Better Solutions for Healthcare

WSJ: The Hidden System That Explains How Your Doctor Makes Referrals

By Anna Wilde Mathews and Melanie Evans,  December 27, 2018

Phoebe Putney Health System doesn’t want its doctors to send business to competitors. If they do, Phoebe makes sure their bosses know about it.

Doctors working for the Albany, Ga.-based hospital system’s affiliated physician group get regular reports breaking down their referrals to specialists or services. One viewed by The Wall Street Journal included cardiology, colonoscopies and speech therapy, along with the share of each referred to Phoebe health-care providers.

If the share of in-house business wasn’t viewed as adequate, administrators would press them to improve, doctors said.

“They would let you know it wasn’t high enough,” said Thomas Hilsman, a primary-care doctor recently retired from the Phoebe medical group. He said he felt referrals should be based on which health-care provider was best for patients. “They keep the Phoebe physicians busy, they see more patients, they make more money.”

Phoebe officials said they use referral policies to improve quality and reduce costs, and physicians weren’t punished for their decisions.

Patients are often in the dark about why their doctors referred them to a particular physician or facility. Increasingly, those calls are being driven by pressure to keep business within a hospital system, even if an outside referral might benefit the patient, according to documents and interviews with doctors, current and former hospital executives and lawyers.

Losing patients to competitors is known as “leakage.” Hospitals, in response, use an array of strategies to encourage “keepage” within their systems, which in recent years have expanded their array of services.

The efforts at “keepage” can mean higher costs for patients and the employers that insure them—health-care services are often more expensive when provided by a hospital. Such price pressure and lack of transparency are helping drive rising costs in the $3.5 trillion U.S. health-care industry, where per capita spending is higher than any other developed nation.

For hospital systems, doctors’ referrals are a vital source of revenue. A hospital earns an average of $1.8 million annually in revenue from an internal-medicine physician’s admissions, referrals for tests and other services, plus practice revenue for employed doctors, a 2016 survey by recruiter Merritt Hawkins, a unit of AMN Healthcare Services Inc., found. The survey didn’t include hospital revenue from referrals by internal-medicine doctors to specialists, such as orthopedic surgeons or cardiologists.

Hospitals have gained more power over doctors with a wave of acquisitions of practices and hirings in recent years, and hospitals are getting more aggressive in directing how physicians refer for things such as surgeries, specialty care and magnetic resonance imaging scans, or MRIs.

Insurers have been working to steer patients toward doctors’ offices and other non-hospital locations for many types of care, because they are generally less expensive. The same service often costs twice as much or more when delivered in a hospital setting, compared with a doctor’s office, according to an analysis of dozens of medical services performed for The Wall Street Journal by the nonprofit Health Care Cost Institute. Hospitals often have the clout to negotiate higher rates with insurance companies, including extra fees that they often receive.

For a patient with employer-provided insurance, the average cost of a complicated drug administration—such as chemotherapy—was $612 when performed in hospital-affiliated facilities, and $247 in a doctor’s office in 2016, according to the analysis. The data include a small number of locations that aren’t hospital-affiliated or doctors’ offices.

Patients often pay more out-of-pocket as a result. A study released earlier this year by researchers at Yale University and elsewhere found that patients whose doctors worked for hospital systems were 27% more likely to get their lower-limb MRIs at a hospital, and their scans cost $277 more on average, with about $90 of that extra amount being added to the patient’s out-of-pocket cost. The researchers suggested that the referring doctors “may be motivated to refer patients to specific providers for reasons other than quality or patient costs.”

Jim Wood, a manufacturing-company executive, said his doctor, who worked for Rockford, Ill.’s SwedishAmerican, annually ordered his lab tests done by the hospital, with bills that amounted to $529.85 in 2015. The next year, Mr. Wood had the same tests done at an independent lab instead. The total cost: $57.83.

His doctor suggested he get a shoulder MRI from a mobile SwedishAmerican site, at a total cost of $2,507.36, including the radiologist’s fee, of which he had to pay $626.85 out-of-pocket. When he later checked what the scan would have cost at a local imaging center, the estimate was under $300, not including the doctor’s fee.

His doctor “works for them, so he’s not necessarily going to tell me where to go to get it done cheaper,” Mr. Wood said. “Any procedure done by a hospital is going to be marked up.”

In a statement, SwedishAmerican, which is part of the University of Wisconsin Health system, said that “patients have the final say in where they choose to receive care,” and it accommodates referrals to outside groups. The statement also said “we also believe that there is benefit to patients receiving ancillary services within our health system as it provides opportunities for enhanced continuity of care.”

Federal rules generally block hospitals from directly tying physicians’ pay to referrals, because of worries that factors other than patient needs could impact physicians’ decisions. Doctors and hospital officials said that hospitals make the goals clear in ways both subtle and overt.

Some hospitals have employment contracts that mandate doctors refer within their system, with a few exceptions required by law. In electronic medical records, a system’s own specialists and services are sometimes located in a convenient drop-down menu, while referring to an outsider requires additional steps. Hospitals may train doctors’ staffs on where to direct referrals, since doctors often leave the final decision to them…