PORA & Physician Self-Referral Rules

When Can California Physicians Self-Refer?

Business & Professions Code § 650.01 establishes strict requirements for physician self-referral. The baseline rule: physicians may not refer patients to entities they own or in which they have financial interests UNLESS an exception applies.

PORA Exceptions & Compliance Requirements

Exception 1: In-Office Ancillary Services

Physicians may refer patients for designated health services performed “in the same building” where the physician provides primary services, if:

• Services are personally supervised by the referring physician or another physician in the same group
• Services are billed by the physician or group, not a separate entity
• Physician or group assumes financial risk for the services (not fee-for-service arrangements with outside vendors)

Example – Compliant: Dermatologist performs skin biopsies in his own office suite, sends specimens to in-house lab staffed by group-employed technician, and bills under the group’s tax ID. Dermatologist directly supervises lab quality.

Example – Non-Compliant: Dermatologist refers patients to imaging center located in the same medical building (but not the same suite) where dermatologist owns 25% equity stake. Even though services are in same building, they’re not under physician’s direct supervision and billing—PORA violation.

Exception 2: Disclosure to Patients

California requires physicians to disclose financial interests in referral targets. If a physician has ownership in an imaging center, lab, or DME company, they must:

• Provide written disclosure to patients at time of referral
• Inform patients of alternative providers (at least one) where services are available
• Allow patients to choose whether to use physician’s affiliated facility or an alternative
• Document disclosure in medical record

Disclosure Requirement Language (B&P § 650.01(f)):

“You are being referred to [Facility Name] for [services]. I have a financial interest in this facility. You have the right to choose any provider for these services. Alternative providers include: [List]. Your choice of provider will not affect the quality of care you receive from me.”

Consequences of Non-Disclosure: Failure to provide required disclosure voids the referral and may entitle patients to:

• Refuse payment for services
• Demand refunds if already paid
• File complaints with Medical Board for unprofessional conduct
• Pursue civil claims under Unfair Competition Law (B&P § 17200)

Ownership Percentage Limits

Even with disclosure, California limits the extent of physician ownership in ancillary services. B&P § 650.01 prohibits physicians from referring to entities where the physician’s ownership interest exceeds:

• 40% of the value of the facility or entity for a single physician
• Exceptions: Group practices where all owners are licensed physicians may exceed 40% individual ownership if structured properly

Why the 40% Limit Matters: This prevents physicians from creating sham “partnerships” with non-physician investors where the physician holds majority control but the arrangement is designed to circumvent PORA.

Common Kickback & Patient Steering Schemes

Med-Spa “Medical Director” Kickbacks

Scheme Structure: Physician agrees to serve as “medical director” for med-spa owned by non-physician esthetician or investor. Physician is paid monthly fee PLUS a percentage of revenue from patients physician refers for Botox, fillers, laser treatments, or other cosmetic procedures.

Legal Violations:

• B&P § 650: Revenue-sharing tied to referrals is classic fee-splitting
• Corporate Practice of Medicine: If med-spa controls clinical decisions, it’s practicing medicine unlawfully
• False advertising: Patients believe physician provides services when estheticians actually perform treatments

Red Flags:

• Physician’s compensation increases with patient referral volume
• Physician has office hours at med-spa only on days when high-volume procedures scheduled
• Physician refers 100% of cosmetic patients to single med-spa with no clinical rationale
• Physician has ownership stake in med-spa without proper disclosures to patients

Imaging Center Ownership Without Disclosure

Scheme Structure: Orthopedic surgeon owns 30% of outpatient MRI center. Surgeon refers all patients needing imaging to owned center without disclosing financial interest or offering alternatives. MRI center charges $3,500 for studies that cost $800 at hospital or independent centers.

Legal Violations:

• B&P § 650.01 (PORA): Failure to disclose ownership and provide alternatives
• Unfair Competition: Concealing conflict of interest while charging inflated prices
• Insurance fraud: If billing insurers for unnecessary imaging driven by profit motive

Patient Harms:

• Higher out-of-pocket costs (deductibles, co-insurance)
• Unnecessary imaging exposure (radiation, contrast dye risks)
• Delayed diagnosis if physician orders wrong imaging study to route patient to owned facility

Compounding Pharmacy Kickbacks

Scheme Structure: Pain management physician receives $100-$200 per prescription for compounded pain creams prescribed to patients. Compounding pharmacy charges insurers $2,000-$5,000 per month for creams containing generic ingredients costing $50. Physician prescribes creams liberally to maximize kickback income.

Legal Violations:

• B&P § 650: Direct payment for referrals (prescriptions)
• Federal Anti-Kickback Statute: If patients covered by Medicare/Medicaid
• Insurance fraud: Billing for medically unnecessary compounds
• Malpractice: Prescribing based on profit, not medical need

Recent Enforcement: DOJ and California AG have prosecuted dozens of compounding pharmacy kickback cases, resulting in multi-million dollar settlements and physician license suspensions.

Lab Testing Ownership & “Integrated Care” Models

Scheme Structure: Primary care practice partners with lab company. Practice collects specimens in-office but sends to “partner” lab where physicians have equity stake. Lab performs comprehensive panels (30-40 tests) when only basic metabolic panel (7 tests) was medically indicated. Physicians profit from over-testing.

Legal Violations:

• PORA (B&P § 650.01): Self-referral to lab without proper in-office ancillary compliance or disclosure
• Medicare fraud: Ordering unnecessary tests
• Patient welfare: Over-testing leads to false positives, patient anxiety, unnecessary follow-up procedures

Patient-Side Claims for Kickbacks & Self-Referral Violations

When Patients Have Standing to Sue

Patients harmed by physician kickback or self-referral arrangements have several legal remedies under California law:

1. Refund Claims Based on Lack of Informed Consent: If physician failed to disclose financial interest in referral (violating PORA § 650.01 disclosure requirements), patient may argue they did not give informed consent to the conflicted referral. Patients can demand refunds of amounts paid for services.

2. Unfair Competition Law (B&P § 17200): Patients have standing to sue under UCL for unlawful (§ 650, § 650.01 violations), unfair (conflicts of interest), or fraudulent (concealing financial interests) business practices. Remedies include restitution and injunctive relief.

3. Fraud/Concealment Claims: If physician actively concealed ownership interest or misrepresented reasons for referral (“This is the only facility that can do this imaging” when in fact many alternatives exist), patient may sue for fraud. Damages include amounts paid plus punitive damages if fraud was malicious.

4. Medical Malpractice: If physician’s conflicted referral led to substandard care (e.g., ordered wrong imaging study because owned facility didn’t have proper equipment; prescribed unnecessary compounded drug that caused adverse reaction), patient has malpractice claim.

5. Unjust Enrichment: Patient can argue physician was unjustly enriched by profiting from undisclosed conflicts, and restitution is appropriate.

Evidence Patients Should Gather

Damages Calculation for Patient Claims

Direct Economic Damages:

• Amounts paid to physician-owned facility (co-pays, deductibles, out-of-pocket costs)
• Difference between inflated price at physician-owned facility vs. fair market price at independent facility
• Cost of corrective treatment if conflicted referral led to wrong or delayed diagnosis

Consequential Damages:

• Lost wages from unnecessary procedures or complications
• Travel costs to physician-owned facility when closer alternatives existed
• Emotional distress from unnecessary radiation exposure, false-positive test results, or adverse drug reactions

Restitution Under UCL: California’s Unfair Competition Law allows restitution of “money or property” obtained through unfair competition. Courts may order physicians to disgorge profits from conflicted referrals.

Punitive Damages (Fraud Cases): If physician intentionally concealed ownership and made affirmative misrepresentations, punitive damages may apply. California allows punitive damages when defendant acted with “malice, oppression, or fraud” (Civ. Code § 3294).

Sample Demand Letters

Attorney Services for Self-Referral & Kickback Disputes

Self-referral and kickback disputes involve complex healthcare regulations, high financial stakes, and sophisticated concealment tactics. Whether you’re a patient seeking a refund for conflicted care or a physician defending against allegations, specialized legal knowledge of California’s PORA framework and federal fraud laws is essential.

How I Can Help