A question frequently asked these days relates to the practice of paying for referrals. This
issue is one of the most misunderstood laws in California. This business practice has the
potential for significant adverse consequences. As we see treatment business practices under
scrutiny, knowledge is key.
By way of background, I am a lawyer, and an addiction treatment professional with over
40 years of experience working in the addiction field. I starting in addiction treatment in 1975 as
a counselor at the Alcohol Rehabilitation Unit at the Navy Hospital at Camp Pendleton. While
there, I train several times at the Johnson Institute in Minneapolis. I have owned an outpatient
center, I worked as a counselor and Intervention specialist in treatment centers. Using my
undergraduate degree in business, I have restructured 8 for profit and non-profit programs that
ranged from a 20 bed hospital unit to a78 bed free standing center.
I watched the spectacular growth of treatment centers and corporations from the 1970’s
until the late 1980’s. I saw one small hospital based treatment program grow into what was once
the largest addiction treatment company in the world, now long gone. Many medical and
psychiatric hospitals developed inpatient treatment programs to take advantage of insurance
reimbursements. It seemed like the halcyon days of addiction treatment would never end.
Unfortunately, the “bottom line” mentality replaced quality of care. The lingo reduced it
self to a “heads on the bed.” Treatment center directors were given bottom line quotas. If they
missed their quota, were given a pink slip. In some instances the unethical tactics used to fill
beds were exposed through hidden camera interviews by news agencies. These tactics included
lying to potential patients and placing center vans near a county detoxification center at the end
of the month so that homeless alcoholics and addicts could be enticed with free food and housing
into using their MediCare benefit and check into the center for 3 days of detoxification.
Today’s practice of paying for referrals is often justified the same as “heads on a bed at
any cost” was. The common refrain is “we are trying to help those who otherwise might not get
help.” No matter the motive for their practices, providers created and continue to create serious
legal problems for themselves. The result for the centers then were federal investigations that
resulted in numerous corporations being forced out of business due to their illegal business
The result today is an increase in lawsuits against providers. My fear is, if we do not get
our own house in order quickly, we will see more criminal investigations and insurance company
law suits against providers. With the result for patients and their families more restrictions on
the availability of addiction treatment programs.
The practice of paying for referrals gets calls into question our integrity. If examined
closely by the media or the justice system, it is inevitable that families will lose faith in our
ability to help their loved ones. The result will be another collapse of treatment centers across
the country. Once our integrity is compromised, it will be a long and difficult road back to
respectability. It is time for us to understand the law, and examine the practices many view as
This review of paying for referrals applies to California law. Other states may have
differing laws, so I strongly encourage anyone outside of California who has concerns or
questions to seek an opinion from a qualified healthcare lawyer in their home state.
The Stark Law is not the only law in California that prohibits paying for referrals
This discussion does not rule out true marketing of a program, rather it applies to actually
paying third parties for each admission. It is common practice today for many independent
intervention and marketing professionals to be paid by several treatment centers at once. This
independent relationship in and of its self is most likely not a violation of the law. The key test
to apply is whether or not the payment is either adjusted upward or downward based upon the
number of admissions. If the dollar value of the payment changes based on the number of
referrals, then it is illegal. The bottom line is that referrals must not “be induced … by
considerations other than the best interests of the patients” (i.e., by promise of financial
The State of California has several laws that expressly prohibit paying for referrals.
Illegal Kickbacks – payments for referrals
California Business and Professions Code section 650, the law expressly prohibits any health
care entity or provider from paying or receiving compensation (payment in any form) to induce
B&P Code Section 650 states in relevant part: (a) “. . . 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 these patients, clients, or customers are referred is unlawful.”
If you wonder what the consequences may be, in People v. Guiamelon (App. 2 Dist.
2012) 140 Cal.Rptr.3d 584, 205 Cal.App.4th 383, a doctor was convicted for paying for referrals.
In a separate civil case in Los Angeles, the Court of Appeals made clear any contract (written or
oral) that provided for a payment based upon a referral is a misdemeanor. “The Business and
Professions Code interdicts as a misdemeanor, and also as grounds for revocation or
suspension of license.”
California Business & Professions Code, Section 2273(a) states: “Except as otherwise allowed
by law, the employment of runners, cappers, steerers, or other persons to procure patients
constitutes unprofessional conduct.”
This law means that if there is a licensed professional, M.D., Ph.D., LCSW, MFT etc.
involved, the individual can lose his or her professional license for this practice. This section
also is legal grounds for a licensed program to lose its license.
California Health & Safety Code (“H&S”) Section 445 (“Medical Referral Services”), states:
“No person, firm, partnership, association or corporation, or agent or employee thereof, shall for
profit refer or recommend a person to a physician, hospital, health-related facility, or dispensary
for any form of medical care or treatment of any ailment or physical condition.”
There are numerous individuals and companies that now openly promote the selling of
referrals for a fee. Clearly their conduct violates H&S § 445.
California Insurance Code Section 1871.7(a) prohibits knowingly employing “runners,
cappers, steerers, or other persons to procure clients or patients… that will be the basis for a
claim against an insured individual or his or her insurer.”
Insurance Code §1817.7(a) provides legal grounds for an insurance company to file suit
against any treatment center that has billed their company (whether in network or not).
There are a number of law suits that have already been filed against providers and drug
testing facilities. It is just a matter of time until we see the issue of paying for referrals become a
major problem for all treatment centers.
If you have questions, I suggest you consult with an attorney who practices Health Care
law. An individual who understands the significant differences between general business
practices and health care.
THE LAW OFFICES OF
M. DAVID MEAGHER
2643 Gianelli Lane
Escondido, CA 92025
Facsimile (760) 743-4500
Mick Meagher is a California State Bar member. He divides his services between
addiction treatment professionals and courts. He has represented clients in Federal and State
courts. His legal practice consists of matters related to Risk Assessment and Risk Reduction for
health care professionals and organizations, the First Amendment (called SLAPP) Litigation and
Business Litigation. His SLAPP representation is primary focused on defense from SLAPP suits.
In Business Litigation the focus is on contracts, trade secrets, and unfair business practices.
Mick holds a business degree, and prior to entering law spent over 17 years in Chemical
Dependency Treatment, Intervention training, Treatment facility management and consulting full
time. After 12 years of experience, and over 2000 interventions, Mick wrote Beginning of a
Miracle: How to Intervene with the Addicted or Alcoholic Person (Health Communications,
Inc. 1987). This book has been described as one of the best books ever written on the subject
Intervention. Mick’s book is a step by step guide that teaches the reader how to develop
strategies to overcome the denial present in anyone who suffers from chemical dependence.
His addiction consulting services range from restructuring treatment centers that were
failing to provided training for over 5,000 professionals to establish Intervention services.
Participants in his programs include Family Members, Attorneys in MCLE programs, members
of Physician Well-Being Committees, Physicians, Therapists, Educators and business leaders.