Dollar signs tip the scales of medical judgment, physician-owned distributorship study finds

Physician-owned distributorships (PODs) will most certainly continue to be subject to increased government scrutiny after a recent Senate Finance Committee (SFC) investigation confirmed its suspicions that “PODs present an inherent conflict of interest that can put the physician’s medical judgment at odds with the patient’s best interests.” The report, “Physician Owned Distributorships: An Update on Key Issues and Areas of Congressional Concern,” provided more fuel for the argument that PODs have a distinct potential to violate fraud and abuse laws.

Kathleen McDermott, a partner at Morgan Lewis’ Washington, D.C. office, commented, “the findings of the SFC update are not a surprise but are important. PODs pose classic fraud and abuse risks for companies, physicians and hospitals and the SFC update shows most of all that the heat is on and should be to assure protection to the Medicare program and patients.”


The SFC requested the report based on its concerns that physician ownership of and self-referral to PODs result in:

  • anti-kickback statute (AKS) (42 U.S.C. §1320a-7b) and Stark law (42 U.S.C. §1395nn) violations;
  • physician conflicts of interest;
  • evidence of overutilization and higher health care costs;
  • danger to patients; continued medical industry confusion over legality; and
  • lack of transparency of physician ownership, including failure of PODs to meet their legal obligations to report under the Sunshine Act.

The report focused on PODs operating in the field of spinal surgery, but noted, “the POD business model could be used to market any type of medical device, and there are indications that PODs have started to appear in other fields beyond spinal surgery.”


The SFC reports a significant amount of overutilization by PODs, noting that “POD doctors see more patients, perform more surgeries, and perform more complex surgeries . . . [which] come at a cost, not only by increasing costs for the entire health care system, but also by harming patients who receive unnecessary treatment.” Having identified the continuing trends, McDermott said, “The Senate Finance Committee’s update assures continued scrutiny because it has confirmed over-utilization trends.”


According to the report, although a POD is taking some steps to try to mitigate the risks associated with its business model does not mean that the risks no longer exist. Hospitals face serious risks when they do business with PODs, and the only way to completely eliminate those risks is to not conduct business with any POD or any entity like a POD. This may not be as easy as it sounds. McDermott noted, “more troubling is the transparency findings where it appears many PODs are not disclosed to hospitals, preventing hospitals from managing a clear conflict of interest in the interests of patients.” She recommends that “hospitals should pro-actively collect information from its surgeons on participation in PODs and undertake policies that manage the conflict as well as the fraud and abuse risk. Some hospitals manage the risk by prohibiting PODs.”


The report recommended that the Government Accountability Office (GAO) evaluate the costs and benefits of requiring hospitals that purchase from PODs to perform enhanced utilization review. It also noted that CMS should consider withholding reimbursement from hospitals that have not adopted POD-specific policies and do not document that they consider the Sunshine Act database in making procurement decisions involving medical devices. Larger scale recommendations involved revising federal law to require doctors to disclose any interest they have in a POD to the hospital where they practice and to patients and expanding law enforcement efforts to investigate and prosecute hospitals and PODs that violate the law.

‘Break out of the silos,’ remove Stark barriers says AHA

The American Hospital Association (AHA) is urging lawmakers to adopt a single broad exception to federal fraud and abuse laws in response to queries on how to improve the physician self-referral (Stark) law under new value-based payment models. In a letter to the House Ways and Means Committee, the AHA claims that, as the reimbursement models are moving to value-based from volume-based, enforcement mechanisms are still rooted to the volume-based approach.

According to the AHA, the Stark law is not the only legal barrier that needs to be addressed. Hospitals, physicians and other health care providers must “break out of the silos” and collaborate as teams to achieve the efficiencies and care improvement goals of the new payment models. To accomplish that goal, the AHA stressed the need for a legal safe zone across the fraud and abuse laws (Stark, anti-kickback and certain civil monetary penalties (CMPs)).

As such, the AHA views Stark as poorly suited to a value-based payment system. The law should not be the central point of oversight for value-based payments, as it was designed to keep hospital and physicians apart through micro-managing compensation arrangements on a strict liability basis.

The AHA supports the creation of an exception under the anti-kickback statute for hospital-physician integrated arrangements designed to achieve the goals of team-based care. In addition, there should be protection for shared savings and incentive programs, as well as any arrangement start-up or support contribution. Any arrangement covered by the exception would be deemed compliant with the Stark law and applicable CMPs.

Moreover, the AHA stated that any requirement governing the form rather than the substance of an arrangement is a technical rather than substantive requirement. Thus, Stark should require that enforcement take into account mitigating factors when a violation does occur. These factors should include: (1) whether the violation is technical or substantive; (2) whether the parties’ failure to meet all the prescribed criteria of an applicable exception was due to an innocent or unintentional mistake; (3) the corrective action taken by the parties; (4) whether the services provided were reasonable and medically necessary; (5) whether access to a physician’s services is required in an emergency situation; or (6) whether the Medicare program suffered any harm beyond the statutory disallowance.

DOJ recovers almost $2B in health care false claims

The Department of Justice (DOJ) obtained more than $3.5 billion in False Claims Act settlements and judgments in fiscal year (FY) 2015, more than half of which—$1.9 billion in federal losses—came from companies and individuals in the health care industry. These cases included companies and individuals that allegedly provided unnecessary or inadequate care, paid kickbacks to health care providers to induce the use of certain goods and services, or overcharged for goods and services paid for by Medicare, Medicaid, and other federal health care programs.


The False Claims Act (FCA) (31 U.S.C. §3729 et seq.) is the federal government’s primary civil remedy to redress false claims for government funds and property under government contracts and programs including Medicare and Medicaid. Most false claims actions are filed under the FCA’s whistleblower, or qui tam, provisions that allow individuals to file lawsuits alleging false claims on behalf of the government. Section 1313 of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) provided additional inducements and protections for whistleblowers and strengthened the provisions of the federal health care Anti-Kickback Statute (AKS) (42 U.S.C. §1320a-7b). If the government prevails in the action, the whistleblower, also known as the relator, receives up to 30 percent of the recovery. In fiscal year 2015, whistleblowers filed 638 qui tam suits leading to $2.8 billion in DOJ recoveries, with awards to relators totaling $597 million.

Health care fraud

In addition to recovering losses from health care fraud that has already occurred, the DOJ says that its continuing pursuit of fraud deters individuals who might otherwise cheat the system and prevents billions of additional lost dollars. The DOJ’s focus on health care fraud is a priority of the Obama Administration, which created the Health Care Fraud Prevention and Enforcement Action Team (HEAT), an interagency task force to increase coordination and optimize criminal and civil enforcement. Additional information on the government’s efforts in this area is available at, a webpage jointly established by the DOJ and HHS.

Largest recoveries

The largest health care recoveries in FY 2015—October 1, 2014, through September 30, 2015—were from DaVita Healthcare Partners, Inc., the nation’s largest dialysis provider. DaVita entered into an agreement with the DOJ to pay $350 million to settle claims that it violated the AKS by soliciting and entering into joint venture agreements with physicians who had large renal patient bases, and agreed to a civil forfeiture of $39 million, totaling $389 million (see DaVita filters $350M to feds in dialysis scheme, Health Law Daily, October 23, 2014; DaVita to pay $389M in largest kickback-only case in healthcare history, Health Law Daily, October 27, 2014). A few months later, DaVita agreed to pay $450 million to resolve claims that it for knowingly created unnecessary waste in administering the drugs Zemplar® and Venofer® to dialysis patients (see Another day, another DaVita settlement; $450M this time, Health Law Daily, June 25, 2015).

Among the other health-care-related FCA recoveries were $330 million in settlements and judgments involving hospitals (see Whistleblowers rake in heart-stopping $38M in cardiac device FCA settlements, Health Law Daily, November 2, 2015), several Stark Law (42 U.S.C. §1395nn) settlements involving financial relationships between hospitals and doctors that could improperly influence patient referrals, $96 million in settlements and judgments involving the pharmaceutical industry., and many civil fraud and false claims actions against skilled nursing homes and rehabilitation facilities. The DOJ also made note of actions it successfully pursued against individual providers or facility owners and operators.

Other recoveries

Following health care fraud and abuse, the next largest recoveries were in connection with government contracts. This is the fourth year in a row that the DOJ has recovered more than $3.5 billion in FCA claims. Since January 2009, the DOJ has recovered $26.4 billion under the FCA, nearly $16.5 billion of which is attributed to health care fraud. Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division, said, “The False Claims Act has again proven to be the government’s most effective civil tool to ferret out fraud and return billions to taxpayer-funded programs. The recoveries announced today help preserve the integrity of vital government programs that provide health care to the elderly and low income families, ensure our national security and defense, and enable countless Americans to purchase homes.” Overall, the DOJ collected $23.1 billion in civil and criminal cases in FY 2015.