CMS and OIG Respond to Finance Committee’s Letters Regarding PODs

In July, the HEALTH LAW ATTORNEY BLOG reported on five U.S. Senators asking the Office of Inspector General (“OIG”) and the Centers for Medicare and Medicaid Services (“CMS”) to issue guidance on physician owned distributorships (“PODs”) (or, sometimes referred to as physician owned intermediaries (“POIs”)). The OIG and CMS have issued their responses.

By way of brief background, a POD is an arrangement in which, according to the U.S. Senate Committee on Finance (“Finance Committee”), “allow physician investors to purchase ownership shares in an entity that, in turn, purchases or serves as a medical device distributor for the products the physician utilizes in surgery.” Because of lack of industry guidance on the potential for fraud and abuse violations, the Finance Committee issued Physician Owned Distributors (PODs): An Overview of Key Issues and Potential Areas for Congressional Oversight wherein it recommended letters be sent to the OIG and CMS articulating its concerns and asking for guidance.

On June 9, 2011, the Finance Committee issued two letters–one to the OIG and one to CMS. In its letter to the OIG, the Finance Committee sought guidance on how PODs fit, or don’t fit, within the confines of the Anti-Kickback Statute (“AKS”). In so doing, the Finance Committee insisted that

[I]t is incumbent upon the OIG to address this rapidly evolving healthcare market issue by conducting an inquiry into PODs and their current structures and activities and then reporting to us the results of such an inquiry, along with your recommendations for further action should be taken by the OIG and Congress to effectively address the patient and program risks presented by PODs.

In its letter to CMS, the Finance Committee sought guidance on the Physician Payments Sunshine Act (“Sunshine Act”) and accountable care organizations (“ACOs”). In seeking guidance on these issues, the Finance Committee requested CMS

[C]losely examine the physician ownership and investment interests presented by PODs and ensure that those are addressed as you finalize the reporting requirements of the Sunshine Act. This would mean that the distribution model of these physician owned companies would need to be included as CMS develops a final definition of “applicable manufacturers” and “applicable Group Purchasing Organizations (GPOs).”

The Finance Committee continued in its letter to ask CMS to take PODs into consideration when issuing the final ACO regulations:

CMS should take into account the POD models when developing its final regulation to ensure that qualification and oversight of ACOs protect against potential abuses posed by PODs. The final rule should prohibit ACOs from purchasing products or services from entities that are owned by physicians participating in the ACO. Ownership should be deemed to exist if the physician receives any remuneration (cash, equity, options, profits, dividends, etc.) from the entity supplying the product or service. It should be made clear that waivers of Stark and Anti-Kickback laws should not extend to PODs.

On August 10, 2011, CMS replied to the Finance Committee’s letter stating that it will take the Finance Committee’s letter into consideration when developing the Sunshine Act’s proposed regulations. CMS also stated that the period for submitting comments on the ACO Waiver Designs proposed regulations ended on June 6, 2011 and that it was reviewing the comments it received and was developing the final ACO regulations with respect to its waiver authority.

More significant, however, is the September 13, 2011 OIG response to the Finance Committee. The OIG revealed that, pursuant to a meeting with the Finance Committee on July 19, it is “initiating a review of PODs that will seek to determine the extent to which PODs provide spinal implants purchased by hospitals.” The OIG stated that it will be a national study of hospitals that bill Medicare for spinal surgery. After the review, the OIG intends to establish:

How widespread PODs are;
What services PODs offer to hospitals;
Whether PODs save hospitals money in the acquisition of implants; and
Whether the PODs identified in the review are associated with high use of spinal implants.

With respect to the AKS concerns raised by the Finance Committee, the OIG reminds the Finance Committee that such determinations are extremely fact specific and, therefore, the “OIG’s ability to issue guidance about the application of the statute to these business structures is limited.” The OIG also reminded the Finance Committee that when it evaluates the legality of situations in which referring physicians can earn a profit–including through an investment in an entity for which s/he generates business–it considers certain factors, including:

The terms under which a physician may invest in the entity;
The terms under which a physician-owner may be required to divest his/her ownership interest;
The actual return or projected return on the physician’s investment; and
The amount of revenues generated for the entity by its physician-investors.

The OIG did not state how long its review would last, but providers and suppliers should be aware that the OIG is beginning to focus its attention on this issue and that guidance will be forthcoming.

For more information on PODs and the effects of this recent guidance on manufacturers and other industry relationships, as well as for more information on structuring various healthcare business ventures, please contact Adrienne Dresevic, Esq., Carey F. Kalmowitz, Esq. or Esq. at (248) 996-8510 or (212) 734-0128 or visit the HLP website.