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Recent OIG Letter Might Indicate Increased Enforcement Focus
Mark Langdon
In a development that underscores the increased scrutiny that medical device companies are facing in today’s enforcement environment, and that reaffirms a longstanding concern with physician joint ventures, the Office of Inspector General (OIG) of the Department of Health and Human Services recently released on its Web site an advisory letter in response to a request by a medical device trade association for guidance regarding physician investment interests in medical device manufacturers and distributors.
In short, the OIG, which is the federal agency charged with combating healthcare fraud and abuse in the Medicare and Medicaid programs, reiterated that previous guidance it has issued on physician joint ventures is equally applicable to those ventures that also involve medical device companies, and that such arrangements raise potentially significant compliance issues. This announcement probably is of particular relevance to orthopedic device companies, as the close collaboration between companies and physicians in this sector has led many to have at least some form of physician ownership.
The OIG letter was released in response to a Sept. 6, 2006 request submitted by the Advanced Medical Technology Association (AdvaMed), a national trade association consisting of member companies that produce medical devices, diagnostic products and health information systems. The request sought guidance on the federal government’s legal analysis of arrangements involving physicians having an equity ownership interest in a medical device manufacturer or a distributor. Specifically, AdvaMed requested the following:
• Confirmation that a 1989 OIG “Special Fraud Alert on Joint Ventures” and various other guidance on physician investment issued by the OIG applied to medical device and distribution companies
• Clarification with respect to certain factors relevant to analyzing a joint venture under fraud and abuse laws
• Publication of additional OIG guidance concerning physician investment in medical device and distribution entities
In its response, the OIG noted that it was aware of an apparent proliferation of physician investments in medical device and distribution entities, including group purchasing entities, and that, given the strong potential for improper inducements between and among the physician investors, the entities, device vendors and device purchasers, it believed that these arrangements should be closely scrutinized and monitored under the fraud and abuse laws.
The most important law that may come into play as a result of these arrangements is the Federal Anti-Kickback Law. This is a criminal law that prohibits the payment or receipt of anything of value that is intended to induce the referral of patients, or the purchase of items or services, covered by a fede-
ral healthcare program—including Medicare or Medicaid. The concern with respect to any joint venture arrangement involving physician ownership is that there is no legitimate reason for the physician to be provided with an interest in the entity, except to lock up a stream of referrals from the physician, and that the ownership payments to the physicians are intended to provide compensation to the physicians for their referrals.
In the device context, the potential concern is that the physician’s referrals to the entity that he or she has an ownership interest in may comprise most, or a substantial portion of, the entity’s total business. In addition, AdvaMed’s letter notes that physician equity investments could have the effect of reducing quality of care and creating conflicts of interest over the physician’s ethical obligation and responsibility to provide optimum care to patients.
The OIG’s response noted that the existing guidance addressing physician investment is current guidance, and that all industry stakeholders involved in joint ventures with physicians, including medical device manufacturers and distributors, should heed such guidance. In particular, the OIG noted that a Special Fraud alert that it issued in 1989, and the principles announced in that guidance, are still alive and well today, and would apply to physician investments in device companies.
In addition, the OIG confirmed that the amount of revenues generated directly or indirectly by a physician investor is a relevant factor in assessing the level of risk that a joint venture may pose under fraud and abuse laws, and in determining whether such an arrangement can meet what is referred to as a “safe harbor” to the law. Qualification for a safe harbor assures the parties that the arrangement will not be subject to prosecution by the OIG. The exemption most relevant to physician joint ventures is the “small investment” safe harbor, which, among other things, requires that entities derive no more than 40% of their revenues from physician investors.
The OIG letter also noted that the Anti-Kickback Statute is an intent-based law, and, therefore, the ultimate determination as to whether an arrangement is illegal depends on the intent of the parties.
Although the medical device industry necessarily involves close collaboration between companies and physicians, as a result of this recent advisory, and in light of the government’s increased focus on healthcare fraud and abuse in the medical device arena, as evidenced by recent settlements, medical device companies that have existing physician ownership would be well advised to review their arrangements with these physicians to ensure that they are compliant with applicable laws and guidance in this area, and, if they are not, to immediately take appropriate remedial steps to bring them into compliance. Further, medical device companies considering offering investment interests to physicians should tread carefully, and, to the extent possible, make certain that any such arrangement complies with the small investment exception to the Anti-Kickback Statute.
