SRS Newsletter
June 2013
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Ethical Issues in Physician Owned Distributorships

James W. Roach, MD
Ethics Committee Chair

James W. Roach, MD

This is a report requested by the Scoliosis Research Society (SRS) Presidential Line regarding potential ethical issues arising from physician owned distributorships. A physician owned distributorship (POD) is a business entity, typically solely owned by physicians, that purchases medical implants from manufacturers and resells them to hospitals. Some PODs are also involved in manufacturing or modifying the medical implants before resale but most are only distributing the devices. The POD business plan often describes potential savings for the purchasing hospitals because the POD seeks a discount from the manufacturer and therefore offers the hospitals a lower price.  Presumably the manufacturer would discount the implant because the POD either assures large volume purchasing or the POD has an exclusive arrangement with the hospital to provide the implants.1

PODs are found in 20 states with the majority thought to be in California and Texas. It is estimated that over 200 PODs exist, usually focusing on orthopaedic spine and total joint implants. Important legal concerns have been posed especially if the POD has an exclusive purchasing agreement with a hospital and the surgeon/investors of the POD also control implant selection by the same hospital.  These legal issues include possible physician violation of the Stark Law regarding illegal self-referral and possible hospital violation of the anti-kickback law regarding improper inducement of referrals.2, 3

While the legal considerations exist, they are beyond the scope of this discussion which will only outline the potential ethical issues for SRS members.  Even if the POD is constructed to be a proper business entity and adds value to the process of hospital implant purchasing there are still several ethical areas of concern for a practicing physician who owns a share of a POD.  In the Senate Finance Committee report dated June 2011 the authors described the ethically difficult position for a POD surgeon/investor of being “the seller, buyer, and person making the decision about what is best for the patient”.2

We will consider several of the SRS Standards of Professionalism which can be directly applicable to PODs.

SRS SOP Providing Musculoskeletal Services to Patients
Standard 1.  A spinal surgeon shall, while caring for and treating a patient, regard his or her responsibility to the patient as paramount.
Standard 5.  A spinal surgeon shall serve as the patient’s advocate for treatment needs and exercise all reasonable means to ensure that the most appropriate care is provided to the patient. 
If the POD pays the surgeon/investor based on the number of POD implants the surgeon/investor uses or if POD participation influences a surgeon to only use POD implants that are more expensive than other equally effective implants, then the surgeon/investor could be inappropriately incented to perform unnecessary surgery or unnecessarily expensive surgery.  Historic evidence suggests that this can occur.  Procedure utilization significantly increased in California in 1992 when physician owed imaging centers were developed4 and in a study, cited by the Senate Finance Committee, spinal fusion rates increased over 300% one year after surgeons formed a POD.2  Performing unnecessary surgery or unnecessarily expensive surgery would not be the best for the patient.

Standard 13.  A spinal surgeon shall disclose to the patient any conflict of interest, financial or otherwise, that may influence his or her ability to provide appropriate care.

The surgeon would violate Standard 13 is they failed to disclosure their POD involvement to the patient.

Standard 15.  A spinal surgeon shall make a reasonable effort to ensure that his or her academic institution, hospital or employer shall not enter into any contractual relationship whereby such institution pays for the right to care for patients with musculoskeletal conditions. 
If a surgeon’s POD was found illegal under the Federal Anti-kickback law that would be a violation of Standard 15.
Standard 16.  A spinal surgeon or his or her professional corporation shall not couple a marketing agreement or the provision of medical services, supplies, equipment or personnel with required referrals to that spinal surgeon or his or her professional corporation.
Standard 16 would be violated if a surgeon’s POD was successfully convicted under the Stark law.

SRS SOP Conflict of Interest Standard
Standard 2.  A spinal surgeon shall prescribe drugs, devices, and other treatments primarily on the basis of medical considerations and patient needs, regardless of any direct or indirect interests in or benefit from industry. 

            Similar to Standards 1 and 5 under Providing Musculoskeletal Care to Patients above, the COI Standard 2 would be violated if the surgeon placed personal economic benefit before the needs of the patient.

Standards 9.     A spinal surgeon shall accept no direct financial inducements from industry for utilizing a particular implant or for switching from one manufacturer’s product to another.   
Standard 10.    A spinal surgeon shall enter into consulting agreements with industry only when such arrangements are established in advance and in writing to include evidence of the following:  
• Documentation of an actual need for the service;
• Proof that the service was provided; 
• Evidence that physician reimbursement for consulting services is consistent with fair market value; and • Not based on the volume or value of business he or she generates.

 A surgeon’s business relationship with a POD should not require the use of the POD’s implants and the surgeon’s remuneration from the POD should not be determined on the surgeon’s case volume sent to through the POD.

In summary there are a number of potential ethical issues that a physician/investor may encounter if they choose to participate in a POD.

1. Steinmann J HG, Burton P, Skubic H. Surgeon Ownership in Medical Device Distribution: Economic Analysis of an Existing Model. Scientific Exhibit SE48: 2009 AAOS Annual Meeting 2009.
2. O H. Physician Owned Distributors (PODs). Senate Finance Committee 2011.
3. Bal BS BL. Physician-owned distributorships face increased scrutiny. Orhtopedics Today 2013.
4. Swedlow A, Johnson G, Smithline N, Milstein A. Increased costs and rates of use in the California workers' compensation system as a result of self-referral by physicians. The New England journal of medicine 1992; 327(21): 1502-6.

Chair: James W Roach MD Committee Members: J Abbott Byrd, MD; Richard E. McCarthy, MD; Michael J Bolesta, MD; Brian G. Smith, MD; M. Wade Shrader, MD