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OIG Approves Physician-Owned Medical Device Company

On April 25, 2022, the Office of Inspector General (OIG) for the Department of Health and Human Services (HHS) issued a favorable Advisory Opinion regarding a medical device company (Company) in which physicians who order the Company’s products hold a majority ownership interest.  The Company manufactures medical device products that may be ordered by the physician owners and a physician spouse of one of the physician owners.

As noted below, the government has long scrutinized physician-owned medical device companies, particularly physician-owned distributors (PODS). Nevertheless, the OIG found that the Company presented a low risk of fraud and abuse, based on a number of factors.  Crucially, only a small percentage of the Company’s revenues are generated by orders from the physician-owners or an immediate family member.  The Company also takes certain steps to dilute the physician-owners’ financial incentives to order the Company’s products, and the physicians-owners disclose their financial interests in the Company to patients, health care facilities, and the public.

Governmental Scrutiny of Physician-Owned Medical Device Companies

The OIG and other government authorities have long-standing concerns regarding PODs, which are physician-owned entities that derive revenue from selling medical devices ordered by their physician-owners for use in procedures performed by the physician-owners at ambulatory surgery centers (ASCs) or hospitals.  In 2013, the OIG issued a Special Fraud Alert: Physician-Owned Entities noting that these entities are inherently suspect under the Federal Anti-Kickback Statute (AKS) and are particularly concerning when they have questionable features, such as selecting investors who are in a position to generate substantial business for the entity; requiring investors who cease practicing medicine to divest their ownership interests; and distributing extraordinary returns on investment compared to the level of risk involved. 

Congress has also expressed concerns about PODs.  In March 2019, the Senate Finance Committee wrote a letter to HHS deeming PODs “inherently suspect” and requesting that HHS begin investigating and issuing penalties against PODs that fail to comply with Open Payments reporting (otherwise known as the Sunshine Act).

Perhaps partially in response to the Senate Finance Committee’s letter, the Centers for Medicare & Medicaid (CMS) adopted an arguably overly-broad definition of “physician-owned distributor” for Sunshine Act reporting on November 21, 2021. Under the new definition, a "physician-owned distributor" includes applicable medical device manufacturers (i) with 5% physician ownership or (ii) that compensate a physician owner with “a commission, return on investment, profit sharing, profit distribution, or other remuneration directly or indirectly derived from the sale or distribution of devices by the manufacturer.” Entities that meet the definition of a POD are also required to self-identify as a POD in any Open Payments reporting.

PODs have also been the subject of enforcement actions by the Department of Justice (DOJ). For example, in November 2020, the DOJ announced a $9.2 million settlement resolving allegations that a POD violated (i) the AKS and the False Claims Act by paying kickbacks to a neurosurgeon and (ii) the Sunshine Act by failing to accurately report payments it made to the neurosurgeon. Please see our discussion on the settlement, which was the first-publicly available settlement involving alleged violations of the Sunshine Act.

OIG Advisory Opinion No. 22-07 – Factual Background

The Company produces and sells upper extremity surgical technology medical devices domestically and internationally.  The Company was originally formed by an orthopedic surgeon, who is the inventor of all of the Company’s intellectual property and was granted a majority interest in the Company and preferential voting rights in exchange for assigning ownership of proprietary technology that the Company uses to develop medical devices.

The Company’s founder and his spouse later contributed their majority ownership interest to two irrevocable trusts (Trusts) which benefit the founder, his spouse, and their children, including their daughter who is also an orthopedic surgeon and is married to another orthopedic surgeon, both of whom order the Company’s devices. The remaining ownership interests are held by Company managers and current and former employees, none of whom are health care practitioners or family members of any of the physicians. The founder and his daughter are the only physicians with an ownership interest in the Company, and the daughter’s spouse is the only immediate family member of an individual with an ownership interest in the Company who orders products from the Company. (The founder, his daughter, and the daughter’s spouse are collectively referred to in this blog post as the Physicians.)

The Physicians are all orthopedic surgeons and members of the same medical group (Medical Group).  The Physicians and other members of the Medical Group all perform surgeries in an ASC in which the founder has an ownership interest.  The Physicians order Company products, but these orders generate a relatively small percentage of the Company’s revenues – less than 1 percent of all gross revenue generated from Company’s sales in the U.S. during the past three years.  Though the Physicians certified that they may order Company products for surgeries they personally perform at hospitals and ASCs and may recommend Company products to others, the Physicians do not otherwise attempt to influence hospitals or ASCs to purchase the Company’s products. As described in more detail below, the Physicians and other Medical Group members also disclose their financial interests in the Company to patients, to health care facilities in which they perform procedures, and in academic presentations and peer-reviewed articles on the Company’s devices.


The Arrangement implicates the AKS, because the Physicians (or their immediate family member) hold an ownership interest in the Company, and the Physicians order medical devices from the Company that may be reimbursed by Federal health care programs. 

The small entity investment safe harbor, which protects profit distributions paid on investments in small entities, is potentially applicable.  However, the Arrangement fails the safe harbor’s requirement that no more than 40% of an entity’s investment interests be held by investors in a position to make or influence referrals or otherwise generate business for the entity, because, through the Trusts, the Physicians hold more than 40% of the investment interests in the Company.

Nevertheless, the OIG noted that the Arrangement does not raise the concerns identified in the 2013 Special Fraud Alert, and determined that the Arrangement poses a sufficiently low risk of fraud and abuse under the AKS based on the following safeguards:

  • The Company is a Legitimate Business and Not a “Shell Entity.” The Company develops medical products that it sells 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, the submission of regulatory filings with the FDA and international regulatory bodies, marketing, and inventory management.  In contrast, the OIG has expressed concerns about PODs that are shell entities that do not conduct appropriate product evaluations, maintain or manage sufficient inventory in its own facility, or employ or otherwise contract with personnel necessary for operations.
  • The Manner in which the Company makes Profit Distributions Dilutes Financial Incentives the Physicians May Have to Order the Company’s Products. The Company certified that any revenue that is generated by orders from any Physician or other Medical Group member will be “carved-out” from any distributions to the Trusts, which dilutes any financial incentives the Physicians may have to order the Company’s products. The Company also does not treat the Physicians preferentially compared with non-physician owners in making any profit distributions, and, other than reducing future distributions to the Trust by the carve-out amounts, the Company will make any future profit distributions in direct proportion to each owner’s investment interest in the Company.
  • Physicians and other Medical Group Members Generate a Very Limited Amount of Business for the Company.  Unlike physician-owned entities where physician owners are the sole or primary source of business for the devices sold by their physician-owned entities, the Physicians and other Medical Group members generated less than 1 percent of all gross revenue generated from Company sales in the United States over the last three years.
  • The Company does Not Select or Retain Physician Investors in Suspect Ways.  For example, the Company has not reserved the right to repurchase the Trusts’ ownership interest, and it does not, and will not in the future, have any requirement that the Trusts divest their ownership interest if any of the Physicians cease practicing medicine or ordering from the Company. The Trusts’ ownership interests are not contingent on any of the Physicians or the Medical Group physicians generating business for the Company.
  • The Physicians and Medical Group Physicians are Transparent about the Physicians' Ownership Interest in the Company. The Physicians disclose their financial interests in the Company to patients, facilities, and the public.  Physicians and their Medical Group partners provide written notice of each Physician’s ownership interest in the Company or relationship with an immediate family member with an ownership interest in the Company, as applicable.  The notice includes the names of alternative medical device companies in which neither the Physicians nor any of their family members have an ownership interest, and the patients have the opportunity to instruct the Physicians to use these alternative devices.  The Physicians also certified that they have disclosed their ownership interest in the Company to all of the hospitals and ASCs at which they currently perform services and would do so for any other facilities at which they will practice in the future. In addition, when the Company’s products are the subject of an academic presentation, lecture, or peer-reviewed publication by one of the Physicians, the Physician includes a disclosure regarding his or her financial interest in the Company.

Key Takeaways

This Advisory Opinion is notable as one of the few instances in which the government has issued a favorable opinion on a POD.  But, as with all Advisory Opinions, this Advisory Opinion is limited to its facts and is binding only with respect to the requesting party.  Here, a crucial factor is that only a small percentage of the Company’s revenues are generated by Physicians with an ownership interest in the Company.  PODs and other health care entities with physician ownership, particularly entities where physician-owners are a considerable source of revenue, should proceed with caution and consider the following risk-mitigation strategies: (i) carving out revenue generated from owners’ orders or referrals to the entity from profit distributions; (ii) requiring physician-owners to disclose their financial interests in the entity to patients, health care facilities in which they provide services, and in academic presentations and publications; and (iii) refraining from requiring physician-owners to refer or generate business for the entity in order to retain their ownership interests in the entity.

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Rachel Yount is a Mintz attorney who focuses her practice on health care industry transactions. Her clients include hospitals, health systems and plans, physician organizations, and pharmacy benefit managers.