Referral-For-Profit Drives Up Health Costs By Creating Inherent Conflict Of Interest

As the health care reform frenzy continues, one issue everyone can agree on is that runaway medical costs must be controlled. With that goal in mind, the issue of physician self-referral should come under increased scrutiny.

Whether you are a risk manager, an insurer or a third-party administrator trying to get a handle on your self-insured workers' compensation or employee health coverage costs, self-referrals by doctors for diagnostic or rehabilitative medical services should be a topic of keen interest.

An example of this practice is a growing number of physicians who refer patients for imaging done by scanners they own and profit from. For instance, one medical practice in Iowa increased requests for scans by 700 percent within seven months–the same time period after the practice bought its own CT scanner.

The Government Accountability Office found that nearly two-thirds of the money Medicare paid for imaging was for scans in doctors' offices and that physicians reap an ever larger part of their income from providing these services. Simply put, when doctors have imaging equipment in-house, more imaging gets done.

A similar alarming pattern is seen in the private sector with the rise in physicians who employ physical therapists (PTs) or refer patients to physical therapy clinics in which they have a financial interest.

The American Physical Therapy Association (APTA) describes these situations as “referral-for-profit.” It has long opposed these services because they pose an inherent conflict of interest, which impedes both the autonomous practice of the physical therapist and the fiduciary relationship between the therapist and patient.

Multiple independent studies have shown that this profit motive can lead to lower quality of care and overutilization of physical therapy services, resulting in excessive costs for both patients and payers. Consider the following consequences of referral-for-profit arrangements:

o Payment for unnecessary services.

Patients typically trust their doctors to recommend appropriate treatment. If a doctor refers a patient to PT services they own, the physician's decision may be tainted by financial incentives. Referral-for-profit may subject the patient to unnecessary treatment, inconvenience and extra expense.

A study of the California Workers' Compensation program reported in the New England Medical Journal found that if an injured worker received initial treatment from a physician with an ownership interest in PT services, that patient received a referral for PT 66 percent of the time.

By contrast, a patient receiving initial treatment from a physician with no ownership interest was referred for PT 32 percent of the time.

o Compromised quality of care.

The quality of patient care may suffer in referral-for-profit settings. A report from the Office of Inspector General of the U.S. Department of Health and Human Services on Medicare physician services found that 49 percent of rehabilitation therapy services performed by nonphysicians were furnished by staff not trained as therapists and whom the OlG found to be unqualified.

o Higher costs for payers and consumers.

The lack of oversight in self-referral settings drives up utilization and inflates costs. The OIG found that 91 percent of PT billed in doctors' offices didn't meet Medicare requirements, costing taxpayers millions of dollars.

The total payments for PT claims from physicians skyrocketed from $353 million in 2002 to $509 million in 2004. In addition, the total number of physicians billing the program for more than $1 million in PT services more than doubled in that two-year period.

It's clear from these findings that self-referral and health care reform don't mix. So, what can be done about self-referral relationships?

The federal Stark legislation that had been so strong in preventing referral-for-profit situations in Medicare (Stark II in 1993) was watered down in 2001 with revisions that enable physicians to structure their practices without violating the law using a concept called “incident to” billing.

The loopholes allow physicians to own, refer to and profit from their own ancillary services.

Legislators on Capitol Hill have shown little interest in toughening the laws to prohibit referral-for-profit. This is sadly true even in light of concerns over rising health care costs and current proposals for health care reform.

Some states have been successful in creating laws that disallow therapists to work in these schemes, but they are too few in number. Others have attempted–yet failed–to pass legislation that would prohibit physician-owned PT services.

Referral-for-profit arrangements will proliferate as long as economic pressures on physicians persist. But to limit physician self-referral for PT, risk managers as well as their insurers and third-party administrators can take a number of actions:

o Analyze claims and cost data to compare charges and utilization for different types of providers to determine the extent of the problem within their own statistics.

o Revise underwriting rules and coverage terms so therapy is covered only when it is provided by therapists who are independent of physicians and/or other referral sources.

o Contract only with physical therapists in private practice. Substantial evidence shows that private practitioners in physical therapy deliver better quality of care, more cost-effectively, than do PTs working for physicians.

Private practitioners provide the most efficient, quality-oriented services without conflicts of interest, ensuring patients receive the best possible care and payers get the most value for their dollars.

o Support health care policy to change the situation. Stand with the APTA to urge Congress to take action to remove physical therapy as an “incident to” service in physician offices, and to tighten Stark II referral-for-profit regulations to eliminate financial incentives that contribute to high physician billing of PT services.

Michael Weinper, MPH, PT, is president of PTPN, a national network of independent rehabilitation providers based in Calabasas, Calif.