OIG Anti-Kickback Opinion Examines Physician Ownership of Medical Device Manufacturer and Referrals

The Office of Inspector General (“OIG”) in the Department of Health and Human Services has longstanding concerns regarding physician-owned entities that derive revenue from selling items ordered by their physician owners for use in procedures the physician owners perform at hospitals or ASCs.

Recently, the OIG issued Advisory Opinion 22-07 concerning the question whether an arrangement in which certain physicians have an ownership interest in a medical device company that manufactures products that may be ordered by the physician owners and a physician spouse of one of the physician owners (the “Arrangement”) violates the Federal Anti-Kickback Statute (“AKS”).

Based on the relevant facts, the OIG concluded that, although the Arrangement would generate prohibited remuneration under the AKS if the requisite intent were present, it would not impose administrative sanctions on the parties in connection with the Arrangement because the Arrangement poses a sufficiently low risk of fraud and abuse under the AKS.

Advisory Opinion 22-07 is of significance because it identifies certain specific factual circumstances and structural/operational safeguards that were in place and that are especially relevant in assessing whether an arrangement of this type violates the AKS.

In a summary/simplified form, the facts and structural/operational safeguards relied upon by the OIG in issuing the favorable opinion are as follows:

  • Several orthopedic surgeons are part of the same medical group (“Medical Group”). One of the physicians (“A”) formed a company (“Company”) to develop upper extremity surgical technologies that he invented into medical devices that the Company sells domestically and internationally.
  • The Company granted a majority ownership interest to A and his spouse who is also an orthopedic surgeon in the medical group in exchange for A assigning ownership of a substantial portfolio of proprietary technology to the Company that the Company has used to develop medical devices. Each of A and his spouse then contributed their ownership interest to trusts benefiting each of the other and their children.
  • The remaining ownership interests in the Company are held by Company managers and employees (or former employees), none of whom are health care practitioners or family members of any of the Physicians.
  • The Company is not a “shell” company for the physicians involved. It employs dozens of individuals and is responsible for the full range of operations of a medical device company.
  • The Physicians’ orders of Company products along with those of other members of the Medical Group account for a small percentage of the Company’s revenues — 0.98%, 0.36%, and 0.45% of all gross revenue generated from Company sales in the United States in 2019, 2020 and 2021, and are expected to remain extremely small in future years.
  • Any future profit distributions to owners will be to all owners and in direct proportion to each owner’s investment interest in the Company, except that any distributions to the Trusts will be reduced by the amount of revenue that is generated by orders from any Physician or other Medical Group members.
  • While the Physicians may order Company products for surgeries they personally perform at hospitals and ASCs that permit the use of Company products and may recommend Company products to others, the Physicians will not otherwise attempt to influence hospitals or ASCs to purchase the Company’s products.
  • The Physicians will not directly or indirectly condition referrals to hospitals or ASCs on the purchase of Company products.
  • The Trusts’ ownership interests are not contingent on any of the Physicians or their Medical Group partners generating business for the Company.
  • The Physicians and other Medical Group members will provide certain written disclosures to patients related to the Arrangement and the use of Company products:
    • When patients are first seen at the Medical Group’s practice, they will be provided 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.
    • The notice will include the names of alternative medical device companies in which neither the Physicians nor any of their family members have an ownership interest, and patients will have the opportunity to instruct the Physicians to use these alternative devices.