This article appeared in the May 2022 issue of Technology Transfer Tactics. Click here for a free sample issue or click here to subscribe.

A recent advisory opinion from the HHS Office of Inspector General (OIG) represents good news for physician inventors and the start-ups in which they have ownership interests.

The advisory opinion is OIG’s first clarification of its 2013 Special Fraud Alert (SFA) on Physician-Owned Entities using a specific set of facts. The SFA described characteristics that make physician-owned distributors “inherently suspect” under the Federal Health Care Programs Anti-Kickback Statute (AKS).

The law firm of Ropes & Gray represented those requesting the advisory opinion, three orthopedic surgeons who have ownership interests in a company making surgical devices. OIG’s advisory opinion says that the situation described by the surgeon-owners presents a low risk of fraud and abuse under the AKS and it would not impose sanctions. (The advisory opinion, which describes relevant details of the requestors’ situation, is available online at https://bit.ly/3M69kyl. The original fraud alert is available online at https://bit.ly/39VdQkX.)

The advisory opinion is of particular importance to legitimate medtech innovators because it clarifies that the SFA should not be read to mean that physician ownership of a medical device maker automatically represents a significant risk under the AKS, says Thomas N. Bulleit, JD, partner with Ropes & Gray in Washington, DC.

“This should be very good news for the tech transfer segment of the academic community,” he says. “The advisory opinion says that when the doctor comes into possession of an ownership interest in the company because he is an inventor-entrepreneur, that is a favorable factor” regarding any fraud and abuse concerns.

The opinion could be important to start-ups that in the past have found hospitals reluctant to do business with them because physician inventors have an ownership interest in the company, says Michael D. Lampert, JD, partner with Ropes & Gray in Boston, MA.

OIG’s intent with the original fraud alert was to target physician-owned distributors that “derive revenue from selling, or arranging for the sale of, implantable medical devices ordered by their physician-owners for use in procedures the physician-owners perform on their own patients,” according to the SFA.

But many hospitals and health systems took an overly cautious approach to avoid potential AKS liability by avoiding purchases from medtech vendors that had any physician owners, Lampert explains.

The advisory opinion clarifies that the key for avoiding “inherently suspect” fraud risk is to not build a business model dependent on sales to the physician-owners, Lampert says — a situation far removed from that of physician inventors who have a stake in a start-up selling a novel device nationally or globally.

The opinion is a clear recognition of the distinction between true physician inventors and physicians who may develop an implantable device that is not actually much different from another product on the market, yet they create a company to sell the product to themselves or their hospitals for their own financial benefit, Lampert explains.

“The opinion recognizes the value of physicians in true innovation and that there is no legal requirement in the anti-kickback statute to separate the physician from the invention once it occurs,” Lampert says. “That would be disastrous for the physicians and tech transfer offices. This a positive recognition of the legitimacy of their interest, which could be a retained equity interest or a royalty, for the contribution they made.”

Contact Bulleit at Tom.Bulleit@ropesgray.com; contact Lampert at Michael.Lampert@ropesgray.com.