Feds probe surgeon-distributor as pressure on PODs continues

(This article has been updated with a correction.)

The Justice Department is 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 government scrutiny into the impact of PODs on patient care and costs, which has led some hospitals to back away from dealing with these entities.

Court records show that the Justice Department is conducting a False Claims Act investigation into the dealings of Dr. Aria Sabit, a neurosurgeon who has practiced in California and Michigan. An application for a civil investigative demand, filed last month in federal court in Detroit, alleges that Sabit concealed profits he made as an investor in a POD. It also alleges that financial incentives associated with the POD may have motivated him to perform unnecessary surgeries.

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, based in Ventura, Calif., and operated by Reliance Medical Systems. Sabit also is resisting demands for patient records detailing 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. The alert caused some health systems, such as Dallas-based Baylor Scott & White Health and Nashville-based HCA, 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 devicemakers, whose business has been hurt by PODs, say the physician-owned entities create a conflict of interest because the doctors who implant the devices stand to profit when hospitals buy the equipment.

PODs market themselves as lower-cost distributors to hospitals of traditional spine devices such as screws, rods and plates. In recent years, the companies have cut into market shares typically held by traditional device manufacturers. It is estimated that PODs accounted for 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 their spinal surgery rates 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.

The allegations about Sabit's conduct were revealed in 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,” according to a March 5 filing. “The government has evidence that Dr. Sabit's economic relationship with Reliance may have caused him to perform unnecessary surgeries using Reliance devices.”

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

In court records, federal investigators said 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 that the government was trying to “tarnish his personal and professional reputation.” He insisted he was never paid by Reliance to use specific Reliance equipment.

PODs supplied devices for 19% of spinal fusion surgeries for Medicare beneficiaries in 2011. Unlike traditional spine product manufacturers, PODs tend to sell only commodity spine products such as pedicle screws and cervical plates, rather than new or innovative products.

Hospital executives and devicemakers said federal scrutiny over the past year into POD spine device distribution has chilled hospital purchases from these companies. But it hasn't curtailed the sector as a whole. However, that may soon change. HCA's new 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,” said Matt Miksic, managing director and senior research analyst with Piper Jaffray. “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. Alexis Lukianov, chairman and CEO of San Diego-based NuVasive, recently told investors that the prevalence of PODs in the U.S. spine market is declining, but “what we haven't seen … is surgeons immediately jumping away from PODs.”

David Demski, president and chief operating officer of Globus Medical, another spine-device maker, told investors last month 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.”

A spokesman for the American Association of Surgeon Distributors said that while some hospitals may cut ties with PODs, “these same hospitals may reconsider the accredited POD model as an effective cost savings measure.”

(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.)

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