2013 was not a good year for physician-owned distributors of
implantable medical devices (“PODs”). In March, the Office of Inspector General
of the Department of Health and Human Services (“OIG”) published a Special Fraud Alert on Physician-Owned Entities,
the essential conclusion of which was that physician-owners ordering
implantable devices for their patients through their PODs is “inherently
suspect” under the Federal health care programs antikickback law (“AKL”). In
October, OIG released a report reviewing the prevalence and use of spinal
devices supplied by PODs, the essential conclusions of which took the wind out
of the sails of POD proponents by demonstrating that PODs (i) do not result in cost savings and
(ii) do lead to increased utilization of implantable
devices. In the course of the year, several large hospital chains, including
Tenet, Ascension, and Intermountain Health, adopted policies prohibiting
purchasing from PODs owned by the ordering physicians. While the proponents of
PODs have continued to scrounge for arguments that support the POD business
model (see links below), it is increasingly clear that there is little to be
said in favor.
These developments should not come as a surprise to anyone who has
followed the steady defeat of each new physician ownership vehicle over the
last twenty years. Beginning with the publication of OIG’s Special Fraud Alert on Joint Venture Arrangements in 1989, the federal government has moved to
restrict self-referrals by passive physician owners in ancillary lines of
business. In the early 1990s the government settled cases involving
physician-owned laboratories, imaging and radiation therapy centers. See,
e.g., SmithKline Lab To Pay Record
$1.5-Million Fine, Los Angeles Times, Dec. 29, 1989; DOJ Press
Release, T2 Medical, Inc. Agrees to
Pay $500,000 and Discontinue Improper Practices (Sept. 26, 1994), ; Shalala v. T2 Medical, No.
1-94-CV-2549-ODE, 1994 WL 686949 (N.D. Ga. 1994); Shalala v. RadiationCare, No.
1 :94-CV-3339-RCF, 1995 U.S. Dist. LEXIS 749 (N. D. Ga. 1995).
In the course of 7 years of litigation against the Hanlester laboratory network that yielded only a partial
victory – investment interests are remuneration under the AKL, but some
defendants were acquitted – OIG convinced Congress to act against physician
self-referral more directly, and the Stark law was born. See, e.g.,
Office of Inspector General (OIG),Financial
Arrangements Between Physicians and Health Care Businesses: Report to Congress (May 1989); General Accounting Office,Referrals to Physician-Owned Imaging
Facilities Warrant HCFA’s Scrutiny; Report to the Chairman, Subcommittee on Health (Oct. 1994).
Stark effectively stopped, or at least severely regulated and
restricted, physician self-referral for certain “designated health
services.” Where self-referral crept back in to exempt certain services
from Stark (e.g., physician-owned mobile providers), the government continued
to pursue cases under the antikickback law, and obtained a settlement against a
physician-owned mobile laser provider as recently as 2010. See
OIG Press Release, OIG Enters into $7.3 Million
Civil Monetary Penalty Settlement with Physician-Owned Enterprise (July 8, 2010). See
also, American Lithotripsy Society v. Thompson, 215 F.Supp.2d 23
(2002) (holding that lithotripsy is not a Stark DHS); 69 Fed. Reg. 16054, 16105
(Mar. 26, 2004) (“in light of the unique legislative history regarding the
application of [the Stark law] to lithotripsy, we will not consider lithotripsy
an ‘inpatient or outpatient service’ for purposes of [the Stark law].”).
PODs are easier to disapprove than any of these earlier models,
since at least those involved regulated providers furnishing healthcare
services. And as CMS has made clear, PODs also raise concerns under the Stark
law. See, e.g., 73 Fed. Reg. 23527, 23694-23695 (April 30, 2008) (concern
that PODs “may serve little purpose other than providing physicians the
opportunity to earn economic benefits in exchange for nothing more than
ordering medical devices . . . that the physician-investors use on their own
patients” and in many instances would not qualify for an exception from the Stark
law’s self-referral prohibition). Accordingly, as OIG’s recent
pronouncements make clear, the physician-owned supply chain is doomed to wither
under the continued scrutiny of enforcers, whistleblowers, and perhaps
most important, hospital customers who will not want to put themselves at risk
by purchasing from a self-referring POD. But these developments do beg
the question, what next? In this regard, I offer a few possibilities:
- Gainsharing
Makes a Comeback. Hospital-physician gainsharing never really
went away, and OIG has approved numerous programs that allow procedural
physicians to share in the concrete savings to which they contribute by
adopting cost-reducing treatment protocols. The withering of the
physician-owned supply chain will re-invigorate interest in these programs.
- ACO
Waivers Arrive. As the Affordable Care Act continues to
encourage hospitals and physicians to work together to control costs through
bundled payment arrangements, there will be an increasing array of
physician-incentive plans tested. For recognized ACO’s, some of these
will be protected at least temporarily under waivers from the AKL and the Stark
law. http://www.gpo.gov/fdsys/pkg/FR-2011-11-02/pdf/2011-27460.pdf
- ACO-type
Arrangements Proliferate. Even outside the context of CMS-recognized
ACOs, hospitals and physicians will explore shared savings arrangements that
are based on similar principles. Providers, drug/device companies, and payors
will work more closely to achieve arrangements that properly incentivize
physicians through the existing managed care safe harbors: 42 C.F.R.
1001.952(m) (“price reductions offered to health plans”), (t) (“price reductions
offered to eligible managed care organizations”), and especially (u) (“price
reductions offered by contractors with substantial financial risk to managed
care organizations”).
Now that OIG’s pronouncements have made clear that PODs are not an
acceptable or lawful answer to rising healthcare costs, hospitals, physicians,
and implantable device makers can be expected to begin more serious efforts at
shared savings and other arrangements that will at once bring about greater
cost control and continue to encourage the product and service innovation that
represent the best of American medicine.
- Tom Bulleit, Partner, Ropes & Gray