Physician or Supplier?

When physicians own substantial portions of medical device companies, contracting professionals play a key role in keeping their IDNs on safe legal ground.

Who hasn’t read reports about physicians who earn generous stipends or “consulting fees” for speaking on behalf of certain device or pharmaceutical manufacturers; who attend weekend trips in plush resorts sponsored by device or drug makers; or who, unbeknownst to the medical community, own a piece of a company whose technologies they write about in esteemed medical journals? And certainly, most JHC readers have contracted for products that carry the name of the physician who helped invent them. (The poster child might be the Swan-Ganz catheter, for exploration of blood flow in the heart, which was designed by two American cardiologists – Harold James C. Swan and William Ganz.)

But what about those situations in which a physician or surgeon on staff owns a portion of a medical device company? Can that surgeon avoid violating federal regulations that prohibit providers from receiving any remuneration that might influence the referral of services covered by Medicare or Medicaid (the Anti-Kickback statute), or that prohibit physicians from referring patients to entities in which he or she has an ownership interest (the Stark laws)?

And what are the risks to the hospital or IDN that contracts to buy products from physician-owned manufacturers or distributors? Is it possible that federal officials could conclude that the IDN is “buying off” the physician in order to make sure he or she continues to practice there? If so, that might be a violation of the Anti-Kickback statute.

Perhaps not surprisingly, the ethical issues surrounding physician ownership of medical device companies is a topic that few people care to weigh in on, at least publicly. For example, one manufacturer that expressed concern to JHC about upstart competitors soliciting physician investors would not speak on the record about it. Hospital administrators and risk managers are averse to speaking publicly on the topic as well; JHC was unable to get comments from any providers. What’s more, three medical device makers whose names had been shared with JHC as examples of companies that were, in effect, “buying off physicians” by offering them substantial ownership interest, failed to return JHC’s phone calls.

Problem for manufacturers
To be sure, physician ownership of medical device companies can present obstacles (sometimes hidden) to contracting professionals seeking to standardize physician-preference items. But contracting professionals aren’t the only ones who are concerned. Some manufacturers, particularly those that are entrenched in the market, fear competition from new companies with financially motivated physician users and investors.

In September 2006, AdvaMed, the Washington, D.C.-based association for medical products manufacturers, wrote a letter to the Office of the Inspector General of the U.S. Department of Health and Human Services asking for clarification of the legality of certain physician investments in medical device manufacturers and distributors.

AdvaMed President and CEO Stephen Ubl wrote that the association “recognizes the important and beneficial role that physician investment in device companies may have.” But at the same time, he expressed concern about “the emergence of companies with equity investments by physicians who are also major revenue-generators for the companies …”

In the letter, Ubl concedes that “many beneficial medical technologies available today are the product of physician innovators and entrepreneurs,” and that physicians can, appropriately, receive compensation “in the form of equity, consulting fees, royalties or other forms. But, he adds, the practice is appropriate only if “the payment received by the physician is for valuable bona fide services rendered to the company.”

Ubl continues, “Recently, the device industry has seen the emergence of device companies and distributors that offer substantial equity positions to physicians apparently, in some cases, selected because collectively they are in a position to generate a substantial amount of business for the entities (e.g., more than 40 percent of total revenues) through ordering (or influencing orders for) devices sold or manufactured by the company.”

In his letter, Ubl asks the OIG to clarify whether such arrangements are legal, citing a 1989 Special Fraud Alert issued by the agency, which stated that “a joint venture may be suspect when physicians are both investors in the joint venture and in a position to refer to the joint venture.” In that alert, OIG expressed concern that such ventures are using profit distributions to disguise payments to investing physicians for their referrals – a violation of the Medicare Anti-Kickback statute. Ubl asks if the Special Fraud Alert applies to physician ownership of medical device manufacturers and distributors.

Ubl also references an OIG “safe harbor,” which protects certain physician investments in businesses to which they refer. “The key element of this safe harbor is that investors that refer to, or can otherwise generate business for, the venture or that provide services or supplies to the venture cannot generate more than 40 of the revenues of the venture; or own more than 40 percent of the venture,” he writes. “Simply put, the venture cannot depend on the referring physicians as its customer base; it must do the majority of its business with independent third parties.”

He got his answer about a month later from Vicki Robinson, chief of the industry guidance branch of OIG. In her response, Robinson writes, “We are aware of an apparent proliferation of physician investments in medical device and distribution entities, including group purchasing organizations. Given the strong potential for improper inducements between and among the physician investors, the entities, device vendors, and device purchasers, we believe these ventures should be closely scrutinized under the fraud and abuse laws.”

Robinson confirms that the industry should assume that the Special Fraud Alert regarding provider services “is not sector specific and applies equally to all physician joint ventures. Thus, principles set forth in the 1989 Special Fraud Alert on Joint Ventures and our other joint venture guidance would be applicable to physician investments in medical device manufacturing and distribution entities (as well as group purchasing agents).” Robinson goes one step further: “It is important to note that the characteristics of a suspect venture enumerated in the Special Fraud Alert and other guidance are illustrative, not exhaustive, and other characteristics may also indicate potential unlawful conduct.”

She goes on to confirm that “the amount of revenues generated directly or indirectly by a physician investor is a relevant factor in analyzing a joint venture under the anti-kickback statute …. [T]he 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.”

Black, white and gray
“The bottom line is, there are no laws against physicians investing in device companies,” says Kevin McAnaney, a Washington, D.C.-based attorney whose specialty is healthcare fraud and abuse. He served as the chief of the Industry Guidance Branch of the Office of Counsel to the Inspector General from its creation in 1977 until May 2003. “A lot of medical device companies were founded by physicians. There’s nothing inherently wrong with that, provided physicians are buying their shares at fair market value.”

There’s not a lot of black-and-white in this issue, says McAnaney. For example, it might not be unusual for a startup medical company to begin with just a handful of physician investors, all of whom use the company’s medical device in their practices. But the government might take a closer look if, five years down the road, those physicians are still the only investors in the company. (It’s unlikely that would occur, however, adds McAnaney, the reason being that most device companies need far more investors and capital than a handful of physicians can provide.)

“As far as the government is concerned, there are two keys surrounding physician investors,” says McAnaney. “The first is that the physician pays fair market value for the interest they purchase; and the second is that their profits are based on their percentage of ownership of interest, not on the volume of business they generate for the company.”

In other words, the fact that a physician buys and owns shares of stock in a publicly held company – and earns some dividends or sells off some shares at a profit – doesn’t present much of a legal problem for the doctor or the hospital, says McAnaney. Situations that can lead to scrutiny are those in which the physician gets stock for free or nearly free, or makes money that is directly tied to his or her usage of the product.

The hospital or IDN itself has to be on guard, he continues. “If I’m a hospital and I buy and stock a device that I know some big referrer has a piece of, and maybe it’s more expensive than other devices, one could make a case that it’s a kickback,” says McAnaney. “It’s really a big problem if it’s a distribution company, and the physician gets a piece of every sale. That could be both a kickback and a Stark violation.”

Such arrangements can present huge practical problems for the IDN, he says. “If anything goes wrong with that device, people will go after the hospital. They’ll say, ‘You have jeopardized quality to give this guy extra money.’”

Typical profile
Thomas Bulleit, a partner in Hogan & Hartson LLP, an international law firm based in Washington, D.C., has seen a growing number of physician-owned medical device companies sprout up in the market. “Where I have seen this most is in the implantable metals areas – spinal implants, hip and knee implants, and cardiac defibrillators and pacemakers,” he says. “I haven’t seen it in things like hospital beds or MRIs, because these things are not ordered for individual patients.”

Few of these companies actually engage in manufacturing, adds Bulleit. “These are not companies that are doing their manufacturing. They are entrepreneur-driven opportunities, where a group of doctors are seduced into kicking in a little bit of money in exchange for shares of the company. The company then outsources all the work.” It may contract with overseas or domestic manufacturers to actually make the devices, many of which are, essentially, copycat products of those already on the market.

“There’s no purpose for these companies but to give the doctors a return,” says Bulleit. “It’s not like the doctor has purchased shares of stock in a Stryker, Medtronic or J&J, that is, a bona fide company that really is in the business of product development and manufacturing, that has an infrastructure and product support. Instead, the entrepreneurs are enticing physicians – who are fighting declining reimbursement and facing economic challenges of their own – to invest in companies the sole purpose of which is to share with the doctors the economic advantage of the product that the doctor is ordering for his patients, but not purchasing. All the economic risk is on the hospital; all the profit is transferred to the doctor.”

Such arrangements stymie the efforts of the IDN to standardize on the most efficacious and cost-effective products, says Bulleit. What’s more, the products of such companies can become entrenched in the IDN, making it more difficult to switch to new technologies three or four years down the road.

The IDN has to tread these waters carefully, advises Bulleit. The Anti-Kickback statute is violated if one purpose of a financial reward to a doctor is to get him or her to order a particular product or refer patients to a particular hospital, he says.

“The question is, ‘Who’s paying the kickback to the doctor?’” asks Bulleit. “The hospital wouldn’t be contracting with the company unless the doctor was saying, ‘If you don’t buy this, I’ll go across the street.’” That could put the hospital at risk.

In certain cases, doctors have established ownership in “distribution companies,” and they insist that manufacturers sell their products through that distributor. In such cases, “the legitimate medical device manufacturer is also at risk of paying a kickback, because it is paying the doctor’s company, or selling through the doctor’s company, and it wouldn’t be doing so unless the doctor was saying, ‘If you don’t, I will buy someone else’s product,’” says Bulleit.

Remedies
How can an IDN – and the contracting professional – steer clear of problems? First, by avoiding contracting with companies that give doctors excessive ROI in exchange for very little money, “especially when the company adds no value to the hospital’s purchase or just duplicates a service the hospital is already getting from a more experienced company,” says Bulleit. “It puts you at legal risk; it puts doctors at legal risk; and there’s little doubt in my mind that government scrutiny of one or more of these companies eventually will end up with someone getting indicted or excluded or forced to enter into a settlement agreement where large sums of money are paid.”

Second, IDNs must stay on top of what’s going on at their facilities. “Hospitals ought to have, for medical staff members, as for hospital employees, conflict-of-interest policies that at least require physicians to fill out annual disclosure statements of financial relationships they have with vendors to the hospital,” advises Bulleit. “Given the important role that physicians play in the development and refinement of medical devices, it’s probably not desirable, or feasible, to prohibit hospitals from purchasing products where some financial relationship exists with staff physicians. But a traditional product development or product training consulting relationship with a bona fide manufacturer is vastly different from a relationship with one of these physician-owned intermediaries. With disclosure, the hospital can take that information into account in making rational purchasing decisions.”

Indeed, if hospitals don’t require full disclosure, the federal and state governments might do it for them. Several states, including Minnesota, Vermont and West Virginia, already have, requiring full disclosure of payments made by wholesalers to physicians. In September, Iowa Republican Senator Charles Grassley and Wisconsin Democratic Senator Herb Kohl introduced the Physician Payments Sunshine Act, which would require drug and device manufacturers to disclose to the Secretary of Health and Human Services on a quarterly basis, anything of value given to doctors, such as payments, gifts, honoraria or travel.

“This bill does not regulate the business of the drug and device industries,” said Grassley, speaking on the floor of the Senate September 6. “I say, let the people in the industry do their business. After all, they have the training and the skill to get that job done. Just keep the American people apprised of the business you are doing and how you are doing it. Let a little bit of sunshine in to this world of financial relationships – it is, after all, the best disinfectant.” (Ironically, the bill would apply only to companies with annual revenues over $100 million – not the upstarts that many of the big manufacturers are complaining about.)

Objective evaluation process
The third thing that providers can do to stay in compliance with the law is to conduct objective evaluations of the medical devices they are considering contracting for. Here’s where JHC readers have a huge role to play.

“Situations can arise if a physician is really putting pressure on the IDN to only deal with this one particular product in which he has ownership interest,” says Glenn Troyer, partner for the law firm Krieg DeVault LLP in Carmel, Ind., and former legal counsel to an Indiana IDN. “Let’s say that product is much more expensive than comparable products. Then you begin to develop a basis for potential violation of Stark and the Anti-Kickback statute.”

If the IDN caves in to such demands, it could be in trouble. “Now you have the factual basis for intent to violate the Anti-Kickback statute,” continues Troyer. “The reason is, in essence, you’re making a decision not based on separate, objective information. Instead, you’re making it based on the physicians’ threat. So, your purchase of the product could be viewed as a kickback to the physician, because you’re saying, ‘I will buy the product if you continue to make referrals to our hospital for services for which we bill Medicare and Medicaid.’”

The best way to avoid problems is to establish an objective process to evaluate products, something most IDNs already have in place, says Troyer. “One of the best approaches from the IDN purchaser’s perspective is to go through a comparative review of the products you’re selecting, aside from the physician ownership issue. Look at them, what they’re designed to accomplish, what their prices are, their viability, their efficacy, their clinical value. If you can arrive at [answers] through a fairly blind process within the institution, then the fact that the physician has an ownership interest at all becomes a minor issue. This would be a way of controlling your risk. It would be difficult for anyone to show that the physician is putting pressure on the IDN to the extent that the IDN purchased a product that was not beneficial to the patients and not as efficacious as other products.

“The key is to guard against undue influence and pressure from a particular physician for reasons that are unrelated to the performance of the product.”

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