Recent Favorable OIG Advisory Opinion Addresses Physician Ownership of Medical Device Companies

The Office of Inspector General’s (OIG) recent Advisory Opinion 25-09 is favorable towards physician investments in a medical device company but reaffirms OIG’s ongoing scrutiny of these arrangements. Although OIG has previously warned that physician-owned medical device companies are “inherently suspect” under the Federal Anti-Kickback Statute (AKS) — as stated in its 2013 Special Fraud Alert on Physician-Owned Distributorships — the new opinion reinforces that physician ownership is not prohibited. Instead, each arrangement must be examined on its own facts, and there is a compliant pathway when thoughtfully structuring and implementing such a venture.

In the opinion, OIG weighed in on the investment structure of a medical device company focused on emergency stroke treatment. The company is owned, in part, by physicians, including the creator of the device, and those physicians are in a position to order the device or recommend that a hospital purchase the device. Because the requestor of the opinion certified that the physicians’ ownership fell within a safe harbor to the AKS, OIG found that there was no violation.

While it is not surprising for an arrangement that falls squarely within a safe harbor to be protected (that is, after all, the point of a safe harbor), the advisory opinion provides some useful insight regarding such investments. As with any advisory opinion, only the requestor can rely on the findings, and it does not address all applicable federal and state laws that could apply. Regardless, it provides meaningful guidance for other stakeholders in the industry.

OIG Scrutiny of Physician-Owned Medical Device Companies Remains Active

OIG reaffirmed its “longstanding concerns” regarding medical device companies that derive revenue from medical devices ordered by physician owners in the advisory opinion.

The 2013 Special Fraud Alert identified various red flags related to physician investments, noting that such structures are “inherently suspect,” especially if they exhibit certain features, including:

• Selectively recruiting physician investors who are in a position to refer substantial business.
• Requiring investors who cease practicing in a service area to divest their ownership interest. 
• Distributing extraordinary returns on investment compared to the level of risk involved.

Echoing the 2013 Special Fraud Alert, OIG reiterated its concerns that physician ownership can create incentives to overutilize items or services, inflate costs to federal health care programs and distort clinical judgment. Accordingly, arrangements in which physician investors can influence device selection could invite close review.

Physician-Owned Device Companies Are Not Prohibited – Facts and Circumstances Matter

OIG confirmed in the advisory opinion that there would be no prohibited remuneration under the AKS based on the facts certified by the requestor. In particular, the company certified that it satisfied every element of the small entity investment safe harbor (42 C.F.R. § 1001.952(a)(2)). Among other safeguards, physician investors comprised only 35 percent of ownership (under the 40 percent threshold), received the same investment terms as other investors, were not required or pressured to make referrals to or otherwise generate business for the company, and were not loaned the capital needed to invest in the company.

Safe harbors under the AKS are voluntary, and any arrangement that does not fall within a safe harbor is evaluated on a case-by-case basis. While OIG took the opportunity to reaffirm its scrutiny in this area, it also did not prohibit such arrangements. Like any other arrangement that is not squarely within a safe harbor, an assessment of the facts and circumstances is required.

OIG stated that other similar business arrangements “could raise fraud and abuse risks under the [AKS], especially if, due to the owners’ financial relationship with the company, the physicians: (i) order or purchase — or recommend that a hospital or other provider order or purchase — their devices over competitor devices; or (ii) use their devices over other treatments that may be more clinically appropriate.” Both the device companies and the physician owners can implement various compliance safeguards to help reduce the risks associated with these concerns.

Takeaways

• Advisory Opinion 25-09 reaffirms a dual message: OIG will scrutinize physician-owned ventures closely, but compliance pathways remain open.
• Companies that proactively align their structures with a relevant safe harbor, or structure as closely as possible to one, can preserve legitimate opportunities for physician innovation and investment while reducing AKS enforcement risk.
• While physician-owned medical device companies have invited particular scrutiny, the advisory opinion provides a helpful roadmap for other health care companies offering investment opportunities to physicians.

If you have any questions, please contact Amy Joseph, Emily Brodkin, or another Orrick team member.