Hospital Employment May Mean New Referral Restrictions for Physicians

January 13, 2012

A community physician’s gut reaction to a contractual referral restriction will likely be negative … but the restrictions should not be of great concern.

A physician who considers hospital employment (including employment by a hospital-affiliated group) must weigh many pros and cons. The potential effect on referrals – both to and from the physician – is one major consideration. A prior article suggested how to assess and possibly mitigate the negative effect on upstream referrals. This article covers the other side of the coin: changes a physician might encounter on her or his ability to refer patients.

Understanding why referrals from a physician might be affected requires an understanding of why hospitals hire physicians in the first place. A primary reason hospitals hire and integrate community physicians is to develop the hospitals’ internal expertise and range of continuum of care. Hospitals seek to develop a strong internal network of primary-care and specialist physicians and related inpatient and outpatient facilities. Hospitals often use physician-assisted management and a unified electronic system to tie it all together.

This objective is both patient-centered and economically rational. A hospital that attracts and retains patients from their initial PCP office visit forward and is able to control the care throughout will almost always be in a better position than otherwise.

Physician referrals are obviously an integral part of retaining patients in a hospital’s continuum of care. If hospital-employed physicians generally refer patients outside of the “system” for consults and procedures, then the hospital will not achieve its primary objectives.

Hospitals approach this issue in one of two ways.

Some hospitals include terms in physician employment agreements that require the physicians to refer within the hospital system unless (i) the patient expresses a preference for a different provider, practitioner, or supplier; (ii) the patient’s insurer determines the provider, practitioner, or supplier; or (iii) the physician believes that the referral is not in the patient’s best medical interests. A hospital that includes this type of contractual restriction must determine that it is reasonably necessary to effectuate the legitimate business purposes of the arrangement with the physician. The Stark Law specifically permits a hospital to impose these referral restrictions, subject to these exceptions/conditions. Consistent with the patient-centered objective related to hiring physicians in the first place, hospitals often determine that retaining patients in its network through this type of restriction leads to better coordination of care, better outcomes, and increased ability to lower risk through a unified, controlled network.

Alternatively, some hospitals do not include any contractual referral restrictions. These hospitals either rely on their quality to drive referrals, simply do not “believe in” referral restrictions, or are unable to include them because of historical physician objections. These hospitals typically have open medical staffs and/or strength in their market. They typically elect to build “destination” programs and rely on the market’s acknowledgment of their superior quality.

A community physician’s gut reaction to a contractual referral restriction will likely be negative. Experience indicates, however, that the restrictions should not be of great concern. On the one hand, a physician that considers hospital employment should believe in and promote that hospital’s network. If a physician is not willing to make downstream referrals within a hospital’s network, then that physician probably should not pursue employment with that hospital - regardless of whether there is a contractual restriction. On the other hand, the Stark Law-required exception regarding a patient’s best medical interests provides a physician wide latitude to refer outside the system. Once again, however, a physician probably should not accept employment with a contractual referral restriction based on the (undisclosed) assumption that she or he will likely refer outside the system on this basis.

The typical and best practice is to address this issue directly during the employment negotiations. If the physician does not already have a predictable referral pattern, then the hospital should ask if the physician would feel comfortable referring patients within the system for typical types of consults or procedures. If the answer is “no,” then this should lead to a discussion of potential physician misperceptions or of specific actions to improve the hospital network’s quality. In any event, a physician should assess hospital employment based on the assumption that the physician will refer to that hospital whenever appropriate.

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