Kusserow’s Corner: OIG Reports on Spinal Devices Supplied by Physician-Owned Distributors (PODs)

Over the past year, there has been a sharp increase in the government’s scrutiny of PODs. The HHS Office of Inspector General (OIG) is monitoring these business arrangements and has promised that guidance will be issued. The OIG, in response to a Congressional request, conducted a review to determine the extent to which PODs provide spinal devices to hospitals. Physician-owners of PODs can include the surgeons who implant the PODs’ devices. As such, these owners have an opportunity to profit from using the devices their PODs sell. Concerns were raised that PODs ownership creates a conflict of interest that may affect physicians’ clinical decision-making. On the other hand, PODs assert that their devices cost less than devices provided by other spinal device companies.

The OIG reviewed a sample of 1,000 claims billed to Medicare that included spinal fusion surgery. The hospital associated with these claims were asked to complete a questionnaire about its knowledge of physician ownership of spinal device suppliers and provide details about the spinal devices used in each surgery in our sample. The following are among the most significant OIG findings:

  1. PODs supplied devices used in nearly one in five spinal fusion surgeries billed to Medicare in the period reviewed (FY 2011).
  2. Spinal surgeries that used POD devices used fewer devices, but did not have lower per surgery device costs as compared to surgeries that did not use POD devices.
  3. Approximately a third of hospital included in the review reported buying spinal devices from PODs.
  4. The hospitals data provided indicated that when they began buying from PODs, their rates of spinal surgery grew faster, than the rate for hospitals overall.
  5. Surgeons performed more spinal surgeries at hospitals in the OIG sample that purchased from PODs than at those that did not purchase from PODs.

The OIG concluded that PODs evidence a substantial presence in the spinal device market and their findings raise questions about PODs’ claim that their devices cost less than those of other suppliers. They noted surgeons performed more spinal surgeries at hospitals that purchased from PODs, than those that do not. They also experienced increased rates of growth in the number of spinal surgeries performed in comparison to the rate for hospitals that did not purchase from PODs. Taken together, the OIG conclude that their finding suggest PODs may increase the cost of spinal surgery to Medicare over time. The OIG also noted that hospital policies varied in whether they required physicians to disclose ownership interests in PODs to either the hospitals or their patients. Thus the ability of hospitals and patients to identify potential conflicts of interest among these providers is reduced.

It should be noted that the OIG had no specific recommendations to their findings. However, frequently OIG survey audits and inspections often lay the groundwork for future efforts. Anytime the OIG suggests a potential increase of cost as result of potential conflict of interest situations, it should be consider a “yellow flag” that there may be a growing concern about this type of physician arrangement that could translate in potential further action. This is especially the case when it is grounded in congressional concerns that arise from complaints from parties who complain about PODs.

In this particular case, the OIG report follows “Special Advisory Alert: Physician Owned Entities” that has proved to be highly contentious. In that alert they specifically refer to PODs and the OIG position that they may produce substantial fraud and abuse dangers to patient safety. They expressed concerns about these types of arrangements and identified PODs among them that “exhibit questionable features… that may include…(1) selecting investors because they are in a position to general substantial business of the entity, 2) requiring investors who cease practicing in the service are to divest their ownership interests, and (3) distributing extraordinary returns on investment compared to the level of risk involved.”

The OIG concerns with PODs focus on the federal Anti-Kickback Statute and if one purpose of a POD arrangement is to induce referrals for services or purchases of items reimbursable under a federal healthcare program. The PODs that are likely to be the most scrutinized or highest risk are those that distribute substantial returns to physicians based on a small investment, limit their business only to physician investors, guarantee high returns on investment, and result in more surgeries being performed by investors than were performed prior to the POD’s involvement.

The OIG POD Alert has drawn a lot of attention and is being challenged in the federal courts. The new OIG report is likely to add fuel to the controversy related to PODs. It is something worth monitoring to see what the final outcome will be.

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

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Copyright © 2013 Strategic Management Services, LLC. Published with permission.