Physician Referral Programs Hold Revenue Potential and Pitfalls

Upon merging or signing a co-management or joint venture agreement, healthcare leaders will often wax that the pairing fills gaps in care, will grow their hospital's market share, and offers the opportunity for increased physician referrals. However, partnerships don't guarantee that referrals will follow—and that lost opportunity equals lost revenue. Aligning hospitals and physicians to create a successful physician referral program requires a concerted, coordinated approach if it's to bear financial fruit.

Creating a successful referral program starts with trust between the hospital or health system and the doctors, says Jeff Brickman, president and CEO of St. Anthony Hospital in Lakewood, CO, and president of Centura Health's Mountains North Denver Operating Group. He notes that organizations need to build trust not only with the physicians being brought on, but also with their existing medical staff.

Cultivating physician relationships and responding to each doctor's needs translates to business success, he says. Brickman is the previous system senior vice president of Provena Health and president and CEO of Provena Saint Joseph Medical Center in Joliet, IL. He worked at Provena Health from 2004 to 2011 and documented a period of 44 consecutive months of growing volume and market share. The foundation was collaboration with the physicians, built through a very aggressive physician referral approach.

Brickman and Provena's physician liaisons cultivated relationships with physicians and responded quickly to their requests. The physician liaisons received formal training to work with physicians, as well an incentive or compensation program to encourage them to go after the business, he says.

Building trust with physicians can be a tall order, however, for hospitals and health systems that are rapidly acquiring or partnering with hospitals or group practices. The zeal to deal sometimes brings out the worst of an organization during the negotiation process. Even if all goes smoothly in the negotiations, healthcare organizations that grow too rapidly many run into another problem.

"Our biggest challenge is developing internal awareness, acceptance, and support. We're a very large organization that was, and still is, undergoing a lot of changes as we grow from a collection of independent-minded hospitals and medical groups to a large, integrated health system," says Kimberly Marzullo, RN, MBA, system director of the physician marketing and liaison program at Sutter Health, headquartered in Sacramento.

The current Sutter Health was formed in 1996 through a fusion of 26 hospitals owned by Sutter Health and California Healthcare System. Each hospital had its own board of directors and local strategy. Eventually the health system restructured into five regions. Marzullo joined the system in 2007 to create a new physician liaison program to combat a migration of services to competing healthcare facilities. Her team of seven promotes key service lines, identifies and addresses the barriers to care, and solves other issues that impact the relationship the system has with physicians and hospitals.

"In most of our service lines that we are supporting, we are seeing growth," says Marzullo. "To accomplish this, I spent a very large amount of time introducing myself, my team, and our program to leaders of all levels throughout the organization. Despite the travel time, I did this and continue to do this in person. We also developed a sophisticated activity report that we share each month with a large audience, demonstrating that we work in a very transparent, accountable way. I think that has helped us develop trust."

With the blossoming of medical homes and accountable care organizations, the need to create a strong referral network has never been more essential, but that doesn't preclude it from legal scrutiny. In seeking to boost referrals, financial leaders need to be sure the organization treads lightly so as not to violate any self-referral laws.

Each year the Office of Inspector General at the U.S. Department of Health & Human Services looks into numerous violations of the self-referral laws, most of which are self-reported by healthcare organizations. The financial consequences for missteps with referrals can be costly; settlement amounts grow with each count and the degree of severity.

Hospital–physician practice dealings that violate Stark I, Stark II, the Anti-Kickback Laws, or the False Claims Act can wind up costing the bottom line rather than boosting it. If a hospital or practice is found in violation of these laws, it must return all proceeds of Medicare and Medicaid claims arising from all referrals of patients for designated health services at the hospital made by physicians at the practice in question.

For instance, in September 2011, Whidbey Island Public Hospital District in Coupeville, WA, agreed to pay $858,571 for allegedly violating the Civil Monetary Penalties Law provisions related to physician self-referrals and kickbacks. The OIG alleged that WIPHD had over 100 violations surrounding various physician contracts and arrangements, including: (1) several expired hospitalist contracts and new, unsigned contracts; (2) no written agreements in place for many medical staff leadership and call coverage arrangements; and (3) a variety of improper lease arrangements, personal service arrangements, and malpractice subsidies for physicians, and a housing allowance and an equipment loan for one physician.

Another fine was the $1,216,511 that St. Elizabeth Medical Center in Covington, KY, agreed to pay in November 2010 after self-disclosing improper conduct to OIG that it discovered had occurred at another hospital with which it merged. OIG alleged that "St. Elizabeth entered into an improper billing arrangement for 'provider-based services' involving a rural outreach program that had occurred at another hospital prior to its acquisition by St. Elizabeth. In addition, the OIG alleged that the acquired hospital entered into several improper financial relationships with a referring physician that violated the Stark Law and the Anti-Kickback Statute."

A common mistake hospital or health systems make when it comes to referral programs is not fitting a physician compensation arrangement within an HHS Safe Harbor category, explains Thomas Barker, a partner at Foley Hoag, LLP in Washington, D.C., and former acting general counsel for HHS.

"Many of the violations [cited above] could've potentially fit into a safe harbor if the arrangement was drafted correctly," he adds.

Barker's advice to avoid mistakes is:

• Ensure that referral programs are structured so that physician compensation is not tied in any way to the volume or value of referrals.
• Put all arrangements in writing to ensure the agreement is clear and the purpose is legitimate and is not "a cover to just pay for referrals," he says.
• Seek competent legal advice.

There are allowances for referral incentives, however. Barker explains that OIG recognizes that some arrangements are protected under safe harbor rules if they are structured properly. For example, a physician recruitment program can be permissible and subsidies to recruit physicians or to encourage adoption of health IT may be allowable, Barker says, but "they cannot take into account the volume or value of referrals."

Self-referrals offer organizations huge potential for financial growth if the business can be captured. To learn more about how Brickman and Marzullo created their organizations' respective referral programs, listen to the HealthLeaders Media webcast on May 15, "Boost Physician Referrals, Build Your Bottom Line."

Note: HealthLeaders Media Senior Editor Carrie Vaughan contributed to this column.