Physician-owned distributorships (PODs) may be an innovative alternative to manage costs of orthopaedic implants for hospitals, patients, and payers, but they are also fraught with multiple legal and ethical challenges. During a panel discussion at the 2011 AAOS Board of Councilors (BOC)/Board of Specialty Societies (BOS)Fall Meeting, representatives from government and the orthopaedic device industry joined orthopaedic surgeons in reviewing the pros and cons of this distribution model.

PODs for DME
Robert H. Haralson III, MD, medical director of DeRoyal Industries, reviewed the history of physician-owned distribution of durable medical equipment (DME). By buying directly from manufacturers, physicians could have an inventory on hand to serve patients. Eliminating the “middle man” resulted in savings for patients while providing an ancillary income for the practice.

Recently, however, the Senate Finance Committee has taken an interest in physician-owned distributorships (PODs), believing that the use of PODs may result in improper billings and fraud. Dr. Haralson pointed out that 60 percent of medical claims for power wheelchairs did not meet all documentation requirements, resulting in $112 million in improper payments.

“The question is: who do we suspect more…doctors making money through PODs or companies making money by overcharging for implants?” asked Dr. Haralson.

Although the Office of the Inspector General (OIG) has developed safe harbors for PODs, participating physicians will have to document, use multiple vendors, avoid using physician-owned manufacturers, distribute profit equally (not based on usage), and disclose their ownership to colleagues, patients, and hospitals. He pointed out that PODs for DME are primarily stock-and-bill operations, but that PODs for spine and/or trauma equipment use different models.

“We are convinced they will be allowed,” concluded Dr. Haralson, “but it will be necessary to collect data to show that PODs deliver lower costs and as good as or better quality than standard manufacturing distribution systems.”

“A model whose time has come”
According to John C. Steinmann, DO, a California orthopaedic surgeon who has ownership interest in a POD as well as in device companies, surgeon-owned distribution systems are “a model whose time has come.” In his view, physician ownership encourages volume pricing, controls costs, and fosters competition. Where PODs have been introduced, he noted, substantial cost savings have resulted.

“The current model is based on one-at-a-time purchases, while implants have reached commodity status,” said Dr. Steinmann. “If 10 different implants all provide the same outcome, why shouldn’t doctors negotiate directly with companies to obtain cost savings?” But, he added, the primary goal must be to save costs rather than to obtain personal financial gain.

Dr. Steinmann explained that PODs negotiate with manufacturers and agree to purchase in bulk and to assume the financial burden of inventory. The POD replaces distributors, who, he argued, add very little to the value of the implant. Salaries for product representatives will be more in line with those paid to other healthcare providers, such as nurses and physician assistants, and the difference is distributed to the providers of the service—surgeons and hospitals.

“Quality is maintained, value is markedly improved, and this system will sustain this service to the public by compensating the providers fairly,” said Dr. Steinmann. “The portion to the surgeon is a return on his investment for the inventory and the distribution services he provides—not a pass through.”

Dr. Steinmann also discussed the American Association of Surgeon Distributors (AASD), a trade association that was recently established. The goal of the AASD is to establish a set of standards governing the legal and ethical use of the surgeon-owned distribution model and to gain endorsement of these standards by the U.S. government.

“In conclusion,” said Dr. Steinmann, “PODs provide the orthopaedic surgeon the control necessary to compete in an accountable care organization (ACO) and bundled payment environment. It’s a great ancillary business that provides value to hospitals and society.”

Congressional concerns
Sara Levin, a staff member in Sen. Herb Kohl’s (D-Wisc.) office, noted that several Congressional inquiries into PODs have been launched, although Congress has not taken any official position on the subject. She expressed concern about the impact of PODs on medical decision making; in her opinion, the proposed models for these systems need close scrutiny to ensure that the potential for financial inducements does not affect medical decisions.

She also raised the issues of transparency and overutilization. Although intrigued by the idea that PODs may result in cost savings, she reported that so far, Congress has heard only about bad models. “We want to ensure that these models sufficiently protect taxpayer interests, particularly for Medicare and its beneficiaries,” she said.

Ms. Levin quoted from an OIG report on the “growing trend” in physician ownership models, which may influence a physician’s choice of device. PODs, she noted, are prevalent in the fields of spinal surgery and total joint replacement and are increasing in the field of cardiology—all areas in which Medicare spends substantial dollars.

Initial investigations found that some PODs distributed substantial sums to physicians based on a small investment, limited their business only to investors, guaranteed high returns on investment, and resulted in more surgeries being performed by investors. These issues all raised concerns with members of Congress and resulted in more investigations.

“Not everyone is a bad actor,” she admitted, “but we believe these models deserve close scrutiny.”

The industry perspective
The final speaker was Bill Kolter, a registered lobbyist and corporate vice-president of government affairs, public affairs, and corporate communication for Biomet, Inc. According to Mr. Kolter, the POD model has significant potential pitfalls. He believes that PODs are “antikickback traps,” which rely on usage and changes in purchasing and prescribing.

Although eliminating sales and marketing costs can result in better pricing, doing so relies on a captive market. Thus, investors are also the source of revenues. “Saving money, even if anecdotally true, doesn’t change the legal landscape,” he cautioned.

Warning that PODs may become “the next high profile healthcare scandal,” Mr. Kolter noted that the business structure has more “cons” than “pros.”

Rising concerns about conflicts of interest should prompt surgeons to avoid even the appearance of impropriety, he suggested, but PODs present conflicts at every level. “Is it OK for surgeons to profit from prescribing certain implants?” he asked. “Or for hospitals to protect referrals by sourcing through PODs? Or for manufacturers to distribute through customer-owned companies?”

In conclusion, he noted that as PODs proliferate, issues related to conflict and impropriety will grow and the OIG will not be able to ignore the issue indefinitely. “When the leash snaps, it will snap hard,” he warned, “and reputations and patient trust will be damaged.”

Mary Ann Porucznik is managing editor of AAOS Now. She can be reached at porucznik@aaos.org