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New California law tightens restrictions on physician-owned distributorships

Posted: Jan-26-2012 9:45 AM ET  |   |  Comments (5)

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The California state legislature has dealt a blow to physician-owned companies (POCs), including physician-owned distributorships (PODs). In a new law that took effect January 1, California prohibited physicians from billing workers' compensation payors for medical devices manufactured or distributed by a company in which the physicians have an ownership interest.1

As we have argued in earlier blogs, PODs rely heavily on physician-investors to prescribe the products that PODs sell, in apparent violation of the Federal Anti-Kickback Statute, and possibly other state and federal statutes. As such, PODs may run the risk of federal prosecution and enforcement.

Curiously, the California law is limited to workers' compensation programs. The import of the new California law, however, is potentially much broader; if it is not acceptable for physicians to prescribe implants distributed by their own companies in the case of workers' compensation patients, then why should it be acceptable in any case? After all, a kickback is a kickback, regardless of who pays the bill.

The California law is just the latest evidence of growing concern with the POD model:

  • In June, the Senate Finance Committee requested that the Office of the Inspector General, Department of Health and Human Services (OIG) investigate PODs.2
  • Concurrent with its request to OIG, the Senate Finance Committee minority staff issued a report that comprehensively detailed its concerns with PODs. The report stated:

    "On its face [the POD model] appears to be entirely inconsistent with the fundamental tenets of healthcare compliance that have shaped the medical device industry over the last decade, and the POD structure has generated significant conflict of interest and anti-kickback concerns."3
  • In October, OIG denied a request to clear a proposed physician-owned pathology laboratory management company. In its opinion, OIG pointed out that the proposed model was not protected by a safe harbor and potentially violative of the Anti-Kickback Statute. OIG stated that the proposed company's investors had no experience in delivering the services to be offered, relied heavily on investor referrals, and would profit from those referrals despite the fact that the investors would not be rewarded directly for referrals.4

It will be interesting to see whether other states follow California's lead and enact similar-or even more restrictive-limitations on PODs. What's clear is that government entities on the state and federal level are uncomfortable with the POD model, and are intensifying their scrutiny. And that should give pause to physicians and manufacturers who are considering doing business with PODs.

  1. Bulleit TN, Trilling HR, Andonova EL, "New California law prohibits medical device physician-owned companies in workers' compensation program," Medical Device Alert, Hogan Lovells, 19 January 2012, available at
  2. "Bipartisan Letter to Inspector General Levinson," United States Senate Committee on Finance, June 9, 2011, available at
  3. "Physician Owned Distributors (PODs): An Overview of Key Issues and Potential Areas for Congressional Oversight," United States Senate Finance Committee Minority Staff, June, 2011, available at
  4. Bulleit TN, Immelt SJ, Wisor RL, Sterling MA, Kraner SA, "OIG Releases Advisory Opinion Demonstrating Continued Concern with Physician-Owned Companies," Health Alert, Hogan Lovells, 19 October 2011, available at

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