NCPA - National Center for Policy Analysis


October 6, 2005

In a referral deal, a doctor sends a patient sample to an outside lab for testing. The medical laboratory charges the doctor a discounted price and then the doctor profits by getting reimbursed by the patient's insurer for a much higher amount, explains the Wall Street Journal.

Typically the doctor does not tell the insurer an outside lab did the work for a steep discount. Insurers could put a stop to the practice by refusing to pay the inflated reimbursement, but they are often unaware of the arrangements.

Critics of referral deals argue:

  • Referral deals are harmful because doctors have an incentive to send work to the cheapest lab, not necessarily the best one, to maximize their profit margins.
  • By enticing doctors to order many tests, the arrangements drive up the nation's healthcare bill.
  • A 1993 study by the Center for Health Policy Studies compared states where doctors are allowed to bill for outside work and states where they are not; researchers found doctors in the former ordered 28 percent more tests.

While referral deals are not new, people in the industry say they have grown rapidly in recent years as doctors seek new sources of income and demand grows for expensive lab work to detect diseases. Medical laboratory industry revenues grew from $30 billion in 1999 to $40 billion in 2003.

Doctors and companies involved in lab referrals say what they do is legal. Companies say they just offer a service for a price, which does not add up to illegal inducement. In general, doctors do not own a stake in the outside labs, which they say clears them of any charge of self-dealing. Doctors say they are entitled to mark up work farmed out to a contractor to cover costs such as billing and delivering results to patients.

Source: David Armstrong, "Lucrative Operation: How Some Doctors Turn a $79 Profit From a $30 Test," Wall Street Journal, September 30, 2005.

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