Overutilization and M.D. self-referrals - physicians referring patients to health care facilities and laboratories in which they have an ownership interest - Column

Business & Health, July, 1991 by Peter Kazon

Increasing attention is being paid to the practice of "self-referal"--the practice by which physicians and other practitioners refer their patients to ancillary facilities, such as laboratories, diagnostic imaging centers or physical therapy centers, in which they have an ownership interest. Several recent studies have demonstrated that self-referral increases the utilization of the services provided by these ancillary facilities and drives up the cost of care.

For instance, a study of the Office of Inspector General (OIG) of the Department of Health and Human Services found that patients of physicians who had financial interests in laboratories received 45 percent more clinical lab services than all Medicare patients, a practice that, conservatively, probably cost Medicare $28 million in one year alone. Obviously, the impact would be far greater if the cost to private payers was also included.

Beginning next year, the federal government will prohibit self-referral in connection with laboratory testing for Medicare patients, and there is some interest on Capitol Hill in expanding this prohibition to other services. Several states are also considering laws stating that private third-party payers are not required to reimburse for services provided by entities in which the referring physician or other practitioner has an interest.

Recent studies have shown that many ancillary facilities are owned in whole or in part by physicians. Often, these entities are structured as joint ventures, with referring physicians as limited partners. A 1989 OIG study found that nationally, at least 25 percent of independent laboratories, 27 percent of independent physiological laboratories, and 8 percent of durable medical equipment suppliers were owned, in whole or in part, by referring physicians--estimates that the OIG stated were probably conservative. In fact, an ongoing study being conducted by Florida's Health Care Cost Containment Board found that over 40 percent of the ancillary facilities responding to a survey had physician-investors. It also found that almost 44 percent of the physician-investors surveyed had chosen to invest in diagnostic imaging centers--independent facilities that provide X-rays, CAT scans or MRI services.

Kickback schemes

Many of these joint venture are structured to attract as investors the very physicians who are in a position to refer patients to the provider of the services. For example, in its study of self-referral, the OIG found that offering documents for these ventures often stated that only physicians were permitted to invest. In some instances, the investment was expressly limited to physicians who practiced in a particular state or locality. The documents often promised returns of several hundred percent on an initial investment of a few thousand dollars. In some cases, no cash investment was even required; the physician-investor simply gave the venture a note that was paid back out of future profit distributions. The OIG was so concerned about these types of arrangements that it issued an unprecedented "Fraud Alert" to all Medicare providers, including all physicians, stating that it believed many such arrangements were simply elaborate kickback schemes designed to compensate physicians for referring patients, a practice that violates federal Medicare anti-kickback law.

The reason for the OIG's concern is that several recent studies show that when practitioners have an investment interest in ancillary facilities, their utilization of the services provided by the facility will increase, leading to increased costs.

Congressman Pete Stark (D-Calif.), Chairman of the Health Subcommittee of the House Ways and Means Committee and a strong opponent of self-referral, recently estimated that overutilization of imaging services due to self-referral may be costing Medicare over $200 million a year, a figure that also does not take into consideration the impact of self-referral on private payers.

Difficult issues

Both federal and state governments have now begun to look closely at the practice of self-referral. One recent federal case, Inspector General v. Hanlester Network, however, demonstrates the legal ambiguity that surrounds the practice. In Hanlester, the OIG sued a network composed of three limited partnerships, each of which owned a laboratory in California, arguing that the structure and marketing of the ventures demonstrated that they were actually an elaborate kickback scheme designed to induce physicians to refer their business in return for future profit distributions. The laboratories claimed, however, that it was simply good business for them to encourage investors to refer to the entity, as this would make them more profitable. In addition, the laboratories claimed that investors were not required to refer to any laboratories.

In March 1991, Administrative Law Judge Steven T. Kessel ruled in favor of the laboratories and against the OIG. The judge determined that it was not illegal to encourage investors to make referrals to a facility in which they had an interest. It would only be illegal, according to the judge, if investors were required, as a condition of investment, to refer to the entity--an interpretation that is inconsistent with previous federal court decisions in this area.