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Justice Department investigating doc-owned device distributorship


By Jaimy Lee and Joe Carlson
Posted: March 11, 2014 - 1:15 pm ET
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(This article has been updated with a correction.)

Federal investigators are pursuing what may be the first enforcement action against a surgeon involved in a controversial type of medical device firm known as a physician-owned distributorship. The probe follows scrutiny by the government into the impact of these PODs on patient care and costs.

Court records show that the Justice Department is conducting a False Claims Act investigation into the practices of Dr. Aria Sabit, a neurosurgeon who has practiced in California and Michigan. An application for a civil investigative demand, filed Feb. 7 in U.S. District Court in Detroit, alleges that Sabit concealed the profits he made as an investor in the POD. It also alleges that financial incentives arising from the POD may have caused him to perform unnecessary surgeries.

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Sabit is fighting a federal subpoena for records showing how much he was paid by a small spinal-surgery device firm called Apex Medical Technologies, which is based in Ventura, Calif., and operated by a company called Reliance Medical Systems. Sabit is also resisting government efforts for patient files that could show what equipment was used on each patient, and whether the procedures were needed.

Last year, HHS' Office of the Inspector General published a national alert warning doctors and hospitals about the patient safety dangers and fraud risks of buying surgical products from PODs, which are medical device companies that generally have surgeons as owners or investors. The alert caused large integrated health systems such as Baylor Scott & White Health and HCA to revise their policies to phase out purchasing supplies from PODs.

In a typical POD arrangement, physicians own or have a financial interest in the POD. The hospital where those doctors have staff privileges buys equipment from the POD and provides it to the doctors to perform procedures. The government's concern is that this creates a financial incentive for physician owners of PODs to perform more procedures. Traditional medical devicemakers, whose business has been hurt by PODs, say the physician-owned entities are involved in a clear conflict of interest, because the doctors who implant the devices stand to profit personally when hospitals buy equipment.

PODs market themselves as lower-cost distributors of traditional spine devices such as screws, rods and plates to hospitals. In recent years, the companies have cut into the market share held by traditional medical device manufacturers. It's estimated that PODs generated about 15% of the domestic spine device market at their peak in 2011 and 2012.

But the report and fraud alert issued by the OIG found that spinal surgeries using devices sold by PODs did not have lower costs. It also found that hospitals buying devices from PODs reported that rates of spinal surgeries grew faster than at hospitals that did not buy from PODs. “Taken together, these factors may increase the cost of spinal surgery to Medicare over time,” the report concluded.

Spinal surgeries for Medicare patients cost on average $21,613 in 2012. Nearly 179,000 such procedures were performed that year.

The allegations about Sabit's conduct, which raise many of the same concerns addressed in the OIG report, were revealed in the context of legal arguments over whether the Justice Department has the right to force Sabit to produce records that he says could be used against him in a future criminal case.

“The government has learned that Dr. Sabit had an undisclosed financial relationship with a spinal implant distributor during a period that the Medical Board of California has accused him of gross negligence, repeated negligent acts and dishonest and corrupt acts,” a March 5 filing (PDF) says. “The government has evidence that Dr. Sabit's economic relationship with Reliance may have caused him to perform unnecessary surgeries using Reliance devices.”

Reliance Medical Systems operated several physician-owned surgical supply companies, including Apex, Justice Department officials say. Reliance Medical did not respond to requests for comment.

The federal investigators in court records say Apex paid Sabit $30,000 a month after he made a $5,000 investment to buy a stake in the company. Investigators also produced data showing that Sabit's use of Apex devices, including spinal-surgery screws, spiked while he was being paid by Apex.

Sabit replied in court documents (PDF) that government lawyers are trying to “tarnish his personal and professional reputation to the point that it is irreparable.” He insists that he was never paid by Reliance to use specific Reliance equipment. He said he has openly acknowledged his financial relationship with the company. Jonathan Frank, Sabit's lawyer, said in an interview that they are waiting for a decision from the judge about whether the case will proceed.

PODs first gained prominence several years ago. PODs supplied devices for 19% of spinal fusion surgeries, one of the most common spine procedures, for Medicare beneficiaries in 2011. Unlike the traditional manufacturers of spine products, which market both commodity devices and new, more innovative technologies, PODs tend to sell only commodity spine products such as pedicle screws and cervical plates.

“Those are the kinds of products that the surgeons could make the argument that these products are interchangeable,” said Matt Miksic, managing director and senior research analyst at Piper Jaffray.

Hospital executives and devicemakers say the federal scrutiny over the last year into physician-owned distributors of spine devices and the surgeons who choose to implant these products is chilling hospital purchases from these companies. But it hasn't curtailed the sector as a whole. Part of that may be attributed to the timing of the new policies. HCA's policy, which will halt purchases of implantable devices, biologics and drugs from PODs, goes into effect June 30.

“Since the OIG fraud alert went out last March, we've seen a stalling and a slow reversal of activity around PODs,” Miksic said. “Some hospital groups are getting more outspoken about their policies around doing business with PODs.”

That reversal hasn't yet led to increases in market share for traditional manufacturers of spine devices. Alex Lukianov, chairman and CEO of San Diego-based Nuvasive, last week told investors that the prevalence of PODs in the U.S. spine market is declining, but he noted that the decline wasn't enough to materially help his company's domestic growth this year. “What we haven't seen… is surgeons immediately jumping away from PODs,” Lukianov said during an investor call. “And whatever has happened has been pretty minor in terms of impact.”

Dave Demski, president and COO of Globus Medical, another spine device maker, told investors in late February that the OIG's actions “are beginning to have some impact as we have recently been notified of several hospital systems who have adopted a no-POD policy.”

For hospitals, the appeal of PODs has been the pricing. By stripping out costs associated with paying sales representatives and other fees and acquiring the devices from lower-cost manufacturers, PODs say they offer lower prices than what traditional manufacturers charge. It's unclear whether declines in utilization of PODs will lead to higher prices for these devices for healthcare providers, analysts say.

“Hospitals are price sensitive all the time,” said Joanne Wuensch, a research analyst for BMO Capital Markets. “I'm not sure if this will accelerate pricing pressure, but it will be a continuation of the discussion (hospitals and manufacturers have) been having.”

While federal scrutiny and new hospital policies are driving the shift away from PODs, the market is also responding to the change. The domestic spine market is likely to consolidate as a result of decreased reliance on PODs, Wuensch said.

Biomet, a Warsaw, Ind.-based manufacturer of musculoskeletal and biotechnology products, late last year acquired Lanx, a small spine device manufacturer, for $150.8 million.

Similar deals may occur across the spine market, Wuensch added.

(This article has been updated to indicate that a Justice Department application to enforce a civil investigative demand has been filed rather than a civil lawsuit.)

Follow Jaimy Lee on Twitter: @MHjlee

Follow Joe Carlson on Twitter: @MHJCarlson


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