Senators Urge OIG to Review PODs

The legality of physician-owned distributorships or PODs, a growing part of the medical device industry, has come under the scrutiny of the Senate Finance Committee.

Typically, medical devices are sold to hospitals or surgery centers through manufacturer representatives. In a POD the physician-investor serves as a middleman between the manufacturer and the hospital or surgery facility.

The Senate Finance committee issued a report, Physician-Owned Distributors: An Overview of Key Issues and Potential Areas for Congressional Oversight, examining the structure and activities of PODs within the medical device supply chain. The committee is concerned that PODS may exist for no other reason than to give physician investors the opportunity to profit from the sale and utilization of the medical devices they use for their patients and sell to hospitals.

In a letter dated June 9, a bipartisan group of five senators headed by Sen. Orrin Hatch (R-Utah) asked Donald R. Levinson, Inspector General of the Department of Health and Human Services, to conduct an inquiry to determine "how these arrangements square with federal law."

Joining Sen. Hatch in seeking an investigation are Max Baucus (D- Mont.), who chairs the Senate Finance Committee, Bob Corker (R-Tenn.), Charles Grassley (R-Iowa) and Sen. Herb Kohl (D-Wis.) The senators asked CMS to respond by July 15 and set Aug. 12 as the deadline to receive a report from the Inspector General.

The group also sent a letter dated June 9 to Donald Berwick, M.D., administrator of the Centers for Medicare & Medicaid Services, requesting that CMS address PODs as it finalizes reporting requirements for the Patient Payments Sunshine Act and rules for accountable care organizations. The letters were accompanied by the report prepared by Senate Finance Committee staff.

According to the report, which is based on interviews and the review of thousands of pages of documents, PODs first appeared in 2003 in Northern California and have now expanded to 21 states where there are an estimated 150 PODs. Proliferation of PODs is attributed to the reduction in physician reimbursements, which have sent physicians seeking alternative revenue sources. The POD distributor model is being used "very aggressively" in rural areas, the report says.

The report notes ancillary evidence concerning the increased utilization of spinal fusion surgery has coincided with the expansion of PODs. The report cites an April 2010 study in the Journal of the American Medical Association that found a 15-fold increase in the number of spinal fusion surgeries performed for Medicare patients between 2002 and 2007.

And there is a lot of money is involved. Kim Grant, chief healthcare investigative counsel for the Senate Finance Committee, said that in 2008 spinal fusion surgery was a $15 billion industry with Medicare accounting for $2 to $3 billion of that amount. Grant says that while not all PODs are necessarily bad, in rural areas there were cases where the same surgeons were performing 100% of the surgeries and then pocketing 100% of the revenues from the sale of the medical devices to their patients and hospitals. "Hospitals said they felt like hostages because the surgeons would threaten to leave if the hospital complained about the POD."

The Levinson letter requests that the structure of PODs be reviewed in terms of the federal anti-kickback laws, which are designed to protect patients and federal healthcare programs from the potential influence of financial arrangements. The letter also asks Office of Inspector General to clarify its stance on PODs in terms of "policy statements, guidance or visible enforcement proceedings that demonstrate…the extent of the government's concerns with the ways that PODs differ from physician joint ventures to provide legitimate healthcare services."

The Berwick letter asks CMS to review ACO regulations to make sure there are no inadvertent loopholes that allow "less reputable POD models to fall under the Stark and Anti-Kickback law waiver." It also requests that the ACO regulations "prohibit ACOs from purchasing products or services from entities that are owned by physicians participating in the ACO."

Chris White, general counsel and executive vice president for AdvaMed, a trade organization for medical device manufacturers, issued this statement regarding the committee's actions: "AdvaMed welcomes this inquiry and looks forward to reviewing the final results. We have long expressed concerns that physician owned distributorships raise ethical and legal concerns, specifically issues relating to the anti-kickback statute." He added that "AdvaMed supports the Senators' view that physician owned distributorships should be held to the same Physician Payments Sunshine transparency standards as physician owned manufacturers and physician owned GPOs."