Warning Over Doctor-Run Groups


A federal agency issued a special fraud alert about physician-owned distributorships—commercial entities run by doctors that have proliferated in the fields of orthopedic and spine surgery—calling them “inherently suspect” and warning they “pose dangers to patient safety.”

The alert, from the Department of Health and Human Services’ Office of Inspector General, comes as the Justice Department is pushing ahead with an investigation of physician-owned distributorships, or PODs, according to people familiar with the matter. The probe is centered on California and Utah, two of the states where PODs have become widespread, these people say.

Distributorships act as intermediaries between medical-device makers and hospitals: In exchange for marketing and stocking devices, they get a cut of each sale. When surgeons own the distributorship, that commission goes into their pockets.

Since surgeons often dictate to their hospitals which devices to buy, surgeons involved in PODs can effectively steer business to themselves, according to surgeons and hospitals.

The Office of Inspector General and the Justice Department began to take a closer look at PODs in 2011 after The Wall Street Journal published articles about surgeons involved in such arrangements, according to people familiar with the matter.

In Tuesday’s fraud alert, the Office of Inspector General said PODs produced “substantial fraud and abuse risk” and were unlikely to pass muster under the federal Anti-Kickback Statute. “The financial incentives that PODs offer to their physician-owners may induce the physicians both to perform more procedures (or more expensive procedures) than are medically necessary and to use the devices the PODs sell in lieu of other, potentially more clinically appropriate, devices,” the agency said.

The strongly worded alert is likely to cause hospitals to reassess whether to continue doing business with PODs. Already, a number of hospitals across the country have implemented policies restricting the purchase of medical devices from physician-owned entities. They include HCA Corp., the big for-profit hospital chain; Providence Health & Services, a not-for-profit system with hospitals in California, Oregon, Washington, Montana and Alaska; Tomball Regional Medical Center in Tomball, Texas; and Martin Memorial Health Systems in Stuart, Fla.

Proponents of PODs say they save the U.S. health-care system money because they sell their products to hospitals for less than the big device makers.

One doctor the Journal wrote about, Portland neurosurgeon Vishal James Makker, worked with a POD that paid its surgeon members as much as $500,000 a year to use its products.

Dr. Makker, who had a pattern of performing multiple spine surgeries on the same patients, surrendered his Oregon medical license in October after the state’s medical board found that he had engaged in “unprofessional or dishonorable conduct” and in “repeated negligence in the practice of medicine.” Dr. Makker had denied that was the case, according to the medical board, but agreed to permanently surrender his Oregon license and never to reapply for it.

Dr. Makker told The Wall Street Journal in 2011 that all the spinal surgeries he performed were medically necessary. He couldn’t be reached for comment Tuesday. An attorney who previously represented Dr. Makker, Michael Hoffman, couldn’t be reached.

Sen. Orrin Hatch (R., Utah), who had asked the Office of Inspector General to review the legality of PODs, applauded the agency’s action. “Moving forward, I will continue to scrutinize these high-risk structures,” he said. “Our patients and American taxpayers deserve nothing less.” Sen. Hatch is the top Republican on the Senate Finance Committee, which exercises oversight of Medicare, the federal health program for the elderly.

As part of its concurrent investigation, the Justice Department has served civil investigative demands on a number of surgeons involved in PODs in California. With more than 40 surgeon-owned distributorships active there, California is the epicenter of the phenomenon.

“They’re all over the place,” said Scott Lederhaus, a neurosurgeon in Pomona, Calif., and an advisory board member of the Association for Medical Ethics. “It’s difficult to stay pure and not be influenced by these people who are offering you a lot of money to use their products,” he said.

Dr. Lederhaus said he routinely sees POD arrangements alter surgeons’ behavior. “The guys who are egregious may do a two-level lumbar fusion for a herniated disk instead of just removing the disk fragment” because of the extra money they stand to gain by implanting more rods and screws in the patient’s spine, he said.

Write to John Carreyrou at john.carreyrou@wsj.com