Regulator Warns of Potential Fraud in Physician-Owned Distributorships

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Physician-Owned Distributorship, or PODS, have been established in least 20 states, and, now, a government watchdog group is alerting the public about fraud risks with these types of entities.

The Office of Inspector General just issued a warning about fraud risks associated with these so-called PODs, which involve physicians purchasing ownership interests in a medical device distributor and sharing in the PODs profits made via sales to hospitals, explained Reuters. In its report, the Office of Inspector General said its longstanding guidance “makes clear 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 illegal remuneration under the anti-kickback statute,” according to Reuters. PODs are most frequently seen in orthopedic practices.

“The anti-kickback statute is violated if even one purpose of the remuneration is to induce such referrals” by healthcare professionals involved in such PODs, the report said, according to Reuters. The language in the report “can’t get any more damning,” Dr. Josh Jennings, a Cowen & Co analyst, told Reuters.

According to Jennings, PODs typically involve smaller, private companies that make orthopedic devices, including spinal devices, Reuters explained. The report will likely discourage hospitals from using PODS, despite any potential for cost savings. This will also likely stop physicians from joining PODs, despite any money they may make, Jennings, noted.

Some attempts have been made to expand PODs into joint reconstruction procedures and cardiac devices; however, Jennings said the report will also likely delay those efforts, as well, wrote Reuters.

PODs are middleman outfits that offer profits to surgeons for the medical devices they use on their patients and that, as far back as two years ago were drawing criticism over the rise in PODs being seen in spine and orthopedic surgery. POD arrangements create financial incentives for doctor investors to use the devices that provide them with the best return, financially, creating an arrangement that can lead to violations on an anti-kickback statute and other federal fraud and abuse laws.

With the entities working as a liaison between medical device manufacturers and hospitals, there is an exchange in marketing, stocking, and selling in which PODs receive a sales percentage. In those cases in which surgeons own a POD, they receive commissions for devices sold. This is important because surgeons typically decide for the hospitals where they operate what devices they want to use in their procedures, so POD surgeons can move business to themselves.

We have long noted that the financial relationships between the drug and medical device industries and the health care industry have led to enormous controversy. Critics maintain that such relationships create conflicts of interest and could unduly influence everything from research findings to prescribing practices, with patients no longer the primary focus in health care decisions.

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