Operation Profit: Some surgeons pull in millions by owning medical device companies

Medical business model at the center of legal, ethical debates
Published: May. 23, 2022 at 5:34 PM CDT
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InvestigateTV - Surgeries gone awry. Unnecessary procedures. Extra hardware implanted in patients’ bodies. Insurance companies and government insurance over-charged.

All potential consequences critics point to when doctors own a stake in the devices they use in surgeries.

The set-up is known as a physician-owned distributorship, or POD.

In this type of arrangement, a surgeon might own a percentage of a company that distributes devices, such as the metal parts used in spinal fusions. That doctor could then have the hospitals they work at buy the hardware right from the POD – and implant that hardware in their own patients.

Critics say that financial motive for installing equipment can cloud judgement and mean unnecessary surgeries for patients.

“You have these egregious doctors that were throwing in hardware just for the sake of making money,” said Dr. Scott Lederhaus, a California neurosurgeon who has spoken out against PODs for years.

According to government research, doctors who own medical distributorships are more likely to operate. For example, the rate of spinal surgery, according to the Health and Human Services’ inspector general, grew at a rate three times faster at hospitals that bought equipment from PODs than those that did not.

According to the Health and Human Services Office of Inspector General's data analysis in...
According to the Health and Human Services Office of Inspector General's data analysis in 2013, the rate of spinal surgery grew more rapidly in hospitals that utilized POD-supplied devices.(HHS OIG, October 2013)

The government has warned about the potential for issues with physician investments in medical companies. In 2013, it issued a special fraud alert.

Some PODs could be illegal, according to that Health and Human Services Office of the Inspector General alert. It called the business model “inherently suspect” under the law for reasons including that doctors might be “pressured” to use those devices and “threatened” if they don’t.

Some physicians and attorneys argue there’s built in quality control when a surgeon - the expert in the operating room - gets to decide what he or she uses.

“If I trust my doctor to cut me open and start working on my spine, I probably trust my doctor to own an interest in a device company,” said attorney Charles Oppenheim, a health law attorney. “That probably may even give me more confidence. The surgeon is so confident in the device he’s going to implant in me that he actually has an interest.”

When it comes to financial interests, proponents also say that many doctors are already paid based on the number of surgeries they do and that owning a piece of a distributorship they buy equipment from helps keep down costs for hospitals and clinics.

But critics say the potential for abuse is too high.

Some doctors have made extra money by cutting out big device companies and acting as their own middleman to funnel devices into their own operating rooms.

One doctor is in prison after multiple complaints of surgical issues and unnecessary operations using products in which he invested. A patient’s son says his mother died because of her surgery that went awry.

“Putting physical hardware that you have an ownership or stake in, I believe, makes the mindset a little bit more on the financial side than the medical side and helping people,” said Kevin Reynolds, who testified before Congress after his mother died from complications after having surgery performed by a doctor involved in a distributorship.

An overall problem many point to is the secrecy. Even the health systems that write the checks are unaware of the financial interests in some cases. Of hospitals who bought equipment from PODs, HHS found 40% of them had no idea.

Without explicit disclosure, patients may not know their doctors own a stake in the screws, plates and cages they use in their surgeries. Critics say that needs to change.

‘I’ll never get another surgery in my life’

One California patient says he will never have another surgery again. Through public records, InvestigateTV found he was operated on by a doctor who had a financial interest in the hardware he implanted in multiple patients.

“I’m supposed to have several surgeries over the last decade, and I’ll never get another surgery in my life again. I’d rather die than trust,” said Paul Shinn.

Paul Shinn plays the bass guitar in his home in December 2021. He was a professional musician...
Paul Shinn plays the bass guitar in his home in December 2021. He was a professional musician for years, touring and playing on large stages (inset right).(Owen Hornstein, InvestigateTV (Left), Randy Miller (Right))

Previously a professional rock ‘n’ roll musician and college instructor teaching computer security and electronic engineering, Shinn is now relegated mostly to a chair and often walks with a cane or uses a wheelchair. He is in constant dull pain with unpredictable shots of even worse pain.

“It kind of fires off, I would say, like a taser within me, fireworks-style. It’s really electric,” Shinn said. “It’s sharp, and it’s just constant and it won’t stop. And then there’s a really deep, deep, deep, burning pain. That just, it doesn’t go away.”

Unable to sleep for long, he wakes up at around 3:30 each morning to start his day with attempts at pain management, trying to eat something and working to get upright for the day.

“I can’t hold food down. I pretty much get sick and lay on the floor,” Shinn said. “You’re spinning, you’re lightheaded, you’re sick, you’re throwing up, but you have nothing to throw up.”

Once he musters enough strength to move from the bathroom floor, Shinn spends his mornings sitting at a desk next to his bed. He trades stocks and has monitors full of moving lines and numbers.

Trading stocks is how Paul Shinn spends his mornings. He starts early in the morning after he...
Trading stocks is how Paul Shinn spends his mornings. He starts early in the morning after he gets his pain managed enough to move to his desk. Shinn enjoys working with computers and taught security, hacking and engineering classes at a local college.(Owen Hornstein, InvestigateTV)

Shinn’s troubles all started about ten years ago. He’d torn his meniscus in his knee and says he began overcompensating. He’d had neck pain before, but he now had lower back pain from a slight limp due to his knee injury.

He decided to go to the doctor. From there, it was a whirlwind of opinions and referrals.

Ultimately he had surgery that involved a clamp and fusion material inserted into his spine.

“The second I woke up from surgery, I think the first words out of my mouth were, ‘What happened? What happened to me?’” he said.

Recovery was difficult. The fusion hardware detached.

“The fusion material actually shot up and went … into the severed spot of the spinal cord. And then over the next week, the cage that was in my spine, dislocated and dislodged and came and just loose inside me and started to do a lot of damage in there,” Shinn said.

A surgeon removed this hardware from Paul Shinn’s back. He said some of the fusion material...
A surgeon removed this hardware from Paul Shinn’s back. He said some of the fusion material remains lodged in his back.(Owen Hornstein, InvestigateTV)

Days after his initial surgery, he went back in for emergency surgery.

He had much of the hardware removed. Some of it remains lodged in his spinal cord. He says taking the rest out is too risky.

Shinn has the removed parts in a tiny resealable plastic bag. He keeps it alongside piles of his medical records.

Today, Shinn weighs 115 pounds. He used to be 160.

He busies himself with numerous hobbies: playing music, tattooing and creating art.

“The art is an escape from the pain. Primarily because if my mind is busy, I don’t have time to focus on the pain,” Shinn said.

Shinn said his main escape from pain is being creative. He paints and plays music and is a...
Shinn said his main escape from pain is being creative. He paints and plays music and is a tattoo artist(Owen Hornstein, InvestigateTV)

InvestigateTV identified Shinn as a patient of Dr. Aria Sabit, a surgeon who operated in California, through public court records and news articles.

Shinn was one of many plaintiffs listed in court proceedings and lawsuits — people whose lives were changed after having surgery but were ultimately reduced to scans and diagnoses and medical plans running though the court system in an attempt to financially compensate them for years of pain.

Prosecuting the “Butcher”

According to court records, Dr. Aria Sabit performed hundreds of surgeries during his short tenure at a Ventura, California health system.

He was there for about a year and a half beginning in the summer of 2009. During that time, multiple accusers say he botched surgeries. There were high infection rates, surgical mishaps, high complication rates and other serious issues, according to a court complaint.

Some of his former patients and coworkers now call him “the butcher.” Federal prosecutors also categorized Sabit’s work as “butchery.”

Dr. Aria Sabit was accused in multiple lawsuits of performing unnecessary surgeries in order...
Dr. Aria Sabit was accused in multiple lawsuits of performing unnecessary surgeries in order to profit from devices in which he held a financial stake.(Photograph: Romain Blanquart – USA TODAY NETWORK, Photo Illustration: Owen Hornstein)

Other doctors accused Sabit in court filings of specifically choosing elderly Medicare patients for medically unnecessary spine surgeries — some of which they say he was unqualified to perform.

A neurologist InvestigateTV spoke with said Medicare is easier to navigate when it comes to doctors choosing procedures and hardware because it lacks the scrutiny a private insurer might require in order to approve paying for the surgery.

Sabit performed the surgeries unusually fast, prosecutors said. And he performed a lot of them in his short time at his California post.

In 19 months, Sabit performed more than 375 procedures, according to a court complaint lodged by the federal government along with doctors who later treated Sabit’s patients.

For comparison, Dr. Lederhaus, the California neurosurgeon who speaks out against PODs, said he might average around 200 surgeries or fewer a year — one or two lumbar fusions a month.

And surgeries were rare compared to consultations: For every 25 consults on a lumbar fusion for example, Lederhaus said he might do one surgery.

In many of Sabit’s surgeries, he used hardware from a company called Apex. Sabit, it turned out, had financial interest in the company.

According to a federal complaint against the device company, Sabit invested around $5,000 in the distributorship.

While he’d never used the company’s implants before, after he made his 2010 investment, he used those parts in 90% of his surgeries.

In December 2010, with complications piling up, Sabit’s hospital suspended him but then reversed the suspension. A couple of weeks later, Sabit resigned.

But he kept practicing.

Sabit moved to Detroit, Michigan in 2011.

There, according to an FBI special agent’s report, Sabit changed course. Multiple patients went in for spinal fusion procedures that were to involve implanted hardware.

But there was no hardware at all.

Their backs were cut open and sewed shut again.

Some patients had “serious bodily injury” as the result of those fake device operations, according to federal prosecutors.

Over about two years, he made $438,000 from Apex, according to a federal court complaint.

Sabit’s attorney did not respond to a request for comment.

A court complaint  (Left) filed against Dr. Aria Sabit in California details some of the...
A court complaint (Left) filed against Dr. Aria Sabit in California details some of the allegations about surgical procedures. A federal court complaint (Right) against a medical device company details a list of payments made from the company to Sabit. The complaint alleges prior to his financial involvement, he did not use that company's products; however, after his investment, he used those products in 90% of his surgeries.(United States District Court for the Central District of California/InvestigateTV Illustration)

It was ultimately his billing of government insurance that landed Sabit in prison. For example, some of those Michigan surgeries, with their non-existent hardware, were billed to Medicaid, the government insurance for the poor and those with disabilities.

In 2017, Sabit pleaded guilty to health care fraud and other crimes in Michigan and California. A federal judge sentenced him to nearly 20 years in prison.

As part of his admissions in court, Sabit agreed he had used more implants than medically necessary to make extra money.

A debate amongst doctors

Years ago, Dr. Scott Lederhaus started noticing something concerning around southern California: He thought too many patients were having problems from surgeries they probably didn’t need.

“There were a number of complications. I saw infections or hardware failure. Sometimes there would be instability of the spine produced from being too aggressive. So there is basically a lot of complications that I saw that wouldn’t have occurred otherwise. And it was in patients who didn’t need to have that particular surgery done in the first place,” Lederhaus said.

Dr. Scott Lederhaus, a California neurosurgeon and past president of the Association for...
Dr. Scott Lederhaus, a California neurosurgeon and past president of the Association for Medical Ethics, discusses his perspective on physician-owners of medical device companies. He believes the model may cause some surgeons to operate more often than necessary in an effort to make more money.(Owen Hornstein, InvestigateTV)

A Senate committee’s analysis of doctors it believed to be part of a POD saw 23% more patients. Those doctors also did more surgery: on average they performed twice as many fusion surgeries.

Some of those unnecessary — and Lederhaus said ultimately damaging — procedures came from doctors who Lederhaus said were getting extra money by owning a part of a medical device company.

“When they put an implant in, the doctor makes extra money on every implant they put in, every screw, every piece of metal. Everything that goes into a patient is conceivably owned by the doctor, and so that doctor will make more money with more implants that they put in,” Lederhaus said.

Doctors are paid in different ways depending on where they work. For example, at a research hospital, a surgeon may be paid a flat salary. In private practice, a surgeon might make more money based on the number of patients they see or the more procedures they perform.

PODs too have different structures. Senate documents lay out various distributorship models, ranging from those where a doctor gets a flat compensation no matter how many surgeries they perform or surgeons who invent new devices and sell them to many hospitals, sometimes including their own, to those critics are most concerned with: physician investors receiving a percentage of the money that their distributorship’s surgical implants generate - with much of it coming from their own hospitals.

Lederhaus said doctors may stand to make two to three times more money per surgery by using their own company’s devices.

Some involved in the distributorships say they are better for patients and hospital systems — mainly because they cut the large device companies out of the equation.

“In fact, a lot of the early PODs that got started were viewed as competitors of the big device companies,” said Charles Oppenheim, an attorney with expertise in the laws potentially at play in this area. “The big device companies were selling name brand products at high prices. And the physician-owned distributorships were purchasing and reselling as distributors, sort of generic, much lower cost products that were functionally equivalent.”

Oppenheim’s firm is referenced in Senate documents, stating there is “a demonstrated savings to hospital customers alongside favorable returns on investment for physician and non-physician investors in such companies.”

Dr. John Steinman, a surgeon from California, testified before the Senate in 2015 and said the usual system of buying one item at a time from a manufacturer is cost inefficient. The alternative — PODs — allows surgeons to buy in bulk. It also allows the people who perform the surgeries to have control over their products and the quality.

“It is an unfortunate fact that throughout the medical profession there will always be a few ‘bad apples’ who can do serious damage to peoples’ lives. We simply must have mechanisms that force physicians to be held to the high standards patients deserve,” Steinman said.

Physician-owned distributorship guidelines from the American Association of Surgeon...
Physician-owned distributorship guidelines from the American Association of Surgeon Distributors show what its members must adhere to, including no leverage or pressure to physicians. Additionally, the organization requires competitive negotiation, hiring of a product rep, and evaluating surgeon volumes and operative days.(AASD via published U.S. Senate Finance Committee Testimony)

Oppenheim said the statistics that point to surgeries increasing in hospitals that use PODs should not necessarily be understood as causation.

“It could be the doctors who do a lot of surgeries are more interested in the devices and which ones are best and which companies make the best devices,” Oppenheim said. “Who’s more likely to open up a donut shop on the corner? Someone who loves donuts or someone who doesn’t like to eat donuts? I mean, right? … The person who is, does more surgeries and is more interested in devices may be a candidate to own a distributorship.”

HHS too looked at the device costs. In its research, it did not find a significant cost difference for the hospitals between POD and non-POD devices in any areas except spinal plates, where POD-provided parts averaged higher in the sample.

The 2013 HHS hospital survey also found in its sample that surgeries involving PODs devices used about two fewer devices per surgery than non-PODs-supplied surgeries.

“I don’t think you can reach a universal conclusion to say that all PODs are good or all PODs are bad. I mean, when you’ve seen one POD, you’ve seen one POD. And there’s a huge range of how they, how they are owned and how they operate and what they’re doing,” Oppenheim said.

With that range of variables, Oppenheim said he generally supports doctors being open with patients about financial interests.

“I typically would suggest that you want to be transparent. If you’re a doctor who owns a device company… you want to let your patients know about that. You want to let the hospital know about that,” Oppenheim said.

Some PODs are opaque and not disclosed. Critics say that’s the case in many of these set-ups.

“The interesting thing is patients have no clue. They don’t know if a doctor is a POD owner or not. Nobody tells them. The doctor doesn’t tell them … the hospital doesn’t tell them where they have their surgery done,” Lederhaus said.

‘Stealth Mode’

Kevin Reynolds is shown with his mother, Lillian Kulbach, in a photo from her personal albums.
Kevin Reynolds is shown with his mother, Lillian Kulbach, in a photo from her personal albums.(Family-Provided Photo)

Kevin Reynolds found out years after his mother, Lillian Kaulbach, had spine surgery that her surgeon, Dr. Sabit, had a stake in a medical device company.

“When it came down to it, it was about hardware. It was about physician-owned distributorships. It was about money, capital gains,” Reynolds said.

He found out about Sabit’s ownership of Apex when he saw newspaper articles about patient lawsuits. He was angry when he found out, and as he thought through his mother’s experience, he felt sure a profit motive was part of his mother’s surgery.

“That’s why I’m sitting here. It was wrong. It was. It was devastating. It was just something that I think could have been avoided, and I was just so, so angry in myself and the system, and it’s been difficult to deal with,” Reynolds said.

His nightmare started more than a decade ago.

Kaulbach had been a caretaker for her mother and her brother for years. Over those years, she developed a number of medical conditions and pain, Reynolds said. She had multiple joint replacement surgeries and suffered from diabetes.

In her personal albums, Lillian Kaulback's son Kevin Reynolds explains she kept photos of her...
In her personal albums, Lillian Kaulback's son Kevin Reynolds explains she kept photos of her family. These photos, he says, show the people in her family she helped care for over the years including her niece (left), mother (center), and brother (right).(Family-Provided Photo)

Eventually, she needed back surgery, and she met with Sabit. Reynolds felt the 2010 consultation appointment was rushed and lasted only three to five minutes.

“It was just more of a handshake greet meeting. Let’s go to surgery,” he said.

Reynolds said he and his mother signed papers for one type of spinal fusion, but the surgery she received was different.

“He took it upon his own accord to do more levels, three to four levels in total. So two extra levels without our consent,” Reynolds said. “In hindsight, with the amount of fraud and the amount of savage carnage that he inflicted on people, it seemed to be the … incentive was to get financial gains, I would say, personally.”

After the surgery, she had multiple infections. She fought for weeks and then months battling pain and infections. She never walked again.

On May 31, 2011, Lillian Kaulbach died at 69 years old.

“She was beautiful lady. Heart of gold. Mother to everybody. Sunshine in the room. Always in red, always in makeup. Always nails and jewelry done right,” Reynolds said.

Reynolds has been fighting for years in his mother’s memory, telling Congress the same story he shared with InvestigateTV. He’s frustrated more hasn’t changed.

“I’ve spent years fighting the fight, the cause, for the common American that has to go through this situation,” Reynolds said. “I’ve cried many cries, many tears. I tried to have to put it in Pandora’s box. But over the years, and for many more years … the fight about physician owned distributorships, it has broken my heart. Not my spirit. But it’s just so emotional for me still.”

Lederhaus said Reynolds’ story is far from uncommon. Most patients — and their families — don’t get much information about financial relationships or the exact devices they are receiving.

“Most of the doctors keep it in a stealth mode where they just will keep quiet about their involvement in the POD making any money on the implants they put in,” Lederhaus said.

PODs vary on disclosure

When InvestigateTV attempted to identify PODs across the country, it was nearly impossible.

The Affordable Care Act created a disclosure program called Open Payments that was supposed to help patients understand the financial relationships between medical providers and drug and device companies.

The program requires those companies to file disclosures with the federal government when they pay for things like royalties or research — or when a doctor or their families own a stake in a medical company.

But the way that ownership data is currently reported, it can be difficult to decipher. In the files, companies are supposed to name the physician and describe their terms of investment — but in 3,000 records from 2020, there were more than 300 definitions.

While some described specific stock holdings or ownership stakes, other definitions simply said “N/A” or “Investment.” One entry stated in its ownership definition that it needed “additional instructions” from CMS.

In 2015, the Medicare Payment Advisory Commission (MedPAC) investigated PODs and described difficulties identifying them.

That advisory group for Congress said in a memo to CMS that it found “only” 16 PODs and cited the Senate’s finance committee’s report saying the number of PODs is underreported.

“It appears that many PODs are not complying with the Sunshine Act requirements to report their payments or ownership interests to CMS. In examining the Open Payments data, Committee staff found only a few PODs that reported their payments to physicians and POD ownership interests,” the 2016 report stated.

A 2016 report from the Senate Finance Committee Majority Staff highlighted a number of...
A 2016 report from the Senate Finance Committee Majority Staff highlighted a number of concerns it had with PODs. The excerpts shown specifically pertain to issues of transparency the committee staff brought up, including an apparent under-reporting of disclosure to the government and a lack of disclosure to hospitals and patients.(Senate Finance Committee, Illustration by InvestigateTV)

When it released the 2020 Open Payments data, CMS told Congress it had conducted outreach to 35,000 doctors “to increase physicians’ awareness of the reporting requirements of PODs.”

But when InvestigateTV analyzed the 2020 Open Payments data for ownership interests by replicating MedPAC’s methodology, only a handful more PODs emerged with around 24 total likely.

That number appears low given that the HHS’ survey of more than 500 hospitals found more than a third of them bought devices from PODs and a 2016 Senate report identified PODs operating in 43 states.

That report also noted Congressional staffers identified a total of 507 surgeons believed to have a financial relationship with a POD.

Further, InvestigateTV obtained a list of financial disclosures for speakers at a spine surgery conference that specifically named 24 PODs. Only one of those distributorships appeared listed under the same name in the Open Payments records.

MedPAC also noted deficiencies in the data including that there is no disclosure for what type of products a company makes, such as pharmaceuticals versus devices.

“It’s kept a secret, and then even the doctors in the community don’t know. The hospital purchasing agent who purchases the implants doesn’t know. And so it’s such a secret that it becomes very difficult for anybody to be sure what they’re getting or whether it’s a reputable product. So who knows? Well, the doctor knows who puts it in,” Lederhaus said.

Some of the companies InvestigateTV identified were obviously PODs. Four of them belong to an association of surgeon distributors. Some have definitions such as “part owner of LLC.” Others disclose the information on their websites, particularly those who have invented a new product and are selling that invention as well as operating.

A spine surgery center affiliated with one of the groups has a patient disclosure form indicating the financial interest and the likelihood that their implant will come from the distributorship.

Others were more opaque and have little online presence or have more vague interest descriptions in the Open Payments records.

In November 2021, CMS finalized a new rule that will require PODs to specifically identify themselves in Open Payments reports. That rule goes into effect this year.

The rule reads, in part, “Reporting entities currently have the ability to self-identify as a POD when registering with Open Payments, but due to the lack of a definition of the term ‘physician-owned distributorship’ or ‘POD,’ this designation is not required. We believe that the disclosure of an entity’s status as a POD is essential to the transparency that is central to the program, and will also help clear up confusion about whether PODs are required to report.”

Illegal kickback allegations

Some PODs end up in the court system with the government accusing the physician owners of illegally profiting off the model.

One part of the law frequently comes up here: The anti-kickback statute. According to federal prosecutors, that provision makes it “generally unlawful for a doctor to solicit or receive money or other remuneration paid to influence the doctor’s health care decisions.”

Some doctors and their healthcare affiliates have been hauled to court with allegations they illegally profited off of patients using government health insurance.

“What the statute is trying to do is prevent unnecessary surgeries or surgeries using subpar equipment or referrals for unnecessary services over utilization based on a financial decision rather than a medical one,” said Assistant Special Agent in Charge Korby Harshaw, with the Health and Human Services Office of Inspector General’s regional office in Kansas City.

In 2020, one such neurosurgeon, Dr. William Choi of Colorado, settled a case in which he was accused of receiving illegal kickbacks through a distributorship he secretly owned and defrauding Medicare, Medicaid and TRICARE, the insurance for military members and veterans.

“Basically, the hospitals exclusively purchased equipment from distributorships that Dr. Choi secretly owned. Dr. Choi would then use a number of different methods to get that money out of those companies and into his own pocket,” Harshaw said.

Choi, according to federal court records, hid his ownership by hiring different people to appear as the owners of the company, including a church musician from Massachusetts.

In reality, they said Choi was in charge, and he was pulling the strings and the profit.

Behind the curtain, the government said Choi held the credit cards. He determined hiring and firing. He picked out the manufacturers to be used.

“He then, being a prolific neurosurgeon at some of the local hospitals in Denver, would instruct the hospital to purchase all of the implantable devices that he used from that distributorship that he owned,” Harshaw said.

Those devices, implanted in Medicare and Medicaid patients, were billed to the federal government and paid for with taxpayer dollars. Often, Harshaw said, that equipment came at a markup.

“The hospital received money for it. And so did Dr. Choi. He’d received money for those surgeries. And then of course, the hospital’s buying the implants from Dr. Choi’s distributorships, prior to the surgeries occurring,” Harshaw said.

Choi also spent a lot of money gained through his POD on extravagant expenses, according to the federal government.

“Including $125,000 for Skybox at the Pepsi Center in Denver and some pretty extravagant Christmas parties, things like that, and a lot of travel,” Harshaw said.

The government pursued Choi when a whistleblower brought the concern and filed charges. Ultimately, Choi settled for $2.35 million, but he did not admit to any liability.

Choi’s attorneys spoke with InvestigateTV and provided a statement on his behalf. In his case, they said, he hired an executive to manage his business affairs and that person “established the POD pursuant to favorable written advice that executive received from a prominent national law firm.”

Choi, they said, had accusations only related to his business — but his surgical quality was not questioned.

“Dr. Choi’s case was a structural one — there were no allegations of unnecessary surgeries or negative patient outcomes. In over 20 years of practice, Dr. Choi has never received a malpractice complaint. The specific allegations were disputed, and the government settled the case without requiring any admission of liability or wrongdoing.”

Legal experts say a settlement in this type of case is relatively common, especially because the cost of litigation can be so high.

The DOJ has settled other allegations, including one last year in South Dakota in which a surgeon has agreed to pay a fine and be excluded from federal health care programs for six years.

The government accused Apex, which is the POD Dr. Sabit invested in, and its parent company of paying kickbacks to surgeons.

While Sabit’s name was removed from the lawsuit, the companies went to trial this month. After a day in court, they agreed to pay $1 million, and the government agreed to dismiss its lawsuit.

An attorney who represented the companies (and never represented Sabit) said in a statement to InvestigateTV that the DOJ acknowledged the settlement agreement isn’t an admission of guilt.

“Our clients are pleased with this result. They appreciate having their lives back after nine years during which time they were vilified in DOJ press releases and media coverage based on the releases, which caused them to lose, among other things, a substantial portion of their business, their banking privileges and their reputations in the healthcare industry,” said attorney Patric Hooper on behalf of Reliance (full statement available at the end of the story).

Harshaw with the OIG said there has been a relatively steady stream of Anti-Kickback Statute claims in his region. The law, he explained, is complex but important to enforce for both taxpayers and patients.

“We’re making sure people aren’t getting things that they don’t need, not just because of the loss of money, but as we discussed earlier, people can get hurt if they’re getting things they don’t need or not getting things they do need just based totally on finances,” Harshaw said.

The legal questions

While the government has gone after some doctors who took the model too far, saying they improperly made money off their own products, it’s a gray area and a thin legal line. The business model, with different components changed up, can tip from legal to illegal.

The anti-kickback statute, used in Choi’s case, is one where there is some disagreement over how it works in practice.

The national law firm Hogan Lovells, referenced in Senate documents, has written about its belief all PODs setups it was aware of implicate and most likely violate laws.

“We believe a close examination will reveal that most POIs essentially are shell entities,with no real infrastructure or capital investment, that exist for the unlawful purpose of directing remuneration to physicians for their ability to control the selection of surgical implants sold through the scheme,” the firm wrote in a 2009 report.

But others argue the statute is much more complicated.

The law states that it’s illegal to offer or receive anything of value in order to generate business from a federal health care program, such as Medicare. But the law includes a number of provisions that must all be met in order for a POD’s activities to be illegal, including that a person must know what they are doing is wrong and there must be an intent to get that extra money.

“For the Kickback Statute, it’s still facts and circumstances and intent based, and you have to look at it carefully. And it certainly isn’t the case that every POD violates that statute,” said Oppenheim, the health law attorney.

Charles Oppenheim is an attorney who specializes in health care laws, particularly those that...
Charles Oppenheim is an attorney who specializes in health care laws, particularly those that sometimes come into play with physician-owned distributorships. He and his firm are frequently referenced in trade journals and government publications.(InvestigateTV)

The other legal consideration is known as the Stark Law, or the self-referral law. That law makes it illegal in most cases for doctors to make a referral to an entity with which they have a financial relationship for medical services reimbursed by Medicare, unless it falls under a specific exemption.

While critics argue that PODs fall into this law because it amounts to a self-referral for doctors to pick out their own hardware and bill for it, Oppenheim said there is a nuance to the law that the model doesn’t fit into — namely that the law directly prohibits referrals to hospitals but does not apply to a physician ordering devices from a distributorship.

“Most POD arrangements are indirect arrangements because the physician has an ownership interest in the POD, and the POD sells medical devices to the hospital. So there’s no direct financial relationship between an individual physician and a hospital,” Oppenheim said.

In April 2022, the OIG issued an opinion directed at one POD that requested input on its specific setup in relation to the anti-kickback law. While the agency noted its concerns about certain distributorship setups, it stated this specific arrangement “does not raise the concerns identified” in its previous Special Fraud Alert.

Some of the factors the opinion listed as making the setup above-board included the fact that the doctor invented his own product, it is a very large company with many employees that distributes internationally, and the doctor-owners’ use of their own equipment is less than 1% of the company’s yearly gross revenue.

Finally, the OIG notes the company is transparent and gives every patient written notice of the arrangement.

“While transparency, alone, is not sufficient to decrease the risks associated with a physician-owned entity, in this case, the Physicians’ various disclosures to patients, facilities, and the public, in combination with other safeguards present in the Arrangement, further decrease the risk of fraud and abuse from the Arrangement,” the OIG opinion stated

Patient empowerment

Knowing that there is a lack of transparency with some PODs, experts told InvestigateTV patients should feel empowered to ask their surgeons about the hardware they plan to use — and where it comes from.

“You would want to make sure it’s a reputable company that produces reputable implants and that you’re not getting squeezed by this doctor who’s just trying to make money for his bank account,” Lederhaus said.

Oppenheim also suggested asking doctors about their devices and requesting second opinions if there is a concern about whether an operation is necessary.

Reynolds, the son whose mother died after an operation involving a PODs doctor, wants more regulations for PODs. He believes there are arrangements where profit motives could be lessened — but he wants rules spelled out.

And he wants more up-front answers for patients and their families before an operation.

“This type of stuff wasn’t disclosed,” Reynolds said. “I hate the word transparent in the medical field because I didn’t experience any of that.”

Kevin Reynolds says he is so passionate about speaking out about transparency and medicine...
Kevin Reynolds says he is so passionate about speaking out about transparency and medicine because of his late mother, Lillian Kaulback. She passed away May 31, 2011.(Family-Provided Photo)

InvestigateTV producer Daniela Molina contributed to this report.

Full statement from attorney Patric Hooper on behalf of Reliance Medical:

Our clients, Reliance, Bret Berry, and Adam Pike, hired our firm, Hooper, Lundy and Bookman, as their attorneys because of our experience in taking on DOJ and the HHS OIG on cutting edge healthcare issues, including allegations of kickbacks based on ownership distributions made to physician owners of healthcare joint ventures.

In fact, we had successfully handled the OIG test case that gave rise to the landmark 9th Circuit decision in Hanlester Network laboratories v. Shalala., 51 F. 3d 1390 (9th Cir. 1995). It felt to us that U.S. v Reliance was an attempt by DoJ and the OIG to retry the Hanlester case because they did not like the outcome. The OIG is philosophically opposed to physician ownership in healthcare joint ventures. However, the OIG does not make the law. Congress does.

We have never represented Dr. Sabit. He had an ownership interest in one of Reliance’s spinal implant distribution/design companies, Apex. Dr. Sabit came highly recommended to our clients by other surgeons, including the surgeons who recruited him to provide complex spinal fusion surgeries at Community Memorial Hospital in Ventura California in 2009-2010. Our clients did not learn about Dr. Sabit’s alleged malpractice at Community Memorial until February 2012, long after Dr. Sabit left California to go to Michigan.

When confronted with allegations in Michigan unrelated to our clients, Dr. Sabit chose to plead guilty to such allegations and began “cooperating” with DOJ against our clients in 2015 to try to obtain favorable treatment in his criminal case. Notwithstanding Dr. Sabit’s allegations as a government cooperator against our clients, in February 2019, DOJ’s criminal division chose not to pursue criminal charges against our clients.

Nevertheless, DOJ’s civil division chose to continue to pursue its civil action against our clients, which had been filed in September 2014. The civil action alleges kickbacks causing false claims to be submitted to Medicare due to surgeries performed by four doctors-owners, including Dr. Sabit.

In its civil action, DOJ was seeking treble damages and penalties against our clients under the False Claims Act, totaling more than $30 million. Our clients have always denied any wrongdoing on their part, and have consistently emphasized that they had received continuing advice of their Utah healthcare lawyer, John Bradley, in structuring and conducting their activities since 2006. They are very proud of the high quality spinal implants and devices they designed and manufactured with the input of their surgeons-owners.

The civil case finally came to trial on May 4, 2022, before Judge Dean Pregerson in the Central District of California (Los Angeles). In the weeks leading up to the trial, and even during the first day of trial, DOJ revealed for the first time the existence of various documents (FBI reports) that contained evidence that was exculpatory for our clients.

Following the first full day of trial and the cross-examination of the government’s lead witness, a very experience OIG special agent, Judge Pregerson raised the issue (outside of the jury) of whether settlement discussions should be considered. Such discussions began that evening and continued into the next morning.

Ultimately, DOJ agreed to dismiss its lawsuit against our clients in exchange for our clients paying $1 million. DOJ has acknowledged that the settlement is not an admission of wrongdoing. And, DOJ is releasing our clients of all relevant claims from 2007 through the date of the settlement agreement, which will likely be late May or June 2022. DOJ has also confirmed that the OIG will not be pursuing any exclusion action against our clients.

Our clients are please with this result. They appreciate having their lives back after nine years during which time they were vilified in DOJ press releases and media coverage based on the releases, which caused them to lose, among other things, a substantial portion of their business, their banking privileges and their reputations in the healthcare industry.