Physician Preference Items: A New Paradigm By John M. McGuire President & CEO Surgical Implant Services, LLC

As physicians continue to see dramatic reductions in reimbursements, increased demands on their time, hospital cost initiatives and growth in patient and procedure volumes, they are continuously looking for ethical, legal and sustainable ancillary revenue sources.

Some models implemented in order to provide such revenue sources to physicians have to date included informal & formal gainsharing arrangements, physician owned GPO’s, and physician ownership of device manufacturers and distribution companies.

Physician entrepreneurship in not illegal! AKS Guidance on Physician Equity Joint Ventures Special Fraud Alert on Joint Ventures Safe Harbor on Investment Interests in Small Entities (1989, 1991) Safe Harbor on Investments by Group Practices (1993, 1999) Special Advisory Bulletin on Contractual Joint Ventures (2003) Advisory Opinions Other Guidance Letters

Inquiries: Does the arrangement satisfy the appropriate safe harbor? Selection/retention of referring investors (physicians)? Substance and organization of business model & operations. Capital and Return on Investment (if the ROI is great, especially early on—its trouble.

What are the Legal Issues: (1) The civil monetary penalty prohibiting a hospital from making a payment to a physician as an inducement to reduce or limit items or services to Medicare or Medicaid beneficiaries (the CMP Statute); (2) The federal healthcare program anti-kickback law (AKL)(Joint Ventures); and (3) The federal physician self-referral law (Stark Law).

The OIG HHS promulgated the Small Entity Investment Interest Safe Harbor recognizing the fact that physician investment in privately held health care joint ventures can be legitimate and beneficial. However, the Safe Harbor contains eight (8) requirements, all of which must be met for Safe Harbor immunity to attach.

The 60/40 Rules: Prong (1) “No more than 40% of the value of the value of the investment interests in each class of investment may be held in the previous twelve month period by investors who are in a position to make or influence referrals to, furnish items or services to, or otherwise generate business for the entity”. Prong (6) “No more than 40% of the entity’s gross revenue related to furnishing of health care items and services in the previous fiscal year may come from referrals or business otherwise generated from investors”.

The 60/40 Example A Spine Company’s Website Announced record revenue for year ending An increase of 88% over 2005 According to Company CFO approximately 80% of the Company is owned by employees, while approximately 11% is owned by Spine Surgeons.

Physician Investment in Device Manufacturers Lots of Risk: FDA Issues Reimbursement Risk Product Liability Malpractice Risk Capital Requirements Product (Me too/Clinically Accepted) AKL, Stark and CMP

Currently there are approximately 101 Spine Companies that have products cleared or approved for sale in the United States. Of the 101 companies, approximately 72 of them are selling some form of traditional implant, the remaining 29 are marketing bio-materials products or specialty instruments to perform Spine Surgery 21 of the 72 companies with instruments approved for sales in the U.S. have some degree of Surgeon Ownership. There may be more than this.

Physician Investment in Device Distributors Riskier than Device Manufacturer Less need for Capital/Money at risk. Less overall risk. No particular skill from MD Owners. Lots of third-party alternatives. Over-utilization, increased costs, interference with judgment, potential harm to patients. Hospitals (distributors customers) have potential AKS exposure.

Gainsharing Gainsharing means any arrangement pursuant to which a hospital shares savings in the costs of its clinical operations with physicians who contribute to those savings.

The CMP prohibits hospitals from knowingly paying a physician directly or indirectly to reduce or limit clinical services to his or her patients. Stark issues still being addressed. Limits on payments only to group/physicians that performed services, limits on amount of payments, limits on duration of payments, limits on procedures over base year. Actions must be supported by clinical research data. Cost for hospitals upfront, ongoing, and potentially long term.

Physician Ownership in GPO’s Physician’s clinically qualify products and poole their purchasing power together. No change in operations for hospital, suppliers and physicians. Physicians receive dividend distribution based on performance of specialty GPO.

AdvaMed Letter to OIG On September 2006, a letter was sent to the HHS OIG requesting guidance on physician investments. In particular, AdvaMed asked to: (1)Confirm that the OIG’s 1989 Special Fraud Alert and other guidance on joint ventures applies to device firms, (2)To assess whether the amount of revenues generated by physician investors is a factor in evaluating these arrangements, and (3)To publish additional guidance specific to device firms.

In October, 2006 the OIG replied with a very brief letter which referred to and restated existing guidance in the general topic of physician joint ventures. The letter did not contain any new guidance on this topic, nor did it offer guidance on the specific topic of physician joint ventures in the device market.

In line with such guidance, the OIG observed that the anti-kickback statute is an intent-based statute which means that each arrangement is evaluated on a case-by-case basis. In summary, the letter does little more than reaffirm existing guidance regarding physician joint ventures and the small entity investment safe harbor. Finally, as the correspondence between AdvaMed and the OIG demonstrates, successful physician owned entities must be carefully structured and operated to comply with various federal, state and local laws and regulations.

What does the Future Hold? Public awareness, and disclosure will continue Less Physician owned entities than last year. Difficult to see how these companies will work for any length of time. Risk/Reward However, some of these entities which effectively allow choice of product and reduced cost in an ethical & legal fashion will be successful.

Thank you Open Discussion