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Testimony on Physician Self-Referral Regulations by Kathy Buto
Deputy Director, HCFA Center for Health Plans & Providers
U.S. Department of Health and Human Services

Before the House Ways & Means Health Subcommittee
May 13, 1999

Chairman Thomas, Congressman Stark, distinguished Subcommittee members, thank you for inviting us to discuss limits on physician self-referrals for Medicare and Medicaid beneficiaries. These limits were enacted into law, with leadership from this Subcommittee, to prevent increased program costs and potential harm to beneficiaries from unnecessary tests and treatments. They are based on numerous studies showing that physicians made far more referrals when they had a financial interest in a testing or treatment facility. Some studies also found higher prices and lower quality with self-referrals. The American Medical Association has declared self-referral unethical in most instances.

Self-referral limits play an important role in bolstering our successful efforts against fraud, waste, and abuse. However, we would all agree that we must take great care in translating this important legislation into policy. Important exceptions are needed to protect beneficiaries' access to care, and we must take into account the many detailed financial arrangements in today's health care delivery system. We would also all agree that physicians and other health care entities have by and large made a good faith effort to comply with the law without final regulations to clarify many issues.

We have taken steps in our proposed regulations to clarify the law and create appropriate flexibility. One of the most important provisions establishes that referrals to an entity with which a physician has a compensation arrangement are generally permissible as long as the compensation is at "fair market value," furthers a legitimate business purpose, and is not tied to the volume or value of physician referrals. This exception goes a long way in simplifying the policy under the law.

We are evaluating the 12,800 comments we received on these proposed regulations, and are open to ideas to further simplify the regulations and the law itself in ways that do not undermine its intent. But we must take care to uphold its intent and prevent arrangements that would increase costs to taxpayers and subject beneficiaries to possible harm from unnecessary tests and procedures.


Concern about the ethical risks inherent in physician self-referral dates back at least to a 1986 Institute of Medicine study. A 1989 HHS Inspector General study documented that physicians who owned or invested in independent clinical laboratories referred Medicare patients for 45 percent more laboratory services than did physicians who did not have such financial interests. In 1991, the American Medical Association Council on Ethical and Judicial Affairs concluded that physicians should not refer patients to a health care facility outside their office at which they do not directly provide services and in which they have a financial interest. And in 1992, the American Medical Association House of Delegates voted to declare self-referral unethical in most instances.

Limits on self-referral were first enacted into law as part of the Omnibus Budget Reconciliation Act of 1989. The law took effect January 1, 1992. It bars referral of Medicare patients to clinical laboratories by physicians who have, or whose family members have, a financial interest in those laboratories. The Omnibus Reconciliation Act of 1993 expanded the scope of the ban on self-referral to 10 additional designated health services, including:

  • physical therapy;
  • occupational therapy;
  • radiology services;
  • radiation therapy services and supplies;
  • durable medical equipment and supplies;
  • parenteral and enteral nutrients, equipment and supplies;
  • orthotics, prosthetics, and prosthetic devices and supplies;
  • home health services;
  • outpatient prescription drugs; and
  • inpatient and outpatient hospital services.

The 1993 law also expanded and clarified exceptions, and applied the referral limits to Medicaid. Provisions related to the new designated health services were effective January 1, 1995.

The self-referral law works differently from the law against kickbacks, which was enacted as part of the Social Security Amendments of 1972. Enforcement of the anti-kickback law requires proof of "knowing"and "willful"illegal remuneration, such as bribes or rebates, for patient referrals, and it can result in criminal sanctions. Self-referral laws, on the other hand, are generally self-enforcing. The simple existence of an improper financial relationship is subject to loss of Medicare payment or a civil fine. This creates a powerful incentive to proactively comply with the law through due diligence efforts to avoid financial arrangements that may unethically lead to substantial increases in use of services. The law's preventive nature makes a highly effective contribution to our increasingly successful efforts to protect Medicare and Medicaid program integrity.


As mentioned above, the law includes many important exceptions. It also gives the Health and Human Services Secretary authority to create new exceptions through regulations as long as they do not create a risk of program or patient abuse. One of the most important exceptions is for most services physicians provide in their own offices or through their group practices. There are more than a dozen additional exceptions, including ones for managed care plans, rural providers, and isolated financial transactions.

Adequately defining these exceptions and determining whether new exceptions are warranted has proven to be a daunting task. We have spent a great deal of time meeting and talking with industry associations, individual providers, and their attorneys in efforts to deal fairly and proactively with the many issues subject to interpretation. We are continuing these efforts.


We published proposed regulations for the clinical laboratories referral ban on March 11, 1992, and a final rule with comment period on August 14, 1995. These regulations have been in effect since September 13, 1995.

We published proposed regulations for the other designated services on January 9, 1998. These proposed regulations were generally well received. The American Hospital Association has said they make it easier for physicians and hospitals to work together in integrated systems. The proposed regulations include several clarifications and create new exceptions, providing flexibility for physicians while not compromising the intent of the law. They:

  • create a "fair market value" exception to make clear that compensation arrangements are generally permissible as long as they are at fair market value, further a legitimate business purpose and are not tied to the volume or value of physician referrals. Physicians must simply put in writing the terms of their arrangements, the items or services the physician will provide, and the time period involved. The agreement must be commercially reasonable and not based on the volume or value or referrals made, and must comply with the anti-kickback statute;
  • state that token gifts, such as free parking at a hospital, are allowed as long as the value is $50 or less with an annual maximum of $300 and there is no direct link to patient referrals.
  • clarify that physicians can provide crutches to patients as long as the physicians do not profit;
  • allow for discounts as long as they are passed along to the patient or insurer with no benefit to the physician;
  • clarify that a financial transaction qualifies for the Aisolated" exception only if another financial relationship does not occur within six months; and
  • clarify an exception for recruitment payments made by hospitals to encourage physicians to relocate to the hospital's geographic area, and invite comments on how that geographic area should be defined.

The Omnibus Reconciliation Act of 1997 instructed the Health Care Financing Administration to issue, upon request, advisory opinions as to whether particular arrangements would violate self-referral policy. We published a final regulation implementing this provision January 9, 1998. To date, we have issued two such advisory opinions and are working on several others.

Reporting and Enforcement

Our proposed regulations also significantly limit the information that physicians are required to report for financial relations related to the 10 new designated services. Also, we are not asking physicians to submit information regarding these financial relationships as we did for clinical laboratory services. Instead, physicians need only keep on file the kind of information that they would normally maintain to meet Internal Revenue Service, Securities Exchange Commission, and other Medicare and Medicaid rules. This would be sufficient to demonstrate compliance in the event of a complaint investigation or spot audit. No other type of enforcement actions will be taken until outstanding questions are resolved and a final rule is published.


While the general response to our proposed regulations was positive, many outstanding issues remain. We extended the public comment period by two months in order to provide more time for interested parties to respond. The public comment period closed on March 10, 1998. We are reviewing the 12,800 comments we received and continuing to evaluate how we should address the many concerns that have been raised in final regulations. Many comments involve issues related to physicians in multi-specialty group practices and to a requirement in the law for direct supervision by physicians of services provided in physician offices. We are considering a wide range of clarifications and other suggestions to determine whether they can be addressed through regulations and would meet the statutory requirement that exceptions not create a risk of program or patient abuse.

We greatly appreciate the good faith efforts made by physicians to comply with the law and to work with us to address the many issues raised by this complex legislation. We look forward to continuing to work with physician groups and this Subcommittee to resolve remaining issues. I thank you for holding this hearing, and I am happy to answer your questions.

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