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Current & Critical

PODs: Proceed with Extreme Caution

By Edward J. Buthusiem, Cheray Lynch Sieminski, Vahan Minassian; Berkeley Research Group, LLC
U.S. legislators and enforcement agencies have grown increasingly concerned with physician-owned distributors (PODs) and their relationship with hospitals and other providers. Because physicians may refer patients to hospitals—and use specific products in connection with such referrals—the government asserts that PODs have the potential to unduly influence physician decision making, encourage overutilization of certain products and services, create unfair competition and otherwise increase unnecessary healthcare spending by Federal programs. 
While PODs have not been expressly prohibited, legislative statements1 and agency guidance2 cite concern for the “questionable nature” of such entities and underscore inherent regulatory risks. 
The Department of Health and Human Services’ (HSS) Office of Inspector General (OIG) recently released a Special Fraud Alert3 regarding PODs that distribute implantable medical devices. This release will inevitably usher in a wave of investigation and enforcement activity against these entities. 
PODs and companies transacting with PODs, such as hospitals and medical device manufacturers, must weigh the substantial risks against the rewards of their operation and consider introducing significant safeguards in order to mitigate government actions. 
In this article, we will highlight recent agency guidance and enforcement developments, and provide practical considerations for PODs (and entities that interact with PODs) to promote compliance with regulatory standards and mitigate the risks presented by these business models.
What is a POD?
OIG has defined PODs broadly as any physician-owned entity that “derives revenue from selling, or arranging for the sale of, implantable medical devices and includes physician-owned entities that purport to design or manufacture, typically under contractual arrangements, their own medical devices or instrumentation.”4
In other words, a POD is a company in which at least one physician has an ownership interest that also distributes, manufactures, sells, or arranges for the sale of medical devices. Most PODs will operate as either distributors or group purchasing organizations (GPOs)5 that (i) negotiate a discounted price for certain third-party products, (ii) share this savings with hospitals and other institutional customers (e.g., ambulatory surgical centers) and (iii) distribute profits to physician investors. 
Oftentimes, the POD physician will exclusively use the product that it distributes in reimbursable surgical procedures, thus creating a potential conflict of interest given that the physician-owner profits from the use of the reimbursable product.
OIG Enforcement and the Special Fraud Alert
OIG vigorously monitors arrangements with physicians who have the potential to unduly influence medical judgment, promote overutilization of products or services and ultimately unnecessarily increase costs to Federal healthcare programs. 
Accordingly, OIG has consistently taken the position that ventures in which physicians earn a profit (directly or indirectly) through the sale of reimbursable products are at substantial risk for violating the Anti-Kickback Statute (AKS). AKS makes it a criminal offense to give or receive anything of value to induce, or receive, referrals for the purchase of items or services reimbursable by a Federal healthcare program.6
For many reasons, the POD business model creates a substantial risk of running afoul of the AKS. PODs mainly operate in the orthopedic and cardiac implant markets, and thus service a patient base that largely comprises Medicare recipients. Moreover, physician-owners of PODs often refer their patients to providers (e.g., use of a surgical suite, and/or post-operative care), thus creating liability under the anti-referral provisions of the AKS. 
Furthermore, most POD products, including orthopedic implants, are “physician preference items” (i.e., the implanting physician generally dictates the product he or she will use). Finally, POD arrangements often involve lucrative investment opportunities/distributions for potential physician-owners, a means to supplement their income that has declined due to reductions in reimbursement rates. 
As such, PODs are vulnerable to AKS enforcement because physician-owners are in a unique position to influence, and be rewarded for, the referral or purchase of products that are reimbursable by a Federal healthcare program. 
On March 26, 2013, OIG released a Special Fraud Alert on PODs that draws a further line in the sand regarding the status of these entities.7 The Fraud Alert restates the OIG’s general concern regarding the propriety of certain arrangements involving physician investors, citing several “questionable features”: (i) selecting investors because they are in a position to generate substantial business for the entity, (ii) requiring investors who cease practicing in a certain area to divest their ownership interests, and (iii) distributing relatively disproportionately-high returns on investment considering the low level of risk involved.8
The Fraud Alert identifies specific elements of a POD arrangement that will draw heightened scrutiny regarding the POD’s operation and interaction with physician-owners and customers:
• “The size of the investment offered to each physician varies with the expected or actual volume or value of devices used by the physician. 
• “Distributions are not made in proportion to ownership interest, or physician-owners pay different prices for their ownership interests, because of the expected or actual volume or value of devices used by the physicians. 
• “Physician-owners condition their referrals to hospitals or ASCs on their purchase of the POD’s devices through coercion or promises, for example, by stating or implying they will perform surgeries or refer patients elsewhere if a hospital or an ASC does not purchase devices from the POD, by promising or implying they will move surgeries to the hospital or ASC if it purchases devices from the POD, or by requiring a hospital or an ASC to enter into an exclusive purchase arrangement with the POD. 
• “Physician-owners are required, pressured, or actively encouraged to refer, recommend, or arrange for the purchase of the devices sold by the POD or, conversely, are threatened with, or experience, negative repercussions (e.g., decreased distributions, required divestiture) for failing to use the POD’s devices for their patients. 
• “The POD retains the right to repurchase a physician-owner’s interest for the physician’s failure or inability (through relocation, retirement, or otherwise) to refer, recommend, or arrange for the purchase of the POD’s devices. 
• “The POD is a shell entity that does not conduct appropriate product evaluations, maintain or manage sufficient inventory in its own facility, or employ or otherwise contract with personnel necessary for operations. 
• “The POD does not maintain continuous oversight of all distribution functions. 
• “When a hospital or an ASC requires physicians to disclose conflicts of interest, the POD’s physician-owners either fail to inform the hospital or ASC of, or actively conceal through misrepresentations, their ownership interest in the POD.”9
While PODs containing one or more of these elements are not deemed to be per se illegal, there is no doubt that the OIG and Department of Justice (DOJ) will target PODs engaging in these practices. The legality of a POD arrangement will ultimately depend upon the intent of its owners (e.g., the entity’s legal and compliance controls) and the actual conduct of its owner’s employees and customers. 
These safeguards notwithstanding, PODs are deemed to be “inherently suspect” in the eyes of the OIG and, as such, will be closely scrutinized for potential violations of the AKS. 
OIG/DOJ’s July 2010 prosecution of United Shockwave Services, United Urology Centers and United Prostate Centers (United Group) illustrates the type of POD arrangements that cross the prosecutorial threshold. DOJ alleged that the United Group, with the help of their physician investors, leveraged their ability to control patient referrals in order to coerce business referrals (supplying lithotripsy and other laser equipment) from hospitals (e.g., by threatening to refer patients to competing institutions if the respective hospital did not contract with the United Group, promising referrals to hospitals that did contract with the United Group).10
Moreover, OIG/DOJ alleged that the United Group rewarded physician–investors with company shares based on generating referrals, and had a process for divesting physician investors for not using United Group products or services.11
Based on these allegations, the United Group paid over $7 million in fines and entered into a five-year Corporate Integrity Agreement with OIG/DOJ.12
Leading Compliance Practices
In light of the increased scrutiny and inevitable surge of enforcement activity, PODs must seriously evaluate the level of risk posed by their current business model and whether such practices will draw prosecutorial attention. 
PODs will continue to be viewed as “inherently suspect” entities, even when supported by an optimal legal structure and good intentions. PODs that ultimately decide to proceed with this venture should, at a minimum, adopt strategies informed by government guidance, settlement provisions, and industry best practices that may reduce risk of enforcement, including, but not limited to:
Corporate Policies
• Develop and adopt (if not already) a Code of Conduct and related policies that ensure compliance with AKS and other relevant Federal and state regulatory requirements. The Code of Conduct and policies should be made available to all relevant employees and physician-owners. 
• Refrain from entering into exclusive agreements with hospitals in order to prevent the perception of an improper relationship. 
• Warehouse and manage products on site. Employ or contract with personnel necessary for operations in order to demonstrate a bona-fide business rather than a shell company used by vendors for improper inducement and referrals. 
• Refrain from offering potential physician-owners preferential investment opportunities, condition compensation ownership or initial investment requirements, based on their volume of referrals (or lack thereof). This includes PODs retaining a right to repurchase a physician’s ownership interest, or threatening reduced distribution payments, in the event that a physician fails or is unable to refer or arrange for the purchase of a POD’s products.
Procedures and Documentation
• Assess and improve/formalize current processes governing HCP interactions to promote consistency in compliance with company policy and facilitate auditability. 
• Develop efficient and effective processes, with documented workflows, for areas such as (i) determining fair-market value of relevant goods and services, (ii) review and approval of potential agreements and payment requests prior to execution or adjudication, (iii) periodic review and approval of agreements with HCPs by compliance officer or analogous entity, and (iv) response to suspected or actual violations of Federal or state law or company policy. 
• Evaluate and revise current contracts, forms and templates to ensure their alignment with company policy and government requirements. Standard agreements governing HCP relationships such as physician ownership and compensation, discounts and consulting or speaking arrangements must be structured, with the help of counsel, to comply with relevant safe harbors to AKS and Stark exceptions (indirect compensation exception). 
• Routinely train relevant employees on the relevant laws, policies and processes governing interactions with HCPs. 
• Document completion and retain results of such training. 
Auditing, Monitoring and Review
• Develop and formalize an auditing and monitoring program overseen by compliance or another analogous entity within the company. For instance, companies should periodically review the accounting and inventory functions, particularly the effectiveness of payment and product request review, approval, and document retention (e.g., expense receipts), and develop recommendations for improving the process. 
• Monitor ownership investment distributions to ensure they align with terms of their respective agreements. 
• Review the terms of the Code of Conduct, policies, processes, template contracts, and forms, and make appropriate revisions to ensure compliance with changing regulations, safe harbors, guidance, industry best practices, and internal preference. 
Importantly, companies transacting with PODs will also be at risk of AKS enforcement. Hospitals will bear significant risk of AKS enforcement if their arrangements with PODs are perceived as intended to induce the use of POD products in procedures by a physician-owner—particularly where POD physician-owners are employees, have privileges or are otherwise associated with the particular hospitals. 
Some hospitals and health systems have already developed policies limiting or restricting interactions with PODs.13 
Moreover, medical device manufacturers that have an ownership interest in PODs, or otherwise have physician-owners that are potential referral sources, face substantial risk of AKS enforcement. These manufacturers should ensure that PODs they have invested in reflect the above safeguards. 
Although most of the manufacturer’s risk will arise from their ownership interest in such companies, it is possible that contractual arrangements (e.g., agreements to purchase products) with PODs can create an equal level of risk of AKS enforcement. 
Thus, when dealing with a POD, manufacturers should conduct thorough due diligence to determine potential risks in their contractual arrangement or ownership in the POD with respect to PODs’ downstream business arrangements with hospitals and other providers. 
For example, manufacturers should avoid conditioning purchase price, or the execution of the contract itself, based on volume of referral business that the POD generates as a result of its agreements with its provider/payor customers. 
Moreover, manufacturers should familiarize themselves, to the extent possible, with the POD’s structure and operation, and ensure that it reflects the best practices described above.
The downward trend on physician compensation attributable to reduced reimbursements will continue to drive physicians to seek alternative sources of income in the form of PODs or other similar business ventures. 
To the extent that these ventures involve the referral or purchase of products or services reimbursable by Federal healthcare programs, enforcement risk associated with these ventures will substantially increase for all stakeholders, including hospitals, manufacturers, and other healthcare companies. 
Indeed, with the recent success and empowerment of DOJ health fraud section prosecutors,14 as well as increased whistleblower incentives, the opportunity for civil and criminal penalties is at an all-time high. 
Companies that choose to continue to operate as or transact with PODs are encouraged to critically evaluate their structure and strengthen their corporate compliance programs.

1 E.g., Vicki Robinson, “Response to Request for Guidance Regarding Certain Physician Investments in the Medical Device Industries,” HHS OIG (October 6, 2006),available at: oig.hhs.gov/fraud/docs/alertsandbulletins/GuidanceMedicalDevice%20%282%29.pdf; Gregory Demske, “Examining the Relationship Between the Medical Device Industry and Physicians,” hearing before the U.S. Senate Special Committee on Aging (February 27, 2008), available at: oig.hhs.gov/testimony/docs/2008/demske_testimony022708.pdf
2 HHS, Publication of OIG Special Fraud Alerts (1994), Part B: Special Fraud Alert: Joint Venture Arrangements, available at: oig.hhs.gov/fraud/docs/alertsandbulletins/121994.html
3 OIG, “Special Fraud Alert, Physician-Owned Entities” (March 26, 2013), available at: oig.hhs.gov/fraud/docs/alertsandbulletins/2013/POD_Special_Fraud_Alert.pdf
4 Id.
5 42 CFR 403.902: Applicable group purchasing organization (GPO) means an entity that (i) Operates in the United States, or in a territory, possession, or commonwealth of the United States; and (ii) Purchases, arranges for, or negotiates the purchase of a covered drug, device, biological, or medical supply for resale or distribution to a group of individuals or entities, but not solely for use by the GPO or commonly owned entities of the GPO.
6 42 U.S.C. 1320a–7b, “Criminal penalties for acts involving Federal health care programs.”
7 OIG, “Special Fraud Alert, Physician-Owned Entities” (2013).
8 Id.
9 Id.
10 See United Shockwave Services, United Urology Centers, and United Prostate Centers (collectively, United) (July 8, 2010), available at: oig.hhs.gov/fraud/enforcement/cmp/kickback.asp
11 Id.
12 Id.
13 HCA, “Physician-Owned Vendor Relations” (November 1, 2012), available at: ec.hcahealthcare.com/CPM/LL027.doc; Tomball Regional Hospital, “Physician-Owned Vendors” (July 2010), available at : www.tomballregionalmedicalcenter.com/PhysicianPortal/Documents/phy-OwnedVendors.pdf; Providence Health & Services, “Purchases from Physician-Owned Intermediaries/Distributors” (February 9, 2012), available at: www2.providence.org/phs/integrity/Documents/PROV-ICP-723%20-%20Purchases%20from%20Physician-Owned%20Distributors.pdf
14 Jeff Overley, “Criminal Probes Await Top Health Cos.: Ex-DOJ Fraud Chief,” Law360 (May 17, 2013): “The DOJ has also bulked up the staff in its health fraud section, which now boasts almost 40 full-time prosecutors, compared with none five years ago…”; available at: www.law360.com/articles/441615/criminal-probes-await-top-health-cos-ex-doj-fraud-chief
Edward J. Buthusiem is a director in the Health Analytics practice of Berkeley Research Group, advising executive management and general counsels on strategic business and operational issues. He can be reached at ebuthusiem@brg-expert.com.
Cheray Lynch Sieminski is a principal in the Health Analytics Practice of Berkeley Research Group, providing forensic and regulatory advisory services to healthcare and life sciences companies and their legal counsel. She can be reached at CSieminski@brg-expert.com.
Vahan Minassian is a consultant in the Health Analytics and Compliance practices of Berkeley Research Group, assisting medical device manufacturers and healthcare providers on Federal and State regulatory compliance concerns. He can be reached at vminassian@brg-expert.com.