Industry Lawyers Take on POD Doc

On November 7, 2013, OTW published a guest feature by John Steinmann, D.O., titled, “OIG Report: The Rest of the Story.” Dr. Steinmann provided the view of a surgeon leader from the physician-owned distributor (POD) community to a Special Fraud Alert (click here to see report) put out by the Office of Inspector General (OIG) this past March.

The Alert said PODs are “inherently suspect” under the anti-kickback law due to the substantial risks of fraud and abuse.

Dr. Steinmann argued that the OIG report was a draw and showed that implant usage and re-fusions went down with PODs, “while costs were the same and fusion rates went up—in a completely unregulated model that has no standards by which participants must act.”

Since the Alert, medical device maker Reliance Medical, Inc. filed a federal lawsuit against the OIG saying the presumption that something legal is inherently suspect violates their First Amendment right to speak to physicians about joining PODs. Additionally, a number of hospitals limited their use of PODs.

OIG Report a “Body Blow”

On Friday, December 6, 2013, Tom Bulleit and Natalie Morris, Family Lawyers Cairns from the law firm of Hogan Lovells US LLP, replied to Dr. Steinmann’s feature article from the perspective of legal advisers to device companies.

Thomas Bulleit represents clients from academic medical centers and companies engaged in biomedical research and development, to large and small manufacturers of medical devices and pharmaceuticals. Natalie Morris is an associate at the firm.

Bulleit and Morris say the OIG report reviewing the prevalence and use of spinal devices supplied by PODs is a “body blow” to the arguments that have been made in support of PODs as evidenced by the pullback of POD use by some hospitals.

“Now, OIG has taken away the only argument that POD proponents ever had in their favor by demonstrating convincingly that PODs do not reduce implant cost, and do lead to increased utilization.’

Dr. Steinmann’s attempt to downplay the “significance” of the findings of the report is, they say, “understandable given that it is the latest in a string of bad news for PODs.”

No Difference in Device Costs

According to Bulleit and Morris, even Dr. Steinmann conceded that the OIG report found that PODs do not bring about costs savings. “Specifically, OIG did not find a favorable difference between the total device cost for spinal surgeries that used POD devices and those that did not.” In fact, they say that of six specific types of spinal devices examined by OIG, one device type (spinal plates), by a statistically significant degree, was more expensive when provided by PODs.

In attempting to address the findings that PODs fail to reduce costs, they note that Dr. Steinmann cited a report prepared by the American Association of Surgeon Distributors (AASD) which found that cost savings were substantial for a “select group” of five distributorships that are members of the association. The lawyers point out that AASD is a trade organization founded by Dr. Steinmann to promote PODs.

They assert that, unlike OIG’s analysis, AASD didn’t assess actual purchase prices at POD and non-POD hospitals. Instead, Bulleit and Morris say AASD simply compared existing implant contract prices to the lower contract prices that AASD member-PODs agreed to charge hospitals when given the opportunity to underbid existing contracts.

No Head-to-Head Competition

“There wasn’t head-to-head competition with other sellers, because once PODs come on the scene, purchases from other channels essentially cease…Given a chance to compete, manufacturers distributing implants through non-POD channels, with well-established infrastructure and supply channels, can easily offer a competitive price for comparable or superior products.”

In other words, perhaps PODs should declare victory and go home. They’ve accomplished their goal of forcing sellers to compete on price.

Implant Density Fallacy

The lawyers write that the OIG found that the growth in the rate of spinal surgery after hospitals began buying from PODs was three times the rate for hospitals overall, and that the rate of spinal fusions grew more than twice as fast for hospitals that used PODs compared to the overall hospital rate. “In addition, OIG reported that hospitals that purchased from PODs performed 28% more spinal surgeries than hospitals that did not purchase from PODs.”

They claim that Dr. Steinmann failed in his attempt to rebut this “powerful evidence” of increased utilization by emphasizing OIG’s finding that implant density—the number of implants used per spinal surgery—was lower in surgeries that used POD devices than surgeries not involving POD devices. The OIG report found that complex spinal fusion surgeries not involving POD implants used an average of 23 devices, while complex spinal fusion surgeries involving POD implants used an average of 16.5 devices.

Bulleit and Shaw don’t buy Dr. Steinmann assertion that this suggests that “surgeon owners, as a whole, do not make surgical implant decisions based on their financial interests.”

Numerous explanations are possible. “For example, it may be that POD implants are less sophisticated than those sold by major implant manufacturers, and therefore used in less difficult cases requiring fewer implants. Or it may be that the most complex cases requiring the most implants per procedure are carried out in large ‘teaching’ hospitals that can attract surgeons without doing business with PODs. Or it may be that minimally-invasive procedures, which use more implants, are generally not supplied through PODs.”

The POD Business Shuffle

Bulleit and Shaw say Dr. Steinmann’s main defense to “this evidence of an overwhelming increase” in utilization at POD hospitals, is to suggest that this is due to nothing more than “consolidating inventories” or “growing partnerships between hospitals and surgeons to create centers of excellence.”

In other words, they say Dr. Steinmann argues that the surgeons aren’t doing more cases, but are just moving their cases to hospitals that buy from their PODs.

“Putting aside the compliance issues raised when a hospital agrees to buy from a POD to reward a POD owner for his or her referrals, Dr. Steinmann doesn’t offer any evidence of such ‘consolidation, ’ or any evidence that would adequately explain the dramatic difference in utilization between POD and non-POD hospitals, or the fact that when hospitals begin buying from PODs, their rates of spinal surgeries increase dramatically. The more obvious explanation for this increase in utilization is that giving a physician a financial interest in the implants used on his or her own patients will incentivize the doctor to perform more surgeries.”

A POD by Any Other Name

The lawyers also take on Dr. Steinmann over his attempt to differentiate PODs that are members of the AASD, or “ePODs” from PODs in general and arguing that the ePOD standards address the “valid concerns” raised by the OIG.

“Nothing in the OIG Special Fraud Alert or report lends them any credence. In fact, OIG’s Special Fraud Alert specifically dismisses several of the AASD’s standards, such as the standard that ‘ownership is determined by each surgeon’s investment interest’ and ‘any profits are distributed proportionate to ownership interests, ’ when it notes that adopting them would not serve as a blueprint for a ‘lawful POD.’ As long as physician owners have a financial interest in the implants they use in their own patients, the risks to patients and federal healthcare program remain.”

Systems of Conflict

They also dispute Dr. Steinmann’s assertion that the fee-for-service model creates potential conflicts of interest. Bulleit and Shaw argue that conflicts of interest created by PODs are fundamentally different than the conflicts created by a fee-for-service system.

As a former president of the American Association of Neurological Surgeons, Dr. James Bean, explains, the difference is that “PODs invite abuse that cannot be regulated or prevented. The POD surgeon may exert undue influence over the purchasing hospital, by either an offer to increase surgical procedures at the hospital if it agrees to a POD contract, or a threat to shift practice away from the hospital if it does not. The hospital may enter an exclusive agreement with the POD, irrespective of the quality of the device, without examining competing vendor offers. The hospital may overlook quality monitoring of the surgeon’s practice, particularly surgical indications, since quality is generally judged by lack of complications, not surgical necessity or choice of procedure.”

“Not only does this conflict of interest result in increased costs and risks to patients, but can only tarnish the reputations of physicians, as professionals who act in the best interest of their patients, ” added Dr. Bean.

The Myth of Market Failure

The lawyers chide Dr. Steinmann for making an apples-to-oranges comparison when he says there is a “clear market failure” in the U.S. because implants cost more here than in Europe. They say his statement glosses over the dramatic differences among U.S. and European health care systems, and ignores the fact that market competition in the U.S. has indisputably driven down prices of spinal and total joint implants.

For example, from 2008 to 2013, Bulleit and Shaw note the average sales price of pedicle screws fell by almost 20%. Additionally, average sales prices of artificial hips and knees fell dramatically from 2007 to 2011. Over this four-year period, the average sales price of hip replacements fell by almost 20% when adjusted for inflation, while the average sales price of knee replacements fell by 13% over this time period, when adjusted for inflation.

PODs Are Not the Answer

“Dr. Steinmann makes the admirable suggestion that healthcare providers ‘step up and ensure the American public obtains the highest quality healthcare for the lowest cost, surely a goal everyone could embrace. However, OIG’s report makes clear that PODs are not the way to this end. PODs will not result in cost-savings. In fact, given that they result in increased utilization, they are likely to increase costs to federal healthcare programs.  Additionally, healthcare providers, manufactures, and hospitals and ASCs (ambulatory surgical centers) who deal with PODs do so at substantial compliance risk.”

Bulleit and Morris conclude that OIG’s report “destroys the credibility of any justifications of the POD business model.”