                       TO BE PUBLISHED IN THE OFFICIAL REPORTS


                            OFFICE OF THE ATTORNEY GENERAL

                                      State of California


                                       DANIEL E. LUNGREN

                                         Attorney General


                          ______________________________________

                  OPINION            :
                                     :          No. 93-404
                  of                 :
                                     :          September 15, 1993
        DANIEL E. LUNGREN            :
           Attorney General          :
                                     :
         GREGORY L. GONOT            :
        Deputy Attorney General      :
                                     :
______________________________________________________________________________


            THE HONORABLE MARIAN BERGESON, MEMBER OF THE CALIFORNIA
SENATE, has requested an opinion on the following question:

                 With respect to a pharmaceutical company's clinical research program in which
patients will be paid for participation in the program and will receive free drugs, medical care, and
laboratory evaluations, may the company pay referral and evaluation fees to physicians for referring
their patients to the program and for evaluating the results of the program?

                                           CONCLUSION

                 With respect to a pharmaceutical company's clinical research program in which
patients will be paid for participation in the program and will receive free drugs, medical care, and
laboratory evaluations, the company may not pay referral fees to physicians for referring their
patients to the program, but it may pay evaluation fees for legitimately performed evaluations of the
results of the program.

                                             ANALYSIS

                The question presented involves proposed investigational drug research conducted
by a pharmaceutical company in compliance with and subject to federal Food and Drug Act
regulations. Patients would be paid for participation in a clinical research study and receive free
drugs, medical care, and laboratory evaluations during the course of the program. In order to
increase participation in the drug trials, the company will pay referral fees to physicians for referring
suitable patients to the program. Evaluation fees will also be paid to the physicians for evaluating
the results of the program. We are asked to determine whether these proposed payments to
physicians would be contrary to state law.




                                                   1.                                            93-404

                  Business and Professions Code section 6501 states in part:

                  ". . . the offer, delivery, receipt, or acceptance by any person licensed under
          this division of any rebate, refund, commission, preference, patronage dividend,
          discount, or other consideration, whether in the form of money or otherwise, as
          compensation or inducement for referring patients, clients, or customers to any
          person, irrespective of any membership, proprietary interest or coownership in or
          with any person to whom these patients, clients or customers are referred is unlawful.

                  "The payment or receipt of consideration for services other than the referral
          of patients which is based on a percentage of gross revenue or similar type of
          contractual arrangement shall not be unlawful if the consideration is commensurate
          with the value of the services furnished or with the fair rental value of any premises
          or equipment leased or provided by the recipient to the payor."2

As noted in 70 Ops.Cal.Atty.Gen. 65, 67 (1987), the purposes of section 650 are to protect the public
from excessive health care costs, referrals based upon considerations other than the best interests
of the patients, deceit and fraud, and payment to a licensee where professional services have not
been rendered. In Beck v. American Health Group Internat., Inc., (1989) 211 Cal.App.3d 1555,
1564, the court stated:

                   "The statute was intended to prevent `the referring person [from being
          tempted] to suggest or prescribe extra, or more expensive services by the person to
          whom the patient is referred because the referring person's income is a function of
          the business he generates by referral.' (53 Ops.Cal.Atty.Gen. 117, 118 (1970).) The
          evil to be proscribed by section 650 `"`. . . is not just the payment for the referral, but
          also any relationship where the referral may be induced by considerations other than
          the best interests of the patient . . . .'"' (63 Ops.Cal.Atty.Gen. 89, 92 (1980), fn.
          omitted.) `Certainly a sick patient deserves to be free of any reasonable suspicion
          that his doctor's judgment is influenced by a profit motive.' (Magan Medical Clinic
          v. Cal. State Bd. of Medical Examiners (1967) 249 Cal.App.2d 124, 132.)"

                 We have had occasion to apply section 650 in a variety of circumstances, finding a
violation in some instances (see, e.g., 73 Ops.Cal.Atty.Gen. 321 (1990) [radiologists may not
contract with physicians to provide imaging services for patients of the physicians, where the
radiologists would charge each patient a fee for the services, the fees collected would be transmitted
to the physicians, the physicians would pay stipulated amounts to the radiologists for the services,
and the total amounts paid by the physicians would be independent of, but increase proportionately
less than, the total fees collected from the patients]; 70 Ops.Cal.Atty.Gen. 65, supra [physicians may
not form a professional corporation to which other physicians would refer their patients for the
performance of pulmonary and cardiac stress tests, where the corporation would pay a fee to the
referring physician for preparing an evaluation report of the referred patient's test data, but no
legitimate reason would exist for the report to be prepared as part of the referral]), while not in
others (see, e.g., 68 Ops.Cal.Atty.Gen. 28 (1985) [physician may refer patients to a clinical
laboratory in which he or she owns a limited partnership interest, if the patients are informed of that
interest and are free to choose another laboratory to have the work performed, there is a valid

   1
       All undesignated statutory references are to the Business and Professions Code.
   2
    Physicians are licensed under the Medical Practice Act (§§ 2000-2515), part of "this division"
(§§ 500-4998.7).

                                                      2.                                                93-404
medical need for the referral, and the physician's return on investment is not measured by the
number or value of the referrals]; 63 Ops.Cal.Atty.Gen. 89 (1980) ["professional courtesy services"
may be provided by a clinical laboratory to a physician and his family where such services are not
provided as compensation or inducement for referring patients to the laboratory]).

                 Here, as to the referral fees, the pharmaceutical company will offer to a licensed
physician a fee as an inducement for the referral of patients to the company's clinical drug testing
program. "`As the prohibition [of §650] extends to offer and delivery as well as receipt and
acceptance, only one of the two parties in a referral fee transaction need be a licensee in the healing
arts for the transaction to be illegal.'" (Mason v. Hosta (1984) 152 Cal.App.3d 980, 986, emphasis
added.) Moreover, it is of no consequence that the referral arrangement does not involve an
excessive charge to the patient:

                "The court in Mast v. State Board of Optometry, supra, 139 Cal.App.2d 78,
       91, held: `An excessive charge [to the patient] is not an element of the offense.'
       (Italics added.) Pertinent to this argument of plaintiff is the Attorney General's
       response in 63 Ops.Cal.Atty.Gen., supra, at page 94: `[S]ection 650 in no way
       requires . . . that there in fact be an obvious increased cost to patients [resulting from
       the prohibited referral fee] . . . . Essentially, it is the potential for harm to patients as
       well as actual harm to them that is proscribed in Section 650.'" (Ibid.)

               In the proposed referral arrangement, it would be the patient's physician, not the
pharmaceutical company, who would determine whether the referral is in the best medical interests
of the patient. That judgment could become clouded by pecuniary interests if the physician is
allowed to accept a fee for the referral. As previously noted, the evil proscribed by section 650 is
not simply the payment for the referral, but also any relationship with third parties whereby the
referral may be induced by considerations other than the best interests of the patient.

                As for the proposed evaluation fees, section 650 does not proscribe contractual
agreements between physicians and others where the physicians are paid for the fair market value
of their services. (See Blank v. Palo Alto-Stanford Hospital Center (1965) 234 Cal.App.2d 377,
390; 53 Ops.Cal.Atty.Gen., supra, 119.) Thus, pharmaceutical companies may provide financial
support to physicians who perform actual research on new unapproved drug products and new
unapproved uses of approved drugs, with the cooperation of patients from whom informed consent
has been obtained.3




   3
    In Moore v. Regents of the University of California (1990) 51 Cal.3d 120, the Supreme Court
analyzed a physician's fiduciary duty to his patient and the requirements for obtaining the patient's
informed consent prior to the performance of any medical procedure.

                                                    3.                                                 93-404

                We therefore conclude that a physician would violate section 650 by accepting a fee
for referring patients to a pharmaceutical company's clinical research program;4 however, evaluation
fees may be paid for appropriately evaluating the results of the program.

                                              *****




  4
    Other statutes may have some bearing on the question of accepting fees for referring patients to
clinical drug trials. If any of the participants in the referral arrangement are paid by Medicaid or
Medi-Cal for services or products related to the clinical research, payment of the referral fees would
be prohibited under the Medicaid and Medi-Cal anti-fraud statutes. (42 U.S.C. § 1320(a)(7)(b);
Welf. & Inst. Code, § 14107.2.) Also, Health and Safety Code section 445, creating a misdemeanor
for medical referrals "for profit," may apply to a physician who charges a fee for the referral of any
person to a clinical research program being conducted by "a physician, hospital, health-related
facility, or dispensary" on behalf of a pharmaceutical company. However, such practice could as
easily be prosecuted under section 650 and would be subject to the greater penalties of that
provision.

                                                 4.                                           93-404
