Spotlight on PODs

Federal regulators are sounding the alarm over physician-owned distributorships of orthopedic devices, which the regulators worry may be violating the nation's kickback laws and driving up costs.

HHS' inspector general's office published long-awaited guidelines last week that will help hospitals determine when it might be illegal to buy orthopedic devices from physician-owned distributorships (PODs). The guidance could lead to a swift downturn in business for the organizations, which have proliferated in the wake of greater scrutiny of direct payments to surgeons by implantable-device makers.

PODs are most active in selling devices for spinal, hip and knee replacement surgeries, which generated $13.6 billion in U.S. sales in 2011, according to research firm iData Research. Critics of the traditional orthopedic sales model say those figures are larded with outsized commissions and fees that may add as much as 40% to the cost of each device.

POD proponents say they offer generic pricing and smaller profits, which drive down costs. But the Senate Finance Committee and HHS' inspector general's office say the POD model includes an inherent conflict of interest, since the doctors who implant the devices also reap profits from their sale.

The inspector general's office “views PODs as inherently suspect under the anti-kickback statute,” officials in HHS' watchdog's office wrote in a special fraud alert last week. It detailed eight specific warning signs of problematic organizations.

Anecdotal accounts from government and industry sources say PODs have experienced rapid growth in the past decade. They may now account for as much as 25% of all sales of orthopedic devices.

A physician-owned distributorship sells surgical devices directly to hospitals—often the same hospitals where the PODs' doctor-owners practice and frequently get to choose which device brands to use. HHS' inspector general said the arrangements become troublesome when physicians use their influence to try to force hospitals to buy products from their PODs, or when surgeons threaten to refer patients to other hospitals that will buy from a distributorship.

Joseph Truhe, a senior vice president and general counsel for a POD based in Nashville called PDP Holdings, said he personally welcomes the new rules. He suggested unethical practices in the industry may have been caused by the absence of clear guidance.

“Part of the context of the special fraud alert is the fact that there are a lot of people doing the bad things described in there,” he said. “When we show up, we have to overcome that. It's uphill. It's a slow process of convincing them, one hospital at a time.”

PODs make money by offering better deals on devices by removing the huge sales, distribution and promotional costs charged to hospitals. They also use what Truhe called generic versions of basic rods, plates, surgical screws and other off-patent medical equipment that is adequate for at least half of all such procedures.

Andrew Van Haute, associate general counsel for the devicemaker interest group Advanced Medical Technology Association in Washington, disputed the notion of the “generic device.”

“That's not really a term of art that is used in our industry. There is no such a thing as a generic device,” he said. “For our members, this is not a price issue, and it is not a competition issue. ... It is much more an issue of legality and ethics.”

Tom Bulleit Jr., a partner with law firm Hogan Lovells in Washington and a representative for the lobbying group Quality Implant Coalition, said the group documented a fourfold increase in the number of spinal refusion procedures at one unidentified hospital after doctors who practiced there invested in a physician-owned distributorship that sold refusion equipment.

Bulleit said one of the main drivers of the POD market is that orthopedic surgeons tend to have a great deal of influence over which brands of implants hospitals buy. The new fraud alert may change that dynamic.

“I have to believe that the pace of new PODs coming into existence will slow down, and that many hospitals that have been willing to deal with PODs will be rethinking that,” he said.