As we have pointed out in many of these columns, the laws and regulations that apply to health care operations in New York are comprehensive and quite complex. Attorneys representing providers, insurers, patients and other participants in the health care industry must be familiar with the many rules that are applicable to their clients. Even experienced attorneys are sometimes not aware of obscure statutes or regulations that, while seldom invoked, are very much in effect. These rules and prohibitions lie buried in the landscape like land mines from a previous war, and ignorance of their detonation potential can have significant adverse effects.

One of these lesser-known healthcare laws is Article 45 of the New York Public Health Law (PHL), which generally prohibits the operation of for-profit medical referral services. The wording of this statute is fairly broad, and violations of the statute carry serious penalties. Moreover, we can find only one reported case involving this statute, an unsuccessful challenge to its constitutionality shortly after it was enacted.

History

Like most obscure statutes, this one has an interesting history. The Legislature had legalized abortion in New York State in 1970—three years prior to the Supreme Court's controversial decision in Roe v. Wade, 410 U.S. 113 (1973), which struck down most state laws banning abortion.

Following New York's legalization of abortion, a number of highly profitable businesses sprang up that referred out-of-state patients to providers in New York for abortion services. The state soon determined that these businesses were doing more than just referring patients. They were also illegally rendering medical advice, splitting fees with the physicians and hospitals to which patients were referred, and generally advertising their referral services nationwide.

The attorney general at the time, Louis J. Lefkowitz, successfully obtained an injunction against one of the larger abortion referral agencies. State v. Abortion Information Agency, 69 Misc.2d 825 (Sup. Ct. N.Y. Co. 1971); aff'd 37 A.D.2d 142 (1st Dept. 1971); aff'd 30 N.Y.2d 779 1972). Both the state Senate and the attorney general conducted hearings into the operations of these referral services in 1971 and heard testimony about various abuses such as excessive fees being charged, fee-splitting, and laypersons giving medical advice by telephone.

Attorney General Lefkowitz then asked the Legislature for an outright ban on all for-profit medical referral services. He argued that if physicians had been the operators of these services, "their activities would be violations of standards of professional ethics and would subject them to disciplinary proceedings for unprofessional conduct." He also found that "physicians and hospitals have benefited indirectly from acts and practices which they would be forbidden to perform themselves by applicable standards of public policy and ethics." Accordingly, he urged the Legislature to prohibit these referral services. The ban was enacted by the Legislature and signed into law by Governor Nelson A. Rockefeller in 1971.

Public Policy

PHL §4500 sets forth the Legislature's findings and a statement of public policy:

The security of the health and welfare of the residents of this state requires that the utmost attention be given to assure that persons seeking medical care and treatment in this state receive adequate care rendered within the standards of ethics and public policy applicable to all practices of medicine.

Because the Legislature had determined that for-profit medical referral services "have consistently engaged in practices inimical to the public interest," the statute declares it to be public policy that "profit making medical referral service organizations be declared to be invalid and unlawful in this state."

Section 4501 contains these prohibitions:

1. No person, firm, partnership, association or corporation, or agent or employee thereof, shall engage in for profit any business or service which in whole or in part includes the referral or recommendation of persons to a physician, dentist, hospital, health related facility, or dispensary for any form of medical or dental care or treatment of any ailment or physical condition. The imposition of a fee or charge for any such referral or recommendation shall create a presumption that the business or service is engaged in for profit.
2. No physician, dentist, hospital, health related facility or dispensary shall enter into a contract or other form of agreement to accept for medical or dental care or treatment any person referred or recommended for such care or treatment by a medical or dental referral service business located in or doing business in another state if the medical or dental referral service business would be prohibited under this section if the business were located in or doing business in this state.

Section 4502 sets forth the penalties for violations of the statute. The operation of a prohibited referral service is punishable as a misdemeanor, with imprisonment for up to one year or a fine of up to $5,000, or both. Moreover, the Attorney General is authorized in §4502(2) to seek an injunction against operations that violate the statute, even in the absence of proof than anyone has incurred any injuries or damages.

The Legislature was careful to exempt from this ban non-profit organizations, such as charitable hospitals and clinics. Section 4503 of the statute specifies that it does not apply:

to any individual agency, association or corporation not organized or incorporated for primary profit or financial gain or to any organization or association which is exempt from taxation [under Internal Revenue Code Section 501(c)].

The extensive advertising by non-profit hospitals of their physician referral services, which is frequently encountered in various media, would therefore seem to be exempt from the ban on medical referral services.

Attempting to cover all bases, the Legislature not only banned the operation of for-profit medical referral services in Article 45, it soon thereafter added a new §2811 to the PHL, which prohibits licensed facilities from entering into fee arrangements with referral services. PHL §2811 reads:

No hospital or facility delivering health care shall grant or receive a discount to or from any medical referral service or in any manner split fees with a medical referral service.

This statute was apparently intended to attack the problem from the other side by preventing hospitals, clinics, ambulatory surgery centers, and other licensed facilities from entering into deals with referral services, and penalizing them if they did so. Oddly, however, it is not limited to for-profit medical referral services, and would seem to ban hospitals and other licensed facilities from discounting or splitting fees with either a for-profit or non-profit referral service.

Constitutionality

Shortly after PHL Article 45 was enacted, several abortion referral services filed suit in the U.S. District Court for the Southern District of New York, on behalf of themselves and other similarly situated providers, challenging the constitutionality of the statute and seeking to enjoin its enforcement. The plaintiffs argued that the statute's ban abridged their First Amendment rights to disseminate information concerning the availability of health care facilities and services and the public's right to receive such information. They also claimed that it violated their rights to equal protection under the Fourteenth Amendment by permitting non-profit agencies to perform services that they, as for-profits, were barred from performing. These claims set the stage for the lone reported judicial decision on the statute, SPS Consultants Inc. v. Lefkowitz, 333 F. Supp. 1373 (SDNY 1971).

An unusual three-judge panel consisting of Circuit Judge Wilfred Feinberg and District Judges Dudley Bonsal and Inzer Wyatt, heard the case in district court (pursuant to 28 U.S.C. §2281 and 2284), and unanimously upheld the constitutionality of the statute. Writing for the court, Judge Bonsal disposed of the First Amendment claim by noting that the statute does not prohibit selling information about available providers, but only prohibits actual referral. The statute, he explained:

does not prohibit the plaintiffs from disseminating information for a fee concerning the availability of health care facilities. It merely prohibits them from referring or recommending persons to a physician, hospital, health-related facility, or dispensary for any form of medical care or treatment. Accordingly, if the plaintiffs supply lists of physicians and facilities performing abortions, which lists are not as selective as to make actual recommendation or referral of a particular physician or facility a justifiable inference therefrom, their activities would not violate the statute.

Bonsal also rejected the plaintiffs' equal protection arguments. Citing the U.S. Supreme Court's decision in Semler v. Oregon State Board of Dental Examiners, 294 U.S. 608 (1935), which held that the profession of medicine demands "different standards of conduct from those which are traditional in the competition of the marketplace," Bonsal held that the state, in the exercise of its police power, can ban commercial practices in the field of medicine that violate the state's public policy. Based upon the testimony obtained at the state Senate's and attorney general's hearings, the Judge reasoned, the Legislature could well find:

… that the commercial activities of the profit agencies, in making direct referrals to selected medical facilities, were inimical to the public interest and violated the public policy of the state. The legislature could also find a valid distinction between the activities of the profit agencies and the non-profit agencies, so that only the former need be banned.

He therefore concluded that the statute's distinction between non-profit and for-profit operations was rationally related to a legitimate state end.

Conclusion

In recent decades, market forces have greatly changed the way that health care is delivered in New York and the rest of the nation. There is a certain quaintness in encountering past legislative and judicial expressions of concern about freeing the profession of medicine "to as great an extent as possible, from all taints of commercialism," Williamson v. Lee Optical of Oklahoma, 348 U.S. 483, 291 (1955) and to the deference once given to non­profits over for-profits. The fact is that, in today's world, non-profit health care providers operate in much the same way as their for-profit counterparts. Innovative approaches to the delivery of medical care continue to come from both sectors, and continue to improve the quality and cost-effectiveness of health care services.

Although PHL Article 45 and §2801 were intended to address particular abuses that occurred some 50 years ago, they nonetheless remain in effect, and have the potential to derail what might otherwise appear to be a reasonable business model. When advising clients on any arrangements involving the referral of patients, it is incumbent upon lawyers to be familiar with this law, the federal Anti-Kickback Statute 42 U.S.C. §1320a-7b(b), the Stark Anti-Referral Law 42 U.S.C. §1395nn, and all other federal and state laws and regulations that relate to such referrals.

Francis J. Serbaroli is a shareholder in Greenberg Traurig and the former vice chair of The New York State Public Health Council.