Recently, the Department of Justice ("DOJ") announced that it filed a complaint under the False Claims Act against a spinal implant company, its owners, and two of the company's physician-owned distributors. The DOJ filed another complaint under the False Claims Act in an existing qui tam action against a neurosurgeon investor of one of the company's distributors. Notably, the lawsuit brought against the company, its owners, and two distributors mark the first government-filed False Claims Act lawsuit against a physician-owned distributor ("POD").
The complaints allege that the company's distributors paid physicians to induce them to use the company's spinal implants in their surgeries. For example, the complaints allege that:
• Investment payments to physician investors were based on profits generated for the company by the physician investor (e.g., number of surgeries performed with the company's spinal implants);
• The number of surgeries performed by physician investors dramatically increased after the physicians became investors in the company;
• The company did not allow physicians to become investors unless the hospitals where they performed surgeries agreed to purchase the company's implants;
• The company did not offer investment interests to physicians who will not order a high volume of the implants;
• The company's owners retained - and asserted - the right to repurchase the shares belonging to the company's physician investors if they failed to generate significant profits for the POD;
• Many of the physician investors did not make any initial capital contributions for their investment interests; and
• The physician-investors lied to hospitals with which they were affiliated about their investment interest in the PODs.
These lawsuits were filed approximately a year and a half after the Office of Inspector General, Department of Health and Human Services ("OIG"), published a Special Fraud Alert on the inherently suspect nature of PODs. In the March 2013 Special Fraud Alert (here), the OIG reiterates its longstanding concern about arrangements that corrupt medical judgment and result in over utilization of unnecessary procedures, the use of devices that are not clinically appropriate, and increased costs to federal health care programs and beneficiaries. The OIG also outlined a number of "suspect characteristics" of POD arrangements, such as:
• The size of the investment interest offered to each physician varies with the expected or actual volume or value of devices used by the physician;
• Physician investors are required or pressured into using the POD's devices for their patients;
• The POD retains the right to repurchase the physician investor's interest if the physician fails to refer, recommend, or arrange for the purchase of the POD's devices; and
• The physician-investor fails to disclose to the hospital their ownership interest in the POD.
Since the March 2013 Special Fraud Alert, many providers have continued to assume the risks that accompany a relationship with a POD. Perhaps providers found some comfort in the fact that, until now, there has not been any significant government enforcement in the area. However, the above-mentioned cases evidence the government's intention to act on the warnings it gave in its Special Fraud Alert. Therefore, providers should re-evaluate their relationships with PODs to ensure compliance with the Anti-Kickback Statute and other federal laws.
Additionally, while the government did not name the hospital as a defendant in the above-mentioned case (in part due to the allegations that the physician investors concealed their association with the PODs), the government alleges that the hospital claims resulting from the physician investors' referrals are also false claims. However, under a different (but similar) set of facts, the government may be able to allege that a hospital was put on notice of a physician's investment interest in a POD based on the physician's utilization of a certain device. These cases and the March 2013 Special Fraud Alert should alert hospitals to closely examine their dealings with PODs and physicians who associate with PODs.
As we watch for further government enforcement in this area, we wait to see how aggressively the government will pursue these lawsuits and how far the government's reach will extend to those who enter into dealings, whether directly or indirectly, with PODs. Those considering a relationship with a POD should seek advice from health care legal counsel to decide if, and how, to enter into such a relationship.