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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. 

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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).) 

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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. 

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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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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 

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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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