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Are PODs Affected by Changes to CA Workers’ Comp Law?
February 2, 2012

Drugs and Devices added to California Workers’ Compensation Self-Referral Law:
Does This Impact Physician-Owned Device Companies?

Effective January 1, 2012, California’s workers’ compensation self-referral law was
expanded to apply to pharmacy goods, defined to include any dangerous drug or device.
As a result, implantable medical devices requiring a physician’s order, are now covered
by the law, and questions have arisen regarding the impact this might have on physician
owners of a medical device company who perform surgeries on California workers’
compensation patients.

When enacting this change in the law, the Legislature made clear that it intended to
address arrangements in which physicians provide prescription medical foods for their
patients. There is no indication the Legislature gave any consideration to physicianowned
device companies. Nevertheless, as amended, the law would now prohibit a
physician from referring a patient for implants to a company that the physician owns or
has a financial relationship with, unless an exception were available.

However, it does not appear that patients would be viewed as being “referred” to a
medical device distributor, within the meaning of California’s self-referral law.
Therefore, this law does not appear to have any impact on physician-owned device
companies. Although the term “referral” is not defined in the statute, the California
Attorney General, for many years, has relied on the standard dictionary definition of a
referral for purposes of California’s closely related anti-kickback statute as follows:

  • The verb ‘refer’ is defined as ‘to send or direct for treatment, aid,
    information, decision’ (Webster’s Third New Internat. Dict. (1971 ed.) at
    p. 1907, def. (2a)) and a ‘referral’ as ‘the process of directing. . . a patient .
    . . to an appropriate specialist or agency for definitive treatment’ (id., at p.
    1908, def (1b)). The phrase ‘referral of patients’ . . . may thus be thought
    of as the process whereby a third party independent entity who initially
    has contact with a person in need of health care first selects a professional
    to render the same and then in turn places the prospective patient in
    contact with that professional for the receipt of treatment. (65
    Ops.Cal.Atty.Gen. 252, 254 (1982).)

Accordingly, instead of the physician referring a patient to device distributor, the
physician is referring the patient to a hospital or surgery center, and the hospital (or
surgery center), upon the physician’s order, purchases the implant from the distributor.
The patient’s relationship is with the hospital or surgery center where the patient receives
care. There is no financial relationship or physical encounter between the patient and the
distributor, and the distributor has no direct relationship with the patient. Under these
circumstances, although the distributor sells an implant to the hospital upon a physician’s
order, we do not believe that there would be any prohibited referral of a patient to
distributor by its physician owners.

There would, however, still need to be an exception allowing the physician to refer the
patient to the hospital (because, through the distributor, the physician would have an
indirect financial relationship with the hospital). However, as before, the law contains an
exception allowing a physician to refer a patient to a hospital, so long as the physician is
not paid for that patient referral (and any equipment lease between the parties meets
certain requirements). This exception would continue to apply. For ambulatory surgery
centers, the analysis is the same, because a similar exception applies for these referrals.

For additional information, please contact Charles Oppenheim, Bradley Tully, David
Hatch, Karl Schmitz, or Eugene Ngai in Los Angeles at 310.551.8111; or Stephen
Phillips in San Francisco at 415.875.8500.

For media assistance, please contact Maura Fisher at 202-580-7714.