Physician-Owned Distributorships Endanger Patient Safety
Our society invests a great deal of trust in our medical care professionals, especially in the surgeons in whose hands people literally put their lives. Which is why the rise in the number of doctors who implant medically unnecessary and invasive medical devices in their patients solely because they have a financial arrangement with a medical device manufacturer is extremely disconcerting. Some doctors engage in such practices through business entities known as physician-owned distributorships (“PODs”). The United States Office of Inspector General has issued multiple fraud alerts regarding PODs, including one as recent as March 26, 2013. This article highlights the danger of PODs, and explains what actions consumers can take to stamp out their unlawful practices.
The conflict of interest inherent in PODs is obvious. If medical professionals have a financial stake in a medical product, they may be tempted to push patients to use those products even when those products are not needed or when there are better alternative products available. It would be bad enough if a mechanic were to install the wrong type of engine in a consumer’s car or unnecessarily replaced the engine simply because the mechanic got a commission from the engine manufacturer. If a doctor were to take a similar course of action with a medical device, then the results could be catastrophic. The risk is real, but patients do have protections against such inappropriate and dangerous activity.
One protection is the “anti-kickback” provision in the Social Security Act. Section 1128B(b)(1) states: “(1) whoever knowingly and willfully solicits or receives any remuneration . . . (A) in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part under a Federal health care program . . . shall be guilty of a felony and upon conviction thereof, shall be fined not more than $25,000 or imprisoned for not more than five years, or both.” In other words, this statute makes it a felony for a doctor to solicit or receive any payment for referring a client to purchase any item or good payable by a federal health care program. Section 1128B(b)(2) makes it a crime for the company offering the payment as well.
A similar California prohibition is found in California Welfare and Institutions Code section 14107.2(a), which establishes criminal penalties for “Any person who solicits or receives any remuneration . . . (1) In return for the referral, or promised referral, of any individual to a person for the furnishing or arranging for the furnishing of any service or merchandise for which payment may be made . . . or (2) In return for the purchasing, leasing, ordering, or arranging for or recommending the purchasing, leasing, or ordering of any goods, facility, service or merchandise for [which Medi-Cal pays], is punishable upon a first conviction by imprisonment in a county jail for not longer than one year or imprisonment pursuant to subdivision (h) of Section 1170 of the Penal Code, or by a fine not exceeding ten thousand dollars ($10,000), or by both that imprisonment and fine.” Like the federal statute makes it illegal for a doctor to receive payment for referring a client to purchase a good payable by a federal health care program, this statute does the same for a doctor who receives payment for referring a client to purchase a good payable by Medi-Cal.
Another California statute that criminalizes such conduct is found in Business and Professions Code § 650. This statute states that: “. . . the offer, delivery, receipt, or acceptance by any person licensed under this division or the Chiropractic Initiative Act of any rebate, refund, commission, preference, patronage dividend, discount, or other consideration, whether in the form of money or otherwise, as compensation or inducement for referring patients, clients, or customers to any person . . . is unlawful.” A “person,” as used in section 650, includes business entities as well as individuals. Section 650.1(f) states: “A licensee who refers a person to, or seeks consultation from, an organization in which the licensee has a financial interest, other than as prohibited by subdivision (a), shall disclose the financial interest to the patient, or the parent or legal guardian of the patient, in writing, at the time of the referral or request for consultation.” Essentially, this statutory scheme also makes it punishable for a doctor to accept any payment from a product vendor for referring a client to that vendor without providing any disclosure of the financial interest to the client.
These statutes are powerful tools that consumers can harness using California’s unlawful business practice statute, California Business & Professions Code § 17200, which allows a person to receive restitution or injunctive relief from a business that has an unfair business practice. In Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1266-1267, the Supreme Court explained: “The Unfair Business Practices Act defines ‘unfair competition’ as any ‘unlawful, unfair or fraudulent business practice and unfair, deceptive, untrue or misleading advertising. . .’ (§ 17200.) The Legislature intended this ‘sweeping language’ to include ‘“anything that can be properly called a business practice and that at the same time is forbidden by law.”‘[Citation.] In drafting the act, the Legislature deliberately traded the attributes of tort law for speed and administrative simplicity. As a result, to state a claim under the act, one need not plead and prove the elements of a tort. Instead, one need only show that ‘members of the public are likely to be deceived.’ [Citations.]” Section 17200 also “borrows” violations of federal, state, or local law and treats them as unlawful practices which are independently actionable. (State Farm Fire & Casualty Co. v. Superior Court (1996) 45 Cal.App.4th 1093, 1102-1103; see Gregory v. Albertson’s, Inc. (2002) 104 Cal.App.4th 845, 857.) In effect, the “unlawful” prong of § 17200 makes a violation of the underlying law a per se violation of § 17200. (Kasky v. Nike, Inc. (2002) 27 Cal.4th 939, 950; Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180.) For this reason, a doctor’s violation of the above-mentioned criminal statutes can serve as a predicate for a patient to initiate a civil suit for restitution or injunction.
While PODs are an insidious danger to the public, patients have legal tools that they can use to seek relief from harm caused by doctors engaged in PODs and have the ability to engage the court to protect other patients.
 As used here, a “medical device” would include such products as prosthetics, implantable medical devices, and other durable medical equipment for which a prescription is required. (See Bus. & Prof. Code, §§ 4022, 4023.)
 Special Fraud Alert; Physician-Owned Entities, Office of Inspector General; Special Fraud Alert: Joint Venture Arrag
 42 U.S.C. 1320a–7b
 Bus. & Prof. C. § 653.