South Dakota Federal District Court Allows Medical Device Kickback Suit to Proceed Against Surgeon

Back in October of 2019, the hospital entities of Sanford Health, Sanford Medical Center and the Sanford Clinic in Sioux Falls South Dakota agreed to pay $20.25 million to resolve False Claims Act (“FCA”) allegations. The settlement is one of the largest in the United States District Court for the District of South Dakota. Last week, the U.S. District Court for the District South Dakota found that the lawsuit filed against the neurosurgeon who worked for Sanford- which alleged that he violated the FCA by engaging in a kickback scheme to order medical devices used in surgeries from two companies he owned- could proceed.

This case is representative of a growing area of concern with respect to addressing possible fraudulent conduct in connection with the delivery of healthcare services vis-a-vi the Physician Owned Distributorship (POD). The Department of Health and Human Services defines a POD as any physician-owned entity that derives revenue from selling, or arranging for the sale of, implantable medical devices and includes physician-owned entities that purport to design or manufacture, typically under contractual arrangements, their own medical devices or instrumentation. This business arrangement in which physician investors form companies that purchase medical devices from third-party manufacturers and sell them to hospitals, often to the hospitals at which the POD physician-investor practices is exactly what happened with the defendants in this case.

Defendant Dr. Wilson Asfora is a neurosurgeon and the owner of Medical Designs LLC and Sicage, LLC. Dr. Asfora ordered and used devices manufactured and sold by Medical Designs and Sicage in the surgeries he performed at Sanford Medical center. As the owner of Medical Designs and Sicage, Dr. Asfora profited from the sales of these devices in violation of the False Claims Act. The claims allegedly were false because they were made in violation of the Anti-Kickback Statute and in connection with surgeries that were medically unnecessary. Thus the very essence of a POD can easily implicate the Anti-Kickback Statute, which prohibits “knowingly and willfully soliciting or receiving any remuneration (including any kickback, bribe, or rebate) directly or indirectly. . . in cash or in kind, in exchange for or inducing another to refer an individual to particular goods or services for which payment may be made in whole or in part under a federal health care program.”
Given the context of the global pandemic, it is imperative that health care professionals and medical device companies, that are critical to innovation and improving patient care, engage in transparent and ethical ways. The business relationship implicated between a hospital and a POD where a physician is the owner of the POD can corrupt the medical judgment of the physician, just as Dr. Asfora’s financial interest in the medical devices he implanted in patients corrupted his medical judgment. Moreover, because the anti-kickback statute assigns criminal liability to parties on both sides of an impermissible kickback transaction- hospitals, as well as ambulatory surgical centers (ASCs) that enter into contracts with PODs also may face liability.

Hospitals and ASCs should note that the risk of fraud and abuse is particularly high in circumstances when such physicians-owners are one of the few users of the devices sold or manufactured by their PODs. The Department of Health and Human Services issued a policy statement announcing enforcement discretion over COVID-19 anti-kickback violations for certain circumstances involving other provider types but expressly indicated that they would not extend that enforcement posture policy towards medical devices. Thus, the federal government continues to aggressively pursue medical device companies for violating the anti-kickback statute during the COVID-19 epidemic.

VW Contributor: Skylar Young
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DHHS Office of Inspector General Signals Willingness to Sanction Individual Physicians Under the Anti-Kickback Statute

By Matthew J. Effken.  The U.S. Department of Health and Human Services Office of Inspector General (OIG) has released a new fraud alert that shows a willingness to impose financial sanctions directly on individual physicians under the Anti-Kickback Statute, and also encourages whistle-blowers to report physicians who participate in questionable compensation arrangements.

The fraud alert highlights the potential risks to physicians of entering into questionable medical directorships and staffing arrangements. The alert notes that the OIG has recently reached settlements with 12 individual physicians in cases involving compensation for medical directorships where the services either were not actually rendered or were compensated at greater than fair market value.

Some settlements also involved cases where physicians’ office staff salaries were paid for by affiliated health care entities, thereby relieving the physicians of a financial burden they otherwise would have incurred. In all cases, the payments were alleged to be remuneration to the physicians based on the volume or value of referrals.

The OIG appears to be signaling that they will not hesitate to impose financial penalties on individual physicians, not just larger corporate entities, when the agency finds a violation of the Anti-Kickback statute. The fraud alert also serves as a reminder that parties on both sides of a problematic transaction are subject to civil and criminal liability when the Anti-Kickback statute is violated.

In addition, the fraud alert reaffirms the rule that a compensation arrangement may violate the Anti-Kickback statute if just “one purpose” of the arrangement –not the only purpose or the main purpose–is to provide compensation for past or future referrals of Federal healthcare program business.

Finally, the fraud alert encourages potential whistle-blowers to report physicians who may be violating the Anti-Kickback Statute and includes both a web-link and toll-free hotline number to make such reporting easier.

The OIG Fraud Alert on physician compensation is available at the following link:

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