U.S. Probing Patient Referrals by Doctors : Health Care: Some 500 labs may be targeted. The Department of Health and Human Services is trying to learn whether they are profiting illegally.

The enforcement arm of the U.S. Department of Health and Human Services has launched a probe of hundreds of doctor-owned clinical laboratories, imaging centers and other health-care facilities to discover whether doctors are illegally benefiting from patient referrals.

Some 500 facilities--about 80 in Southern California--may be targeted in the investigation by the HHS’ Office of Inspector General.

The OIG recently served a rash of broad subpoenas under anti-kickback provisions of federal Medicare and Medicaid laws. The subpoenas seek detailed information on nearly every aspect of the businesses, including how joint ventures were structured, who the partners are and how profits are distributed. They also seek records of the referrals made by physician owners.

Inspector General Richard P. Kusserow has never been as active in investigating the industry as he is now and that fact alone is already having a “chilling effect” on the businesses, said lawyers and consultants who advise health-care businesses.

The investigation has caused confusion among investors because Kusserow seems to be questioning practices considered normal and legitimate in the industry.

“The mere fact that they are targets of investigations has been very damaging to their businesses,” said Patric Hooper, a partner in Hooper, Lundy & Bookman, a Los Angeles law firm specializing in health care.

Some doctors have stopped making referrals to targeted clinics, he said. Also, he added, some physicians are trying to get out of the businesses and pending joint ventures are having trouble finding capital because potential investors are scared.

Southern California, where a greater percentage of physicians have bought into health-care businesses than elsewhere, is a particular focus of the probe.

Judy Holtz, spokeswoman for Kusserow, refused to say how many facilities were targeted, but she said the estimate of 500 nationwide by the industry lawyers was a “bit high.”

The investigation stems from a “fraud alert” the inspector general sent last April to about a million doctors and health-care providers asking them to report suspect joint ventures that may violate the law. Calls started pouring into hot lines set up by OIG around the country, Holtz said, explaining that calls raising questions about California and New York businesses were particularly heavy.

The investigation was opened because the allegations were “substantial,” she said. The probe may result in civil proceedings or criminal charges against the targeted businesses, she said.

The 1977 federal anti-kickback law and related statues have never been interpreted to bar physicians from referring patients to health-care services in which they have a financial stake, said Hooper, Lundy attorney W. Bradley Tully. (California law, however, requires that doctors who refer patients disclose their financial stake, if it reaches a certain threshold percentage.)

“The problem here is that it (federal law) is very broad,” said Craig Holden, a Baltimore attorney specializing in health care. “If any kind of payment is intended to induce referrals, it is a violation,” he said, explaining that distributing profits to partners based on the number of referrals is clearly illegal.

But part of the problem, he said, is that OIG seems to be implying that some practices the industry believes have legitimate business purposes are designed to make indirect payments for referrals possible.

“We think they are . . . really trying to make new law and set new precedents,” Tully said. He said some health-care lawyers believe that OIG will proceed against certain businesses based on “suspect practices “ identified in the fraud alert and seek to have a court declare those activities a violation of the anti-kickback laws.

The fraud alert states that the OIG is trying to ferret out indirect forms of rewarding partners for making referrals.

“These suspect joint ventures may be intended not so much to raise investment capital legitimately to start a business, but to lock up a stream of referrals from the physician investors and to compensate them indirectly for these referrals,” it said. It identifies “potentially unlawful activity” to include:

- Offering greater investment opportunities to doctors who are expected to make a large number of referrals and offering less opportunity to those who are not.

- Encouraging physicians to divest if they don’t sustain a certain number of referrals or requiring doctors to divest if they move out of the area or retire.

- Keeping and distributing sources of referrals to investors.

There may be legitimate quality control reasons for keeping track of referrals in that the laboratory or clinic may want to know whether a drop in referrals is a sign that doctors are unhappy with its service, said Hooper, Lundy partner Robert W. Lundy Jr.

“It is not uncommon for businesses to provide information to investors as to where the business is coming from,” he said.

The OIG investigation comes amid an ongoing debate over whether physicians who have an interest in health-care businesses refer more patients for tests. Kusserow reported to Congress in April that Medicare patients treated at clinical labs owned by their doctors receive almost half again as many tests as Medicare patients in general. Such “over-utilization,” he said, cost Medicare an additional $28 million in 1987.

Some lawmakers as well as many in the medical community believe physician ownership of health-care services where they refer patients is an inherent conflict of interest. Rep. Pete Stark (D-Calif.) has been pushing Congress to ban doctors from referring Medicare patients to labs in which they have invested. The bill currently only has House approval. Despite the stepped-up enforcement by the OIG, Stark still believes new law is necessary to prevent abuses, said a spokesman for the congressman.

The OIG investigation also comes at a time when doctors are facing increased competitive pressures and are seeking new ways to maintain income. The proliferation of health-maintenance organizations and Preferred Provider Organizations mean that physicians are increasingly receiving discounted payments for their services, said Steve Valentine, a Los Angeles-based Ernst & Young partner specializing in health-care consulting. Medicare and Medicaid is also paying doctors less, he said.

“To maintain their income stream, they need to make money somewhere else, “ he said. Investing in clinical laboratories and other ancillary health-care services has become a very popular option. However, with the OIG stepping up its investigations, many potential physician investors are looking at the ventures with a “more jaundiced eye.” The investigations have given doctors who are in some marginal ventures an excuse to bail out, he added.