OIG Approves Physician-Owned Medical Device Company With Several Safeguards

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.

  1. Lacked Certain Suspect Characteristics. The arrangement does not exhibit the suspect characteristics sometimes associated with physician-owned entities. The device company has far-reaching business activities outside its relationship with the orthopedic surgeons and is responsible for the full range of operations of a medical device company, including domestic and international regulatory compliance. It is not a shell to reward referrals.
  2. Distributions Did Not Include Referral Revenue. The way the device company would make future profit distributions reduces the risk of the kind of harm the AKS is designed to prevent. The arrangement meaningfully dilutes the financial incentives requestors may have to order the company’s products by reducing profit distributions to the surgeons by the amount of revenue generated by orders from any surgeon (or physician in the surgeons’ medical group). To date, the company has made only tax distributions.
  3. Ownership for Bona Fide Exchange. The company granted majority ownership for assigning proprietary intellectual property, not for any anticipated referral volume/orders. The intellectual property was used to manufacture the company’s medical devices.
  4. Small Minority of Company’s Revenue. The surgeons (and the surgeons’ medical group) generate less than 1% of the device company’s historic annual revenue, unlike entities where the physician owners are the sole, or primary, users of the devices sold or manufactured by the owned entity. This percentage has decreased over the past seven years as the company expanded its operations and sold more devices.
  5. No Requirement to Continue Medical Practice. The arrangement differs from other physician-owned entity arrangements that select or retain physician investors in suspect ways, such as by retaining the right to repurchase physician ownership interests or requiring divestment where a physician ceases to practice medicine or refers less business to the physician-owned entity. Additionally, the device company has not reserved the right to repurchase the surgeons’ ownership interest and does not have a requirement that ownership interest be divested if any surgeon ceases practicing medicine or ordering products from the company.
  6. No Referral Tracking. In this arrangement, the surgeons’ ownership interest is not contingent on any business generation for the device company. Indeed, the company attested to OIG that it does not treat the surgeons or higher-referring physicians in any unique ways.
  7. No Referral Influence. The surgeons certified that they do not attempt to influence hospitals or ambulatory surgery centers (ASCs) to purchase products from the device company and do not condition referrals to hospitals or ASCs on the purchase of products from the device company.
  8. Transparency Reduces Risk (but Is Not Alone Sufficient). The surgeons (and their medical group) provide patient disclosures related to their ownership interest in the device company, including providing alternative medical device options. The surgeons also certified that they have provided notice of their ownership interest in the device company to all hospitals and ASCs where they currently perform services. OIG noted that “[w]hile transparency, alone, is not sufficient to decrease risks associated with physician-owned entities, in this case [the surgeons’] various disclosures, in combination with other safeguards, further decrease the risk of fraud and abuse.”

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.

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