Investment Interest or Kickback? AdvaMed Asks OIG to Confirm that Physician Investment in Device Companies Is Suspect Where Physician's Referrals Are a Major Revenue Generator for the Device Company

Article

October 19, 2006

By letter dated September 6, 2006 the Advanced Medical Technology Association (“AdvaMed”) requested guidance from the Department of Health and Human Services, Office of the Inspector General (“the OIG”) relating to physician investments in medical device companies. AdvaMed is seeking confirmation that reasoning set forth in a 17 year-old OIG Special Fraud Alert, as well as subsequent Advisory Opinions, means that physician investment in a device company is inherently suspect when the physician referrals are such that the physician is a “major generator” of revenue for the device company.

AdvaMed’s letter notes “an important recent development” in the industry is the emergence of medical device companies in which physicians have an equity ownership interest and generate a substantial portion of the companies’ revenues. The typical example cited by AdvaMed involves instances where physicians with equity interests generate more than 40 percent of a device company’s revenues by ordering devices sold and/or manufactured by the company. AdvaMed is concerned that such arrangements may be inconsistent with the anti-kickback statute.

AdvaMed asked the OIG to confirm that the 1989 Special Fraud Alert, which was published in the Federal Register Dec. 19, 1994 (59 Fed. Reg. 65373)1/ and other guidance on physician investment applies to medical device manufacturers and distributors. According to the 1994 Alert, a joint venture is suspect when physicians are both investors in the joint venture and also in a position to refer to the joint venture. Such arrangements will be subjected to “special scrutiny” by OIG, including: the manner in which investors are selected and retained, the business structure of the venture, and the financing and profit distributions of the venture. In particular, the OIG expressed concern that ventures may use profit distribution to disguise payments to the investing physicians for their referrals of patients or business to the joint venture.

Based on policy considerations underlying the anti-kickback statue and OIG’s statements, AdvaMed states in its letter that it is reasonable to assume that OIG’s guidance on physician joint ventures applies to physician investments in device and distribution companies. However, because OIG never has expressly stated that principle, AdvaMed requests that OIG confirm publicly that its guidance regarding physician joint ventures applies to physician investment in device and distribution companies as well. If you have any questions regarding this alert, please contact the Gibbons attorneys listed below.

Bruce A. Levy

(973) 596-4841

blevy@gibbonslaw.com

Lawrence S. Lustberg

(973) 596-4731

llustberg@gibbonslaw.com



1/ The OIG’s 1994 Special Fraud Alert may be found at the following link:http://oig.hhs.gov/fraud/docs/alertsandbulletins/121994.html