The Department of Health and Human Services Office of Inspector General recently issued a special fraud alert for physician-owned distributorships.

In the alert, the Office of Inspector General (OIG) warned use of physician-owned distributorships has a “strong potential for improper inducements between and among the physician investors, the entities, device vendors and device purchasers.” Physicians who have the opportunity to profit through investment in a physician-owned distributorship (POD) may be subject to the anti-kickback statute of the Medicare and Medicaid Patient Protection Act, which makes it illegal to receive compensation for referring items or services that are reimbursed by a federal health care

Katherine B. Ilten, JD, a health care attorney at Fredrikson & Byron, P.A., said this alert shows the OIG’s stance on PODs, but questions whether every POD would fall under this anti-kickback statute.


Katherine B. Ilten

“Whether the POD complies with the anti-kickback statute remains a fact-specific issue,” Ilten said. “Each POD is set up differently. POD arrangements that are structured to avoid the suspect characteristics mentioned in the OIG fraud alert probably have a better — but in no event guaranteed — chance of withstanding government scrutiny.”

OIG notes that the following characteristics would create concern when exhibited by PODs or physician-owners:

  • when the investment size in a POD offered to a physician varies based on the number, perceived number or price of devices used by them;
  • when distributions are disproportionately made to physician-owners relative to ownership or if physician-owners pay different prices for ownership interest based on the number, perceived number or price of devices used by them;
  • when physician-owners imply they will refer patients or perform surgery elsewhere if hospitals or ambulatory surgery centers (ASCs) do not purchase or enter purchasing agreements with their POD;
  • when physician-owners are pressured or threatened for not purchasing or using POD devices in patients;
  • when a POD has the ability to repurchase a physician-owner’s interest based on the physician’s ability to move POD devices;
  • when a POD is a “shell” company that does not manage day-to-day operations such as maintain inventory, perform product evaluations or oversee all functions of distribution; or
  • when a physician-owner misrepresents his or her POD interest in conflict of interest requests made by hospitals or ASCs.

Ilten said the list of suspect characteristics is not meant to be exhaustive. Although more financially successful PODs may escape scrutiny by OIG, a physician-owner who receives a more disproportionate return may be more suspect.

“If the POD does not have any skin in the game (e.g., does not maintain sufficient inventory, conduct necessary operations, oversee distribution, etc.) and the physician-owner still receives a huge return and, even worse, that higher rate of return is based on the physician’s referrals, then the POD is going to raise the eyebrows of OIG,” she said. “I do not think that huge financial success of the POD alone is enough to support a fraud allegation.”

Regardless of the POD’s success, Ilten said that scrutiny is possible even if the government suspects fraud outside the scope of the alert.

“It is important to always remember that, in the end, one bad email can demonstrate that one intent of the arrangement is to induce referrals, which is extremely helpful for the government to make its anti-kickback case,” she said. – by Jeff Craven

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Disclosure: Ilten has no relevant financial disclosures.

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