After years of government skepticism and enforcement activity targeting physician-owned medical device companies, a recent favorable advisory opinion by the Office of Inspector General for the U.S. Department of Health & Human Services (OIG) may offer a degree of comfort to certain manufacturers of innovative medical devices and their institutional health care customers.1 This advisory opinion is significant as it represents the first time OIG has applied the factors set forth in its 2013 Special Fraud Alert on Physician-Owned Entities (the POD SFA) to conclude that physician ownership in a medical device company presents an acceptably low level of risk under the federal fraud and abuse laws. The opinion also provides welcome guidance on how parties might compliantly structure physician ownership interests in medical device companies to avoid triggering potential scrutiny under the Anti-Kickback Statute (AKS).
In March 2013, the OIG took a shot across the bow at certain physician-owned medical device companies through issuance of the POD SFA. The OIG construed a physician-owned distributorship, or “POD,” 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.”2 While not explicitly stated, the POD SFA was largely focused on entities that perform few legitimate business operations of their own but instead simply act as pass-through distributors of another entity’s products or sell products that have been outsourced to another entity for development and manufacturing. The OIG cautioned that the financial incentives PODs offer to their physician-owners may induce physicians both to perform more procedures (or more extensive procedures) than are medically necessary and to use the POD’s devices in lieu of other products that may be more clinically appropriate for the patient.
In the POD SFA, the OIG recognized that the lawfulness of any particular POD under the AKS turns on the intent of the parties. However, the OIG emphasized that prohibited intent may be inferred from certain POD characteristics, including, in pertinent part:
- The size of the investment offered to physicians or the distributions made vary with or take into account the expected or actual volume or value of devices the physicians use.
- Physician-owners condition their referrals to hospitals or ambulatory surgery centers (ASCs) on the facility’s purchase of the POD’s devices and are required, pressured or actively encouraged to refer, recommend or arrange for the purchase of the POD’s devices or threatened with negative repercussions (e.g., forced divestiture of their ownership interest) for failure to use the POD’s devices with their patients.
- The POD is a mere shell entity that does not conduct robust operations and does not maintain continuous oversight of all distribution functions.
- When a hospital or 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.
The OIG cautioned that the foregoing factors should not be construed as a “blueprint” for how to establish a lawful POD, emphasizing that an arrangement may not exhibit any of the above characteristics and yet still may violate the AKS. The OIG noted that PODs that exclusively serve their physician-owners’ patients or generate disproportionately high rates of return for physician-owners may trigger heightened scrutiny. Finally, the OIG further cautioned that, because the AKS establishes criminal liability to parties on both sides of an unlawful transaction, hospitals and ASCs that enter into arrangements with PODs also may be at risk.
The U.S. Department of Justice has pursued multiple cases under the federal False Claims Act against PODs and their physician-owners for causing the submission of improper claims to the federal health care programs for surgical procedures that involved the POD’s devices and were tainted by illegal kickbacks. In some cases, the government has also pursued and obtained sizable settlements with the hospitals or health systems that purchased devices from the POD for a physician-owner to implant in procedures performed at their facilities.3 These cases have often—but not always—involved allegations of medically unnecessary surgeries as well.
Advisory Opinion Facts and Analysis
Advisory Opinion No. 22-07 (the Opinion) involves three orthopedic surgeons (the Physicians) and a medical device company (the Company), in which OIG deems the Physicians to have ownership interests by virtue of their being in a position to benefit from family trusts that collectively hold a majority direct ownership interest in the Company (the Arrangement). One of the Physicians, Physician A, founded the Company to develop upper extremity surgical technologies that he has invented into medical devices which the Company sells domestically and around the world. In addition to serving as the Company’s chief scientific officer, Physician A has developed all of the Company’s intellectual property. In fact, the Company originally granted a majority ownership interest and preferential voting rights to Physician A and his spouse in exchange for Physician A assigning ownership of a substantial portfolio of proprietary technology to the Company. Notably, all three Physicians actively practice medicine and perform procedures, including using the Company’s products, at hospitals or ASCs.
In the first instance, the OIG determined that the Arrangement does not qualify for protection under the small entity investment interests safe harbor to the AKS because: (i) the family trusts through which the Physicians hold their ownership interests collectively own more than a 40% stake in the Company; and (ii) the Physicians are in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the Company. The OIG proceeded to recite its long-standing position that physician-owned entities that derive revenue from selling, or arranging for the sale of, implantable medical devices are “inherently suspect” under the AKS, particularly when they exhibit the “questionable features” highlighted in the 2013 POD SFA. Nevertheless, based on the specific facts and circumstances presented, the OIG concluded that the Arrangement poses a sufficiently low risk of fraud and abuse under the AKS.
The factors on which the OIG relied in reaching this conclusion include the following:
- The Company possesses several characteristics of a legitimate business, reducing the risk that it serves only as a shell entity. For instance, the Company certified that it develops medical products sold around the world; employs dozens of individuals; and is responsible for the full range of operations of a medical device company (e.g., product design, development and testing, quality control, submission of regulatory filings, marketing, and inventory management). Further, Physician A’s initial ownership interest stemmed from his own inventions, which undergird the Company’s entire business.
- The Company has adopted controls with respect to its profit distributions that guard against the classic harms the AKS was designed to combat, including overutilization or inappropriate utilization, corruption of medical decision making, increased costs to the federal health care programs, and unfair competition. These include: (i) carving out any revenues associated with Company product orders by the Physicians or other members of their medical group when making distributions to the trusts; and (ii) treating the Company’s nonphysician-owners and physician-owners equally, including by ensuring distributions are made in proportion to each owner’s respective investment interest.
- The Physicians and other members of their medical group account for a de minimis proportion of the Company’s business—specifically, less than 1% of all gross revenue generated from Company sales in the United States. The Company certified that, with the exception of a slight increase from 2020 to 2021, the percentage of orders by the Physicians’ medical group had been steadily decreasing over the past seven years and likely would continue to do so as the Company’s sales become increasingly diversified.
- The Arrangement differs from problematic scenarios in which physician-owned entities select or retain investors based on the volume or value of business they may generate. In addition to the fact that Physician A’s initial ownership interest was based on his assignment of bona fide intellectual property rights to the Company, the trusts’ retention of their ownership interests is not contingent on any of the Physicians or their medical group partners using Company products or otherwise generating Company business. Further, though the Company acknowledged that it creates daily and monthly sales reports, the Company certified that it neither uses the reports to encourage additional orders from the Physicians’ medical group nor tracks such orders differently than orders from other sources (other than to administer the carve-out from the trusts’ distributions).
- The Physicians certified that, while they may recommend and utilize Company products in their own personally performed surgeries, they will not otherwise: (i) attempt to improperly influence hospitals or ASCs to purchase Company products; (ii) condition their referrals to hospitals or ASCs on their acquisition of Company products; or (iii) select products for procedures based on reasons other than each patient’s clinical needs.
- Finally, the Physicians and their medical group partners are transparent about the Physicians’ ownership interest in the Company, including by providing written disclosures to patients, when feasible, along with the names of alternative medical device companies from which patients could elect to receive products. Though the OIG noted that this safeguard alone would be insufficient to mitigate regulatory risk, in the context presented, the OIG concluded that the Physicians’ various disclosures to patients, the facilities at which they practice and the public would further reduce the risk of fraud and abuse.
The Opinion represents an incremental, though pragmatic, recognition by the OIG that not all physician ownership of medical device companies inherently presents risk under the AKS. While the Opinion itself is not binding on any parties other than the requestors, it does represent an encouraging sign of the government’s willingness to take a more measured approach in evaluating similar arrangements involving medical device innovators that often are founded by and reliant on physicians to contribute intellectual property, knowledge capital, product evaluation and development, and other bona fide services. This Opinion may also provide reassurance to compliance-minded hospitals, health systems and other institutional purchasers that contracting with startup or smaller medical device companies that happen to have physician ownership can be done in an acceptably low-risk manner, provided appropriate safeguards are in place.
At the same time, the Opinion doubles down on the pronouncements set forth in the 2013 POD SFA, and the facts and circumstances set forth in the Opinion may be challenging to precisely replicate. For example, it is noteworthy that the requestors certified only a very small percentage of the Company’s business would come directly from utilization of the Company’s products by the Physicians and their medical group partners. Moreover, in blessing the Arrangement, the OIG expressly relied on the fact that the Company carved out revenues derived from the Physicians’ own utilization of its products from any distributions to the trusts, thereby eliminating any direct financial incentive to the Physicians. It is difficult to know whether the OIG would have reached a similar favorable conclusion had these two variables been different. Accordingly, though the Opinion may provide valuable protection for companies with diversified sales pipelines and with significant intellectual property obtained from their physician-owners, it remains to be seen whether the OIG will extend similar flexibility to arrangements outside this limited fact pattern.
1 OIG Advisory Opinion No. 22-07, Office of Inspector General (Apr. 25, 2020), https://oig.hhs.gov/documents/advisory-opinions/1029/AO-22-07.pdf.
2 Special Fraud Alert: Physician-Owned Entities, Office of Inspector General (Mar. 26, 2013), https://oig.hhs.gov/documents/special-fraud-alerts/867/POD_Special_Fraud_Alert.pdf.
3 See, e.g., Sanford Health Entities to Pay $20.25 Million to Settle False Claims Act Allegations Regarding Kickbacks and Unnecessary Spinal Surgeries, U.S. Department of Justice (Oct. 28, 2019), https://www.justice.gov/opa/pr/sanford-health-entities-pay-2025-million-settle-false-claims-act-allegations-regarding.