Applicability of RCW 19.68.010 to Referrals for Infusion Therapy

MEDICINE--CORPORATIONS--DRUGS AND MEDICINE--PROFESSIONAL REGULATION--Applicability of RCW 19.68.010 to Referrals for Infusion Therapy

1.  RCW 19.68.010 prohibits a person licensed to practice medicine in Washington from receiving a rebate, commission, or other consideration in connection with the referral of a patient.  RCW 19.68.040 provides that a licensed physician is not prohibited from collecting compensation for services provided by an employee.

2.  RCW 19.68.010 prohibits a physician from referring a patient to an infusion therapy company in which the physician is a shareholder.  However, under RCW 19.68.040 this prohibition would not apply if the persons performing the services for the infusion therapy company are under the control of the physician such that they are employees of the physician.

3.  RCW 19.68.010 does not prohibit a physician from receiving a set fee from an infusion therapy company for providing various services to the company's customers.  However, the fees must actually provide the services, and the fee paid must reflect the market value of the services provided.

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                                                               December 22, 1992

Honorable Cliff Bailey
State Senator, District 39
204 Institutions Building, MS 0439
Olympia, Washington  98504-0439

Honorable George Marshall Paris, Sr.
State Representative, District 44
318 John L. O'Brien Building, MS 0688
Olympia, Washington   98504-0688    

                                                                                      Cite as:  AGO 1992 No. 30

Dear Senator Bailey and Representative Paris:

            By letters previously acknowledged each of you requested our opinion on the legality of certain business arrangements between physicians and infusion therapy companies.  We paraphrase your questions as follows:

            1.         Does chapter 19.68 RCW prohibit physicians licensed to practice in Washington from referring their patients to an infusion therapy company in which the physicians are shareholders?

            2.         Does the answer to Question 1 change if the physicians supervise the treatment provided to their patients by an infusion therapy company?

            3.         Does chapter 19.68 RCW forbid a physician licensed to practice in Washington to receive from an infusion therapy company a set fee for providing various services to the company's customers?

            We answer your first question in the affirmative, your third question in the qualified negative, and your second question as set forth in the analysis below.

                                                                BACKGROUND

            As we understand it, infusion therapy is the administration to a patient of nutrients, antibiotics, or other drugs, usually either intravenously or through a feeding tube.  Until recently, infusion therapy was routinely provided by health care professionals in hospitals.  The therapy now may be administered in a patient's home or at an out-patient clinic, and the patient or a caretaker may be trained to perform parts of the therapy without the assistance of health care professionals.  This allows for substantial cost saving.

            Although some components of the therapy may be performed by persons other than health care professionals, such professionals are still needed to train the patient or caregiver, to supply equipment and pharmaceuticals, and to monitor the therapy.  Infusion therapy companies have formed to satisfy the demand for these goods and services.  The companies employ health care professionals -- typically, registered nurses -- to perform the needed services.  Your questions concern some of the business arrangements that have been made between infusion therapy companies and physicians, who must prescribe the therapy for their patients.

            All three questions require us to interpret provisions of chapter 19.68 RCW, commonly known as the anti-kickback statute.  RCW 19.68.010 provides that:       

                        It shall be unlawful for any person, firm, corporation or association, whether organized as a cooperative, or for profit or nonprofit,to pay, or offer to pay or allow, directly or indirectly, to any person licensed by the state of Washington to engage in the practice of medicine and surgery, drugless treatment in any form, dentistry, or pharmacyand it shall be unlawful for such person to request,receive or allow, directly or indirectly, a rebate, refund, commission, unearned discount or profit by means of a credit or other valuable consideration in connection with the referral of patients to any person, firm, corporation or association, or in connection with the furnishings of medical, surgical or dental care, diagnosis, treatment or service, on the sale, rental, furnishing or supplying of clinical laboratory supplies or services of any kind, drugs, medication, or medical supplies, orany other goods, services or supplies prescribed for medical diagnosis, care or treatment:  PROVIDED, That ownership of a financial interest in any firm, corporation or association which furnishes any kind of clinical laboratory or other services prescribed for medical, surgical, or dental diagnosis shall not be prohibited under this section where the referring practitioner affirmatively discloses to the patient in writing, the fact that such practitioner has a financial interest in such firm, corporation, or association.

                        Any person violating the provisions of this section is guilty of a misdemeanor.

(Emphasis added.)  As we stated in AGO 1988 No. 28, although this statute is no model of clarity, it can be reduced to three elements.  For a violation to occur, (1) there must be a payment of a rebate, refund, commission, unearned discount, or profit by means of credit or other valuable consideration; (2) the payment must be in connection with the referral of patients or in connection with the furnishing of medical, surgical, or dental care, diagnosis, treatment or service; and (3) the recipient of the payment must be a person licensed by the state of Washington to engage in the practice of medicine and surgery, drugless treatment in any form, dentistry, or pharmacy.  AGO 1988 No. 28, at 3-4.

                                                                     ANALYSIS

            Question 1:

            Does chapter 19.68 RCW prohibit physicians licensed to practice in Washington from referring their patients to an infusion therapy company in which the physicians are shareholders?

            We begin by examining the only reported decision construing chapter 19.68 RCW,Day v. Inland Empire Optical, Inc., 76 Wn.2d 407, 456 P.2d 1011 (1969).  Defendants were a group of ophthalmologists who practiced together.  These ophthalmologists also owned all of the stock in an optical dispensing company that operated on the lower floor of the same building that housed their practice.  Patients given prescriptions for glasses were informed, both orally and by signs posted in the ophthalmologists' offices, that they could have their prescriptions filled at the optical dispensing company downstairs, or by the optician of their choice.

            The court held that this arrangement violated chapter 19.68 RCW.  By operating their optical dispensing company just below their offices, and by telling their patients about its existence and location, the ophthalmologists essentially referred their patients to the company.  Day, 76 Wn.2d at 418.

            Furthermore, the ophthalmologists directly or indirectly received a rebate, refund, commission, unearned discount or profit in connection with these referrals because they led to the "accumulation of profits, increase in value of the common stock, growth in net worth, possible tax advantages, and right to a distribution of income" from the optical dispensing company.  Day, 76 Wn.2d at 418.  Thus, each of the three elements necessary to show a violation of RCW 19.68.010 -- payment of a rebate or other valuable consideration, in connection with the referral of patients, to a person licensed to practice medicine in this state -- was present.

            We see little difference between the practice described in Question 1 and that found to be illegal in Day.  Both involve persons licensed to practice medicine in Washington.  In both cases, the licensees have ownership interests in companies that provide goods and services to the licensees' patients.  We must assume that the physicians who own stock in the infusion therapy company will enjoy the same financial rewards that accrued to the ophthalmologists inDay:  accumulation of profits, increased stock value, growth in net worth, tax advantages, and the right to distributions of income.  As a result of their stock ownership, the physicians will receive financial benefit from any referrals.  Consequently, we conclude that a physician referring a patient to an infusion therapy company in which the physician holds stock would violate RCW 19.68.010.

            Question 2:

            Does the answer to Question 1 change if the physicians supervise the treatment provided to their patients by an infusion therapy company?

            RCW 19.68.040 declares that it is the intent of chapter 19.68 RCW, and the chapter shall be so construed, that

            persons so licensed shall only be authorized by law to charge or receive compensation for professional services rendered if such services are actually rendered by the licensee and not otherwise;  PROVIDED, HOWEVER, Thatit is not intended to prohibit two or more licensees who practice their profession as copartners to charge or collect compensation for any professional services by any member of the firm, or to prohibit a licensee who employs another licensee to charge or collect compensation for professional services rendered by the employee licensee.

(Emphasis added.)  Question 2 assumes that professional services would be provided by a nurse or other licensed health care professional[1]   who is employed by the infusion therapy company, but supervised by the physician who referred the patient to the company.  The provision quoted above makes it clear that physicians may receive compensation for professional services rendered only by themselves, their partners, or their employees.  Thus, the answer to Question 1 would change only if the services of such a nurse could be deemed those of the supervising physician, of the physician's partner, or of the physician's employee.  We consider each of these three possibilities.

            Obviously, the nurse's services could not be considered those of the physician.[2]   Nor could they constitute the services of the physician's partner.  Partnerships between physicians and nonphysicians are illegal under Washington law.  Morelli v. Ehsan, 110 Wn.2d 555, 558, 756 P.2d 129 (1988).

            Whether a nurse's services could be considered those of the physician's employee, however, is a more complicated question.  We approach it by first determining what the Legislature intended when it referred to the physician's "employee".  Numerous court cases have discussed the requisites of an employer-employee relationship.  Since the term "employee" is so well defined in the common law, and since no statutory definition was supplied, we presume that the Legislature had the common law definition in mind when it enacted RCW 19.68.040.  Cf.Barendregt v. Walla Walla School Dist. 140, 87 Wn.2d 154, 157-58, 550 P.2d 525 (1976) (where Legislature provides statutory definition of "employee", the term is not to be understood in its usual and ordinary sense).

            An employee is

            a person employed to perform services in the affairs of another under an express or implied agreement, and who with respect to his physical conduct in the performance of the service is subject to the other's control or right of control.

Hollingbery v. Dunn, 68 Wn.2d 75, 79, 411 P.2d 431 (1966); Restatement (Second) of Agency § 220(1) (1958).

            The common law recognizes that a person may be the employee of two different employers.  A person in that situation is known as a "loaned servant".  Generally, a regular employee of one employer is deemed the loaned servant of another if the employee is subject to the "loaned master's" control or right of control.  Davis v. Early Constr. Co., 63 Wn.2d 252, 257-58, 386 P.2d 958 (1963); Restatement (Second) of Agency § 227 cmt. a (1958).

            Courts in many states have applied the loaned servant doctrine to nurses who were employed by hospitals but who worked under the control of physicians not employed by those hospitals.  See, e.g.,Bernardi v. Community Hosp. Ass'n, 443 P.2d 708 (Colo. 1968);Somerset v. Hart, 549 S.W.2d 814 (Ky. 1977); Franklin v. Gupta, 81 Md. App. 345, 567 A.2d 524 (1990);Martin v. Perth Amboy Hosp., 104 N.J. Super. 335, 250 A.2d 40 (1969);Sparger v. Worley Hosp., Inc., 547 S.W.2d 582 (Tex. 1977).  We believe that, under the appropriate circumstances, a court in this state could find a nurse employed by an infusion therapy company to be the loaned servant of a physician who referred patients to that company.

            To be deemed the nurse's employer, however, the physician would have to do more than simply "supervise" the nurse.  The courts have emphasized that the loaned servant must truly be subject to the loaned master's authority:

            Such control or right of control in the case of the loaned servant must create a relationship of subordination between the borrowing master and the borrowed servant rather than a relationship of cooperation.  The fact that the borrowed servant obeys the requests of the borrowing employer as to the act involved does not necessarily cause him to be the servant of such borrowing employer.  Such obedience indeed may be obedience to a noncoercive request of the borrowing employer or the request may be in the nature of information given to the borrowed servant in a cooperative effort to get the job done.

Pichler v. Pacific Mechanical Constructors, 1 Wn. App. 447, 450, 462 P.2d 960 (1969) (citations omitted).  Furthermore, the control exercised by the loaned master must be exclusive.  SeeAmerican Sign & Indicator Corp. v. State, 93 Wn.2d 427, 434, 610 P.2d 353 (1980).

            We conclude that a physician who referred patients to an infusion therapy company for financial benefit would not escape liability under chapter 19.68 RCW merely by supervising the company's employees.  To comply with that act, the physician would have to exercise actual and exclusive control over the performance of the infusion company nurse's professional duties.  If sufficient control were exercised, the nurse would be deemed the physician's employee under the loaned servant doctrine.

            It has been suggested that a physician who supervises the care of a patient receiving services from an infusion therapy company has not actually "referred" that patient.  This argument rests on the premise that referral terminates the original physician-patient relationship.  Because we do not believe the Legislature intended for "referral" to have such a restricted meaning, we find the argument untenable.

            The Legislature provided no definition of "referral" in chapter 19.68 RCW.  A long-standing rule of statutory construction holds that when the Legislature fails to define words used in statute, it is presumed to have intended that those words be afforded their common, everyday meaning.  SeeGarrison v. Washington State Nursing Bd., 87 Wn.2d 195, 196, 550 P.2d 7 (1976).  The common, everyday meaning may be discovered in a dictionary.  Id.  One dictionary frequently cited by the Washington courts states that "refer" means "to send or direct for treatment, aid, information, decision . . . [as to] refer a patient to a specialist".  Webster's Third New International Dictionary 1907 (1971).  Under this definition, a patient may be referred for a limited purpose, such as filling a prescription, while the physician continues treatment.  A patient also could be referred for a much broader purpose, such as diagnosis, treatment, and follow-up care.

            Nothing in this definition suggests, however, that by referring patients, physicians will necessarily end their professional relationships with those patients.  InDay, the court found that the defendant ophthalmologists had referred their patients to a particular optical company to have their eyeglass prescriptions filled.  Even after referring their patients, these ophthalmologists presumably maintained professional relationships with them.  We suspect that patients who continued to experience vision problems after receiving their new glasses would return to the defendant ophthalmologists for care.  Yet the continuing existence of the physician-patient relationship did not lead the court inDay to conclude that no referral had occurred when the ophthalmologist directed the patient to the optical dispensing company.

            For these reasons, we believe that even when physicians continue to supervise their patients' care, they may be viewed as having made prohibited "referrals" within the meaning of RCW 19.68.010.

            Question 3:

            Does chapter 19.68 RCW forbid a physician licensed to practice in Washington to receive from an infusion therapy company a set fee for providing various services to the company's customers?

            Question 3 is based on a sample contract between a physician and an infusion therapy company.[3]  The contract requires the physician to provide specified services to patients of the infusion therapy company.  These services include educating the patient about the infusion therapy, periodically reviewing the patient's condition, consulting with the nurse who actually attends the patient, and responding to patient emergencies.  The contract provides a fixed fee based on the type of therapy provided -- such as antibiotic, chemotherapy, or pain management -- payable to the physician for each week that services are rendered.  The contract also states that the physician is not required to refer any patients to the infusion therapy company, and that no payment is made for such referrals.

            In our opinion, chapter 19.68 RCW does not prohibit the arrangement described above.  The contract provides for an infusion therapy company to pay a physician fees in exchange for the rendition of services.  This practice is consistent with the intent of chapter 19.68 RCW, which is that persons licensed to practice medicine in this state receive compensation only for services they[4]  actually render.

            While no prohibited practices appear on the face of this arrangement, we caution that the wording of a contract will not protect a physician who is actually referring patients for financial benefit.  We believe a court would look behind the written description of the transaction to determine whether an infusion therapy company is paying a physician for services or for referrals.  We can envision at least three situations in which the fees paid could not be deemed payment for services rendered, and so likely would be classified as a rebate or other prohibited payment under RCW 19.68.010:  (1) if the fees paid unreasonably exceeded the fair market value of the services provided; (2) if the physician failed to provide the services called for in the contract, but nonetheless received payment; or (3) if the physician received payment for the same services from a different source, such as an insurer or the patient.

            In each case, the physician would be paid more than was warranted, given the services provided.  This would raise an inference that the excess fees represented payment for something other than services.  If the physician had referred a patient, and offered no other persuasive explanation for the excessive payment, we believe the probable inference would be that the payment represented a rebate, refund, commission, unearned discount, or profit in connection with the referral of patients.  RCW 19.68.010.  The payment would, therefore, contravene chapter 19.68 RCW.

            We trust this opinion will be of assistance to you.

                                    Very truly yours,

                                    KENNETH O. EIKENBERRY
                                    Attorney General

                                    TANYA BARNETT
                                    Assistant Attorney General

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