FTC Staff Comment to the Hon. Jack Jeffey Concerning Nevada S.B. 86 to Prohibit Physical Therapists from Paying or Receiving Referral Fees

to1 Uarkel SH"e1
SII'IO 570
Sen F••nc..co C'" 9" 03
(415) 995-5220
L":\ITED STATES OF A:-'lERICA
FEDERAL TRADE CO~1~llSS10:--:
SA~ FRA~CISCO REGIO:\AL OFFICE
May 	25, 	1989
V890071
COMMISSION AUTHORIZED
The Honorable Jack 	Jeffrey
Majority 	Leader
Nevada 	State 	Legislature
Nevada 	state 	capitol 	Building, 	Room 	106
Carson 	City, 	Nevada 	89710
Re: 	Senate 	Bill 	86
Dear Mr. 	Jeffrey:
The 	staff 	of 	the 	Federal 	Trade 	Commission 	is 	pleased 	to
provide 	these 	comments 	in 	response 	to 	your 	request 	for 	our views
on Senate 	Bill 	86 	("S.B. 	86,,).1 	The 	bill, 	if 	enacted, 	would
prohibit 	a 	physical 	therapist 	from 	paying 	or 	receiving 	any 	fees
in 	consideration 	for 	the 	referral 	of 	a 	patient. 	We 	believe 	that
S.B. 	86 	is 	likely 	to 	injure 	consumers 	because 	restrictions 	on
referral 	fees 	may 	interfere with 	legitimate 	health 	care 	delivery
systems 	that 	contain 	costs. 	We 	respectfully 	recommend 	that 	the
Nevada 	legislature 	consider 	these 	effects 	when 	determining
whether 	to 	enact 	S.B. 	86.
Interest 	and 	Experience 	of 	the 	Federal 	Trade 	Commission
For more 	than 	a 	decade, 	the 	Commission 	and 	its 	staff have
investigated 	the 	competitive 	effects 	of 	restrictions 	on 	the
business 	practices 	of 	state-licensed 	professionals, 	including
dentists, 	lawyers, 	physicians, 	physical 	therapists 	and 	other 	non-
physician health 	care 	providers. 2 	The 	goal 	of 	the 	Commission 	has
1 	These 	comments 	represent 	the 	views 	of 	the 	staff 	of 	the
Bureau 	of 	Competition 	and 	the 	San 	Francisco 	Regional 	Office 	of
the 	Federal 	Trade 	Commission. 	They 	are 	not 	necessarily 	the 	views
of 	the 	Commission 	or 	any 	individual 	Commissioner.
2 	The 	Commission's 	work 	in 	this 	area 	has 	included 	law
enforcement 	investigations 	involving 	efforts 	to 	restrict 	the
practice 	of 	physical 	therapy. 	See 	In 	~ 	Iowa 	Chapter 	of 	the
American 	Physical 	Therapy 	Ass'n, 	Dkt. 	No. 	C-3242 	(consent
agreement 	barring 	state 	physical 	therapy 	association 	from
prohibiting 	its 	members 	from 	accepting 	employment 	by 	physicians
or 	physician-owned 	clinics) 	(Nov. 	4, 	1988). 	In 	addition, 	the
Commission's 	staff 	has 	submitted 	comments 	concerning 	legislative
and 	regulatory 	proposals 	to 	enact 	such 	restrictions. 	Letter 	to
the 	Honorable 	Ray 	Hamlett, 	Missouri 	House 	of 	Representatives
(continued ... )

The 	Honorable Jack 	Jeffrey
May 	25, 	1989
Page 	2
been 	to 	identify 	those 	restrictions 	on 	practice 	that 	impede
competition 	or 	increase 	costs 	without 	providing 	adequate
countervailing benefits 	to 	consumers.
Potential 	Harm 	to 	Consumers 	through 	Restrictions 	on Referral 	Fees
S.B. 	86 	would 	amend 	section 	2 	of 	Nevada 	Revised 	statutes
Section 	640.160, 	the 	Nevada 	statute 	that 	sets 	forth 	the 	grounds
for 	discipline 	of 	physical 	therapists. 	Under 	the 	amended
provisions, 	the 	Nevada 	State 	Board 	of 	physical 	Therapy 	could
refuse 	to 	issue 	or 	renew 	the 	license 	or 	registration 	of 	any
physical 	therapist 	who:
(h) 	Has 	entered 	into 	any 	contract 	or 	arrangement 	which
provides 	for 	the 	direct 	or 	indirect 	payment 	of 	any
portion 	of 	the 	money 	received 	from 	a 	patient 	for
professional 	services 	to 	any 	person 	in
consideration 	for 	the 	referral.
(i) 	Has 	entered 	into 	any 	contract 	or 	arrangement 	to 	provide
a 	person 	with 	a 	credit, 	gratuity, 	commission, 	profes-
sional 	discount, 	or wage 	in 	consideration 	for 	the
referral 	of 	a 	patient.
We 	are 	concerned 	that 	these 	prohibitions 	could be 	construed
to 	stifle 	innovative 	practice 	or 	referral 	arrangements. 	Because
referral 	fees 	may 	promote 	competition, 	as 	discussed 	below, 	we
suggest 	that 	you 	consider whether 	enactment 	of 	a 	prohibition 	on
all 	referral 	fee 	arrangements 	may 	be 	detrimental 	to 	consumers.
Prohibitions 	on 	referral 	fees 	are 	often 	adopted 	to 	avoid 	the
danger 	that 	a 	provider 	of 	professional 	services 	may make 	a
referral 	for 	the 	purpose 	of 	receiving 	compensation, 	rather 	than
serving 	the 	needs 	of 	the 	patient 	or 	client. 	Such 	broad
prohibitions 	on 	all 	referral 	fees 	may, 	however, 	be 	too
restrictive. 	This 	may 	be 	particularly 	true 	in view 	of 	changing
conditions 	in 	the 	health 	care 	services 	market, 	where 	payment 	of
fees 	to 	a 	referring 	provider 	or 	entity 	may 	be 	used 	as 	a 	means 	to
contain 	health 	care 	costs.
2( ... continued)
(Feb. 	27, 	1989) 	(regarding 	proposed 	legislation 	to 	prohibit
physician 	employment 	of, 	and 	payment 	of 	referral 	fees 	to,
physical 	therapists); 	Letter 	to 	the 	Honorable 	Chuck 	Hardwick,
Speaker 	of 	the 	New Jersey 	Assembly 	(May 	21, 	1987) 	(regarding
proposed 	legislation 	to 	prohibit 	physicians 	from 	having 	financial
interests 	in 	physical 	therapy 	practices); 	letter 	to 	Lin 	Ng,
Nevada 	Deputy 	Attorney 	General 	(Oct. 	23, 	1986) 	(regarding
proposed 	regulation 	by 	the 	Nevada 	state 	Board 	of 	Physical 	Therapy
to 	prohibit 	physician 	employment 	of 	physical 	therapists).

The 	Honorable Jack 	Jeffrey
May 	25, 	1989
Page 	3
In 	recent 	years, 	alternative 	health 	care 	delivery 	systems,
such 	as 	preferred 	provider 	organizations 	("PPOs"), 	have
developed. 	Although 	PPOs 	exist 	in many 	forms, 	all 	PPO 	programs
involve 	a 	series 	of 	contractual 	arrangements 	between 	"preferred"
health 	care 	providers 	and 	an 	intermediary, 	such 	as 	an 	insurer 	or
self-insured 	employer, 	that 	acts 	as 	a 	third-party 	payor 	of 	health
care 	benefits. 	PPO 	programs 	often 	attempt 	to 	select 	preferred
providers 	for 	their 	ability 	to 	deliver 	quality 	health 	care 	at 	a
low 	cost. 	Enrollees 	in 	PPO 	programs 	usually 	are 	given 	financial
incentives 	(such 	as 	waivers 	of 	co-payments 	or 	deductibles) 	to
encourage 	them to 	use 	the 	lower-cost 	preferred 	providers.
Some 	of 	the 	contractual 	arrangements 	used 	by 	PPOs 	may,
however, 	involve 	legitimate 	payments 	that 	could be 	construed 	as
referral 	fees, 	and 	therefore 	be 	prohibited 	under 	the 	proposed
legislation. 	For 	example, 	some 	PPO 	programs 	require 	participating
providers 	to 	remit 	to 	the 	PPO 	a 	percentage 	of 	the 	fees 	earned 	from
treating 	PPO 	patients 	referred 	to 	the 	practitioner by 	the 	PPo.
This 	is 	one method 	used 	to 	fund 	a 	PPO's 	administrative 	expenses.
Under 	the 	proposed 	legislation, 	this 	payment 	could 	be 	construed 	as
a 	fee 	in 	consideration 	for 	the 	referral 	of 	a 	patient. 	Prohibiting
payment 	of 	fees 	in 	such 	circumstances might 	restrict 	the 	ability 	of
physical 	therapists 	to 	participate 	in 	such 	alternative 	health
delivery 	systems. 	Consumers 	could 	therefore 	lose 	the 	advantages 	of
obtaining physical 	therapy 	services 	at 	preferred provider 	rates.
Prohibitions 	on 	payment 	of 	referral 	fees 	may 	also 	restrict 	the
ability 	of 	physical 	therapists 	to 	participate 	in 	referral 	services.
Referral 	services, 	which 	can 	be 	either 	for-profit 	or 	not-for-
profit, 	refer 	prospective 	patients 	to 	one 	or 	more 	providers 	based
on 	the 	stated 	needs 	of 	the 	patients 	and 	the 	qualifications 	or
prices 	of 	the 	providers. 	They 	also 	typically 	make 	available 	a 	wide
variety 	of 	information 	on 	the 	providers 	to 	whom 	they 	refer
patients. 	Such 	information 	can 	promote 	competition 	by 	enabling
patients 	to 	compare 	fees 	and 	services 	offered. 	For 	example, 	a
referral 	service 	can 	inform 	patients 	as 	to 	which 	providers 	will
accept 	Medicare 	assignment. 	The 	fees 	paid 	to 	a 	referral 	service
are 	unlikely 	to 	provide 	an 	incentive 	for 	anyone 	to 	refer 	patients
for 	unnecessary 	care. 	This 	is 	because 	the 	entity 	receiving 	the 	fee
-- 	the 	referral 	service 	-- 	does 	not 	recommend 	or 	suggest 	that 	the
patient 	obtain 	medical 	care. 	In 	the 	case 	of 	physical 	therapy, 	the
patient 	already 	has 	a 	prescription 	from 	his 	or 	her 	physician 	and 	is
using 	the 	service 	to 	locate 	a 	physical 	therapist 	with 	particular
qualifications 	(location, 	price, 	area 	of 	specialization).
Prohibitions 	on 	payment 	of 	fees 	for 	referral 	services 	may 	limit 	the
availability 	of 	such 	services, 	and 	hinder 	consumers 	in 	locating
independent 	physical 	therapy 	practices. 	For 	these 	reasons, 	we
believe 	that 	the 	proposed 	legislation 	may 	raise 	costs 	to 	consumers.

The 	Honorable 	Jack 	Jeffrey
May 	25, 	1989
Page 	4
Less 	Restrictive 	Alternatives
One 	reason 	that 	has 	been 	advanced 	for 	adopting 	legislation,
such 	as 	that 	proposed 	by 	S.B. 	86, 	that 	places 	restrictions 	on 	the
relationship 	between 	referring 	entities 	and 	health 	care 	services
providers 	is 	to 	ensure 	that 	medical 	care 	referrals 	are 	based 	on
the 	needs 	of 	the 	patient, 	rather 	than 	on 	the 	financial 	interests
of 	the 	practitioner. 	It 	may 	be 	argued 	that 	a 	physician who 	has 	a
financial 	relationship 	with 	a 	physical 	therapist may 	have 	an
incentive 	to 	prescribe 	treatment 	that may 	not 	be 	appropriate.
When 	patients 	are 	unaware 	that 	a 	physician's 	referral 	could be
motivated by 	financial 	considerations, 	they 	arguably 	may 	be
misled 	about 	the 	necessity 	and 	cost 	of 	the 	recommended 	treatment.
Prohibitions 	on 	the 	underlying 	arrangement 	may 	be 	intended 	to
avoid 	the 	potential 	for 	abuse 	of 	the 	trust 	that 	a 	patient places
in 	a 	practitioner 	to 	make 	appropriate 	referrals 	based 	on
independent 	professional 	judgment 	of 	the 	pa~ient's best 	interest.
The 	possibility 	that 	a 	physician may 	order unnecessary
treatment 	is 	a 	problem 	associated 	with many 	aspects 	of 	medical
service 	delivery, 	not 	just 	physical 	therapy. 	Whenever 	a
physician prescribes 	x-rays, 	injections, 	surgical 	procedures, 	or
other 	forms 	of 	treatment 	(inclUding 	follow-up 	visits) 	to 	be
provided 	in 	the 	doctor's 	office, 	financial 	considerations 	could,
in 	theory, 	affect 	the 	recommendation. 	states, 	however, 	generally
do 	not 	ban 	doctors 	from 	ordering 	those 	other 	services, 	even when
the 	services 	are 	provided 	by 	the 	doctor's 	own 	practice.
Moreover, 	there 	are 	clearly 	less 	restrictive 	means 	of
preventing 	abuse 	or 	deception 	than 	prohibiting 	all 	referral
arrangements. 	For 	example, 	a 	physical 	therapist 	could 	be
required 	to 	disclose 	to 	a 	patient 	that 	the 	therapist 	will 	payor
receive 	a 	fee 	in 	consideration 	for 	a 	referral. 	Such 	a
requirement 	would 	provide 	patients 	with 	information 	to 	aid 	in
their 	decision 	whether 	to 	use 	the 	recommended 	provider. 	In
addition, 	we 	note 	that 	current 	Nevada 	law 	already 	subjects 	a
physician 	to 	discipline 	if 	he 	or 	she 	fails 	to 	disclose 	to 	a
patient 	any 	financial 	or 	other 	conflict 	of 	interest. 	NRS 	Section
630.305(6) .
Conclusion
In 	sum, 	we 	believe 	that 	S.B. 	86 	may 	unnecessarily 	inhibit
beneficial 	competition 	and 	limit 	consumer 	choice. 	The 	proposal
is 	broader 	than 	necessary 	to 	protect 	consumers 	from 	physical
therapists' 	and 	physicians' 	potential 	conflicts 	of 	interest. 	If
necessary, 	you 	may 	wish 	to 	consider 	developing 	a 	less 	restrictive

The 	Honorable Jack 	Jeffrey
May 	25, 	1989 Page 	5
alternative, 	such 	as 	allowing 	referral 	fees 	with 	an 	appropriate
disclosure. 	Consumers 	should 	not be deprived 	unnecessarily 	of
the 	benefits 	of 	competition, 	including 	the 	ability 	to 	choose 	the
provider 	and 	practice 	arrangements most 	suited 	to 	their 	needs.
For these 	reasons, 	you 	may wish 	to 	consider whether 	the 	enactment
of 	legislation 	prohibiting 	referral 	fee 	arrangements 	is
detrimental 	to· consumer welfare.
We 	appreciate 	the 	opportunity 	to present 	these 	comments.
Very 	truly 	yours,
14t<£fHj;~~I~net 	M. 	Grady 	-J
ij_giOnal 	Director