Compliance Statutes Implicated by PODs

Association of Corporate Counsel Health Law Committee March 4, 2014 Physician-Owned Distributorships ( PODs ): Understanding the industry and legal developments Kimberly Brandt, Esq. Investigative Counsel for Health Care Senate Finance Committee (for the Minority/Sen Hatch) Washington, D.C Lawrence W. Vernaglia, Esq. Chair, Health Care Practice Group Foley & Lardner, LLP Boston, Mass. 1 Compliance Statutes Implicated by PODs 2 What is a POD (Physician Owned Distributor)? For our purposes today, it is any physician-owned entity that derives revenue from selling, or arranging for the sale of, implantable medical devices and includes physician-owned entities that purport to design or manufacture, typically under contractual arrangements, their own medical devices or instrumentation. From the March 2103 SFA on Physician-Owned Entities The Anti-Kickback Statute and the Physician Self-Referral Statute typically are implicated Also the Payments to Physician in the Sunshine Act State statutes as well may be implicated 2 1

Anti-Kickback Statute [AKS], Section 1128B(b) of SS Act, 42 USC 1320a7-b(b) 3 Criminal statute Intent of an illegal inducement must be established Prohibits the knowing and willful offer of illegal inducements to purchase or recommend the purchase of services or products that will be paid with government funds. The knowing and willful offer, solicitation, payment or receipt of anything of value that is intended to induce the referral of an individual for which a service may be made by Medicare and Medicaid or certain other federal and state healthcare programs or to induce the ordering, purchasing, leasing or arranging for, or recommending the purchase, lease or order of, any service or item for which payment may be made by such federal healthcare programs Covers referrals for any item or service that might be paid for by Medicare or any other federal or state health care program. 3 AKS (Cont d) Ascribes criminal liability to both sides of an impermissible kickback transaction, and has been interpreted to apply to any arrangement where even one purpose of the remuneration offered, paid, received, etc., is to obtain money in exchange for referrals or to induce referrals United States v. Greber, 760 F.2d 68 (3d Cir. 1985), established the one purpose test No specific intent to violate the statute is required PPACA overruled Hanlester Network v. Shalala, 51 F.3d 1390 (9th Cir. 1995 Resolves split in circuits and makes it easier for Government to gain convictions or extract settlements in the 9 th Circuit 2

Civil Monetary Penalty Statute, Section 1128A(b) of the SS Act, 42 USC 1320a-7a(b) 5 CMP Statute is the civil/administrative analogue to the AKS Statute (Among other things) prohibits kickbacks that are prohibited by the AKS Administered by OIG Provides for CMPs, assessments, and the possibility of exclusion Physician Self-Referral Statute (Stark) Section 1877 of SS Act, 42 U.S.C. 1395nn 6 Stark generally prohibits a referral for Medicare designated health services (DHS) (including inpatient and outpatient hospital services) by a physician to an entity with which the physician (or his or her immediate family member) has a financial relationship, unless an exception applies DHS does not include ASC services 6 3

Physician Self-Referral Statute (Stark) Section 1877 of SS Act, 42 U.S.C. 1395nn 7 Financial relationships include ownership/ investment interests in the DHS entity, or compensation arrangements Can be direct or indirect Stark is usually implicated in POD arrangements because of an indirect compensation arrangement with the hospital Unbroken chain of financial relationships (e.g., Physician POD Hospital) 7 Federal False Claims Act [FCA] [31 U.S.C. 3729-3731] 8 As amended by the Fraud Enforcement and Recovery Act of 2009 (FERA), liability under the False Claims Act occurs when a person or entity: knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval; knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim; or conspires to commit a violation of any of certain provisions of the False Claims Act (including the two listed above). Violations are punished by penalties of not less than $5,500 and not more than $11,000 per claim, plus treble damages for the amount of damages the Government sustains. Whistleblower (qui tam) suits are allowed. Reverse false claims provision now may reach self-discovered overpayments. NOTE: FCA actions can be based on AKS violations and knowing Stark violations. 8 4

9 1. October 6, 2006 Letter, Response to Request for Guidance Regarding Certain Physician Investments in the Medical Device Industries, available at http://oig.hhs.gov/fraud/docs/alertsandbulletins/guidance MedicalDevice%20%282%29.pdf Says that OIG was aware of an apparent proliferation of physician investments in medical device and distribution entities, including GPOs, and that given the strong potential for improper inducements between and among the physician investors, the entities, device vendors, and device purchasers, it believes these ventures should be closely scrutinized 9 10 1. October 6, 2006 Letter Confirms that 1989 Special Fraud Alert on Joint Ventures and other OIG joint venture guidance is applicable to physician investments in medical device manufacturing and distribution entities Confirms that the amount of revenues generated directly or indirectly by a physician investor is a relevant factor in analyzing AKS risk the fact that a substantial portion of a venture s gross revenues is derived from participant-driven referrals is a potential indicator of a problematic joint venture. 10 5

11 2. 2008 Hearing Before the Senate Special Committee on Aging, Examining the Relationship Between the Medical Device Industry and Physicians, Testimony of Gregory E. Demske, Ass t Inspector General, available at https://oig.hhs.gov/testimony/docs/2008/ demske_testimony022708.pdf in an environment where physicians routinely receive substantial compensation from medical device companies through stock options, royalty agreements, consulting agreements, research grants, and fellowships, evidence suggests that there is a significant risk that such payments will improperly influence medical decisionmaking 11 12 2. 2008 Hearing Before the Senate Special Committee on Aging Physicians play a critical role in deciding which medical devices are used in the treatment.... The treating physician generally decides or strongly influences the decision regarding which medical device should be used in this hospital setting. Therefore, a device manufacturer has a strong financial incentive to persuade treating physicians to use or recommend the manufacturer s devices. From 2002 2006, 4 manufacturers controlled almost 75 % of the hip and knee replacement market and paid physician consultants over $800 million under 6,500 consulting agreements. Although many of these payments were for legitimate services, others were not" 12 6

13 3. CMS Solicitation of Comments Following CMS proposal to revise definition of entity for Stark purposes, some commenters urged CMS to define PODs as a DHS entity, thereby creating an ownership interest in a DHS entity (that would require an ownership exception) and/or a direct compensation arrangement (that would require a direct compensation arrangement exception) Other commenters urged CMS not to define PODs as a DHS entity CMS solicited comments on whether it should regulate PODs under Stark, but concluded that it was without authority to do so CMS reminded that indirect compensation arrangement can be created by PODs selling devices to hospitals 13 14 4. 2011 Letter from Senate Finance Committee to OIG June 2011 letter from SFC to OIG voiced concern with proliferation of PODs and the lack of guidance being provided to physicians, patients and the health care community on how these arrangements square with existing federal law some [POD models] 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 healthcare system raise a number of troubling issues about PODs and other similar arrangements which we believe merit further inquiry Cited a JAMA study that noted there had been a 15-fold increase in spinal fusion surgeries from 2002-2007 and that there was a significant financial incentive to both hospitals and surgeons to perform these complex fusions. Questioned whether growth in the number of surgeries and proliferation of PODs are related. 14 7

15 4. June 2011 letter from SFC to OIG takes this parting shot: The continued increase in the number of PODs and the extent to which the medical community remains deeply divided as to the legality of the POD model indicates that previous OIG guidance on this topic is not sufficient. There is as much confusion in your office's stance on PODS as there is confusion in the health care community about how to arrange these in a legal manner 15 16 4. 2011 Letter from OIG to Senate Finance Committee In its September 2011 response to SFC, OIG states that it was conducting a study of PODs to determine the extent to which PODs provide spinal implants purchased by hospitals. Study will be nationally representative of hospitals that bill Medicare for spinal surgery. Will review information from hospitals and other sources to establish how widespread PODs are, what services PODs offer to hospitals, and whether PODs save hospitals money in the acquisition of implants. Expects study will produce important information about PODs, and will consider this information in determining whether to issue additional guidance addressing physician-owned entities, including PODs. 16 8

17 4. 2011 Letter from OIG to Senate Finance Committee OIG cautions that different POD models can raise varying levels of legal concern, and that the legality of any individual physician-owned entity under the AKS is highly dependent on each entity's particular characteristics, including the details of its legal structure; its operational safeguards; and, importantly, the actual conduct of its investors, management entities, suppliers, and customers For these reasons, OIG s ability to issue guidance about the application of the statute to these business structures is limited 17 18 4. 2011 Letter from OIG to Senate Finance Committee OIG responds that its current guidance already explains key factors it considers when evaluating physician investments. OIG's longstanding view that the opportunity for a referring physician to earn a profit, including through an investment in an entity for which he or she generates business, could constitute an illegal inducement under the [AKS] OIG would consider, among other factors, the terms under which a physician may invest in the entity and, conversely, the terms under which a physician-owner may be required to divest his or her ownership interest; the actual return or projected return on the physician's investment; and the amount of revenues generated for the entity by its physician-investors 18 9

19 Pre- SFA Enforcement Activity No enforcement action has been taken against PODs, but device companies and physicans is a different story 4 Device Companies settle kickback allegations. In October 2007, Zimmer, DePuy Orthopaedics, Biomet and Smith & Nephew, enter into deferred prosecution agreements (DPAs) with the NJ USAO Collectively paid $311 million in fines Stryker Orthopedics cooperated in investigation and paid no fines, but did have to implement reforms (as did the 4 companies that settled) 19 20 Pre- SFA Enforcement Activity Other settlements of note 2013 $64,000 settlement of allegations physician received improper payments from device manufacturer 2013 - $6 million Baxano Surgical allegedly paid kickbacks to physicians for attending speaker programs and consultant meetings in order to encourage them to use the company s device. 2010 $100,000 settlement of allegations that physician solicited kickbacks from a medical device manufacture. Allegedly, physician sought to leverage his product usage and ability to influence purchasing decisions in exchange for a consulting agreement with a guaranteed payment 20 10

21 Pre- SFA Enforcement Activity Other settlements of note 2010 -- $650,000 settlement of allegations that physician solicited and received consulting payments from two medical device manufactures in exchange for using their orthopedic hip and knee products 2010 Cochlear Americas -- agreed to pay $880,000 for allegedly violating the Civil Monetary Penalties Law provisions applicable to kickbacks. The OIG alleged that Cochlear Americas paid various forms of illegal remuneration to physicians who prescribed the use of their manufactured implant system for Medicare and Medicaid patients. 2009 --$65,000 penalty and exclusion to settle allegations that physician solicited and received consulting payments from a medical device manufacturer in exchange for using their orthopedic hip and knee products. 21 22 2013 SFA on PODs March 26, 2013 SFA on Physician Owned Entities Defined PODs as any physician-owned entity that derives revenue from selling, or arranging for the sale of, implantable medical devices and includes physician-owned entities that purport to design or manufacture, typically under contractual arrangements, their own medical devices or instrumentation. Describes PODs as inherently suspect 22 11

23 2013 SFA on PODs Lists the following risk factors: The size of the investment offered to each physician varies with the expected or actual volume or value of devices used by the physician. Distributions are not made in proportion to ownership interest, or physician-owners pay different prices for their ownership interests, because of the expected or actual volume or value of devices used by the physicians. Physician-owners condition their referrals to hospitals or ASCs on their purchase of the POD s devices through coercion or promises 23 24 2013 SFA on PODs Risk factors (cont d) Physician-owners are required, pressured, or actively encouraged to refer, recommend, or arrange for the purchase of the devices sold by the POD or, conversely, are threatened with, or experience, negative repercussions for failing to use the POD s devices for their patients. The POD retains the right to repurchase a physician-owner s interest for the physician s failure or inability (through relocation, retirement, or otherwise) to refer, recommend, or arrange for the purchase of the POD s devices. The POD is a shell entity that does not conduct appropriate product evaluations, maintain or manage sufficient inventory in its own facility, or employ or otherwise contract with personnel necessary for operations. 24 12

25 2013 SFA on PODs Lists the following risk factors: The POD does not maintain continuous oversight of all distribution functions. When a hospital or an ASC requires physicians to disclose conflicts of interest, the POD s physician-owners either fail to inform the hospital or ASC of, or actively conceal through misrepresentations, their ownership interest in the POD. 25 26 2013 SFA on PODs The SFA says that the above criteria are not intended to serve as a blueprint for how to structure a lawful POD, and that an arrangement may not exhibit any of the above suspect characteristics and yet still be found to be unlawful SFA recognizes that ultimate question of whether there is an AKS violation depends on intent, not structure But realistically, if none of the risk factors in the SFA are present, how much risk can there be (absent bad behavior or incriminating statements)? Is structure really irrelevant to analysis derived from JV guidance? 26 13

27 2013 SFA on PODs Note that the title of the SFA is not specific to PODs but is Physician Owned Entities Although this Special Fraud Alert focuses on PODs that derive revenue from selling, or arranging for the sale of, implantable medical devices, the same principles would apply when evaluating arrangements involving other types of physician-owned entities If OIG has special antipathy for PODs, what about physicianowned hospitals and physician-owned ASCs? No enforcement ever against physician-owned hospitals or physicianowned ASCs Physicians who have investment interest in hospitals or ASCs have incentive to refer patients and realize share of technical fee; physician investors in implant companies have incentive to refer patients to hospitals or ASCs and realize share of sale of device 27 28 2013 SFA on PODs If PODs can illegally induce physicians to order products in which they have an investment interest, what about the gainsharing arrangements blessed by the OIG in multiple advisory opinions? Nearly all or all of the gainsharing arrangements that received favorable advisory opinions involved making incentive payments to physicians for using one medical device versus another SFA does not address AKS risk for hospitals, but many hospitals are nervous about arrangements with physician-owned implant companies Is there a significant AKS risk for hospitals if the physician investor does not pressure the hospital to order products in which the physician is invested, and the hospital does not order products from the physicianowned company that it could purchase cheaper elsewhere? 28 14

29 Post -SFA OIG Study on PODs Study that OIG promised SFC was released in October 2013 OIG studied 971 randomly selected spinal fusion cases performed at 589 hospitals in FY 2011 Findings included: Approx. 1 in 5 (19%) spinal fusions are supported by a physician-owned distributorship Surgeons using devices supplied by a POD implanted 13.4% fewer devices per surgery than surgeons obtaining products through traditional distribution No identifiable costs savings on devices supplied by the PODs Spinal fusion surgery grew by 21% in those hospitals that used PODs vs. 9% at all hospitals 29 30 Post -SFA OIG Study on PODs Findings Cont d Spinal re-fusions at hospitals using PODs decreased from 6% prior to obtaining implants from PODs to 5% after contracting with PODs Hospitals varied in their policies re whether physicians are required to disclose ownership interest to hospital or patients 94% of hospitals that purchased devices from PODs reported that surgeon preference influenced their decision to purchase from PODs. Majority of Hospitals surveyed by OIG did not know whether or not they were doing business with a POD or whether their physicians were affiliated with PODs 30 15

31 Enforcement Outlook: Reliance Lawsuit On February 5, 2014, a federal court dismissed a challenge to the U.S. Department of Health and Human Services Office of Inspector General s ( OIG ) March 26, 2013 Special Fraud Alert ( 2013 SFA ) on PODs. The lawsuit was filed in the U.S. District Court in the Central District of California by Reliance Medical Systems, LLC ( Reliance ), which had historically included physician owners, and was considering a return to the POD business model. Reliance filed suit against the OIG on October 8, 2013, alleging that the 2013 SFA violated (i) the First Amendment right of speech, (ii) due process rights under the Fifth and Fourteenth Amendments, and (iii) the Administrative Procedures Act. 31 32 Enforcement Outlook: Reliance Lawsuit The Court dismissed Reliance s claims, without reaching the merits, by holding that Reliance had no standing because it had not suffered an injury-in-fact. Specifically, the 2013 SFA had not been enforced in any way against Reliance. The Court made much of the fact that Reliance was not, at the time of the lawsuit, a POD, and, as such, could not conceivably have suffered any injury. The Court rejected Reliance s argument that the 2013 SFA chilled speech regarding formation of a POD, noting that all criminal statutes, by their very nature, may have a chilling effect on personal behavior, but that such effect which is merely part of an agency s authority to regulate economic conduct does not amount to an actionable claim 32 16

33 Enforcement Outlook: Reliance Lawsuit The case leaves unanswered how a court would rule if a plaintiff could demonstrate an injury-in-fact for example, if an existing POD could show that the OIG imposed penalties pursuant to the 2013 SFA. However, courts typically grant significant deference to administrative agencies in their interpretation of laws they are charged with administering, and thus the 2013 SFA is likely to be viewed simply an exercise of OIG s authority to interpret the AKS and implementing regulations. Thus, any injury to a POD in an enforcement action would be due to its alleged violation of the AKS, as interpreted by the applicable agency, and the 2013 SFA itself could not be the cause of the injury. 33 34 POD Landscape Current state of SFC inquiry Impact of OIG actions on Provider Community Future enforcement actions 34 17

35 Acknowledgements and Disclaimers The views expressed in this presentation do not necessarily reflect the views of Foley & Lardner LLP or the Senate Finance Committee. Rather, they are the personal views of Mr. Vernaglia and Ms. Brandt. We would like to express our sincere appreciation to our colleague, Don Romano of Foley & Lardner, for his substantial contributions to this slide deck. All errors or omissions, however, are those of the speakers. 35 Association of Corporate Counsel Health Law Committee March 4, 2014 Physician-Owned Distributorships ( PODs ): Understanding the industry and legal developments QUESTIONS? Kimberly Brandt, Esq. Investigative Counsel for Health Care Senate Finance Committee (for the Minority/Sen Hatch) Washington, D.C Lawrence W. Vernaglia, Esq. Chair, Health Care Practice Group Foley & Lardner, LLP Boston, Mass. 36 18