Five senior senators are urging the Health and Human Services Office of Inspector General to investigate the proliferation of entities that can steer surgeons to make implant choices based on personal profit.

The bipartisan group of lawmakers is also calling on CMS to make sure it protects against inappropriate conflicts of interest that may arise from these physician-owned distributors, or PODs, as part of two major regulations the agency plans to release this year.

In letters to CMS and the HHS OIG dated June 9, the lawmakers say PODs, which typically buy orthopedic implants from manufacturers and resell them to the hospitals where the physician investors practice, clearly raise significant potential for conflicts of interest. Namely: surgeons can profit by choosing to implant devices sold by the distributor in which they have an ownership investment.

While orthopedic implants are the largest focus of PODs, the model is quickly branching out into other markets, including cardiac implants, the Hatch report notes.

But, the senators note, the physician-owned entities exist in a legal gray zone.

"There are a variety of models which are utilized, some of which may indeed be appropriate, but the potential for conflicts of interest in this physician ownership model, the safety concerns for patients, and the potential impact on costs to the health care system raise a number of troubling issues about PODs and other similar arrangements which we believe merit further inquiry," the lawmakers state in both letters.

The senators, led by Orrin Hatch, R-Utah, ask HHS Inspector General Daniel Levinson to take a more detailed look into PODs than OIG has in the past, and to report back findings, including recommendations for enforcement actions and legislation.

The request follows a recent inquiry initiated into the physician-owed device distributors by Hatch, who is ranking member of the Senate Finance Committee. Chuck Grassley, R-Iowa; Finance Committee Chairman Max Baucus, D-Mont.; and Special Committee on Aging leaders Herb Kohl, D-Wis., and Bob Corker, R-Tenn., also signed the letters.

PODs Are Proliferating

According to a June 9 report issued by Hatch's staff, PODs started to crop up in California in 2003, and have rapidly proliferated in that state and others during the past 18-24 months.

The POD model is being used "very aggressively" in rural areas, the report notes. And while orthopedic implants are by far the largest focus of PODs, the model is "quickly branching out" into other markets including cardiac implants, according to the report. The assessment was based on interviews with 50 people, including physicians, hospital employees and device industry representatives.

Business models adopted by PODs include those that mirror a traditional distributor model, arrangements where the original device manufacturer is treated as a contract manufacturer, or structures where PODs act as physician group purchasing organizations, the report explains.

Some physician-owned groups have apparently instituted protections to prevent direct conflicts, such as not tying physician compensation in any way to implant volumes, but there are other set-ups in which compensation appears to directly depend on implant volumes, the report notes.

Regardless, the lawmakers tell OIG that questions have been raised in interviews conducted for the report "about whether PODs serve any legitimate value."

AdvaMed Has Encouraged POD Scrutiny

The scrutiny from lawmakers aligns with priorities of device trade group AdvaMed, which has complained about the business practices of PODs for years.

AdvaMed said that it "welcomes" the inquiry.

"We have long expressed concerns that physician owned distributorships raise ethical and legal concerns, specifically issues relating to the anti-kickback statute," said Chris White, AdvaMed's general counsel, in a prepared statement. "No patient should ever be concerned that financial incentives are distorting their care in the selection of one medical technology over another."

AdvaMed is urging the Medicare agency to include public disclosure requirements for physician investment in PODs in upcoming draft regulations for the physician payment sunshine law that was enacted as part of health care reform. (See " Also see "Device, Hospital Groups Want All-Encompassing Physician Sunshine Rule" - Medtech Insight, 18 April, 2011. " – "The Gray Sheet" April 18, 2011.)

The senators make the same request in their separate letter addressed to CMS Administrator Donald Berwick.

"The POD model at its basic level is exactly the type ... envisioned by the Sunshine Act, which would require disclosure of the financial interests of their physician investors," the letter states.

The lawmakers' comments to Berwick also mirror AdvaMed concerns on the potential for new fraud and abuse waivers that are being entertained for new accountable care organizations to protect inappropriate activities by PODs. (See in this issue, " Also see "Providers, Device Firms Disagree On ACO Fraud And Abuse Protections" - Medtech Insight, 13 June, 2011. .")

CMS is aiming to finalize regulations by year end for a shared savings program to encourage development of ACOs. "The final rule should prohibit ACOs from purchasing products and services from entities that are owned by physicians participating in the ACO," the senators write.

Large Ortho Firms Stand To Gain From Scrutiny

Financial analysts who follow the implantable device market see the congressional scrutiny as an opportunity for the bigger players in the orthopedic space, particularly the spine market, where PODs have delivered some market share to smaller players and driven down prices.

According to Larry Biegelsen, an analyst with Wells Fargo, the focus will likely "lead to PODs either being eliminated or severely restricted, but this may take a year or so to play out," he noted in a June 9 research note. "Such an outcome would be beneficial to the larger spine players."

AdvaMed brought the PODs issue to the attention of OIG back in 2006 with an inquiry into the office's opinion on the legality of the entities.

OIG responded that the entities should be "closely scrutinized under the fraud and abuse laws."

But the senators stressed that more specific guidelines and enforcement policies are sorely needed.

"There is as much confusion in [OIG’s] stance on PODs as there is confusion in the health care community about how to arrange these in a legal manner," they write. "Until there is clarity, inappropriate versions of these entities could continue to proliferate, potentially driving up medical device costs to the Medicare and Medicaid programs and putting patient safety at risk."

"You can expect OIG will look into it," said Julie Taitsman, chief medical officer of the HHS OIG, during a June 10 session of the Medical Device Manufacturers Association annual meeting in Washington, D.C. "But we would look at it just using the same principles that we apply to all business arrangements,” she said, noting that OIG has no "special rules" for PODs.

The lawmakers want to hear back from CMS by July 15. Meanwhile, they expect an initial report from OIG by Aug. 12.

By David Filmore

Senators Seek Scrutiny Of Physician-Owned Device Distributors

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