OIG publishes study report of physician owned distributorships

On October 23, 2013, the Department of Health and Human Services, Office of Inspector General (“OIG”) published a report entitled “Spinal Devices Supplied by Physician-Owned Distributors: Overview of Prevalence and Use” (the “Report”).¹ The Report was provided as a response to Congressional requests to determine the extent to which physician-owned distributorships (PODs) provide spinal devices to hospitals. The Report follows prior OIG review of PODs – specifically, a 2013 Special Fraud Report² and a Senate Finance Report issued in 2011.³
In its production of the Report, the OIG reviewed 1,000 claims by 615 hospitals billed to Medicare in 2011 that included spinal fusion surgery. Each hospital associated with those claims was asked to complete a questionnaire about its knowledge of PODs. Surgeries from 7 states accounted for just over 50% of the use of PODs devices. The states with the highest reported PODs use were California, Texas, Missouri, Florida, Pennsylvania, Alabama and Georgia (collectively, 52%).
The Report noted that the exact makeup of PODs varies. Specifically, (1) whether physicianinvestors practice in the hospitals to which they distribute the devices, (2) whether the PODs solely distribute devices or both manufacturer and distribute their own devices, and (3) which services the PODs offer with the purchase of the devices. In several instances, the Report noted that the PODs provide physician-investors with the opportunity to profit from their own use of the devices.
PODs have been in the marketplace for more than a decade. An important cornerstone of PODs organizations is the assertion by most PODs that the arrangement can lower healthcare costs because it is a more efficient means of delivering the product to the hospital. That is, fewer “middlemen” or sales personnel equates to lower costs and ultimately savings that are passed on to the consumer. The PODs also create an opportunity to increase competition within the marketplace by allowing smaller manufacturers to compete with larger, international manufacturers. Consistent with prior OIG examinations, the Report was highly critical of these assertions.
Notable Findings
Some notable findings from the Report include:

1. In FY 2011, PODs supplied devices used in almost 20% of the spinal fusion surgeries billed to Medicare.
2. Surgeries that used POD devices used almost 2 fewer devices per surgery than surgeries that did not use POD devices.
3. Device costs for surgeries that used POD devices were not lower than those for all other surgeries.
4. The growth rate of spinal surgery after hospitals began purchasing from PODs was three times that for all hospitals.
5. The complexity of hospitals’ caseloads of spinal surgeries was slightly higher for hospitals that purchased devices from PODs than that for hospitals that did not purchase from PODs.

Conclusions
Based upon its findings, the OIG reached several conclusions:

1. The use of PODs is increasing. With a substantial growth rate since 2009, nearly 20% of all Medicare spinal surgeries involved PODs and of the hospital’s surveyed, nearly one-third reported making purchases from PODs. It is clear from the Report that notwithstanding the Special Fraud Alert and extensive concerns raised by the OIG in recent years, that PODs, if not growing, are at least deeply rooted within the spinal surgery marketplace.
2. PODs do not appear to reduce costs or spinal surgery caseloads. The OIG concluded that hospitals that purchase from PODs perform more spinal surgeries and have slightly more complex caseloads than hospitals that do not purchase from PODs. Though the OIG did not pursue the cause, it did determine that hospitals in its study experienced increased rates of growth in the number of spinal surgeries performed as compared to the growth rate for hospitals overall.
3. PODs raise significant fraud and abuse concerns. The OIG reiterated its concern that the PODs create significant concerns under the federal Anti-Kickback Statute. As supported by its findings, the OIG noted that devices sold by PODs are “physician preference items” in which the physician’s choice (either of brand or design) may heavily outweigh that of the hospital’s power of choice in selecting (and purchasing) the devices. Though the federal Sunshine Act will require PODs to become more transparent, the Report noted that the disclosure by hospitals and physicians to their patients is widely disparate and the ability of patients to identify potential conflicts of interest among physicians and hospitals is reduced.

Impact
The Report is an example of the OIG’s consistent, multi-year, focused review of PODs. Both hospitals and physicians must carefully consider their current (or prospective) use of PODs in light of the OIG’s findings and conclusions. It is clear that there is tension between the PODs (which many support as a means to reduce overall healthcare costs, while continuing to drive innovation in the marketplace) and the OIG (which does not appear to have become any more willing to accept such claims). Providers can best address the tension and the resulting uncertainty by being vigilant in their compliance efforts, specifically: (1) reviewing current conflicts of interest policies and revising the same as necessary to interface with PODs and (2) reviewing any current PODs to determine their compliance with federal and state laws.

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Office of Inspector General (OIG) Issues Negative Advisory Opinion Regarding Anesthesiology Provider Contract

On November 12, 2013, the Office of Inspector General (“OIG”) released Advisory Opinion 13-15 concluding that a proposed arrangement between an anesthesiology group and a hospital-based psychiatry group could potentially generate prohibited remuneration under the federal Anti-Kickback Statute (“Kickback Statute”). The OIG based its conclusion on the fact that the proposed arrangement would not qualify for safe harbor protection and that it presented more than minimal risk under the Kickback Statute because the psychiatry group would receive payment in exchange for referrals to the anesthesiology group.
The proposed arrangement originated from the anesthesiology group’s contract with a hospital as the exclusive provider of anesthesiology services that, in 2012, included a carve out to allow the psychiatry group to provide anesthesiology services to the hospital’s electroconvulsive therapy (“ECT”) patients as well as hire an additional anesthesiologist to provide such services at the psychiatry group’s discretion. Shortly after the carve out was negotiated, the psychiatry group determined that another part-time anesthesiologist was necessary. The psychiatry group proposed that it and the anesthesiology group should enter into a contract whereby the anesthesiology group would provide a part-time anesthesiologist for ECT patients. The psychiatry group would bill and collect for those services and, in turn, would pay the anesthesiology group a fixed, per diem rate for its services. The psychiatry group would retain the difference between the amount collected and the per diem rate.
As an initial matter, the OIG concluded that the per diem compensation would not qualify for protection under the personal services and management contracts safe harbor to the Kickback Statute because (i) the aggregate compensation to be paid over the term of the agreement would not be “set in advance,” and (ii) the safe harbor protects only those payments made by a principal (i.e., the psychiatry group) to an agent (i.e., the anesthesiology group) and, here, the principal would receive compensation from the agent in the form of retaining the difference between the amount billed and collected and the per diem rate.
Additionally, the OIG concluded that the proposed arrangement posed more than a minimal risk under the Kickback Statute for the following reasons:

• The proposed arrangement was designed “to permit the psychiatry group to do indirectly what it cannot do directly; that is, to receive compensation, in the form of a portion of the anesthesiology group’s service revenues, in return for the psychiatry group’s referrals of ECT patients to the anesthesiology group.”
• The additional anesthesiologist carve out to the 2012 contract between the hospital and the anesthesiology group gave the psychiatry group the ability to solicit remuneration for its ECT patient referrals by allowing the psychiatry group to contract with an anesthesiologist other than the anesthesiology group if the groups were not successful in negotiating the terms of an agreement. The OIG stated that this presents significant risk that the remuneration the anesthesiology group would provide to the psychiatry group, i.e., the opportunity to generate a fee equal to the difference between the amounts the psychiatry group would bill and collect and the per diem amounts, would be in return for the psychiatry group’s referrals to the anesthesiology group.

Importantly, although outside the scope of the opinion, the OIG noted the potential kickback nature underpinning a hospital’s carve out from an exclusive contract. In a footnote, the OIG stated that “[a]though we have not been asked to opine on, and express no opinion regarding, any aspect of [the anesthesiology group’s] relationship with the hospital . . . we cannot exclude the possibility that: (i) the hospital agreed to negotiate for the additional anesthesiologist provision in exchange for, or to reward, the psychiatry group’s continued referral of patients to the hospital for ECT procedures; (ii) the hospital leveraged its control over its large base of anesthesia referrals to induce the anesthesiology group to agree to the additional anesthesiologist provision; and (iii) the anesthesiology group agreed to the additional anesthesiologist provision in exchange for access to the hospital’s stream of anesthesia referrals.”
In light of this opinion, health care providers should carefully consider whether any of their arrangements that otherwise comply with the personal services and management contracts safe harbor involve direct or indirect payments from the agent to the principal as the OIG has stated that such payments are not protected by the safe harbor. Additionally, although only addressed in a footnote, the OIG expressed concern with carve outs to exclusive contracts between hospitals and providers. Providers and hospitals should carefully examine such arrangements for potential Kickback Statute implications.

http://www.natlawreview.com/article/office-inspector-general-oig-issues-negative-advisory-opinion-regarding-anesthesiolo