In an increasingly competitive environment, many physicians seek creative ways to grow their personal brands, their practices, and their revenue. One common vehicle for achieving these goals involves physician-owned entities that derive revenue from selling, or arranging for the sale of, medical devices that the physician-owners order and use in procedures they perform at hospitals.
Although the U.S. Department of Health & Human Services, Office of Inspector General (OIG) has long-standing concerns about such arrangements, OIG recently issued a favorable advisory opinion (25-09) regarding a proposed arrangement (Arrangement) involving physicians with an ownership interest in a medical device company (Company). OIG determined that while the proposed Arrangement implicated the Federal Anti-Kickback Statute (AKS), it would not impose administrative sanctions because the Arrangement was protected by the small entity investment safe harbor.
Company develops, manufactures, and sells medical devices for emergency stroke treatment. Physicians, including the device creator, own a portion of the Company. These physician -owners may receive profit distributions, order or purchase Company’s devices, or be in a position to recommend the ordering or purchasing of the same, which may be reimbursable by the Federal health care programs. OIG determined that the small entity investment safe harbor applied here because of the Company’s certifications that:
- Physician-owners comprise approximately 35% of Company’s ownership and no other owners are in a position to generate business for Company;
- No more than 40% of gross revenue related to the furnishing of health care items and services in the previous fiscal year or 12-month period came from investor-generated referrals or business;
- Passive physician-owners receive or will receive the same investment terms offered to other passive investors. Passive investors are not required to generate business for Company as a condition of remaining an investor;
- Investment terms are not related to the previous or expected volume of referrals, items or services furnished, or amount of business otherwise generated from that investor to Company;
- Neither Company nor its investors have loaned or will loan funds to an investor capable of generating business for Company if any part of that loan is used to obtain the investment interest;
- Profit distributions will be directly proportional to each investor’s capital contribution, including the fair market value of any pre-operational services rendered; and
- The devices are not marketed or furnished differently to passive investors versus non-investors.
OIG also warned that business arrangements involving physician-owned entities that do not meet all conditions of the small entity investment safe harbor could raise concerns, especially if the physicians order, purchase, or recommend their devices over competitor devices OR use their devices over other more clinically appropriate treatments.
Should you have any questions regarding the above or wish to have a proposed arrangement evaluated for compliance with applicable laws, please contact the authors, the Garfunkel Wild attorney with whom you regularly work, or contact us at [email protected].