the entity form should be per se illegal.

Intermountain Healthcare’s Vice President of Business Ethics and Compliance, Ms. Suzie Draper, shared the integrated health system’s experience revising its POD policy following the 2013 OIG Alert. Intermountain Healthcare adopted a policy generally prohibiting agreements to purchase any item or service from a physician-owned entity other than professional medical services. The policy provides two grounds for exception. The health system may contract with a physician-owned entity: (1) when neither a physician-owner nor immediate family member of a physician-owner is in a position to generate business for the health system and the entity complies with certain structural specifications; and (2) for disruptive technologies assuming required approvals are granted. Ms. Draper noted concern for the potential anti-competitive effects of such a stringent policy, that the policy stifles physician involvement in innovation, and that there is insufficient flexibility to account for factors such as physician preference and quality. According to the testimony, challenges to implementation have related to identification and analysis of evolving ownership arrangements and management of the discontinuation process.

Considering the extent and persistence of federal interest in the arrangement, we anticipate that oversight of PODs will increase. As this may occur with or without additional legal guidance, purchasers that have not yet developed policies pertaining to PODs are advised to do so. For PODs and purchasers interested in structuring relationships in a manner that minimizes conflicts of interest, the 2013 Special Fraud Alert may be informative. The OIG outlines 8 suspect characteristics, such as offering a physician an investment that varies with the volume or value of devices used by the physician. Note, however, that successful avoidance of the suspect characteristics is not a defense to fraud and abuse laws and does not guarantee an arrangement protection from scrutiny.

[1] Member and witness statements are available on the hearing’s webpage.
[2] Senator Hatch’s report and related files are available here.
[3] The Special Fraud Alert on physician-owned entities is available here.
[4] The memorandum is available here.