In a recent Advisory opinion, the Office of Inspector General (OIG) of the U.S. Department of Health and Human Services has determined that a deal involving certain physicians who own an equity stake in a medical device company that manufactures products that physicians can order owners (the “Company”) was not considered a suspicious medically owned concession. Although it concluded that the arrangement involved federal anti-bribery law and generated prohibited compensation, the OIG relied on specific aspects of the arrangement to determine that the risk of fraud and abuse was significantly reduced and administrative penalties would not be imposed.
For your information, the OIG has published a Special Fraud Alert in 2013 which set out its historic concern about physician-owned entities that derive revenue from the sale of implantable medical devices for use in procedures that their physician owners perform in hospitals or Ambulatory Surgical Centers (ASCs) . Arrangements that may be of particular concern to the OIG include those that require investors who cease to practice in the service area to divest their stakes, or that condition the referral of physicians to hospitals or CHWs on purchases by the establishment of the apparatuses of the entity belonging to the doctor. Through this lens, the OIG has analyzed the current arrangement.
Under the proposed arrangement, three doctors (A, B and C) are orthopedic surgeons and members of the same medical group (“Medical Group”). Physician A is a hand and upper extremity surgeon who established the company to develop upper extremity surgical technologies that he invented into medical devices that the company sells in the United States and elsewhere. Doctor B is Doctor A’s daughter and Doctor C is Doctor B’s husband. irrevocable: a trust created by Doctor A which benefits his spouse and their children, including Doctor B, and another trust created by the spouse of Doctor A which benefits Doctor A and their children, including Doctor B (the “Trusts”).
Physicians A and B are the only physicians with an equity interest in the Company who order products from the Company, and Physician C is the only immediate family member of a person with an equity interest in the Company who orders products from the society. As of the date of the advisory opinion, the Company has not made any distributions of profits to the owners of the Company, except for annual distributions intended to cover each owner’s tax liability arising from the owner’s participation. Future distributions to owners would be paid to all owners in direct proportion to their interests in the Company. Distributions to the Trusts are reduced by the amount of revenue generated by orders from any physician or medical group member that would otherwise be due to the Trust, which is referred to as the exclusion amount.
Physicians have also certified that while they may order the Company’s products for surgeries they personally perform in hospitals and ASCs that authorize the use of the Company’s products, and may recommend the Company to others, physicians will not otherwise attempt to influence hospitals or CHWs to purchase the Company’s Products.
In confirming the arrangement, one of the aspects that the OIG noted was that the arrangement dilutes the financial incentives physicians may have to order the Company’s products by reducing any distribution to the trusts through the amount of the l ‘exclusion. The Company has also certified that it has not reserved the right to redeem the Trusts’ interest and that it will have no requirement that the Trusts dispose of their interests if any of the physicians ceases to practice medicine or to order from the Company. Overall, the OIG found that physicians and their medical group partners are transparent about the trusts’ stake in the company.
Other factors that reduce the risk of fraud and abuse, according to the OIG, are that the Company does not have the characteristics of a fictitious entity, including the fact that the Company develops medical products that are sold nationally and internationally; employs dozens of people; and is responsible for several operations such as product development and testing, marketing, inventory management, and submission of regulatory filings to the United States Food and Drug Administration and international regulatory agencies.
Significantly, devices sold or manufactured by physician-owned entities have generated less than one percent of all gross revenue generated from company sales in the United States in each of the past three years. Except for a slight increase from 2020 to 2021, the medical group’s order percentage has steadily declined over the past seven years, even as the company’s sales have expanded to include more physicians ordering the products and who have no stake in the company. .
Finally, the OIG noted that physicians’ various disclosures to patients, institutions, and the public further reduce the risk of fraud and abuse. These disclosures include patient advisories with names of alternative medical device companies in which neither the physicians nor any of their family members have any involvement.