On April 25, 2022, the Office of the Inspector General (“OIG”) issued Advisory Opinion No. 22-07 which assessed the risk of fraud and abuse under the Federal Anti-Kickback Act (“AKS ”) posed by an agreement involving a physician’s ownership of a medical facility. device company. The notice identified six features of the device that significantly reduced the risk of fraud and abuse.
The notice relates to an arrangement (the “Arrangement”) in which three physicians who are members of a medical group (the “Physicians”) hold an interest in a medical device company (the “Company”) through two irrevocable trusts. (the “Trusts”). Doctor A created the company to develop his upper extremity surgical inventions into medical devices sold on the market. Doctor B is Doctor A’s daughter and Doctor C is Doctor B’s husband. The Company manufactures devices for surgery that can be ordered by Doctors.
The OIG ruled on whether the arrangement would be grounds for the imposition of sanctions under the AKS. Under the AKS, it is a criminal offense to knowingly and voluntarily offer, pay, solicit or receive remuneration to induce or in exchange for recommending an individual to any person for the supply or l arranging for the provision of any item or service reimbursable under a federal health care program.
The OIG concluded that the AKS is involved in the arrangement because (1) the doctors are the beneficiaries of the trusts that own an interest in the company, (2) the doctors order products from the company that can be reimbursed by federal health care programs, and (3) Physicians may recommend the Company’s products to others. Historically, the OIG has been concerned with issues of fraud and abuse related to physician-owned entities that derive revenue from the sale of medical devices ordered by their physician owners for procedures performed by the physician owners.
Although potentially applicable, the OIG concluded that the arrangement did not satisfy the “investments in small entities” exemption rule because the trusts collectively own more than 40% of the investment interests in the company and that physicians affiliated with trusts are in a position to make or influence referrals to the Society. In the absence of safe harbor protection, the OIG assessed the arrangement based on the totality of the facts and circumstances.
The OIG concluded that the arrangement presents a low risk of fraud and abuse and does not raise issues of suspicious behavior under the AKS. In making this decision, the OIG identified six damage reduction characteristics of the arrangement.
1. Commercial legitimacy of the company
The OIG found that the company has several characteristics that reduce the risk that the company exists only as a fictitious entity. The company develops devices that are sold in domestic and international markets, employs dozens of people, and is responsible for all operations related to a legitimate medical device company. In addition, the Company’s business is rooted in the marketing and sale of devices invented by Doctor A and the Doctors’ proprietary interests in the Company arise from Doctor A’s inventions.
2. Mode of profit distribution
The advisory noted that the AKS is designed to prevent overuse or inappropriate use, corrupt decision-making, increased costs for federal health care programs, and unfair competition. The manner in which the arrangement distributes profits reduces the likelihood of these harms occurring. The arrangement reduces all distributions to the trusts by an exclusion amount (equivalent to the amount of revenue generated from orders from any physician or other member of the medical group that would otherwise be due to the trusts) which decreases the financial incentives for physicians to order the Company’s products. In addition, physician and non-physician owners are treated the same with respect to the distribution of Company profits. Finally, the Company has certified that it will make any future distribution of profits in direct proportion to each owner’s interest in the Company.
3. Limited business generated by physician-owners
The risk of fraud and abuse is reduced because physicians are not the only or even the main source of business for the Company. Physicians and other members of the medical group generated less than 1% of all gross sales revenue for the company in the United States over the previous three years. The Company has certified that the Medical Group’s order percentage has declined over the past seven years and will continue to do so as the Company expands its sales in domestic and international markets.
4. Type of participation
The nature of physician ownership distinguishes the arrangement from other arrangements of physician-owned entities. The Company has certified that the granting of majority ownership and preferential voting rights to Physician A was not due to past or anticipated orders or recommendations from any of the Physicians. Rather, it was in exchange for Doctor A ceding ownership to the company of a substantial portfolio of proprietary technologies. The interest held by the trusts is not contingent on the physician or medical group generating business for the company. The Company has not reserved the right to redeem the Trusts’ interest and does not require the Trusts to dispose of their interest if the Physicians no longer commission from the Company or no longer practice medicine. Finally, the Company has certified that although it creates daily and monthly sales reports, it does not use these reports to encourage orders from physicians or the medical group.
5. No influence of the doctor on the purchases of the ASC and the hospital
Although physicians order the Company’s products for the surgeries they perform in hospitals and Ambulatory Surgical Centers (“ASCs”) and recommend the Company’s products, they have certified that they will not otherwise try influence hospitals or CHWs to buy the company’s products. Physicians have also certified that they do not and will not condition referrals to hospitals or CHWs on the purchase of the Company’s products and that they select products for medical procedures based on the unique clinical needs of a patient.
6. Transparency regarding participation
Ownership disclosures from physicians to patients, institutions and the public, together with the other safeguards of the arrangement, further reduce the risk of fraud and abuse of the arrangement. Each patient receives written notice of each physician’s involvement with the Company prior to undergoing surgery involving a Company product. All ASCs in which physicians perform surgeries have been notified of ownership interests and certified physicians will in future notify all other facilities in which they practice of their ownership interests. Disclosures are also provided when a Company product is the subject of an academic presentation, conference, or physician-reviewed publication.
Based on these facts, the OIG determined that although the arrangement would generate prohibited compensation under the AKS if the requisite intent were present, no administrative penalty would be imposed due to the low risk of fraud. and abuse of the arrangement.
Despite the OIG’s approval of the arrangement, traditional physician-held concessions remain under scrutiny. In May 2022, Reliance Medical Systems, a manufacturer of spinal implants, settled a False Claims Act case against it. In United States of America v Reliance Medical Systems, the government alleged that the owners of Reliance Medical Systems paid illegal bribes to surgeons who used the company’s products in spine surgeries on Medicare patients. The owners of Reliance Medical Systems formed two intermediary companies, which are “physician-owned distributions,” from which doctors ordered the devices.
*Arushi Pandya is a law clerk in the firm’s Washington, DC office.