[author: Sophie Munroe]
On April 20, 2022, OIG issued an advisory opinion regarding an arrangement involving a family of physicians having an ownership interest in a medical device company that manufactures products that the physicians also order. OIG determined that although the physicians’ involvement in the device company implicated the federal Anti-Kickback Statute (AKS) and was not protected by a safe harbor, the structure and operations of the company and the incorporation of numerous safeguards presented a sufficiently low risk of fraud and abuse and that administrative sanctions would not be imposed.
OIG has had longstanding concerns under the AKS regarding physician-owned entities that derive revenue from selling medical devices ordered by physician owners for use in procedures those physicians perform at hospitals and ambulatory surgery centers (ASCs). In a Special Fraud Alert issued in 2013, OIG characterized such arrangements as “inherently suspect.” Although the 2013 Special Fraud Alert outlined a number of suspect characteristics of these arrangements, it did not address how physician-owned device companies could be organized to pass regulatory scrutiny. OIG Advisory Opinion 22-07 provides insight on the safeguards needed to protect physician ownership in medical device companies and avoid sanctions under the AKS.
The arrangement involves a hand and upper extremity surgeon (Physician A) who invented upper extremity surgical technologies, and certain of his family members. Physician A and his family hold a majority interest in a medical device company (the Company). Physician A is the inventor of all the Company’s intellectual property and serves as the Company’s Chief Scientific Officer. The Company granted the majority ownership interest to Physician A and his spouse in exchange for Physician A assigning to the Company ownership of substantial proprietary technology that has been used by the Company to develop medical devices. Although Physician A and his spouse contributed their interests in the Company to two trusts and disclaimed beneficial interests in those trusts, OIG did not view that as meaningfully altering Physician A’s financial interest in the Company since his children were beneficiaries of the trusts.
A limited number of the Company’s owners are in a position to order the Company’s products. Physician A and his daughter (a physician) are the only persons with an ownership interest who order products from the Company. The daughter’s husband (also a physician) is the only immediate family member of an individual with an ownership interest in the Company who also orders products from the Company. The remaining ownership interests in the Company are held by employees and managers, none of whom are health care practitioners or family members of individuals who would order products from the Company.
The arrangement implicates the federal AKS because the physicians are beneficiaries (or the spouse of a beneficiary) of trusts which hold ownership interests in the Company. Furthermore, these physicians order products from the Company that may be reimbursable by federal health care programs; and they may also recommend the Company’s products to other health care practitioners. Since the Company’s ownership structure precluded qualification under the small entity investment safe harbor, OIG proceeded with a case-by-case evaluation of the facts of the arrangement. In examining the totality of the circumstances, OIG identified six primary reasons why it determined not to impose administrative sanctions in this scenario.
First, OIG concluded that the arrangement did not exhibit suspect characteristics that would undermine the legitimacy of the medical device company as a business—in other words, the Company clearly does not merely exist as a shell entity for the purpose of benefitting the family of physicians. Rather, the Company sells products domestically and internationally, employs dozens of individuals, and is responsible for the full range of operations of a medical device company—including product design, development and testing of products, quality control, and submission of regulatory filings with the FDA and other international regulatory bodies.
Second, the methodology for the Company to make profit distributions significantly dilutes the physicians’ financial incentives. The Company certified that it had not made any profit distributions except annual distributions to cover each owner’s income tax obligation deriving from the owner’s ownership interest. Future distributions would be made in direct proportion to the owner’s investment interest, except that distributions to the trusts set up by Physician A and his spouse will be reduced by the amount of revenue generated by orders from Physician A or any of his family, or a member of their respective medical groups.
Third and fourth, the arrangement differs from many physician-owned entity arrangements in two material respects—namely, a very small fraction of the Company’s revenue is derived from the orders by physician owners, and the ownership interest of the trusts is not contingent upon the physician owners generating business or being in a position to generate business for the Company. The Company certified that it has not reserved the right to repurchase the trusts’ ownership interest if any of the physician owners cease practicing medicine or ordering from the Company.
Fifth, the physician owners certified that although they order the Company’s products for surgeries they perform or that they may recommend the Company’s products, they will not otherwise influence hospitals or ASCs to purchase products. More specifically, the physician owners certified that they will not condition referrals to hospitals or ASCs or threaten to perform their patients’ procedures elsewhere if hospitals or ASCs do not purchase the Company’s products. The physician owners stated that they ultimately select products based on each of their patient’s clinical needs.
Lastly, the physician owners are transparent about the trusts’ ownership interest in the Company. When performing a procedure with one of the Company’s products, the physician owners provide a notice to patients alerting them of their ownership interest in the Company and a list of alternative products that can be used in the procedure. The physician owners also disclose to hospitals and ASCs their relationship and ownership interest in the Company. OIG stressed that while transparency alone is not sufficient to decrease the risk of suspect behavior associated with physician-owned entities, in this case, the physician owners’ various disclosures to patients, facilities, and the public—in combination with the other safeguards present in the arrangement—further decrease the risk of fraud and abuse.
As with all advisory opinions, OIG notes this opinion is limited to the arrangement and parties discussed above. However, following the 2013 Special Fraud Alert, this advisory opinion proves illustrative of the types of facts and safeguards that the OIG will look to when determining if sanctions will be imposed under the AKS in the case of a physician ordering implants and other devices from a medical device company in which the physician has a financial interest.
The full text of Advisory Opinion No. 22-07 is available here.