Published 5/1/2015
Christopher Kontogianis, MD

Physician-Owned Distributorships: Legitimate Ancillary Service or “Kickback Trap”?

Christopher Kontogianis, MD

The number of physician-owned distributorships (PODs) have increased rapidly in the last decade. Under this model, physicians are owners or investors in a business that purchases medical devices in bulk and sells them to the hospitals and surgery centers in which the physician owners/investors practice.

Proponents believe that PODs enable the vertical integration necessary to move toward alternative payment models such as accountable care organizations and bundled payments. Physician ownership, they say, could encourage volume purchasing, foster competition, and ultimately reduce costs to hospitals and lower overall healthcare costs.

Critics of PODs, however, believe the potential for financial gain by the physician owners/investors and the lack of regulatory oversight create a potentially unethical environment. They seek increased government regulation of these entities.

At the 2015 AAOS Annual Meeting, John C. Steinmann, DO, presented the results of a study conducted in California by the American Association of Surgeon Distributors (AASD) on POD utilization and cost savings. These data showed no increase in the recommendation for surgery with implants and a substantial decrease in costs in “ethical distributorships” that operate under AASD standards.

Specifically, when 2010 pricing data from five PODs were compared to contract pricing from traditional distributors (TD), the POD implant cost was on average $2,589 (36 percent) less than the TD cost. For the 1,366 cases included in the sample population, the 1-year cost savings to hospitals and society was $2,456,521—an average of $490,304 per distributorship.

“As physicians,” said Dr. Steinmann, “our decisions affect nearly 75 percent of all healthcare spending. Hence, we must ensure that the American public is receiving value for its dollar. The ability of surgeons to appropriately value technology, create competition, and purchase in bulk makes them, arguably, the most qualified individuals to operate and manage medical device distribution. Our absence in the purchasing decisions related to healthcare spending has allowed many industries to charge U.S. hospitals double what they charge for the same product in Europe.”

Legal/ethical concerns
The ethics and legality of physician ownership of medical device distributors center on intent and conduct. According to Daniel Levinson, head of the Office of the Inspector General (OIG), “The legality of each POD is highly dependent on each entity’s particular characteristics, including its legal structure, operational safeguards, and the actual conduct of its investors.”

The OIG has developed guidance for physician investment and joint ventures that is not sector-specific but applies equally to all physician joint ventures. This guidance reaffirms that intent is at the core of the ethical and legal questions. Entities must demonstrate financial risk (own and maintain inventory), provide cost savings, distribute profit according to capital investment (not based on usage), and disclose their ownership to colleagues, patients, and hospitals.

The U.S. government actively provides warnings regarding the improper application of the POD model. In one case, the U.S. Department of Justice filed a complaint under the False Claims Act alleging that a medical device manufacturer made improper payments to surgeons through the use of PODs.

In a 2013 Special Fraud Alert, the OIG called the POD business model “inherently suspect” under anti-kickback laws. The OIG has also reported that, in certain cases, PODs do not result in lower implant costs and can increase implant utilization. As a result, several hospital systems have adopted policies prohibiting purchasing from PODs in which the ordering physician is an owner.

In response, the AASD has created the ePOD, or ethical physician-owned distributorship, designation for PODs that operate at the highest levels of transparency, quality assurance, and legal compliance. AASD publishes a set of standards for surgeon-owned distributorships on its website.(www.aasdonline.org) and requires that members fully comply with these standards.

Activity in the states
California, New Hampshire, Oklahoma, and, most recently, Virginia are among the states that have attempted to pass legislation regulating PODs. In Virginia, legislation seeking to ban PODs was introduced during two recent sessions. These efforts were backed by a single spinal implant manufacturer and opposed by the Virginia Orthopaedic Society (VOS). VOS argued that physician ownership of ancillary services promotes integrated care, increases patient convenience, expedites healthcare delivery, and spurs innovation. In addition, VOS contended that these arrangements are already regulated by existing state and federal laws.

In 2014, the Virginia Department of Health Professions conducted a hearing on PODs. Its report found a lack of definitive data and evidence on the potential harm of PODs and recommended no action, supporting current laws and their specific exceptions that recognize that ancillary services are a vital component of the diagnostic and treatment regimens. This year (2015), legislation opposing PODs did not make it out of committee and is currently dead.

These efforts, however, indicate that PODs, like all physician ancillaries, need close scrutiny to ensure that the potential for financial inducements does not affect medical decisions. Hospitals, physicians, and medical device manufacturers would benefit greatly from clear legal guidance or the universal adoption of appropriate standards governing the structure of a physician-owned medical device distributorship.

AAOS Activities
The Board of Councilors’ (BOC) State Legislative and Regulatory Issues (SLRI) Committee is committed to the defense of physicians’ rights and autonomy regarding entities such as imaging, physical therapy, and surgery centers. The potential for abuse exists with PODs as it does with other physician-owned entities.

Recognizing that AAOS fellows are already engaged in PODs and considering the need for clearly defined standards, the SLRI recently established a working group on this topic. In addition, at the 2014 fall meeting, the BOC passed a resolution recommending that the American Association of Orthopaedic Surgeons adopt a statement supporting the AASD standards as a minimum standard by which PODs should operate. The AAOS Board has received this report.

Any physician considering participation in a POD model should seek competent legal advice by attorneys working in the healthcare arena and fluent in federal and state law and should adhere to a published and accepted set of standards.

I believe that alternate payment methods make POD participation worthy of a closer look. However, we as physicians will need to police our own or someone else will. To that end, developing a minimum set of standards makes sense.

Christopher Kontogianis, MD, is a BOC representative from Washington state and chairs the BOC SLRI committee. His disclosure information can be found at www.aaos.org/disclosure