                  TO BE PUBLISHED IN THE OFFICIAL REPORTS



                       OFFICE OF THE ATTORNEY GENERAL


                                 State of California



                               JOHN K. VAN DE KAMP


                                  Attorney General



                             _________________________

                                            :
                 OPINION                    :                 No. 86-802
                                            :
                     of                     :               APRIL 1, 1987
                                            :
        JOHN K. VAN DE KAMP                 :
           Attorney General                 :
                                            :
        RODNEY O. LILYQUIST                 :
         Deputy Attorney General            :
                                            :

________________________________________________________________________

         THE HONORABLE DAVID G. KELLEY, MEMBER,                                    STATE
ASSEMBLY, has requested an opinion on the following question:

              Where physicians form a professional corporation to which other
physicians refer their patients for the performance of pulmonary and cardiac stress tests,
would payment of a fee by the corporation to the referring physician for preparing an
evaluation report of the referred patient's test data violate Business and Professions Code
section 650?

                                     CONCLUSION

              Where physicians form a professional corporation to which other
physicians refer their patients for the performance of pulmonary and cardiac stress tests,
payment of a fee by the corporation to the referring physician for preparing an evaluation
report of the referred patient's test data would violate Business and Professions Code
section 650 where no legitimate reason would exist for the report to be prepared as part of
the referral.

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                                          ANALYSIS

               Business and Professions Code section 6501 states in part:

              "Except as provided in Chapter 2.3 (commencing with Section 1400)
       of Division 2 of the Health and Safety Code 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 such patients, clients or customers are referred is
       unlawful.

              "Except as provided in Chapter 2.3 (commencing with Section 1400)
       of Division 2 of the Health and Safety Code and in Section 654.1 it shall
       not be unlawful for any person licensed under this division to refer a person
       to any laboratory, pharmacy, clinic, or health care facility solely because
       such licensee has a proprietary interest or coownership in such laboratory,
       pharmacy, clinic, or health care facility; but such referral shall be unlawful
       if the prosecutor proves that there was no valid medical need for such
       referral."2

              The question presented for analysis concerns whether the provisions of
section 650 would be violated in the following situation: (1) three physicians form a
professional corporation in which they are the officers, directors, and shareholders, (2)
physicians other than these three refer their patients to the corporation for the
performance of needed pulmonary and cardiac stress tests, (3) the corporation pays the
referring physician a fee to prepare an evaluation of his or her patient's test results, (4) the
fee represents the reasonable value of the professional services rendered in preparing the
report, and (5) the patient pays the corporation for the tests and report. We conclude that
section 650 would be violated in such circumstances where the referring physician would
have no need to obtain the report as part of the referral.

   1
     All section references hereafter are to the Business and Professions Code unless otherwise
specified.
   2
      Health and Safety Code sections 1400-1413 govern the licensing of health care referral
agencies. A "person licensed under this division" (§§ 500-4905) covers some 22 categories of
health care professionals, such as physicians, pharmacists, and operators of clinical laboratories.
Section 654.1 requires the licensee to disclose his ownership interest in the laboratory and advise
the patient that another laboratory may be chosen by the patient to perform the tests.

                                                2

                                                                                           86-802


             In Mason v. Hosta (1984) 152 Cal.App.3d 980, 984, the Court of Appeal
quoted from 63 Ops.Cal.Atty.Gen. 89, 90 (1980), in describing the five elements of the
offense prohibited by section 650:

              "'(1) An offer, delivery, receipt or acceptance,

              "'(2) by any person licensed under [the healing arts provisions],

              "'(3) of consideration . . .

              "'(4) as compensation or inducement for,

              "'(5) referral of patients, clients or customers.'"3

In 16 Ops.Cal.Atty.Gen. 18, 19 (1950), we summarized the statutory provisions as
follows:
             "Generally speaking, section 650 [of the] Business and Professions
      Code, in so far as it relates to physicians and surgeons, prohibits a
      physician and surgeon from seeking an additional fee or profit that is to be
      unknowingly paid to him by one of his patients through the device of a
      third party excessively charging the patient for medicine, medical
      laboratory examinations, therapeutical applicances, or other auxiliary
      medical services and paying such excess charges to the physician and
      surgeon."

              The purposes of section 650 are to protect the public from excessive health
care costs (Mason v. Hosta, supra, 152 Cal.App.3d 980, 986), referrals based upon
considerations other than the best interests of the patients (68 Ops.Cal.Atty.Gen. 140, 144
(1985)), deceit and fraud (63 Ops.Cal.Atty.Gen. 89, supra, 91), and payment to a licensee
where professional services have not been rendered (16 Ops.Cal.Atty.Gen. 18, supra, 21).
(See also 68 Ops.Cal. Atty.Gen. 28, supra, 31; 65 Ops.Cal.Atty.Gen. 252, 253 (1982); 53
Ops.Cal.Atty.Gen. 117, 118 (1970).) The legislation was enacted to reinforce the
following provision of the Ethics of the American Medical Association:

            "'. . . The acceptance of rebates on prescriptions or appliances, or of
       commissions from attendants who aid in the care of patients is unethical.

   3
    The statute (paragraph two) is also violated where the licensee's referral is without a valid
medical need to a laboratory in which the licensee has an ownership or proprietary interest. (See
68 Ops.Cal.Atty.Gen. 28 (1985).)

                                               3

                                                                                         86-802


       An ethical physician does not engage in barter or trade in the appliances,
       devices or remedies prescribed for patients, but limits the sources of his
       professional income to professional services rendered the patient. He
       should receive his remuneration for professional services rendered only in
       the amount of his fee specifically announced to his patient at the time the
       service is rendered or in the form of a subsequent statement, and he should
       not accept additional compensation secretly or openly, directly or
       indirectly, or from other source.'" (See 16 Ops.Cal.Atty.Gen. 18, supra, 20-
       21.)

                Here, the referring physician would be paid in connection with each referral
sent to the corporation. This arrangement is to be contrasted with the situation where the
patient's test data are interpreted by a specialist, not the referring physician, or where the
corporation performs and charges the patient only for the tests without an interpretive
report.

               A person receiving a referral may give consideration to the person making
the referral under limited circumstances. If the payment is not to induce or compensate
for the referral, section 650 is not violated. (Blank v. Palo Alto-Stanford Hospital Center
(1965) 234 Cal.App.2d 377, 390 [payment represented reasonable value of equipment
and office space rented]; 63 Ops.Cal.Atty.Gen. 89, supra, 93 [consideration given out of
friendship, in exchange for professional services, or some other reason not related to the
referral]; 53 Ops.Cal.Atty.Gen. 117, supra, 119 [payment represented fair rental value of
the office space rented]; see also 55 Ops.Cal.Atty.Gen. 103, 108 (1972).) Consideration
given in exchange for the referral is one of the elements to be proved in establishing the
offense. (Mason v. Hosta, supra, 152 Cal.App.3d 980, 984.)

              Here we are given that a medical need exists for the performance of the
stress tests. A referral to the corporation would thus be appropriate in order to perform
those tests. The same cannot be said, however, for the referral to include an evaluation
report when such report is to be prepared by the referring physician.

              We have been given no explanation of why the referral should include an
evaluation report under these circumstances except to receive consideration for the report
in violation of section 650. The fee paid for the report would constitute "consideration,
whether in the form of money or otherwise, as compensation or inducement for referring
patients." (§ 650.) Rather than only the best interests of the patient being considered in
making the referral, this arrangement would also be concerned with the best interests of
the corporation and the physician.



                                              4

                                                                                       86-802


              The interposing of the corporation between patient and physician with
respect to the interpretive report provides a potential for increasing the patient's health
care costs. The procedure suggested here could easily lead to double billing.

            We note that an actual increase in the total health care costs of the patient
need not occur to prove a violation of section 650. In Mason v. Hosta, supra, 152
Cal.App.3d 980, 986-987, the court stated:

                "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 by Section 650.'

              ". . . . . . . . . . . . . . . . . . . . . . .

              "'In California alone, health care costs gross nearly $10 billion
       annually and undoubtedly constitute the largest single industry in the state,
       exceeding agriculture and aerospace in dollar volume.'          Obviously a
       business of that scope and breadth is susceptible of possible abuses and
       potential harm to the user public. The Legislature was aware of the
       reprehensible practices of some unethical licentiates who engaged in
       nefarious practices which resulted in 'kickbacks,' 'rebates' and 'hidden fees,'
       and enacted section 650 of the Business and Professions Code to
       proscribe such activities." (Fn. omitted.)

             Moreover, disclosure to the patient of the details concerning the referral
would not prevent a violation of the statute. The essential elements would still remain:
payment made to the physician as an inducement for the referral.

             We find support for our conclusion in federal law. Both Medicare and
Medicaid identically provide:

                "Whoever knowingly and willfully offers or pays remuneration
       (including any kickback, bribe, or rebate) directly or indirectly, overtly or
       covertly, in cash or in kind to induce such person . . . to refer an individual
       . . . ." (42 U.S.C. 1394nn (b)(2), 1396h(b)(2).)


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                                                                                         86-802


              As with section 650 (See 16 Ops.Cal.Atty.Gen. 18, supra, 20-21), the
purpose of these federal statutes is "to provide penalties for certain practices which have
long been regarded by professional organizations as unethical, as well as unlawful in
some jurisdictions, and which contribute appreciably to the cost of" medical care. (1972
U.S. Cong. & Admin. News, at p. 5093; see United States v. Tapert (6th Cir. 1980) 625
F.2d 111, 121.)

               The federal laws are violated where one purpose of the consideration given
is to induce a referral. It is irrelevant that the consideration serves also as compensation
for services legitimately rendered, whether the services are professional in nature or not.
(United States v. Greber (3d Cir. 1985) 760 F.2d 68, 71-72; United States v. Tapert,
supra, 625 F.2d 111, 113-121; United States v. Hancock (7th Cir. 1978) 604 F.2d 999,
1001-1002.)
               In Greber, the operator of a medical laboratory was prosecuted for paying
"interpretation fees" to referring physicians for evaluating their patients' test data. The
defendant argued that no violation occurred because each physician was being paid for
rendering professional services and would be responsible for the interpretive report. In
rejecting this argument, the court stated:

              ". . . Even if the physician performs some service for the money
       received, the potential for unnecessary drain on the Medicare system
       remains. The statute is aimed at the inducement factor.

              ". . . . . . . . . . . . . . . . . . . . . . .

              ". . . If the payments were intended to induce the physician to use
       Cardio-Med's services, the statute was violated, even if the payments were
       also intended to compensate for professional services." (United States v.
       Greber, supra, 760 F.2d 68, 71-72.)

              In Hancock, the doctors argued that they were paid a legitimate fee by the
laboratory to obtain, package, and send the blood and tissue specimens to the laboratory
and to interpret the results of the tests performed. The court concluded otherwise:

              ". . . the element of corruption is found in this allegation that the
       defendants received payments in return for their decision to send specimens
       to Chem-Tech. The potential for increased costs to the Medicare-Medicaid
       system and misapplication of federal funds in plain, where payments for the
       exercise of such judgments are added to the legitimate costs of the
       transaction. We agree with the court in Zacher that these are among the
       evils Congress sought to prevent by enacting the kickback statutes and

                                                               6

                                                                                      86-802


      conclude that the indictments in this case adequately allege the crime of
      receiving kickbacks which Congress sought to proscribe in §§ 1395nn(b)(1)
      and 1396h(b)(1)." (United States v. Hancock, supra, 604 F.2d 999, 1001.)

              Similarly, we believe that a fee paid to the referring physician under the
circumstances presented would violate section 650. No matter how subtly disguised or
ingeniously described, this arrangement for paying the physician would thwart the
legislative design and public policy of proscribing unethical inducements involving
potential harm to the patient. (See Mason v. Hosta, supra, 152 Cal.App.3d 980, 987.)
Without a valid need for the referral to include an evaluation report, payment for the
report by the corporation would be prohibited by the statute.

               In answer to the question presented, therefore, we conclude that where
physicians form a professional corporation to which other physicians refer their patients
for the performance of pulmonary and cardiac stress tests, payment of a fee by the
corporation to the referring physician for preparing an evaluation report of the referred
patient's test data would violate section 650 where no legitimate reason would exist for
the report to be prepared as part of the referral.

                                         *****




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