Medicare Moves to Cut 'Self Referral' Practice

Proposed New Rules Target The Rise in Doctors Sending to Centers They Own


In February, a group of cardiologists in Gainesville, Ga., announced they were building a diagnostic heart center in an $18 million joint venture with the local hospital. Last month, they said the project was dead.

The reason? Federal Medicare officials want to crack down on arrangements like the one that was planned in Gainesville, where doctors refer patients to businesses in which they have a financial stake.

In recent years, many physicians have become wealthy by investing in magnetic resonance imaging, or MRI, facilities, surgery centers and diagnostic sites — and then sending their patients to them. A recent McKinsey & Co. study pegged doctors’ profits from this practice, known as self-referral, at $8 billion a year.

Critics say self-referral fuels the ordering of unnecessary exams or procedures as the doctors stand to profit from the increased business. Supporters say that doctors’ investment in new facilities improves medical services, especially outside metropolitan areas, where patients might not otherwise be able to access the latest technologies.

Now, the criticism has galvanized in the form of tough new restrictions proposed by the federal Medicare authority that would essentially ban Medicare payments for many self-referred services. In unusually blunt language, the Centers for Medicare & Medicaid Services said the self-referral arrangements are “creating incentives for overutilization and corrupting medical decision-making.”

The proposed rules, which Medicare has the power to put in place, are slated to go into effect as early as January, but could be delayed or modified between now and then. However, legal experts say the agency has made clear it is serious about broad limits, and the impact is already being felt.

“A lot of people have just called a time out on these deals,” says Daniel Mulholland, a Pittsburgh health-care attorney who has advised hospitals on such investments. “The party is over.”

Nora Liggett, a Nashville attorney active in health-care regulation, calls the proposed Medicare prohibition “too broad” and says it is already causing reluctance among some of her clients in the medical field to enter into arrangements that might run afoul of the proposed rules. She says there are legitimate reasons for some of the self-referral deals, and the government insurer should make exceptions for the purchase of specialized equipment.

In some locales, she says, doctors have teamed up with hospitals to invest in high-tech devices like Gamma knives, which are used in brain surgery. The doctors share in profits generated by the device. Without the doctor investors, Ms. Liggett says, some of that equipment would never be available to patients.

The Medicare proposal mainly takes aim at increasingly popular joint ventures between doctor groups and hospitals. These deals allow the partners to share the profits from outpatient services such as MRI scans or computed-tomography scans for the heart, endoscopy procedures and commonly performed same-day surgeries.

Hospitals began pushing the joint ventures after many doctor groups started their own centers to provide services — such as MRI scans — that were formerly the exclusive domain of hospitals. Faced with a loss of revenue, more hospitals have decided to co-invest with doctors instead of competing against them. The arrangement allows them to share the cost of expensive equipment purchases as well as eliminate a potential competitor.

In many cases, the company formed by the hospital and doctors is hired to provide services to the hospital. This setup also offers an advantage to the joint venture in that the hospital can bill for the work. Insurers generally pay a higher rate to hospitals than they will for the same service provided in a doctor’s office.

The ability to charge insurers a higher rate is highlighted by many of the consultants who promote doctor-hospital joint ventures to investors. The No. 1 reason for physicians and hospitals to pair up, one Alabama consulting firm says on its Web site, is “access to higher reimbursement” in which “equity participants enjoy higher profit margin potential.”

Medicare says in its proposal to change the rules that these arrangements “may be little more than a method to share hospital revenue with referring physicians in spite of unnecessary costs to the program and to beneficiaries.” The agency’s concern is twofold: One is that doctors who invest in these joint ventures will be tempted to boost the profits of the business by referring patients to the centers for unnecessary or borderline tests. The other is that doctors will refer patients for services at a particular center simply because they have an ownership stake and not because it provides the best service or care.

The new rules wouldn’t affect some self-referral arrangements, such as doctors who own an MRI machine that they keep in their office.

Jean Mitchell, a health-care economist at Georgetown University who studies doctors’ referral practices, says her research shows that doctors refer more patients for services like MRI scans when they own the machine or have an investment in the company providing the service. “Self-referral arrangements represent an inherent conflict of interest for referring physician investors,” she says.

Between 2000 and 2005, the latest year of available figures, Medicare spending for imaging services more than doubled, to $13.7 billion from $6.6 billion.

Dan Merlino, president of ECG Management Consultants Inc., a Seattle firm that helps set up doctor-hospital ventures, says huge increases in spending on technology like MRI scans is driving Medicare to crack down on physician ownership of testing centers. He says one reason for the growing use of MRIs is superior diagnostic capability, but he acknowledges “some self-interest involved here as well. . . . We have seen anecdotally that utilization jumps when physicians own their own centers. There is no question about that.”

In Gainesville, hospital operator Northeast Georgia Health System planned to open an outpatient heart center in a joint venture with a group of local cardiologists. The joint venture planned to buy new CT and MRI machines and open a catheterization laboratory. When Medicare issued its proposed restrictions on self-referral earlier this summer, Northeast Georgia Health System Chief Executive Jim Gardner says it quickly became clear that they could make it a problem for the doctors to invest.

“This landed like a meteor from outer space,” Mr. Gardner says. The hospital and doctors decided to pull the plug on the project now, he says, because it is “clearly not a question of if Medicare” will act to ban these arrangements, “but when.”

He says the hospital is working to figure out another way to open the kind of center envisioned in the joint venture.
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