For all media inquiries,
please contact:
Ariel Rivera
Communications Specialist
973.530.2453
arivera@csglaw.com

Arrangements with Physician-Owned Medical Device Distribution and Purchasing Companies - A Compliance Risk for Hospitals?

April 2009

Hospitals & Health Systems Rx, a publication of the American Health Lawyers Association - Hospitals and Health Systems Practice Group

Hospitals & Health Systems Rx, a publication of the American Health Lawyers Association - Hospitals and Health Systems Practice Group

Physician investment in medical device distribution companies has increased in recent years. Healthcare fraud and abuse authorities have indicated concern with this growing trend, stating physician-owned implant and medical device distribution and purchasing companies ("POC(s)") "may serve little purpose other than providing physicians the opportunity to earn economic benefits in exchange for nothing more than ordering medical devices or other products that the physician-investors use on their own patients.1 As the Centers for Medicare and Medicaid Services ("CMS") explained, "[t]he financial incentives paid to the physicians [who invest in POCs] may foster an anti-competitive climate, raise quality of care concerns, and lead to overutilization of the device or other product to which the physician is linked."2 In spite of this concern and the increased scrutiny recently placed on medical device manufactures' relationships with physicians,3 there has been little movement to directly address POCs within the current fraud and abuse regulatory framework, leaving several questions unanswered and exposing compliance risks for entities that contract with POCs, particularly hospitals. This article will discuss two models of POCs, the Group Purchasing Organization ("GPO") POC and the Distributor POC, and the potential Federal Anti-Kickback Law (the "Anti-Kickback Law")4 and Federal Stark Law (the "Stark Law" or "Stark")5 compliance concerns for hospitals that enter into arrangements with them.

 

I. Background - The GPO POC and Distributor POC Models


The following provides a general description of the GPO POC and Distributor POC models and discusses the typical arrangements between POCs, medical device manufacturers/vendors and hospitals.

A GPO POC enters into member agreements with hospital purchasers ("Hospital Member(s)") that authorize the GPO POC to negotiate purchasing arrangements with medical device vendors on behalf of the Hospital Members. The GPO POC also enters into agreements with medical device vendors, pursuant to which the GPO POC receives administrative fees from the vendors; these administrative fees are generally a percentage of the dollar value of purchases of the medical device vendor's products made by the Hospital Members. In this model, the GPO POC acts as an intermediary for the sale of discounted medical devices between the medical device vendor and the Hospital Members.

The Distributor POC is an entity that generally purchases medical devices directly from the device manufacturer at a discount and sells the devices to hospitals ("Hospital Purchaser(s)"). Unlike the GPO POC model where the POC only acts as an intermediary, the Distributor POC enters into medical device purchase arrangements directly with the Hospital Purchasers. The Distributor POC realizes profits in the difference between the amount it pays to purchase the medical devices from the manufacturer and the price at which it sells the devices to the Hospital Purchasers.

Hospitals often enter into arrangements with both models of POCs whose investors are on the purchasing hospitals' medical staff and perform services at the hospitals that involve the use of medical devices the hospitals purchase through or from the POC (the "Hospital Staff POC Investors"). Hospital arrangements with POCs owned by Hospital Staff POC Investors are the focus of the analysis below.

 

II. Anti-Kickback Law Concerns

A. GPO POC


In the GPO POC context, there appears to be only one "flow" of remuneration to a Hospital Member that potentially implicates the Anti-Kickback Law: the discount purchase arrangement between the medical device vendor and the Hospital Member (facilitated by/through the GPO POC). Provided the Hospital Member complies with its reporting obligations under the discount safe harbor, 6 the Hospital Member would appear to be insulated from any potential Anti-Kickback Law compliance concerns.

When a hospital enters into an arrangement with a GPO POC owned by Hospital Staff POC Investors, however, does the very decision to enter into such an agreement with the GPO POC create a separate flow of remuneration from the Hospital Member to the Hospital Staff POC Investors? No monetary exchange occurs in this circumstance between the GPO POC and the Hospital Member. In such a scenario, however, the Hospital Member's agreement with the GPO POC to authorize the POC to act as its purchasing agent effectively confers upon the Hospital Staff POC Investors an opportunity to profit from their referrals to the Hospital Member. The Department of Health and Human Services, Office of Inspector General ("OIG") has repeatedly communicated its position that a mere opportunity to generate a fee and profit can itself constitute prohibited remuneration under the Anti-Kickback Law. 7

A perceived flow of remuneration in the form of the Hospital Member's provision of the opportunity to profit to Hospital Staff POC Investors presents an awkward compliance difficulty if attempting to apply an Anti-Kickback Law safe harbor to the arrangement. One could potentially argue that if the Hospital Member's agreement with the GPO POC is in writing and specifies the GPO POC's purchasing services to the hospital, the personal services and management contracts safe harbor could be satisfied and the "opportunity to profit" form of remuneration would be protected. 8 However, there is a practical difficulty in that there is no actual monetary compensation exchanged, only the provision of an in-kind benefit in the form of an opportunity to profit. Could this form of remuneration be considered "aggregate compensation" that is "set in advance," "consistent with the fair market value," and "not determined in a manner that takes into account the volume or value of any referrals or business otherwise generated between the parties" (i.e., the compensation standards of the personal services and management contracts safe harbor)?9 In addition to the practical difficulty associated with describing the "opportunity to profit" flow of remuneration in the written agreement and supporting the fair market value of the remuneration to satisfy these safe harbor standards, it may be inherently difficult to assert the Hospital Member's remuneration to the GPO POC - in the form of allowing the Hospital Staff POC Investors to profit from their referrals to the Hospital Member - does not take into account the volume or value of the Hospital Staff POC Investors' referrals to the Hospital Member. Without the protection of the personal services and management contracts safe harbor, remuneration from the Hospital Member to the Hospital Staff POC Investors in the form of an opportunity to profit would appear to be exposed to Anti-Kickback Law scrutiny.

 

B. Distributor POC

In the Distributor POC model, there is again only one apparent flow of remuneration to Hospital Purchasers that potentially implicates the Anti-Kickback Law: the purchase arrangement between the Distributor POC and Hospital Purchasers, which could potentially meet the discount safe harbor. Again, however, there is another separate potential flow of remuneration in circumstances where a hospital purchases medical devices from a Distributor POC that is owned by Hospital Staff POC Investors. Based upon OIG commentary, one could argue that a Hospital Purchaser's mere decision to enter into such an arrangement - which confers upon the Hospital Staff POC Investors an opportunity to generate a fee and profit from their referrals to the Hospital Purchaser - could constitute prohibited remuneration to the Distributor POC and the Hospital Staff POC Investors, and as stated above, applying a safe harbor to this type of remuneration is awkward, if not impossible.

 

III. Stark Law Concerns

A. GPO POC

For purposes of a Stark Law analysis, it appears that at least currently, the only financial arrangement with respect to the GPO POC model that may implicate Stark is a potential indirect compensation arrangement between a Hospital Member and Hospital Staff POC Investors. 10 In cases where a Hospital Member enters into an arrangement with a GPO POC owned by Hospital Staff POC Investors, the arrangement would appear to meet the Stark definition of an "indirect compensation arrangement" 11 for the following reasons.

First, in satisfaction of the first prong of the indirect compensation arrangement definition, there appears to be an "unbroken chain" of entities with financial relationships between the Hospital Staff POC Investors (i.e., the referring physicians) and the Hospital Member (i.e., the entity furnishing designated health services): (i) the Hospital Staff POC Investors have an ownership interest in the GPO POC; (ii) the GPO receives an administrative fee from the medical device vendor; and (iii) the Hospital Member purchases devices from the medical device vendor (Hospital Member ↔ medical device vendor ↔ GPO POC ↔ Hospital Staff POC Investors).

Second, in satisfaction of the second prong of the indirect compensation arrangement definition, the compensation between the GPO POC and the medical device vendor (the administrative fee) would appear to vary with, or take into account, the volume or value of the referrals generated by the Hospital Staff POC Investors to the Hospital Member. (Note, where the direct financial link to the referring physician is an ownership or investment interest, the indirect compensation arrangement definition states the direct compensation arrangement to be analyzed for purposes of this prong of the definition is the closest "nonownership or non investment interest" to the referring physician.12 In the GPO POC model, that would be the direct compensation arrangement between the GPO POC and the medical device vendor (the administrative fee arrangement)).

To demonstrate the correlation between the administrative fee the GPO POC receives from the medical device vendor and the referrals of the Hospital Staff POC Investors to the Hospital Member, consider the following. Let us assume a GPO POC (which is comprised, at least in part, of one Hospital Staff POC Investor) facilitates a purchase arrangement between a Hospital Member and medical device manufacturer for shoulder implants. Assume the Hospital Staff POC Investor performs shoulder implant surgeries at the Hospital Member. When the Hospital Staff POC Investor makes a referral to the Hospital Member for shoulder implant surgeries, the Hospital Member purchases the shoulder implants from the medical device vendor. The GPO POC, in turn, receives an administrative fee, which consists of a percentage of the dollar value of the shoulder implants the Hospital Member purchases from the medical device vendor. This administrative fee paid by the medical device vendor to the GPO POC would increase as the Hospital Member's purchases of shoulder implants increase. Therefore, the more surgeries the Hospital Staff POC Investor performs at the Hospital Member (i.e., the more designated health service referrals the Hospital Staff POC Investor makes to the Hospital Member), the greater the amount of shoulder implants needed by the Hospital Member, the greater the amount of shoulder implant purchases made by the Hospital Member, and the greater the administrative fee paid by the medical device vendor to the GPO POC. The percentage administrative fee would appear to inherently vary with, or take into account, the volume or value of referrals by the referring Hospital Staff POC Investor to the Hospital Member, thus satisfying the second prong of the indirect compensation arrangement definition.

Third, in satisfaction of the third prong of the indirect compensation arrangement definition, it can likely be assumed that the Hospital Member (i.e., the entity furnishing designated health services) has actual knowledge of the fact that the GPO POC will receive increased administrative fees as the Hospital Staff POC Investors make referrals to the Hospital Member for services that entail the use of the medical devices the Hospital Member purchases from the medical device vendor.

Assuming there is, in fact, an indirect compensation arrangement between the Hospital Member and the Hospital Staff POC Investors in this scenario, can the Stark indirect compensation arrangement exception be satisfied?13 The most problematic aspect of the indirect compensation arrangement exception would appear to be the requirement that the compensation arrangement between the GPO and the medical device vendor (i.e., the closest nonownership or non investment interest to the Hospital Staff POC Investors)14 not be determined "in any manner that takes into account the volume or value of referrals or other business generated" by the Hospital Staff POC Investors for the Hospital Member. Is not the administrative percentage fee paid by the medical device vendor to the GPO POC - which is based on a percentage of the Hospital Member's purchases of the medical device - inherently determined in a manner that takes into account the volume/value of referrals the Hospital Staff POC Investors make to the Hospital Member that involve the use of the product the Hospital Member purchases from the medical device vendor? While CMS has not been precise in defining the phrase "takes into account,"15 and in explaining the difference between the "volume/value of referrals" prong in the indirect compensation arrangement definition and the "volume/value of referrals" prong in the indirect compensation arrangement exception,16 it would appear difficult to argue that the administrative fee whether viewing such fee on a per payment or aggregate compensation basis - does not inherently take into account the referrals of the Hospital Staff POC Investors to the Hospital Member in this scenario. There may be too close a correlation between the Hospital Staff POC Investors' referrals, the resulting Hospital Member's purchases of medical devices, and resulting administrative fee paid to the GPO POC. If the indirect compensation arrangement exception is not, in fact, met, the Hospital Member would be the recipient of referrals prohibited by the Stark Law and would, subsequently, be prohibited from submitting claims for such referred services.17

In addition, as stated above with respect to the Anti-Kickback Law, could the Hospital Member's mere decision to enter into a member agreement with the GPO POC owned by Hospital Staff POC Investors constitute a separate flow of remuneration that results in a Stark compensation arrangement?18 While CMS does not appear to have explicitly taken the OIG's position regarding an "opportunity to profit," the same concept can potentially be applied in the context of the Stark Law. In such a case, would the compensation arrangement be considered to exist directly with the Hospital Staff POC Investors, since the remuneration in the form of an opportunity to profit from one's referrals is essentially provided directly to the Hospital Staff POC Investors? If so, the same awkward issues exist in attempting to apply a Stark exception to this direct compensation arrangement as they do in attempting to apply an Anti-Kickback Law safe harbor.19

 

B. Distributor POC

A Stark Law analysis of the Distributor POC model would be very similar to the analysis with respect to the GPO POC model. If a Hospital Purchaser enters into a medical device purchase arrangement with a Distributor POC owned by Hospital Staff POC Investors, there would likely only be, at most, an indirect compensation arrangement between the Hospital Purchaser and the Hospital Staff POC Investors (Hospital Purchaser ↔ Distributor POC ↔ Hospital Staff POC Investors). Depending on the details of the purchase arrangement, there may, again, be too close a correlation between the Hospital Staff POC Investors' referrals and the Hospital Purchaser's purchase of medical devices to argue the compensation between the Hospital Purchaser and Distributor POC is not determined in a manner that takes into account the volume or value of referrals or other business generated by the Hospital Staff POC Investors for the Hospital Purchaser. In such a case, the indirect compensation arrangement exception could not be satisfied and the Hospital Purchaser would be on the receiving end of referrals prohibited under Stark. In addition, as addressed above, if the Hospital Purchaser's mere decision to enter into a purchasing agreement with a Distributor POC owned by Hospital Staff POC Investors constitutes a separate flow of remuneration in the form of an opportunity to profit, similar difficult issues arise in attempting to protect this remuneration through existing Stark exceptions.

 

IV. Conclusion

As noted above, government authorities have expressed concern with POCs, and as can be seen by the analysis above, several compliance issues appear to be raised with respect to these entities' arrangements with hospitals under the current regulatory framework. Until the regulations address POCs more clearly and directly, hospitals should proceed cautiously with respect to their arrangements with these entities. The best way for a hospital to avoid the issues described above is to avoid entering into arrangements with POCs whose physician investors have privileges at the hospital. At the very least, if a hospital chooses to enter into such a relationship, it should certainly seek the advice of counsel and carefully analyze the details of the POC's structure and the POC's legal rationale for compliance.

 


Nicole F. DiMaria
is an associate with Wolff & Samson, PC in West Orange, New Jersey. She may be reached at 973-530-2111 or via e-mail at: ndimaria@wolffsamson.com.

 

ENDNOTES

1. 73 Fed. Reg. 23528, 23694 (April 30, 2008).

2. Id. CMS further stated the following to explain the potential anti-competitive effects of POCs: "Physicians are responsible for selecting or recommending the devices ordered for the hospital's patients. It is reasonable to believe that medical device or implant companies without physician investment will have difficulty finding referral sources in areas where many physicians are invested in a POC that offers competing products." Id.

3. Gregory E. Demske, Examining the Relationship Between the Medical Device Industry and Physicians, Feb. 27, 2008, http://oig.hhs.gov/testimony/docs/2008/demske_testimony022708.pdf.

4. 42 U.S.C. § 1320a-7b.

5. 42 U.S.C. § 1395nn(a); 42 C.F.R. § 411.353.

6. 42 C.F.R. § 1001.952(h).

7. See, e.g., OIG Advisory Opinion No. 08-10 (Aug. 19, 2008).

8. 42 C.F.R. § 1001.952(d)(personal services and management contracts safe harbor).

9. 42 C.F.R. § 1001.952(d)(5).

10. CMS considered adopting a position that a POC performs designated health services and is, therefore, an "entity" under the Stark Law. 73 Fed. Reg. 23528, 23695 (April 30, 2008). CMS has declined, however, to take that position at this time, stating that it is "not adopting the position that physician-owned implant or other medical device companies necessarily 'perform the DHS' and are therefore an 'entity' on that basis." 73 Fed. Reg. 48434, 48727 (Aug. 19, 2008). CMS indicated that it may decide to issue proposed rulemaking on this subject in the future. Id. Also note that the Stark "stand in the shoes" provisions would likely not apply with respect to either the GPO POC or Distributor POC models, since these entities do not generally operate as a "physician organization." See 42 C.F.R. §411.354(c)(1)(ii)(setting forth the "stand in the shoes" direct compensation arrangement provisions); 42 C.F.R. §411.351(defining "physician organization" as "a physician, a physician practice, or a group practice").

11. 42 C.F.R. § 411.354(c)(2).

12. 42 C.F.R. § 411.354(c)(2)(ii).

13. 42 C.F.R. § 411.357(p).

14. For purposes of determining whether an indirect compensation arrangement meets the compensation requirements of the indirect compensation arrangement exception, the compensation arrangement to be analyzed is the same compensation arrangement analyzed for purposes of the indirect compensation arrangement definition. 42 C.F.R. § 411.357(p)(1)(i).

15. For instance, CMS has used a seemingly circular statement to explain the "takes into account" standard: "[a] compensation arrangement does not take into account the volume or value of referrals or other business generated between the parties if the compensation is fixed in advance and will result in fair market value compensation, and the compensation does not vary over the term of the arrangement in any manner that takes into account referrals or other business generated." 66 Fed. Reg. 856, 877-78 (Jan. 4, 2001) (emphasis added).

16. In response to comments that questioned how any indirect compensation arrangement could satisfy the indirect compensation arrangement exception's "volume/value of referrals" requirement given that, by definition, the compensation must vary with, or otherwise reflect, the volume or value of referrals, CMS's only explanation of the difference between the standards is as follows: "the definition looks to the aggregate compensation (that is, compensation that combines each individual payment under the arrangement), whereas the exception looks at individual payments without aggregating them." 72 Fed. Reg. 51012, 51029 (Sept. 5, 2007).

17. 42 U.S.C. § 1395nn(a)(1)(B); 42 C.F.R. § 411.353(b).

18. A "compensation arrangement" is defined under Stark as "any arrangement involving remuneration, direct or indirect, between a physician (or a member of a physician's immediate family) and an entity." 42 C.F.R. § 411.354(c) (emphasis added).

19. Stark exceptions that potentially could apply to such remuneration, such as the exception for personal service arrangements (42 C.F.R. § 411.357(d)), have compensation requirements similar to the Anti-Kickback Law safe harbor for personal services and management contracts.

PDF FileView as PDF