Department of Health Warning:

Physician Owned Distributors Could Violate the Anti-Kickback Statues

By Scott Lederhaus, MD, AME Board Member

The controversy surrounding the legality of Physician Owned Distributors (PODs) has been debated in the medical community for years. However, a recent warning by the U.S. Department of Health stated PODs have never been determined to be legal entities by the department’s Office of the Inspector General (OIG).

Still many proponents of PODs would have you believe that these entities are legal according to extensive legal review.

The most recent opinion by the OIG Special Fraud Alert: Physician-Owned Entities from March 26, 2013 states: “The OIG makes it clear that involvement in a POD could violate the Anti-Kickback statute even if one purpose of the remuneration is to induce referrals.” The alert goes on to state that any POD with these 4 issues raise major concerns: 1) corruption of medical judgment, 2) overutilization, 3) increase costs, 4) unfair competition.

The OIG considers certain aspects of PODs PARTICULARLY concerning, including when:

  1. The size of the investment with each physician varies with the volume or value of devices used by the physician.
  2. Distributions that are not made in proportion to ownership interest, or physician-owners pay different prices for their ownership due to expected or actual volume used by the physicians.
  3. Physician owners condition their referrals to hospitals or Ambulatory Surgical Centers (ASC) through coercion and implying they will force the hospital to use their implants or the business will be taken elsewhere.
  4. Physicians are required or forced to use the PODs implants.
  5. PODs retain the right to repurchase the physician owner’s interest if the physician is unable to use the PODs’ devices (retirement, relocation, etc.).
  6. If the PODs is a shell entity without appropriate product evaluations, maintain inventory in it’s own facility or employ personnel necessary for the operations.
  7. When the hospital or ASC requires disclosure of interest but the PODs’ physician owners fail to inform the hospital or ASC or conceal through misrepresentations, their ownership in the PODs.

The OIG has stated that it will also continue to be concerned with any physician who: 1) magnifies the number of cases, 2) if there are only a few members of a PODs which correlates physician return with physician ownership, 3) alter their practice after or shortly before being involved in a PODs.

This Fraud Alert also contains additional concerns: Hospitals and ASCs who enter into an arrangement with PODs may be at risk under the federal anti-kickback statutes. The OIG will consider if the purpose underlying the hospital or ASC decision to purchase devices from PODs is to maintain secure referrals from the PODs’ physician owners. The OIG views PODs as “inherently suspect” under the anti-kickback statute.

The most recent Fraud Alert from the OIG voices a firm stance against what it considers egregious acts by members of PODs, but also by hospitals that court physicians to their facilities for the purpose of increasing referrals. One has to conclude that because the current “legal” status of PODs are under increasing scrutiny that no PODs can be considered to be a legal entity despite maneuvering being attempted by legal counsels experienced in health care law. Those hospitals that allow PODs may find that they are also included in investigation for kickback and fraud according to this alert. Hospital risk managers and physicians need to beware of being involved in a POD as these entities are clearly now under active investigation by the OIG.

The Continuing BMP-2 Saga: Much More Frightening Than Evident

By Charles Burton, MD, President, Association for Medical Ethics

On June 17, 2013 the simultaneous release of multiple medical reports updating the continuing controversy regarding the clinical use of BMP-2 (marketed as InFuse) has resulted in concluding that it has offered patients little benefit over less costly, safer, and more readily available alternatives (1).

Missing from all of the high profile subsequent press coverage which focused attention on product safety and efficacy, has been the failure to address the importance of the ethical departures which have also been associated with this saga.

A burning question remains: “what would prompt a high-profile leading organization such as Medtronic to suddenly reverse years of previously illustrious corporate values and culture as initiated by their founder Earl Bakken, and then decide to start to “buy” the services of surgical spine care opinion leaders in the community through an initially secret marketing strategy considered unacceptable by some of Medtronic’s chief executives (2)?

The fact that this marketing effort, involving many millions of dollars, was initially very successful in turning some surgeons toward the “dark side” of medicine and incentivize them to become traveling ambassadors for BMP-2, has represented a unique departure, by a group of previously esteemed spine surgeons from the accepted ethics of medical practice in a manner previously unknown and unique in scope in the history of American medicine. Additional unfortunate, but not unexpected, consequences resulting from these payoffs has been an associated, also remarkable, era of consistently biased clinical reporting which has led to a serious erosion of the integrity of “evidence-based” medical practice in the spine care arena.

The many recent disclosures regarding the now known adverse effects of BMP-2 have not addressed the associated serious ethical failures associated with this saga. There has been no mention of the resulting ethical deviations contained in many of the clinical studies published which have been flawed (and often purposely misleading), as well as totally fabricated studies (3), and, remarkably have involved even human experimentation on vulnerable hospitalized American servicemen (in direct violation of the Nurembrg Code, the related Declaration of Helsinki, as well as the subsequent regulations as issued by the U.S. Department of Health and Human Services governing all federally funded research in the United States) (4).

The true scope of the BMP-2 Saga is frightening because it goes far beyond just considerations of safety and efficacy. This real-life experience makes it clear that multi-specialty representative organizations such as the Association for Medical Ethics in the United States must continue to serve an important role as a watchdog in the continuing need to protect the patient’s best interests.


  1. Fauber J: Reports question benefit of Medtronic’s spine surgery product. Milwaukee Wisconsin Journal Sentinel, June 17, 2013.
  2. McKenzie M, Ryle G: Grants a sales tool for implants. Sydney (Australia) Morning Herald, September 7, 2009.
  3. Kuklo TR, Anderson RC, Frisch HM, Islinger RB: Recombinant human bone morphogenic protein-2 fro grade III open segmental tibial fractures from combat injures in Iraq. J. Bone Joint Surg (Britian), 90(8): 1068-72, Aug. 2009.
  4. Burton, CV: Mengele in America: Human Experimentation and the Walter Reed Connection. Ethics in Biology, Engineering & Medicine, 2(3); 271-277, 2011.