Feds tar­get doc-owned de­vice dis­trib­u­tors

Hos­pi­tals at risk of pa­tient, kick­back com­plaints when us­ing PODs

Modern Healthcare - - NEWS - By Jaimy Lee

The Jus­tice Depart­ment has filed a law­suit al­leg­ing that three sur­geons per­formed un­nec­es­sary spinal surg­eries, a dis­tri­bu­tion company they in­vested in en­cour­aged them to pres­sure hos­pi­tals to buy its med­i­cal im­plants, and the company and one of the sur­geons de­nied the physi­cian in­vest­ments even as the sur­geons re­ceived hun­dreds of thou­sands of dol­lars. Only one of those sur­geons was named as a de­fen­dant.

Those de­tails, brought to light in a False Claims Act law­suit filed ear­lier this month, high­light the po­ten­tial risks for pa­tients and hos­pi­tals when hos­pi­tals con­tract with physi­cian-owned dis­trib­u­tor­ships, which are known as PODs.

PODs are com­pa­nies that sell med­i­cal im­plants to hos­pi­tals and usu­ally have physi­cians as their own­ers or in­vestors. Pro­po­nents say PODs lower costs by strip­ping out ex­penses as­so­ci­ated with de­vice sales and also al­low physi­cians who invest in the dis­trib­u­tor­ships to col­lab­o­rate with man­u­fac­tur­ers to foster in­no­va­tion. The dis­trib­u­tors are most preva­lent in Cal­i­for­nia and are of­ten as­so­ciat- ed with the spine im­plant mar­ket.

But en­force­ment ac­tions taken over the last two years al­lege some PODs are driv­ing up health­care costs by charg­ing above-av­er­age rates for im­plants. They also al­lege that PODs may be en­cour­ag­ing physi­cian-in­vestors to in­crease their sur­gi­cal vol­umes and per­form med­i­cally un­nec­es­sary pro­ce­dures, which can lead to avoid­able pa­tient harm.

HHS’ Of­fice of the In­spec­tor Gen­eral in 2013 is­sued a spe­cial fraud alert that said PODs cre­ate “a strong po­ten­tial for im­proper in­duce­ments” be­tween PODs, physi­cian-in­vestors, and the health­care providers that pur­chase med­i­cal de­vices. Later that year it pub­lished a crit­i­cal study call­ing PODs “in­her­ently sus­pect” un­der the anti-kick­back statute. The re­port found hos­pi­tals pur­chas­ing de­vices from PODs re­ported that rates of spinal surg­eries grew faster than at hos­pi­tals that did not con­tract with PODs. It also re­ported that surg­eries us­ing de­vices pur­chased from PODs did not have lower de­vice costs.

But the claims in the Jus­tice Depart­ment’s law­suit go much fur­ther than con­cerns about de­vice costs.

The law­suit, filed in U.S. Dis­trict Court in Los An­ge­les, al­leges that Re­liance Med­i­cal Sys­tems, a Utah-based hold­ing company that op­er­ates 14 PODs; its two own­ers; one non­physi­cian in­vestor; and Dr. Aria Sabit, a physi­cian-in­vestor, vi­o­lated the anti-kick­back statute by sub­mit­ting Medi­care claims tainted by il­le­gal pay­ments made to physi­cian-in­vestors.

The gov­ern­ment ar­gues the PODs op­er­ated by Re­liance gave

physi­cians pay­ments to in­duce them to use POD im­plants in their surg­eries. The pay­ments were based on prof­its gen­er­ated through the sale of im­plants to the hos­pi­tals where the sur­geons prac­ticed. Lawyers for Re­liance, who ar­gue the al­le­ga­tions are in­ac­cu­rate or grossly ex­ag­ger­ated, were ex­pected to file a mo­tion to dis­miss the suit late last week.

The Jus­tice Depart­ment also said that it joined a whistle­blower law­suit against Sabit that had been filed in 2013.

“The OIG does not like physi­cian own­er­ship of busi­nesses,” says Pa­tric Hooper, a lawyer with Hooper Lundy & Book­man, which rep­re­sents Re­liance Med­i­cal. “They haven’t liked it for 25 years and they still don’t like it.”

Viewed as kick­backs

It’s the first law­suit filed against a POD. It’s based on the the­ory that a physi­cian with an own­er­ship or in­vest­ment in a POD who also pur­chases an im­plant sold by the POD re­ceives a kick­back through the re­turn on in­vest­ment, says Thomas Bulleitt, a part­ner with law firm Ropes & Gray. But there is also the po­ten­tial for the case to be set­tled rather than go to trial. Most False Claims Act cases set­tle.

The law­suit names sev­eral physi­cians who in­vested in Re­liance-op­er­ated PODs, but only one sur­geon was named as a de­fen­dant. Dur­ing an eight-month pe­riod in 2010, Dr. Sabit al­legedly used Re­liance im­plants in 90% of his spinal fu­sion surg­eries and re­ceived about $265,000 in pay­ments from the POD he in­vested in. Prior to his in­vest­ment of $5,000 in April 2010, Sabit re­port­edly did not use any Re­liance im­plants in surg­eries he per­formed.

The gov­ern­ment also al­leges that his role as an in­vestor in the POD was not dis­closed to hos­pi­tals in Cal­i­for­nia and Michi­gan where he prac­ticed. The suit claims he per­formed med­i­cally un­nec­es­sary surg­eries us­ing Re­liance im­plants on at least three pa­tients who suf­fered com­pli­ca­tions. His lawyer de­clined to com­ment.

The law­suit, which un­der­scores the at­ten­tion the Jus­tice Depart­ment is giv­ing to last year’s spe­cial fraud alert, also raises the stakes for hos­pi­tals where physi­cians use im­plants from PODs they own. Hos­pi­tals re­luc­tant to es­tab­lish more­strin­gent poli­cies around con­flicts of in­ter­est be­tween physi­cians and de­vice com­pa­nies or those or­ga­ni­za­tions un­aware of such re­la­tion­ships now face a higher risk of pa­tient law­suits as well as gov­ern­ment in­ves­ti­ga­tions.

“There is an ar­gu­ment for le­gal li­a­bil­ity for the hos­pi­tal,” says Kath­leen McDer­mott, a part­ner at law firm Mor­gan Lewis. “It will pro­voke hos­pi­tals to ex­am­ine their poli­cies re­lated to PODs and to en­sure they are man­ag­ing physi­cian con­flicts of in­ter­est.”

Im­mi­nent changes in fi­nan­cial dis­clo­sure are ex­pected to shed more light on th­ese kinds of fi­nan­cial re­la­tion­ships. Later this month, the Physi­cian Pay­ments Sun­shine Act will re­quire dis­clo­sure of physi­cian own­er­ship or in­vest­ments in PODs.

An­tic­i­pat­ing the new law, the own­ers of Re­liance Med­i­cal al­legedly shifted to a physi­cian em­ploy­ment model after buy­ing out their physi­cian-in­vestors, ac­cord­ing to the law­suit. But a lawyer re­port­edly ad­vised Re­liance to avoid that ar­range­ment, not­ing that reg­u­la­tors may still con­sider pay­ing physi­cians an av­er­age of $45,000 a month a red flag, ac­cord­ing to the law­suit.

A more trans­par­ent pur­chas­ing en­vi­ron­ment is only one fac­tor re­duc­ing the preva­lence of PODs in the mar­ket­place. Re­duc­tions in re­im­burse­ment rates and the ris­ing cost of im­plants have pushed more hos­pi­tals in re­cent years to take pur­chas­ing pref­er­ence away from physi­cians and stan­dard­ize prod­uct pur­chases in their ef­forts to keep sup­ply costs down.

But the po­ten­tial for big prof­its gen­er­ated by PODs pro­vides a strong in­cen­tive for new com­pa­nies to sprout up and en­tice physi­cians to be­come in­vestors. The law­suit al­leges that from June 2007 to De­cem­ber 2012 the three own­ers of Re­liance raked in $43 mil­lion, a num­ber dis­puted by Re­liance’s lawyer. “The Jus­tice Depart­ment doesn’t know the dif­fer­ence be­tween rev­enue and prof­its,” Hooper says.

Hos­pi­tals, mean­while, face two kinds of risks: sub­mit­ting po­ten­tial false claims to Medi­care on be­half of the sur­geons whose pur­chas­ing pref­er­ences and care de­ci­sions are in­flu­enced by pay­ments they get from PODs, and be­ing sued by pa­tients over in­ap­pro­pri­ate surg­eries or care. Mit­i­gat­ing those risks will re­quire hos­pi­tals to ad­dress not only how they man­age physi­cian pref­er­ences in de­vice pur­chas­ing, but their sur­geons’ in­vest­ments in com­pa­nies that mar­ket med­i­cal tech­nol­ogy.

Even though the gov­ern­ment’s law­suit against Re­liance does not name as de­fen­dants the hos­pi­tals that pur­chased its de­vices, that doesn’t mean fu­ture in­ves­ti­ga­tions will side­step the role of hos­pi­tals in POD ar­range­ments, le­gal ex­perts say.

Hos­pi­tals re­view­ing poli­cies

Some hos­pi­tals have al­ready re­viewed how and if they con­tract with PODs. At least four of the 10 largest health sys­tems in the U.S. based on rev­enue—HCA, based in Nashville; CHE Trin­ity Health, based in Livo­nia, Mich.; Tenet Health­care Corp., based in Dal­las; and Catholic Health Ini­tia­tives, based in En­gle­wood, Colo.—say they have poli­cies that ei­ther pre­vent con­tract­ing with PODs or have very strict pa­ram­e­ters about what types of PODs can sell to their hos­pi­tals.

But not all hos­pi­tals are un­wind­ing th­ese kinds of re­la­tion­ships. At many hos­pi­tals in the U.S., a physi­cian’s pref­er­ence for a par­tic­u­lar im­plant or de­vice is still the de­cid­ing fac­tor in pur­chas­ing de­ci­sions.

About 65% of U.S. hos­pi­tals sur­veyed by HHS’ Of­fice of the In­spec­tor Gen­eral have poli­cies in place that re­quire physi­cians to dis­close own­er­ship in de­vice com­pa­nies to hos­pi­tals. But the poli­cies var­ied—some re­quired dis­clo­sure only at the time of the hire and about 8% re­quired dis­clo­sure of such own­er­ship to pa­tients.

In­ter­moun­tain Health­care, an in­te­grated de­liv­ery net­work based in Salt Lake City, im­ple­mented a new pol­icy ban­ning the use of PODs in June 2013, three months after the Of­fice of the In­spec­tor Gen­eral is­sued the spe­cial fraud alert. The alert is one of only four spe­cial fraud alerts put out in the past decade.

Sup­pli­ers that sell med­i­cal prod­ucts to In­ter­moun­tain are now re­quired to de­clare that there are no physi­cian own­ers or in­vestors and that they com­ply with a stan­dard es­tab­lished by the Ad­vanced Med­i­cal Tech­nol­ogy As­so­ci­a­tion, a trade group rep­re­sent­ing med­i­cal-de­vice mak­ers that has pushed for reg­u­la­tion of PODs op­er­at­ing il­le­gally.

Con­flicts dif­fi­cult to dis­cern

But Brent John­son, In­ter­moun­tain’s chief pur­chas­ing of­fi­cer, says it’s still dif­fi­cult to dis­cern con­flicts within sup­plier-physi­cian re­la­tion­ships. “The shell game of who owns who and who’s be­ing re­im­bursed is not easy,” he said.

PODs first be­gan to worry tra­di­tional de­vice­mak­ers about a decade ago, prompt­ing Ad­vaMed to re­quest guid­ance in 2006 from the gov­ern­ment about the le­gal­ity of the dis­trib­u­tor­ships. The as­so­ci­a­tion told HHS’ Of­fice of the In­spec­tor Gen­eral that PODs re­ly­ing on re­fer­ring physi­cians as their cus­tomers vi­o­late the safe har­bor pro­vided to physi­cian own­er­ship of med­i­cal com­pa­nies. But Ad­vaMed’s re­quest and the OIG re­sponse did lit­tle to de­ter the mar­ket. By 2011, PODs were sup­ply­ing nearly 20% of the de­vices used in the spinal fu­sion surg­eries cov­ered by Medi­care that year. It’s un­clear how many PODs are cur­rently op­er­at­ing in the U.S.

The in­ves­ti­ga­tion into Re­liance Med­i­cal, its own­ers and Dr. Sabit is be­ing closely watched. If the gov­ern­ment is suc­cess­ful in its law­suit, ex­perts say there will be more in­ves­ti­ga­tions of PODs, physi­cians and pos­si­bly hos­pi­tals where those physi­cians have staff priv­i­leges. But the re­cent at­ten­tion from law­mak­ers and reg­u­la­tors hasn’t stopped PODs from op­er­at­ing. In mul­ti­ple earn­ings calls dur­ing the spring earn­ings sea­son, more than one de­vice ex­ec­u­tive said tra­di­tional man­u­fac­tur­ers still hadn’t taken back mar­ket share held by PODs de­spite the reg­u­la­tory scru­tiny.

“What we haven’t seen, though, is just sur­geons im­me­di­ately jumping away from PODs,” Alex Lukianov, chair­man and CEO of NuVa­sive, a San Diego-based man­u­fac­turer of de­vices used in min­i­mally in­va­sive spine surg­eries, told in­vestors.

Al­liance Sur­gi­cal Dis­trib­u­tors, based in Red­lands, Calif., de­fends the POD model and has no plans to un­ravel its busi­nesses. Formed in 2008 by a group of sur­geons who had been suc­cess­ful with one POD, it now op­er­ates 13 PODs in eight states. Its sur­geon-own­ers pre­sented an anal­y­sis of the costs of its im­plants at the Amer­i­can Academy of Orthopaedic Sur­geons’ an­nual meet­ing in 2009, re­port­ing that hos­pi­tals that pur­chased im­plants from the POD saved 34% on the costs of the de­vices.

“Not all pods are formed equally,” says Dr. John Stein­mann, CEO at Al­liance Sur­gi­cal Dis­trib­u­tors. “If you en­ter for per­sonal or fi­nan­cial gain, that is when you see prob­lems de­velop.”


The Jus­tice Depart­ment filed a False Claims law­suit against Re­liance Med­i­cal Sys­tems and Dr. Aria Sabit, a sur­geon who in­vested in one of the company’s PODs.

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