OIG Approves Physician-Owned Medical Device Company with Multiple Safeguards | McGuireWoods LLP

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On April 20, 2022, the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services issued a Positive Advisory Opinion (#22-07) regarding physician ownership of a device company which manufactures products ordered by proprietary physicians and other affiliated physicians.

The advisory opinion is important because, while narrow, it paves the way for physician ownership of device companies, an area in which the OIG is generally concerned. That said, despite this favorable advisory opinion, comments from the OIG suggest that it will retain its inherent skepticism and that care should be taken in structuring such an arrangement.

The OIG concluded that although the proposed arrangement would involve the Federal Anti-Kickback Act (AKS), the OIG would not impose administrative penalties even though the proposed compensation would not satisfy any safe harbor and pose some risk. remuneration prohibited. As with all OIG advisory opinions, OIG findings apply only to the proposed arrangement. It is, however, informative for those evaluating similar ownership arrangements.

Ultimately, the reading from McGuireWoods is that the OIG did indeed believe that the proprietary physicians (including the inventor) had a good faith investment in the manufacturer that sells widely to non-owners, so ownership n was not intended to prompt referrals. This will likely remain a high bar for other physician-owned manufacturers.

The arrangement

The opinion was sought by orthopedic surgeons with a majority stake in a medical device company that makes products commissioned by the orthopedic surgeons, a joint doctor of one of the surgeons and other doctors in the surgeons’ medical group. Since physicians able to recommend business to the manufacturer exceeded 40% ownership of the company, AKS investment safe harbors were not available for the arrangement. One of the orthopedic surgeons, hand and upper extremity surgeon, is an inventor of surgical technologies and created the medical device company; this surgeon owns all intellectual property of the device company and acts as the chief scientific officer of the device company, but does not participate in the day-to-day operations of the device company.

OIG finds arrangement low risk under AKS

Although the arrangement does not comply with the safe harbor, the OIG has determined that the arrangement presents a limited risk of fraud and abuse under the AKS, for the following reasons.

  1. Absence of certain suspicious characteristics. The arrangement lacks the suspicious characteristics sometimes associated with physician-owned entities. The device company has extensive business activities outside of its relationship with orthopedic surgeons and is responsible for all operations of a medical device company, including compliance with national and international regulations. This is not a shell to reward referrals.
  2. Distributions did not include sponsorship revenue. How the device company would make future profit distributions reduces the risk of the kind of harm the AKS is designed to prevent. The Arrangement significantly dilutes the financial incentives Plaintiffs may have for ordering the Company’s products by reducing profit distributions to Surgeons by the amount of revenue generated from any Surgeon’s (or Surgeon’s Medical Group physician) orders. . To date, the company has only made tax distributions.
  3. Property for Good Faith Exchange. The company granted a majority stake for the assignment of exclusive intellectual property, do not for any anticipated referral volume/order. The intellectual property was used to manufacture the company’s medical devices.
  4. Small minority of company revenue. Surgeons (and the Surgeons Medical Group) generate less than 1% of the device company’s historical annual revenue, unlike entities where physician owners are the sole or primary users of devices sold or manufactured by the owned entity. This percentage has declined over the past seven years as the company has expanded operations and sold more devices.
  5. No obligation to continue medical practice. The arrangement differs from other physician-owned entity arrangements that screen or retain physician investors in suspicious ways, such as retaining the right to buy out physicians’ ownership interests or requiring a divestment when a physician ceases to operate. practice medicine or entrust less business to the physician-owned business. entity. In addition, the device company has not reserved the right to buy out the surgeons’ interest and does not require that the interest be surrendered if a surgeon ceases to practice medicine or order products from the company.
  6. No referral tracking. In this arrangement, the participation of the surgeons is not contingent upon any generation of business for the device company. Indeed, the company has attested to the OIG that it does not treat surgeons or senior referring physicians uniquely.
  7. No reference influence. The surgeons have certified that they are not trying to influence hospitals or Ambulatory Surgical Centers (ASCs) to purchase products from the device company and do not condition referrals to hospitals or ASCs on the purchase of products from the appliance company.
  8. Transparency reduces risk (but is not enough on its own). Surgeons (and their medical group) provide information to patients about their participation in the device company, including offering alternative medical device options. The surgeons have also certified that they have provided notice of their participation in the device company to all hospitals and ASCs where they currently provide services. The OIG noted that “[w]while transparency alone is not enough to reduce the risks associated with physician-owned entities, in this case [the surgeons’] various disclosures, together with other safeguards, further reduce the risk of fraud and abuse.

Conclusion

The OIG concluded that the proposed arrangement could generate prohibited compensation under the AKS if the requisite intent was present, but the OIG would not impose administrative penalties because the arrangement would present a low risk of fraud and abuse for the reasons mentioned above.

However, the OIG referenced its 2013 Special Alert on Physician-Owned Entities and added a caveat:

Physician-owned entities are inherently suspect under the [AKS] and are of particular concern when they exhibit questionable characteristics, such as the selection of investors who are able to generate substantial business for the entity; require investors who cease to operate in the service area to divest themselves of their participation; and by distributing extraordinary returns on investment relative to the level of risk involved. Physicians who own physician-owned entities may also engage in suspicious behavior, such as conditioning their referrals to hospitals or CHWs on facility purchases of the physician-owned entity’s devices through coercion or promises.

Therefore, it is important to exercise caution and have appropriate safeguards in place when a physician acquires a stake in an entity such as a medical device company. Indeed, this advisory opinion may influence investments in other healthcare entities more regularly than in device manufacturing, as things like distributions removing referral profits could be used by other vendors.

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