Senate Panel: Docs Owning Device Companies Have Conflict of Interest

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By James Swann

May 10 — Spinal surgeons participating in a physician-owned distributorship (POD) saw 24 percent more patients than non-POD surgeons, increasing the possibility of unnecessary surgeries and patient harm, according to a Senate Finance Committee report released May 10.

The report from the committee's Republicans, which updates a 2011 report, said spinal surgeons participating in PODs performed spinal fusion surgery on 9 percent of the patients they saw, compared to 6 percent for other surgeons.

In a May 10 statement, committee Chairman Orrin Hatch (R-Utah) said that when surgeons can financially benefit from operating on a patient, “a clear conflict of interest is presented and the patients’ health can be put at risk.”

“Moreover, by recommending surgeries that may not be necessary, such arrangements can also inflate federal healthcare costs at the expense of taxpayers,” Hatch said.

POD surgeons performed roughly 15 percent of all spinal fusion surgeries billed to Medicare, despite accounting for 8 percent of all spinal fusion surgeons who billed to Medicare in 2011, the report found.

PODs are physician-owned entities that produce revenue from selling, or arranging the sale of, implantable medical devices ordered by physician-owners that are then used in procedures performed by physician-owners in hospitals or ambulatory surgical centers (ASCs).

Absence of Enforcement

Richard Westling, an attorney with Waller Lansden Dortch & Davis LLP in Nashville, Tenn., told Bloomberg BNA May 10 that despite Senate Finance Committee scrutiny of PODs dating back to 2011, as well as attention from the Department of Health and Human Services Office of Inspector General, enforcement actions against physicians in connection with PODs remain rare.

“While any report that reflects overutilizations based upon an industry practice, such as PODs supplying implantable medical devices, can be expected to result in increased enforcement activity, to date we haven't seen a significant rise in False Claims Act cases or other enforcement relating to PODs,” Westling said.

He said it is likely that the report will accelerate the trend of hospital systems phasing out purchasing devices from PODs to avoid potential enforcement problems and protect patients.

Linda Baumann, an attorney with Arent Fox LLP in Washington, told Bloomberg BNA May 10 that the Senate report is a warning that PODs will be a “very high priority” for government enforcement.

“I don't think there's any question that there will be further POD investigations and that current POD arrangements should be very closely scrutinized by all parties to ensure compliance with all applicable laws,” Baumann said.

She said the report suggests that POD compliance efforts may have limited value, and that the only way to eliminate any risk is for providers to cut all ties with PODs. Baumann said the report also notes that any threats by physicians to move their practice unless a hospital does business with their POD would probably be a violation of fraud and abuse laws.

The panel included several recommendations, including that federal agencies should examine whether current compliance guidance for the PODs is sufficient.

The report was based on data gathered by CBS News, including the number and type of spinal fusion surgeries performed by physicians who billed to Medicare during 2011 and 2012.

POD Oversight

The past five years have witnessed mounting pressure on PODs from the government, starting with a 2011 report from the Finance Committee's minority staff that questioned whether POD-participating physicians were acting on inappropriate financial incentives when treating patients (112 HCDR, 6/10/11).

The Senate report was followed up by a 2013 special fraud alert from the OIG that said PODs pose a high risk of fraud and abuse and may lead to delivery of inappropriate and potentially harmful services (59 HCDR, 3/27/13).

The OIG also issued a report in 2013 that found an increase in spinal surgeries by hospitals using POD-supplied devices (207 HCDR, 10/25/13), and a November 2015 Senate Finance hearing detailed the results of an investigation that resulted in at least one referral of a POD to the OIG for potential action (222 HCDR, 11/18/15).

Nothing New

Eric Fader, an attorney with Day Pitney LLP in New York, told Bloomberg BNA May 10 that while there's not much that's truly new in the Senate report, PODs have been an unsettled area, and the increased attention and commentary will be welcome.

“It's a difficult area in which to advise law-abiding clients on how to structure arrangements in order to comply with the law and protect themselves,” Fader said.

Fader said he didn't think there would be any new regulations to deal with PODs, since the anti-kickback statute, the Stark law and the Open Payments program are in place and should allow for as much enforcement as the government has the resources to conduct.

“I do think there will likely be continued focus on perceived abuses, probably on the state level as well as by the federal government,” Fader said, predicting there will eventually be investigations of at least a handful of PODs that are deemed to be pushing the envelope.

Fader said that while there are certainly bad apples when it comes to PODs, it's often hard to determine cause and effect.

For example, it's easy to generalize that surgeons who get involved with PODs are more likely to perform more spinal surgeries, but it’s also the case that physicians who do a lot of these surgeries are more likely to be approached to invest in a POD, or to seek out these types of investments, Fader said.

Fader said he had physician clients who were asked to invest in a physician-owned company (POC) that manufactured a surgical product the physicians strongly believed in. He said he made them promise that the investment wouldn't affect their patient referrals because the federal anti-kickback statute is based on intent.

“My feeling is spinal surgeons are among the highest-paid medical practitioners, and it would be extremely foolish for someone earning that much money to assume any legal risk, however small, for a relatively small return from his POD investment,” Fader said.

Report Recommendations

In addition to examining whether POD compliance guidance is sufficient, the Senate report recommended:

  •  revising federal law to require doctors to disclose any interest they have in a POD to the hospital where they practice and to patients;
  •  requiring hospitals and ASCs to review Open Payments data and document that they have used the data when making purchasing decisions;
  •  having the Government Accountability Office prepare a report on the costs associated with the Centers for Medicare & Medicaid Services requirement that hospitals purchasing from PODs perform quality assurance reviews;
  •  expanding law enforcement efforts to investigate and prosecute hospitals and PODs that violate the law; and
  •  having the CMS pursue increased enforcement actions to make sure PODs are complying with the Open Payments program. The Senate report said some PODs are attempting to avoid scrutiny by counting physicians as employees rather than owners and are making payments on behalf of the physician to a family member or close friend.


Lack of Transparency

Kathleen McDermott, an attorney with Morgan, Lewis & Bockius LLP in Washington, told Bloomberg BNA May 10 that the risk of overutilization and increased costs associated with PODs has been predicted by many in the compliance and health-policy field.

“The anti-kickback statute regulates medical conflict of interest for good reason, and this business arrangement [PODs] presumptively doesn't reduce the risk of medically unnecessary procedures,” McDermott said.

McDermott said it was disappointing that many POD owners have failed in their basic ethical transparency practices.

“If an arrangement is OK, there's no reason to hide its existence from hospitals, and in this day transparency is a core competency for health-care entities whether there's an explicit hospital disclosure policy or not,” McDermott said.

While it may not be illegal to avoid being transparent, it's an ill-advised practice for any legitimate POD, McDermott said.

She said the growth of PODs over the past five years has confirmed that they are a highly suspect business model for anti-kickback statute compliance.

The Senate's 2011 report on PODs identified 20 states where PODs were operating, while the current report found PODs operating in 43 states as well as the District of Columbia.

Industry Reaction

The Advanced Medical Technology Association (AdvaMed), a medical device trade group, strongly supported the Senate report, reiterating that PODs can cause patient harm as well as raise the risk of fraud and abuse.

AdvaMed also said it was happy that the report acknowledged the difference between PODs and medical technology manufacturers that may have some physician ownership, according to comments May 10 from Matthew E. Wetzel, AdvaMed's vice president and assistant general counsel.

“We also appreciate the continued interest and leadership of the entire Finance Committee in combatting inappropriate POD arrangements, and welcome further guidance from the OIG, the Centers for Medicare and Medicaid Services, and other agencies on this critical topic of ethics and integrity,” Wetzel said.

To contact the reporter on this story: James Swann in Washington at

To contact the editor responsible for this story: Kendra Casey Plank at

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