Profits From Referrals : Doctors’ Use of Own Labs: Good Ethics?

Doctors at the Woodbridge Medical Center in Irvine used to refer patients who needed X-rays to a separate clinic in the same building. But now, even though sophisticated imaging techniques such as ultrasounds and mammograms are still readily available, clinic personnel say patients are no longer beating a path to their door.

Some of the doctors are instead sending patients down the street to a new medical imaging center--a facility owned by the physicians themselves.

“I used to believe,” said Dr. Robert Benson, a radiologist at the Woodbridge clinic that is losing patients to the new facility, “that if you gave good service, had lower fees and provided TLC to doctors and patients, you’d do fine. But I see now that money is thicker than blood. It’s unbelievable.”

Financial Stakes

Whether it is a radiology lab, sports medicine clinic or physical therapy center, it is increasingly likely--especially in California--that doctors have financial stakes in such outpatient facilities, and refer their patients there for treatment.

From these ventures, they often realize substantial extra income. In setting up the clinics, said Rep. Pete Stark (D-Oakland), some entrepreneurs have offered doctors returns on their investments of more than 100% a year.

To a growing chorus of critics, these entanglements pose a conflict of interest for doctors, jeopardize patient care, undercut honest competition and increase health care costs. “The trend toward arrangements whereby physicians are given an economic inducement to make particular referral decisions is to be deplored and should be rejected in strong terms,” the prestigious Institute of Medicine, part of the National Academy of Sciences, has declared.

“It’s wrong, it’s unethical and it’s not in the public interest,” Dr. Arnold Relman, editor of the distinguished New England Journal of Medicine, said of the investments. “Basically, we’re talking about a kickback or a bribe that has so far avoided existing regulations.”

Survey of Doctors

Relman estimated, based on a recent survey of doctors by the American Medical Assn., that 50,000 to 75,000 physicians nationwide have a financial interest in ancillary health care services.

Stark last week reintroduced federal legislation, the Ethics in Patient Referral Act of 1989, that would bar physicians from referring Medicare patients to clinics the physicians own. The Consumer Federation of America and 17 other groups have announced their support for the legislation.

The American Medical Assn., which opposes Stark’s legislation, asserts that it is unfair to bar doctors from investing in things they know best, especially because their financial involvement in a facility will be likely to ensure better quality care and service. In some cases, AMA officials say, a clinic could not have been financed or built but for local doctors who were willing to make an often-risky investment.

Nonetheless, health care attorneys are anticipating a legislative crackdown and recently staged symposiums in Los Angeles and San Francisco to alert the medical community to the far-reaching implications of the bill and other measures that target business deals involving physicians.

“This issue is on the cutting edge,” attorney Carl Weissburg told a Los Angeles symposium that attracted about 400 people. He and other speakers distributed a 200-page book that examines the legality of business arrangements under the Stark bill.

At the heart of the debate is an axiom of health care, the notion that patients generally trust and expect their doctors to refer them to the best-quality, best-priced, most convenient clinic available.

But Stark contends that physicians’ judgments in making referrals could well be colored by their personal financial stake in the decision. For example, he told Congress that he has learned of cases where cancer patients have been sent for daily radiation therapy to clinics 20 miles away from their homes, rather than being referred to another closer, equally qualified treatment center.

‘Everyone Knows’

By law, a physician’s return on his investment in a clinic is not supposed to be tied to the number of patients he refers. “But everyone knows that the more referrals made, the higher the profits,” Stark said.

He cited a mammography clinic in Los Gatos, Calif., which sent its physician-investors their checks along with a letter reciting the number of referrals each physician had made to the clinic. Those who had ordered fewer than 10 mammograms, which detect breast irregularities, were encouraged “to increase their referrals.” The letter, which Stark provided to The Times, pointed out, “The realization of the long-term goal of this partnership is the responsibility of each one of us.”

Because doctors control patient referrals, Stark said, they can lock up the market and drive independent providers out of business. “We have received hundreds of letters of support from independent providers who feel their survival is threatened by this trend,” Stark said.”

Benson, at the Irvine radiology clinic, said, “I believe in competition, but the deck shouldn’t be stacked.” A spokesman for the nearby competing doctors’ clinic did not return phone calls.

A Los Angeles radiologist, who declined to comment on the record for fear of being ostracized by the medical community on which he depends for referrals, said several diagnostic imaging centers in his area have “locked in” physicians as owners who refer patients there for treatment.

“We could not compete with them,” he said. “There’s no way to compete except to bribe.”

The American College of Radiology has voiced support for curbs on physician ownership of referral services. The practice, said Tom Greeson, general counsel, is sweeping the country “like an epidemic.”

“A promoter can just sign up a bunch of doctors and cut other people out of the market,” said Dr. Stephen Bandeian, staff aide to the House health subcommittee that Stark chairs.

He said the “hot areas” for this activity are X-ray clinics, particularly the lucrative high-technology imaging centers that provide costly magnetic resonance imaging known as MRI’s and CT-scans. Other popular areas for investment, he said, have been physical therapy centers, sports medicine clinics, laboratories that test blood and measure cholesterol levels, as well as companies that provide home health care services and durable medical equipment supplies.

Advanced Marketplace

“Southern California is one of the most advanced marketplaces in the country for this kind of thing,” Bandeian said.

The AMA recently questioned about 900 physicians and reported that California, Arizona and Florida had the highest concentration of physicians who own and refer patients to outpatient clinics--12% compared to the national average of 6%. These three states were grouped together for analysis becauses they all have laws requiring physicians to disclose their financial interest in a clinic to all their patients--not just those insured through the federal Medicare program.

There has been no other formal tally of the number of physicians who refer patients to clinics they own but two government studies are under way. In the meantime, several spot studies have suggested that the services of physician-owned laboratories are over-utilized and more expensive than others.

A 1984 study by Blue Cross in Michigan, for example, found that the average charge per patient and average number of tests per patient were nearly double for the physician-owned labs in the sample.

Cites Competition

But Dr. Johnson Lightfoote, a general partner in Diagnostic Imaging of Southern California in Sherman Oaks, asserted that his clinic competes on the basis of “service, quality and price.” While the clinic is owned largely by physicians, he said that not all of them make referrals.

“There’s one doctor who has sent zero cases in four years,” he said. “One guy down the street sends four cases a day.”

A physician’s return on his investment is totally independent of the number of patients he refers, Lightfoote said. During the last five years, the return on investment has averaged a meager 3.5%, he added.

As for other clinics that find it hard to compete, he said, “Yeah. I try to make it hard.”

A few blocks away is another physician-owned diagnostic imaging center, Computer Medical Imaging. Dr. Steven Novom, a neurologist and founding partner, said he refers about two to four patients there a week. But he said the return on his investment is not tied in any way to the number of referrals. He could not estimate how profitable the venture has been, but said his return is certainly “not 100%.”

The center was set up by physicians to fill a void in the community, according to Dr. Robert Cohenour, another founding partner. He said hospitals in the Valley lack the technology, qualified personnel and motivation to set up sophisticated imaging centers, forcing patients to travel to UCLA Medical Center for care.

Now, he added, local hospitals have been prodded into action, stimulating “healthy competition.”

Dr. James E. Davis, president of the AMA, said Stark’s bill will put an unfortunate end to such physician enterprise and innovation.

He said that several years ago he personally joined with 55 other physicians in Durham, N.C., to set up an ambulatory surgical center that now provides superior and cheaper surgical treatment to patients than is provided by the hospital across the street.

Dr. James H. Sammons, executive vice president of the AMA, said that as long as physicians disclose their financial interest to patients, it is not unethical for them to make referrals to facilities they own.

He said there are already “laws on the books” to combat abuses.

Federal law has long prohibited any person--doctors included--from soliciting or receiving bribes, kickbacks or rebates in return for the referral of patients insured through the government-sponsored Medicare or Medicaid programs. A spokeswoman for the inspector general’s office of the U.S. Department of Health and Human Services said there have been 54 convictions for Medicare and Medicaid kickbacks since 1984.

In Los Angeles, there have been less than half a dozen convictions in the last several years, said Assistant U.S. Atty. Brian Hennigan, who specializes in health care fraud. But he added that the inspector general’s office has called his attention to as many as 20 cases a year involving doctors who have invested in outpatient services, and “there’s a question as to how they’re being compensated--whether they’re being paid for patients they’re sending in.”

Typically, Hennigan said, he does not prosecute these kinds of cases under the federal anti-kickback legislation because the deals are couched in terms that make them technically legal. The money a physician gets from the outpatient service is not viewed as a kickback for a patient referral, but rather as a return on investment, Hennigan said.

Such arrangements involving Southern California doctors “seem to be pretty common now,” compared to four years ago, he said.

“Not all of the 500,000 doctors out there are saints,” Sammons acknowledged, “but by and large they have their patients’ interest at heart, and for the few who misuse the system, they’ll misuse anything. That’s a tiny, tiny part.”