Medicare advisers consider tighter rules on doctor-owned medical distributors

Medicare advisers consider tighter rules on doctor-owned medical distributors
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(A version of this story originally appeared on The Hill Extra.)

Regulators are mulling tightened oversight over physician-owned distributors of medical products, on fears that conflicts of interest could lead to fraud.

Some hospitals have set up barriers to avoid anti-kickback entanglements with device distributors, and the Medicare Payment Advisory Commission (MedPAC) is looking at more specific requirements in congressional recommendations. Some commissioners argue these types of physician-owned distributors of medical products should be outlawed.

At issue are distributors making money by selling devices ordered by their doctor owners for surgical use on their own patients. Physician-owned distributors, or PODs, operate as middlemen, buying a device from manufacturers and selling the device to a hospital at a higher price, although ownership of a distributorship is not always obvious.

The practice developed as a way for physicians to cluster buying power and potentially save on device costs.  

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Devices from these distributors are bought at the same price or higher than those available from manufacturers, a practice which lead some to call these entities “inherently suspect,” according to a recent Office of Inspector General report.

The medical device industry also sees a need for caution.

“PODs do not need to be injected into the medical device supply chain. They have not been conclusively shown to lower costs or add efficiency,” said Matthew Wetzel, Advanced Medical Technology Association vice president and assistant general counsel.

PODs create incentives for their physician owners to perform more surgeries, even when not medically necessary because they directly profit from the use of more devices, critics say.

The groups have been most prevalent in spinal surgery devices, involving plates and screws that are less complex than other implantable devices — although there is industry concern they could spread to other areas involving implantable devices.

MedPAC earlier this month considered potential policies including more robust reporting standards for distributors under the Physician Payment Sunshine Act, which requires information about ownership and financial relationships. Currently, only certain PODs have to disclose under the Sunshine Act, creating a loophole for distributors with a single hospital buyer.

The commission also discussed whether to require hospitals to adopt policies restricting their dealings with physician-owned distributors as part of their Medicare and Medicaid compliance requirements.

“I just don’t see how they are helpful for the [Medicare] program or beneficiaries. They certainly could create mixed incentive,” MedPAC Commissioner Warner Thomas said. “At a minimum, there ought to be more reporting. Frankly, there ought to be a way that we try to do away with them over time because I just don’t find them to be helpful.”

Any changes would need to be approved by Congress.

But devicemakers are worried that companies operating legally will be lumped together with potentially fraudulent operations because of physician involvement.

"The distinction between a POD and a legitimate start-up manufacturer is really important. That line has been blurred for far too long,” Wetzel said.

Thomas Bulleit, healthcare partner at Ropes & Gray, said hospitals have begun to tailor policies to more specifically weed out bad actors, but some continue to avoid physician-owned companies as a precaution.

“You don’t need a policy that avoids every physician-owned entity,” Bulleit said. “We need to avoid squashing innovation. In medical devices, in particular, a lot of innovation comes from doctors.”

Bulleit said disruptive technologies should have some kind of exception, noting physicians’ role in inventing novel products.

“The original cardiac pacemakers were invented by physicians. Most of the artificial knee and hip products had physician inventors and still do,” he added. “You don’t want to prevent physicians who have a really good idea from getting together to make a product. There is a period of time when they might be the main customers. That shouldn’t be illegal. Anyone’s policy ought to take account of that.”

Policies surrounding the entities could be further shaped by currently pending legal cases.

In January, Aria Sabit, a Michigan surgeon was sentenced to nearly 20 years in prison for $2.8 million in POD-related fraud, performing unneeded surgeries and over billing for products.

Two cases related to Apex Medical Technologies, the POD he partially owned in California, are still ongoing and may affect the industry depending on how the court rules on ownership, franchising and incentives.

“Dr. Sabit’s prosecution has to be thought of as an outlier,” Bulleit said. “The things he pled to include egregious behavior by a physician. It is easy for the industry to look at that and say ‘I’m not that doctor. I’m not going to behave like that.’ ”

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