Physician-Owned Distributorships: When Implant Purchases Buy Referrals

Hospital physician-owned distributorship kickbacks arise when implant purchases reward surgeons for the business they bring. A surgeon can choose the device, influence the hospital to buy it and collect a share of the supplier’s profit. The purchase order pays for hardware, while the reason for it may be the operations the surgeon brings. Patients can face unnecessary operations, with Medicare paying the hospital bill. For someone inside purchasing or the operating room, the reason the supplier won the business can be the whole story.

Physician-Preference Devices Put the Surgeon on Both Sides

A physician-owned distributorship earns money from devices its physician investors use on their own patients. The manufacturer supplies the implant, the distributor sells it to the hospital, and the surgeon selects and uses it. When the surgeon owns the distributor, a procedure can bring both a professional fee and a share of the implant margin.

Implants are physician preference items: the surgeon can strongly influence the brand and type the hospital buys. The Inspector General’s concern includes suppliers that collect the money without evaluating products or overseeing distribution, and physician owners whose returns depend on how much hardware they use.

The hospital has its own payment at stake. Medicare’s inpatient payment system pays for a stay according to its diagnosis-related group, with diagnoses and procedures affecting the payment. The supplier purchase and the hospital claim are different transactions. The operation connects them.

What the Inspector General Warned Hospitals to Look For

The Inspector General’s physician-owned distributorship warning reaches the hospital’s reason for buying. In its March 26, 2013 Special Fraud Alert, the Department of Health and Human Services Office of Inspector General called PODs inherently suspect under the Anti-Kickback Statute. The warning covers implantable devices generally, extending beyond spinal hardware. It expressly included hospitals and ambulatory surgical centers in its concern:

Physician-owned distributorship red flags run through the investment agreement and the purchasing relationship:

• Ownership priced by business. Investors are selected for the business they can generate, or investment size, purchase price or distributions track expected device use. Extraordinary returns for little investment risk also concern the Inspector General.
• Referrals used as purchasing pressure. Surgeons threaten to move operations elsewhere, promise to bring cases if the hospital buys their devices, or demand an exclusive purchasing arrangement.
• Ownership conditional on use. Physicians face smaller distributions, forced divestiture or a buyback of their interest when they stop generating device purchases.
• A supplier without the supplier’s work. The company lacks appropriate product evaluation, inventory or personnel, or fails to oversee distribution continuously.
• An interest kept out of view. Physician owners omit or misrepresent their stake when the hospital requires conflict disclosures.

The alert also singled out changes around the investment: more surgery, more extensive surgery or a switch almost entirely to the distributorship’s products. It said disclosure to the patient alone does not address these concerns. The Inspector General also considers the parties’ intent and actual operations, including whether the owners are nearly the only users of the devices. An innovation claim does not answer those questions.

What the Inspector General Found About Spinal Devices

The Inspector General’s October 2013 evaluation found no lower device costs per surgery for operations using physician-owned distributors’ products, even though those operations used fewer devices. The study examined a sample of 1,000 Medicare spinal-fusion claims from fiscal year 2011. Physician-owned distributors supplied devices in nearly one in five spinal-fusion surgeries billed to Medicare that year.

Fewer devices, and still no saving on the hardware. The study also found faster growth in spinal surgery after hospitals in its sample began purchasing from physician-owned distributors. In written testimony for the Senate Finance Committee’s 2015 hearing, a neurosurgeon described the growth rate at those hospitals as three times the rate at hospitals that did not buy from them.

Ownership Can Be Missing From the Purchasing Picture

A hospital’s physician-owned supplier invoice and its physician ownership disclosure answer different questions. The invoice identifies the seller. The disclosure identifies the surgeon’s stake. The Inspector General found that hospital policies varied on whether physicians had to disclose POD ownership to the hospital or the patient.

The Senate hearing put a number on that blind spot: a committee member reported that only 60 percent of hospitals buying from physician-owned distributors correctly identified that relationship to the Inspector General. The agency found the others through invoice data.

Intermountain’s written Senate testimony made that problem concrete. Its accounts-payable database had a field for physician ownership, but the information could come from a supplier or local sales representative who lacked actual knowledge of the ownership. A completed field can look more authoritative than the answer behind it.

Reliance’s Alleged Payments Followed Implant Use

Reliance Medical Systems‘ physician-owned distributorship settlement resolved allegations that its suppliers paid physicians according to referrals and terminated physicians who did not refer enough patients. Reliance agreed to pay $1 million in the 2022 resolution.

The government’s 2014 complaint announcement gives the operating detail. A neurosurgeon allegedly began using Reliance implants only after buying into Apex Medical Technologies and receiving payments. The Senate hearing described his initial investment as $5,000. Apex allegedly paid him $438,570 between May 2010 and July 2012, when he used Reliance implants in approximately 90 percent of his spinal-fusion surgeries. The government alleged that the payments also caused medically unnecessary or excessive surgery.

Kronos Spinal Technologies supplied another view of the pitch. According to the government, Reliance’s owners were recorded describing a plan to “get around” the Anti-Kickback Statute and payments sufficient to “put their kids through college” in the first month or two. The later settlement account described an alleged offer to share a surgeon’s generated profits after he demonstrated loyalty to Kronos. The proposed return followed the business the surgeon could deliver.

Two physicians brought the unnecessary-surgery allegations in a whistleblower case, and the government joined those claims.

Sanford’s Settlement Followed Colleagues’ Warnings

Sanford‘s $20.25 million hospital settlement centered on a neurosurgeon’s financial interest in implants and the warnings from his colleagues, as the Justice Department explained in its October 28, 2019 announcement. Surgeon device ownership had become a question about what hospital management knew and why it kept billing.

The Justice Department alleged that colleagues and others warned Sanford about a neurosurgeon’s kickback arrangement and repeatedly raised concerns about unnecessary procedures using devices in which he held a substantial financial interest. According to the government, Sanford kept employing him, allowed the device profits to continue and kept submitting federal healthcare claims for the surgeries, including unnecessary ones. The warnings connected the surgeon’s financial interest to the hospital’s decisions.

Two Sanford surgeons brought the whistleblower case and received $3.4 million from the settlement. Sanford ended the neurosurgeon’s employment and prohibited its physicians from profiting from devices they used there. Its corporate integrity agreement required an independent review organization.

This is why colleagues’ warnings matter alongside ownership disclosures. The disclosure shows an interest. A warning about unnecessary operations tells management what that interest may be doing to patients.

What an Insider Can See

An insider with evidence of physician-owned distributorship kickbacks may understand only part of the hospital transaction. Purchasing sees the supplier and the reason it was selected. Finance sees ownership payments. Clinical staff see the operation and the device choices. Billing sees the claim that follows.

The 2013 Asian Biomedicine review Hospital manipulations in the DRG system: a systematic scoping review separates hospital payment manipulation into corporate, clinical and coding practices. Applied to a distributorship allegation, that means reading the supplier relationship alongside the clinical choice and the resulting bill.

For purchasing staff, the telling connection may be a referral promise beside the supplier contract. For an operating-room insider, it may be a switch in implants after a surgeon’s investment, or spinal fusion at more levels than necessary. For compliance, it may be an ownership disclosure followed by repeated clinical complaints and continued hospital billing. You can talk to our experts about the part you see. You do not need every contract and claim before contacting us.

The Pattern in Other Hospital Cases

Hospital fraud allegations involving unnecessary spinal fusion can turn on how much surgery the patient needed. In the St. Joseph Tacoma spinal-surgery settlement, CHI Franciscan resolved allegations of hospital billing for surgery at more spinal levels than necessary and for unnecessary fusions.

The cardiac cases make the same point about necessity and documentation. A cath lab manager became the whistleblower in the EMH Regional and North Ohio Heart unnecessary angioplasty and stents case. The government alleged false hospital claims for stents and angioplasty despite insufficient occlusion: patients’ vessels were not blocked enough to require those procedures. At King’s Daughters, the government alleged that physicians falsified records to justify unnecessary cardiac procedures.

St. Joseph Towson‘s settlement required independent review of cardiac catheterization procedures for medical necessity. Blessing Hospital settled allegations over the facility component of procedures involving unnecessary coronary stents. Desert Regional‘s settlement concerned unnecessary cardiac loop recorders.

The seller can also shape the claim. Medtronic Spine settled allegations that its predecessor counseled hospitals to bill kyphoplasty as inpatient care instead of outpatient care. Former device-company reimbursement and sales managers brought the hospital kyphoplasty cases.

The Hospital Claim Behind the Implant

Implant kickbacks concern the financial reason for a purchase. Medically unnecessary procedures concern whether the patient needed the operation or its extent. In the Reliance and Sanford allegations, those questions met.

A claim resulting from an Anti-Kickback Statute violation is a false claim. That is why a hospital whistleblower case can reach from the implant arrangement to the claims the hospital submitted to federal health care programs. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

Why the Hospital Chose That Supplier

If you heard a surgeon’s referrals used to justify an implant purchase, you know something the supplier’s invoice cannot explain. Talk with our whistleblower experts about building your strongest device-kickback case from the purchasing decision, clinical concerns and hospital claims. We bring in whistleblower lawyers who know hospital and implant arrangements and stay with you through the case’s resolution.