May 4, 2022
On April 20, 2022, the U.S. Department of Health and Human Services Office of Inspector General (OIG) issued a favorable advisory opinion (no. 22-07) regarding physician ownership of a medical device company that manufactures products ordered by the physician owners and other affiliated physicians.
The advisory opinion is significant because, though narrow, it provides a path forward for physician ownership of device companies, an area where OIG is typically concerned. That said, despite this favorable advisory opinion, OIG’s comments suggest it will retain its inherent skepticism and care needs to be taken to structure such an arrangement.
The OIG concluded that while the proposed arrangement would implicate the federal Anti-Kickback Statute (AKS), the OIG would not impose administrative sanctions even though the proposed remuneration would not satisfy any safe harbor and would pose some risk of prohibited remuneration. As with all OIG advisory opinions, the OIG’s conclusions apply only to the proposed arrangement. It is, however, informative for those evaluating similar ownership arrangements.
Ultimately, McGuireWoods’ read is that OIG effectively believed the physician owners (including the inventor) had a bona fide investment in the manufacturer that sells widely to non-owners, such that the ownership was not intended to induce referrals. This likely will remain a high bar for other physician-owned manufacturers.
The Arrangement
The opinion was requested by orthopedic surgeons with a majority ownership interest in a medical device company that manufactures products ordered by the orthopedic surgeons, a physician spouse of one of the surgeons, and other physicians in the surgeons’ medical group. As physicians in a position to refer business to the manufacturer exceeded 40% of the company’s ownership, the AKS investment safe harbors were not available to the arrangement. One of the orthopedic surgeons, a hand and upper extremity surgeon, is an inventor of surgical technologies and formed the medical device company; this surgeon owns all of the device company’s intellectual property and serves as the device company’s chief scientific officer but does not participate in the device company’s day-to-day activities.
OIG Concludes Arrangement Poses Low Risk Under AKS
Despite the arrangement not meeting the safe harbor, the OIG determined that the arrangement posed a limited risk of fraud and abuse under AKS, for the following reasons.
Conclusion
The OIG concluded that the proposed arrangement could generate prohibited remuneration under the AKS if the requisite intent were present, but the OIG would not impose administrative sanctions because the arrangement would present a low risk of fraud and abuse for the reasons discussed above.
However, the OIG referred to its 2013 special alert on physician-owned entities and added a caution:
Physician-owned entities are inherently suspect under the [AKS] and are particularly concerning when they exhibit questionable features, such as selecting investors who are in a position to generate substantial business for the entity; requiring investors who cease practicing in the service area to divest their ownership interests; and distributing extraordinary returns on investment compared to the level of risk involved. The physician owners of physician-owned entities also may engage in suspect behavior, such as conditioning their referrals to hospitals or ASCs on the facilities’ purchases of the physician-owned entity’s devices through coercion or promises.
Accordingly, it is important to exercise caution and to construct appropriate safeguards where a physician acquires an ownership interest in an entity such as a medical device company. Indeed, this advisory opinion may influence investment in other healthcare entities more regularly than in device manufacturing, as suggesting items like distributions removing referral profit could be utilized by other providers.
Please contact one of the authors for additional information on structuring ownership investments in corporate entities or other related compliance concerns.