By Joyce Frieden
News Editor, MedPage Today

"While these arrangements are not always problematic, we are seeing more and more of these physician-salespeople using the very devices they sell in the surgeries and procedures they perform," Senate Finance Committee chairman Orrin Hatch (R-Utah), said at a hearing on PODs last month. "Many critics have argued -- with significant evidence to support their case -- that this practice creates a financial incentive for these physicians to recommend and perform more and more unnecessary surgeries."

PODs take varying forms in terms of whether physician-investors practice in the hospitals to which they distribute medical devices, whether they only distribute devices or also manufacture them, and which services they offer along with the purchase of their devices, according to an October 2013 report from the Office of Inspector General (OIG) at the Department of Health and Human Services.

"PODs assert that they supply spinal devices at a lower cost than companies not owned by physicians," the report noted. "They claim to reduce costs to hospitals by lessening the need for sales representatives, procuring inventory from smaller manufacturers, and increasing competition in the market for devices."

Hatch noted that in March 2013, the OIG issued a fraud alert on PODs, calling them "inherently suspect" under federal anti-kickback laws.

"Later that year, the Inspector General reported that the number of spinal surgeries in hospitals that purchase implantable devices from PODs grows at a faster rate compared to other hospitals," he said, referring to the October 2013 report. "Most notably, this same report found that physicians with investments in PODs perform, on average, 20% more surgeries than their counterparts who don't have these kinds of financial relationships. Needless to say, these findings confirmed much of my skepticism about PODs."

Scott Lederhaus, MD, president of the Association for Medical Ethics in Monarch Beach, Calif., agreed. He noted that according to federal law, physician-owned entities can only be 40% owned by physicians and only have 40% of their income come from physicians, which he said raises legality issues for PODs, which in some cases are 100% physician-owned and make 100% of their money from doctors.

Lederhaus, who testified at the hearing, disputed the idea that PODs could be cost-saving; he cited the case of one single spinal surgeon utilizing PODs who put in $4.6 million worth of implants in one year, while Lederhaus and his partners implanted $1.3 million worth of devices during the same period. "How can you talk about cost savings when you have that going on?" he said in a phone interview.

John Steinmann, DO, chairman of the board of the American Association of Surgical Distributors, outlined some of the problems with the current system. "First, when ordering medical devices, surgeons bear no financial burden of their decision, and hence the choice of implant is most often based on [the sales rep] relationship or brand loyalty, never on value," he testified.

"There's no incentive for surgeons to create or support a competitive environment that could better control price," he said. "Second, it misses an opportunity ... to create competition or [to] purchase in volume."

However, said Steinmann, an orthopedic surgeon in Redlands, Calif., there is a way to structure distributorships that would be helpful to all concerned. He pointed out in his written testimony that under the current system, known as commission distribution, manufacturers acquire and hold a full inventory and provide product one at a time in response to surgeon's request.

"Then, manufacturers hire well-compensated sales and marketing staff to ensure that surgeons continue to request their product. This process, where we buy one item at a time, yokes the manufacturer with the inventory costs, and the sales and marketing costs can double the price we have to pay."

"We must move from this highly inefficient commission distribution system to a stocking distribution system where surgeons and hospitals prospectively derive consensus on product designs and features, identify competitive manufacturers, and create an environment that rewards highest value," he told the committee, noting that ownership of such a distributorship could rest with either the surgeons or the hospital, depending on the circumstance.

"We have proven that this model can work in a manner that protects patients and can result in savings in excess of 35%," Steinmann said. "The distributorship we developed 8 years ago has serviced four hospitals, and the main hospital has documented $8 million in savings, all in a manner that is fully transparent to patients, colleagues, hospitals, and the government, and with no increase in surgeries performed. That's nearly $250,000 in savings per surgeon per year."

Steinmann acknowledged that the conflicts of interest associated with surgeon ownership and distribution "are a serious and valid concern" but added that "We've proven these concerns can be countered and patients protected ... it would be a shame for the country's leadership not to endorse ... any model that has been proven to effectively produce these goals."

But Lederhaus wasn't buying it. "I am not sure exactly how he is referring that to any POD model that would make any difference to how PODs function," he said in an email.

Healthcare systems have responded to the POD model in various ways. Suzie Draper, vice president of business ethics and compliance at Intermountain Healthcare in Salt Lake City, Utah, said in written testimony that her organization "will not enter into any agreement to purchase from a [physician-owned entity] any item or service other than professional medical services personally furnished by the physician owner or other health professional employed by the physician-owned entity," with only limited exceptions.

Intermountain's policy has affected the local medical device market, with some physician-owned companies deciding to have their physician owners divest, Draper said.

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