Physician-Owned Distributorships: Why Regulators Scrutinize Them
A physician owned distributorship, often called a POD, is a company that sells or arranges the sale of medical devices, such as orthopedic implants or spinal hardware, and is owned in part by physicians who use or order those products. Orthopedic and spine surgeons are among the physicians most often approached about POD investments. The pitch can sound appealing: surgeons already choose implants, so why not share in the distribution business? Federal regulators, however, have repeatedly warned that these arrangements carry significant legal risk.
This article explains, in general terms, what PODs are, why the Office of Inspector General and others scrutinize them, and the questions surgeons commonly raise with healthcare counsel before getting involved. Laws vary by state, and any specific arrangement should be reviewed by an attorney licensed in your state with healthcare regulatory experience.
Key takeaways
A POD is a device distribution or manufacturing company partly owned by physicians who order or use its products.
The HHS Office of Inspector General issued a Special Fraud Alert in March 2013 stating that PODs are inherently suspect under the federal Anti-Kickback Statute.
Risk depends on how the POD is structured and operated, not just on its legal form.
Many hospitals have policies on POD products and physician ownership disclosure.
Surgeons approached about a POD should have the arrangement reviewed by experienced healthcare counsel before investing or using its products.
What is a physician owned distributorship?
PODs take several forms. Some act as distributors that buy devices from manufacturers and resell them to hospitals or surgery centers. Others hold the rights to private-label products manufactured by a third party. Some function more like sales agencies paid commissions by manufacturers. What they share is physician ownership combined with physician influence over which products are purchased.
Where PODs show up in orthopedics
PODs have been most commonly associated with spinal implants, but they have also appeared in joint replacement, trauma hardware, and biologics. Orthopedic surgeons are frequent targets because implant selection is often driven by surgeon preference.
Why the model spread
Supporters of PODs have argued that physician ownership can bring clinical insight to device distribution and pressure pricing. Critics, including federal regulators, have focused on the financial incentive that ownership creates when the same physician selects the product.
How surgeons are usually approached
Approaches often come from a colleague, a former device representative, or a company recruiting surgeons in a particular region. Offers may describe the investment as low-cost or low-risk and emphasize distributions to physician owners.
Why regulators scrutinize PODs
The Anti-Kickback Statute
The federal Anti-Kickback Statute generally makes it a crime to knowingly and willfully offer, pay, solicit, or receive anything of value to induce or reward referrals of items or services paid for by federal healthcare programs. When a surgeon earns returns from a company whose products the surgeon orders for Medicare or Medicaid patients, regulators ask whether those returns are effectively payments for referrals.
The 2013 Special Fraud Alert
On March 26, 2013, the OIG issued a Special Fraud Alert on physician-owned entities. It stated that the OIG views PODs as inherently suspect under the Anti-Kickback Statute and described characteristics that raise particular concern, such as:
Selecting or retaining investors based on their ability to generate business
Physician owners who are a large share of the entity's customers
Returns that are disproportionately large compared with the risk involved
Limited operational activity beyond the physician owners' own cases
Physician owners who change product choices after investing
The alert also noted that disclosure to patients does not, by itself, solve the legal concerns.
Other federal attention
The OIG has also published reports examining PODs in spinal surgery, and congressional committees have reviewed the topic. The federal civil False Claims Act has been used in cases involving kickback-tainted claims, and the physician self-referral law may also be relevant to some arrangements.
Open Payments reporting
Under the federal Open Payments program, certain manufacturers and group purchasing organizations must report physician ownership and investment interests. Depending on structure, some PODs may have reporting obligations, which makes physician ownership more visible.
Hospital and surgery center policies
Hospitals and ambulatory surgery centers carry their own exposure when they purchase from PODs. As a result, many have adopted policies that:
Require physicians to disclose ownership in device companies
Restrict or prohibit purchasing from PODs
Require value analysis committee review before new products are added
Ask vendors to certify their ownership structure
Surgeons who hold POD interests may find that facilities where they operate will not stock those products or will require additional disclosures.
Structure matters
Not every physician investment in a device company raises the same concerns. Factors that healthcare attorneys commonly examine include:
Ownership and customers
Whether the company sells broadly to many purchasers or depends primarily on its owners' cases.
Investment terms
How investors were selected, whether returns relate to capital invested and risk, and whether ownership is tied to referral volume.
Real business function
Whether the company performs genuine distribution, manufacturing, or regulatory functions or simply sits between manufacturer and hospital.
Safe harbors
Whether any Anti-Kickback Statute safe harbor, such as the small entity investment safe harbor, could apply. Safe harbors have strict requirements, and many PODs do not fit within them.
Related considerations for orthopedic groups
PODs are one part of a broader set of questions about ancillary and investment arrangements. Many orthopedic groups also evaluate imaging, physical therapy, and surgery center ownership, which have their own rules. Our article on orthopedic practice management discusses ancillary services from an operational perspective.
Governing documents also matter. Partnership agreements often address whether owners may hold outside interests and how conflicts are disclosed. See our guide to partnership lawyers for orthopedic surgeons and our overview of the best business entity for orthopedic surgeons.
Questions to ask healthcare counsel
If you are approached about a POD, questions to bring to an attorney licensed in your state include:
How does the OIG Special Fraud Alert apply to this specific arrangement?
Does any safe harbor apply, and does the structure meet every requirement?
Who are the other investors, and how were they selected?
What share of sales come from physician owners' cases?
What reporting or disclosure obligations would apply?
What do the hospitals and surgery centers where I operate require?
Do state laws add any restrictions?
Frequently asked questions
What is a physician owned distributorship?
A POD is a company that sells or arranges the sale of medical devices and is partly owned by physicians who order or use its products.
Are PODs illegal?
PODs are not automatically illegal, but the OIG has stated that it views them as inherently suspect under the Anti-Kickback Statute. Legality depends on the specific facts and structure.
Why are orthopedic and spine surgeons targeted for PODs?
Implant selection is often driven by surgeon preference, so physicians in these specialties have significant influence over device purchasing.
Does disclosing POD ownership to patients solve the problem?
According to the OIG's 2013 Special Fraud Alert, disclosure alone does not address the legal concerns.
Can hospitals refuse to buy from PODs?
Yes. Many hospitals and surgery centers have policies that restrict POD purchases or require ownership disclosure.
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Request an introduction to an independent business attorney who works with orthopedic practices. Learn more about business and legal planning for orthopedic surgeons. Call or text (972) 616-4581, or contact us. The form goes to [email protected].
This article is general information, not legal advice. PPP is an introduction service and is not a law firm. Please read our disclaimer.
