Legal Intelligencer article by Lamb McErlane Health Law attorneys Vasilios J. Kalogredis, Esq. and Sonal Parekh, Esq.

The HHS Office of Inspector General (“OIG”) issued Advisory Opinion No. 25-09 (“Opinion”) on August 7, 2025 regarding an arrangement in which a medical device company (“Requestor”) is partially owned by physicians who may order its devices or recommend their use in hospital settings (the “Arrangement”). The Requestor sought guidance on whether the Arrangement would constitute grounds for sanctions under Sections 1128(b)(7) or 1128A(a)(7) of the Social Security Act (“SSA”) as those sections relate to the Federal Anti-Kickback Statute[1] (“AKS”).

In a favorable determination, the OIG concluded that the Arrangement does not generate prohibited remuneration under the AKS because it satisfies each condition of the Small Entity Investment Safe Harbor[2] (42 C.F.R. § 1001.952(a)(2)). As a result, OIG stated that it would not impose administrative sanctions on the Requestor.

Factual Background

The Requestor develops, manufactures, and sells medical devices used in emergency stroke treatment. Its ownership includes a group of physicians (“Physician Owners”), including the original developer of Requestor’s technology. These Physician Owners may order the devices directly or recommend their use to hospitals and other facilities where they practice.

The Requestor certified to a substantial number of safeguards and structural limitations designed to ensure compliance with the Small Entity Investment Safe Harbor. These include:

1. Ownership and Investor Composition. Requester certified that:
   1. Physician Owners represent approximately 35% of ownership interests.
   2. No more than 40% of any class of investment interests has ever been held by investors in a position to generate business for the company during the prior fiscal year or 12-month period.
   3. No other owners have the ability to make or influence referrals or otherwise generate business for the company.
2. Investment Terms and Neutrality. Request certified that:
   1. Physician Owners are passive investors, and the terms offered to them do not differ from terms offered to other passive investors.
   2. Investment terms are not related to past or expected referral volume or anticipated device usage.
   3. No investor is required, expected, or encouraged to make referrals or generate device utilization as a condition of remaining an owner.
   4. Requestor does not market its products to physician-investors differently than to non-investors.
3. Revenue, Loan Restrictions, and Distributions. Requestor certified that:
   1. No more than 40% of Requestor’s gross healthcare-related revenue comes from investor-generated business.
   2. Requestor has not and will not provide loans, loan guarantees, or other financing support to any physician-investor for the purpose of acquiring ownership interests.
   3. No profit distributions have been made to Physician Owners to date; however, any future distributions will be directly proportional to each investor’s capital contribution.

The Law

1. Federal Anti-Kickback Statute.

The AKS[3] makes it “a criminal offense to knowingly and willfully offer, pay, solicit, or receive any remuneration to induce, or in return for, the referral of an individual to a person for… any item or service reimbursable under a Federal health care program.” The prohibition extends to remuneration to induce, or in return for, the purchasing, leasing, or ordering of, or arranging for or recommending the purchasing, leasing, or ordering of, any good, facility, service, or item reimbursable by a Federal health care program. Here, remuneration includes the transfer of anything of value. The statute applies to any arrangement where at least one purpose of the remuneration is to induce referrals for items or services reimbursable by a Federal health care program. Violations of the AKS constitute a felony punishable by a maximum fine of $100,000 and/or up to 10 years of jail time, as well as exclusion from Federal health care programs and potential imposition of fines by the OIG.

The statute includes certain safe harbors, including one for small entity investments interests (the “Small Entity Investment Safe Harbor” or “SMI Safe Harbor”). The SMI Safe Harbor is very technical and narrowly applied. To qualify, the arrangement must satisfy eight criteria:

1. No more than 40% of the value of the investment interests of each class of investment interests may be held in the previous fiscal year by investors in are in a position to make or influence referrals, furnish items or services to, or otherwise generate business for the entity (hereinafter referred to as “Influential Investors”).
2. Influential Investors are offered the same investment interest terms as other passive investors.
3. Investment interest terms offered to Influential Investors must not be related to the previous or expected volume of referrals, items or services furnished, or the amount of business otherwise generated from that Influential Investor to the entity.
4. Investors cannot be required to make referrals to, or generate business for, the entity as a condition of investment.
5. Items and services must be furnished or marketed in the same manner to passive investors as non-investors.
6. The entity may not receive more than 40% of its gross revenue in any fiscal year from referrals or business otherwise generated from investors.
7. The entity may not lend money, guarantee a loan, or otherwise finance an Influential Investor’s purchase of the investment interest.
8. The amount of payment to an investor in return for the investment interest must be directly proportional to the amount of the capital investment (including the fair market value of any pre-operational services rendered) of that investor.

Legal Analysis

The OIG acknowledged that the Arrangement implicates the AKS because the Physician Owners: (i) hold ownership interests that may generate profit distributions, and (ii) may order or recommend Requestor’s devices, many of which may be reimbursable by Federal health care programs. However, the OIG concluded that the Arrangement is fully protected by the Small Entity Investment Safe Harbor because Requestor certified that every condition of the safe harbor is satisfied.

The Opinion reiterates the OIG’s longstanding concern with physician-owned enterprises – particularly those that derive revenue from items used in the physicians’ own procedures. The OIG specifically referenced its 2013 Special Fraud Alert on Physician-Owned Distributorships (“PODs”)[4], noting ongoing risk factors such as the following, which remain to be considered “red flags” in the eyes of the OIG.

1. Investment amount or value varies with the physician’s referral or usage or anticipated business generation.
2. Coercive referral or site-of-service steering,
3. Tying of investment or referral to the use of the POD’s devices
4. Repurchase rights tied to referrals
5. Disproportionate rates of return for physician-owners relative to risk
6. Limited customer base or exclusive use of device by owners

Despite these concerns, the OIG concluded that Requestor’s structure was non-suspect because: (i) investor ownership was capped below 40%; (ii) revenue from investor-generated business stayed below 40%; (iii) no investment term varied based on referral potential; (iv) no investor was required or encouraged to refer; (v) returns, if paid in the future will be strictly proportional to capital investment; (vi) the company did not loan funds or provide financial assistance to investors; and (vii) marketing did not differ between investors and non-investors. As a result, the OIG found no remunerative intent tied to referral generation.

The Opinion here contains a clear message: Absent strict compliance with the Small Entity Investment Safe Harbor, physician ownership in device companies remains highly suspect and could constitute prohibited remuneration. The OIG expressly noted that other physician-owned arrangements (especially those involving physician-investors or high-utilization specialties) may raise significant risk if they deviate from even one safe harbor requirement.

Conclusion and Limitations

Based on the specific factual certifications made by Requestor, the OIG concluded that the Arrangement would not generate prohibited remuneration under the AKS and therefore would not be subject to sanctions under Sections 1128A(a)(7) or 1128(b)(7) of the SSA.

It is important to note that the Opinion is limited in scope to the specific Arrangement and is not to be relied upon by any person other than the Requestor. The Opinion is also subject to any additional limitations set forth at 42 C.F.R. Part 1008. While the Opinion may not be specifically relied upon for other arrangements, the reasoning stated therein is useful to keep in mind when considering different avenues in which to provide products, services, and incentives.

If you have any questions or if we may be of further assistance regarding compliance under the AKS or other health law matters, please feel free to contact Bill Kalogredis, Esq. or Sonal Parekh, Esq.

Read the article online on Law.com/Legal Intelligencer here.

[1] See Section 1128B(b) of the SSA.

[2] 42 C.F.R. § 1001.952(a)(2).

[3] 42 U.S.C. § 1320a-7b(b).

[4] See, e.g., OIG, Special Fraud Alert: Physician-Owned Entities, 78 Fed. Reg. 19, 271 (Mar. 29, 2013), https://oig.hhs.gov/documents/special-fraud-alerts/867/POD_Special_Fraud_Alert.pdf (hereinafter the “2013 Special Fraud Alert”).

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Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for over 50 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq., is an associate at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers, and is a pharmacist by education and training. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.

*This article is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic, any health care matter, or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq.