Corporate Compliance

Prohibitions on physician ownership in a medical device company

Compliance Monitor, September 9, 2005

Q: Is there any prohibition on physician ownership in a medical device company (not a durable medical equipment company or DME), whereby devices are sold to a hospital? The case involves a physician providing services to a hospital. The doctor gets paid only for her professional service. She has no say as to whether the hospital orders from her device company, but if the hospital does order from the company, the doctor uses the device in her surgery.

A: There are a lot of these questionable deals circulating these days, including some arrangements featuring pseudo device distributors attempting to use doctors with high referral power to get hospitals to buy their product. Structure any arrangement involving doctors very carefully to avoid anti-kickback and Stark Law violations, advises Michael Manthei, an attorney with Holland & Knight in Boston.

Possible violations:

Anti-kickback implications: Your risks depend on the deal and its discount structure. Typically, device companies offer tiered-discounts and market-share discounts to purchasers to hospitals or group purchasing organizations (GPO).

Stark implications: If the doctor is performing inpatient and outpatient services or referring patients, there are still compliance risks, even if the thouth the company is not a DME and the device is not a designated health service. "So the compensation arrangement would raise some risks," Manthei says.

Tips:

·  Watch out for arrangements in which the physician does not put up significant capital.

·  Don't bring on a physician as an owner only because he or she has referral power at the local level

·  Be careful when you approach hospitals. "You can't go to the hospital and say, 'buy our devices, look who our owners are, we'll give you a discount,'" Manthei says. "The amounts paid for your device could be viewed as a kickback to the doctor. A piece of the discount you're offering is being carved out for these doctors, and you have to avoid that."

Acceptable arrangements:

If a physician is the inventor of a device or helped start the company, the physician would take residual compensation from the product's sales. "You can generally structure these types of deals to avoid fraud and abuse implications," says Manthei.

Some companies have tried to encourage doctors to take ownership in a device company or a distributor that sells the product to local hospitals. "But I've started to see pseudo device companies; they're really more like distributors of other people's devices and they recruit doctors to be a part of this," Manthei says.

Arrangements are suspect, he says, when the physician has no relationship to your device. "The doctor needs to be a licensee or hold a patent or perhaps have a license for some piece of the device." For example, if a doctor figures out a way to improve the light on your device, you could engage the doctor as a consultant and give him or her a financial stake. The doctor will probably use the device and you can structure the deal so it's compliant, Manthei says.

This question was answered by Michael Manthei, an attorney with Holland & Knight in Boston. It first appeared in the HCPro ezine Medical Device Reimbursement & Compliance Alert.

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