                   TO BE PUBLISHED IN THE OFFICIAL REPORTS

                        OFFICE OF THE ATTORNEY GENERAL
                                  State of California

                                     BILL LOCKYER
                                     Attorney General



                                              :
                  OPINION                     :                   No. 98-611
                                              :
                      of                      :                January 20, 1999
                                              :
              BILL LOCKYER                    :
              Attorney General                :
                                              :
         ANTHONY S. DA VIGO                   :
         Deputy Attorney General              :
                                              :




         THE HONORABLE LIZ FIGUEROA, MEMBER OF THE CALIFORNIA
STATE SENATE, has requested an opinion on the following question:

               May a corporate entity licensed as a health care service plan enter into an
agreement with a network of providers of cosmetic medical services, a specialty not covered
by any of the entity’s health benefit plans, according to the terms of which the entity would
(1) refer its enrollees to a participating provider, or to a provider selected by the enrollee
from a directory of participating providers, for medical services at a discounted rate and (2)
collect and forward to the provider the fees for such medical services after deducting an
“administrative fee”?




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                                              CONCLUSION

               A corporate entity licensed as a health care service plan may not enter into an
agreement with a network of providers of cosmetic medical services, a specialty not covered
by any of the entity’s health benefit plans, according to the terms of which the entity would
(1) refer its enrollees to a participating provider, or to a provider selected by the enrollee
from a directory of participating providers, for medical services at a discounted rate and (2)
collect and forward to the provider the fees for such services after deducting an
“administrative fee.”


                                                ANALYSIS

               A corporate entity licensed by the Department of Corporations as a health care
service plan under the Knox-Keene Health Care Service Plan Act of 1975 (Health & Saf.
Code, § 1340 et seq.; “Act”)1 offers a variety of full service and specialized health care
service contracts. It operates under the Act’s requirements serving the legislative purposes
set forth in section 1342:

              “It is the intent and purpose of the Legislature to promote the delivery
       of health and medical care to the people of the State of California who enroll
       in, or subscribe for the services rendered by, a health care service plan or
       specialized health care service plan by accomplishing all of the following:

               “(a) Assuring the continued role of the professional as the determiner
       of the patient’s health needs which fosters the traditional relationship of trust
       and confidence between the patient and the professional.

             “(b) Assuring that subscribers and enrollees are educated and
       informed of the benefits and services available in order to enable a rational
       consumer choice in the marketplace.

               “(c) Prosecuting malefactors who make fraudulent solicitations or
       who use deceptive methods, misrepresentations, or practices which are
       inimical to the general purpose of enabling a rational choice for the consumer
       public.

                 “(d)     Helping to assure the best possible health care for the public at


       1
           Unidentified section references prior to footnote 2 are to the Health and Safety Code.

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       the lowest possible cost by transferring the financial risk of health care from
       patients to providers.

             “(e) Promoting effective representation of the interests of subscribers
       and enrollees.

              “(f) Assuring the financial stability thereof by means of proper
       regulatory procedures.

              “(g) Assuring that subscribers and enrollees receive available and
       accessible health and medical services rendered in a manner providing
       continuity of care.”

              The entity has proposed establishing a directory of participating physicians,
plastic surgeons, dermatologists, ophthalmologists, and other licensed health care providers,
who would perform cosmetic surgery procedures for the entity’s enrollees at discounted
rates. The entity would refer an enrollee to a participating physician and serve as a third-
party intermediary by collecting the fee from the enrollee-patient, retaining a portion as an
“administrative fee” for organizing and administering the program, and forwarding the
remainder of the fee to the physician-provider.

               The proposed medical services are not presently covered by any of the entity’s
existing health benefit plans. Accordingly, the services would be offered not as a plan
benefit, but rather as a “supplemental personal purchasing program.” We are asked whether
the entity may operate such a program. We conclude that it may not.

              Section 1375.1 provides as follows:

               “(a) Every plan shall have and shall demonstrate to the commissioner
       that it has all of the following:

               “(1) A fiscally sound operation and adequate provision against the
       risk of insolvency.

              “(2) Assumed full financial risk on a prospective basis for the
       provision of covered health care services, except that the plan may obtain
       insurance or make other arrangements for the cost of providing to any
       subscriber or enrollee covered health care services, the aggregate value of
       which exceeds five thousand dollars ($5,000) in any year, for the cost of
       covered health care services provided to its members other than through the
       plan because medical necessity required their provision before they could be

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       secured through the plan, and for not more than 90 percent of the amount by
       which its costs for any of its fiscal years exceed 115 percent of its income for
       that fiscal year.”

Under the proposed program, the entity would assume no financial risk. Payment on a fee-
for-service basis would be entirely the responsibility of the entity’s enrollee. Accordingly,
the proposal may not be operated under authority of section 1375.1 or any other provision
of the Act.

             If the Act does not authorize the proposed program, does any law prohibit its
establishment? Section 650 of the Business and Professions Code2 provides in pertinent part:

                 “. . . [T]he offer . . . by any person licensed under this division of any
       . . . discount, or other consideration . . . as . . . compensation or inducement for
       referring patients . . . to any person . . . is unlawful.”

A physician is a person “licensed under this division.” (§§ 2050-2078.) Consequently,
section 650 prohibits the offering of any discount by a physician as inducement for the
referral of patients. Here, the offer of a discount would be made to the patient rather than
to the referring entity. In such circumstances, may the discount be deemed a proscribed
“consideration” given as an “inducement” for the referring of patients?

        In interpreting the language of section 650, we apply well recognized principles of
statutory construction. An interpretation is favored that would defeat subterfuges,
expediencies, or evasions employed to continue the mischief sought to be remedied by the
statute or to defeat compliance with its terms or any attempt to accomplish by indirection
what the statute forbids. (Freedland v. Greco (1955) 45 Cal.2d 462, 467; Granberry v. Islay
Investments (1984) 161 Cal.App.3d 382, 388.)

              As noted in 77 Ops.Cal.Atty.Gen. 143, 144 (1994), the Legislature enacted
section 650 to protect the public from excessive health care costs (Mason v. Hosta (1984)
152 Cal.App.3d 980, 986), referrals based on considerations other than the best interests of
the patients (Magan Medical Clinic v. Cal. State Bd. Of Medical Examiners (1967) 249
Cal.App.2d 124, 132; 68 Ops.Cal.Atty.Gen. 28, 31 (1985)), deceit and fraud (63
Ops.Cal.Atty.Gen. 89, 91 (1980)), and payment to a licensee where professional services
have not been rendered (65 Ops.Cal.Atty.Gen. 252, 253 (1982)). In Beck v. American
Health Group Internat., Inc. (1989) 211 Cal.App.3d 1555, 1564, the court observed:



       2
           Hereafter, unidentified section references are to the Business and Professions Code.

                                                     4                                            98-611
             “. . . 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 patients . . . .’
       (63 Ops.Cal.Atty.Gen. 89, 92 (1980), fn. omitted.)”

               Under the proposed program in question, the discount offered by the physician
to an enrollee of the entity would constitute “consideration” to the referring entity for
purposes of section 650. Specifically, the discount conferred upon an enrollee of the entity
would enhance the entity’s economically advantageous relationship with the enrollee. The
program would be a marketing tool for the entity to use in soliciting new enrollees. The
partnership between the physicians and the entity would thus not only benefit the physicians
in obtaining new patients, but also the entity in promoting its health care service plans vis-a-
vis its competition. In sum, the referrals would be induced by considerations other than the
best interests of the patients.

               We reject the suggestion that section 650 would be inapplicable here because
the proposal would allow the enrollee to select from a list of physicians and other licensed
heath care providers. We have previously expressed the view that “. . . even if the [enrollee]
could request and receive the referral agency’s entire list of professionals willing to [provide
services at a discount], the referral would nevertheless be predicated upon considerations
other than the best interests of the prospective patient.” (77 Ops.Cal.Atty.Gen., supra, at
146.) Nor are we dissuaded by the fact that the entity could offer the program not only to
its current enrollees but also former enrollees. While the entity’s economic fortunes may
not be significantly enhanced by the participation of its former enrollees, the fact remains
that a benefit would be derived by the entity from the discounted services rendered to the
vast majority of participants in the proposed program. The operation of the program by the
entity apart from the Act would thus violate section 650.

                It is concluded that a corporate entity licensed as a health care service plan
may not enter into an agreement with a network of providers of cosmetic medical services,
a specialty not covered by any of the entity’s health benefit plans, according to the terms of
which the entity would (1) refer its enrollees to a participating provider, or to a provider
selected by the enrollee from a directory of participating providers, for medical services at
a discounted rate and (2) collect and forward to the provider the fees for such medical
services after deducting an “administrative fee.”

                                           *****




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