The Senate Finance Committee recently called for federal agencies to begin investigating physician owned distributors’ (PODs) alleged noncompliance with the U.S. Physician Payment Sunshine Act (Sunshine Act, or Open Payments). The letter is addressed to the head of the Office of Inspector General (OIG) and the Administrator of the Centers for Medicare & Medicaid Services (CMS). If acted upon, the OIG/CMS investigations could change the landscape of the Sunshine Act in an important way: any resulting public enforcement would most likely be a first.

How the Sunshine Act Applies to PODs

The Sunshine Act requires applicable manufacturers and group purchasing organizations (GPOs) to annually disclose payments or transfers of value to covered recipients (physicians and teaching hospitals), as well as to disclose ownership or investment interests held by U.S. physicians or their immediate family members (with an exception for publicly traded companies).

PODs, which distribute revenue to their physician owners in a variety of ways, generally have obligations to file such reports under the Sunshine Act in one of two ways:

  1. The POD falls within the definition of a “GPO.” CMS defines a GPO as “an entity that (1) Operates in the United States; and (2) Purchases, arranges for or negotiates the purchase of a covered drug or device, biological, or medical supply for a group of individuals or entities, but not solely for use by the entity itself.”1 CMS has been clear that it intends this definition to include PODs.2
  2. The POD qualifies as an “applicable manufacturer.” To the extent that a POD takes title to a product, the Sunshine Act implementing regulations make clear that PODs are “subject to the same requirements as all other applicable manufacturers.”3

Sunshine Enforcement Landscape

Under the Sunshine Act, the knowing failure to disclose reportable payments or ownership interests is punishable by a civil monetary penalty of up to $10,000 for each item not timely reported. However, despite nearly a decade since enactment and five cycles of data reporting (this year will be the sixth), there have been no public enforcement actions. (We must acknowledge, however, the possibility that investigations may be ongoing and merely not yet publicly disclosed, or were resolved without penalty and therefore not publicly announced.)

Interestingly, the March 19, 2019, letter, written by Senators Chuck Grassley and Ron Wyden (Chairman and Ranking Member, respectively, of the U.S. Senate Finance Committee), appears to imply that the authors have knowledge of specific violations by PODs: “It has come to our attention that some physician owned distributorships (PODs) may be failing to disclose physician ownership or investment interest as required by the Physician Payment Sunshine Act (Sunshine Act).”

This is not the first time PODs have been in the Senate’s — or specifically Senator Grassley’s — crosshairs. In June 2011, Senator Grassley along with several colleagues implored CMS to investigate the “troubling” proliferation of PODs, highlighting their potential to run afoul of the Anti-Kickback Statute, along with the important role the Sunshine Act plays in providing transparency into PODs’ potential to create conflicts of interest. The Senate Finance Committee also held a hearing in 2015 on the risks PODs pose to patient safety and the rising cost of health care.

PODs have also been the subject of earlier commentary from OIG, including the publication of a 1994 Special Fraud Alert on Joint Venture Arrangements and a 2013 Special Fraud Alert on Physician-Owned Entities.

Indeed, a provision in the Trump Administration’s proposed FY 2020 budget makes explicit that all PODs will be required to make disclosures effective in 2020. The HHS “Budget in Brief” also acknowledges the importance of transparency, particularly given criticism that PODs’ “ownership may affect physicians’ clinical decision-making, influencing them to perform unnecessary surgeries or choose a medical device in which they have a financial interest over one more appropriate for the patient.”

What’s Next?

In their recent letter, the senators request that OIG and CMS respond to a series of questions by April 15, 2019. One of those questions specifically requires OIG to explain whether it has “conducted a detailed review and audit of the CMS sunshine database to determine whether PODs are reporting physician ownership or investment interest.” OIG also must explain what steps it takes to validate allegations it receives that PODs have failed to report a physician’s ownership or investment interest to CMS.

Thus — assuming the contents of the government’s reply are made public — we are likely to learn a great deal about how OIG and CMS mine Sunshine data relating to PODs specifically, as well as the agencies’ approach to Sunshine Act enforcement generally.

More Information

The full letter from Senators Grassley and Wyden, including the complete list of questions to which CMS must respond, can be found here.

Reed Smith’s prior coverage of issues relating to PODs can be found here.

42 C.F.R. § 403.902.
78 Fed. Reg. 9458, 9493 (Feb. 8, 2013) (the definition of GPO would “include, for example, physician owned distributors (PODs) of covered drugs, devices, biologicals, and medical supplies.”).
78 Fed. Reg. at 9462-63.