MEDICINE AND SURGERY ‑- NURSING HOMES ‑- LICENSES ‑- OWNERSHIP OR OPERATION OF NURSING HOMES BY LICENSED PHYSICIANS

MEDICINE AND SURGERY ‑- NURSING HOMES ‑- LICENSES ‑- OWNERSHIP OR OPERATION OF NURSING HOMES BY LICENSED PHYSICIANS

(1) Nothing contained in chapter 19.68 RCW or in any other state statute prohibits a licensed physician from owning part or all of a nursing home in which he is responsible for any patient care.

(2) Because of RCW 19.68.010, a physician is not entitled to receive a financial benefit from the services or goods furnished to patients of a nursing home or other institution for patient care in which the physician holds some ownership interest when the physician prescribes the services or goods that such institution furnishes to the patient or when the physician refers the patient to the institution.

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                                                               November 28, 1975

Honorable James A. McDermott
State Senator, 43rd District
1650 22nd Avenue East
Seattle, Washington 98105

                                                                                                                 Cite as:  AGO 1975 No. 24

Dear Sir:

            By letter previously acknowledged you requested our opinion on certain questions relating to the ownership or operation of nursing homes by licensed physicians.  We paraphrase those questions as follows:

            (1) Does anything in chapter 19.68 RCW or any other state law prohibit a licensed physician from owning part or all of a nursing home in which he is responsible for any patient care?

            (2) If question (1) is answered in the negative, what restrictions are there in existing laws upon a physician who holds a total or partial ownership in an institution for patient care when he is responsible for the care of any patient in that institution?

             [[Orig. Op. Page 2]]

            We answer your first question in the negative and your second question in the manner set forth in our analysis.

                                                                     ANALYSIS

            Question (1):

            Chapter 19.68 RCW restricts the financial benefit practitioners of the healing arts may receive as the result of referrals of patients or the furnishing of prescribed goods or services to patients.  The declaration of the legislature's intent in adopting these restrictions is found in RCW 19.68.040 which states that:

            "It is the intent of this article [chapter], and this article [chapter] shall be so construed, that persons so licensed shall only be authorized by law to charge or receive compensation for professional services rendered if such services are actually rendered by the licensee and not otherwise: . . ."

            Although chapter 19.68 RCW originated more than twenty-five years ago, as chapter 204, Laws of 1949, it has only been the subject of one reported appellate court.  InDay v. Inland Empire Optical, Inc., 76 Wn.2d 407, 456 P.2d 1011 (1969), the state supreme court considered, specifically, so much of RCW 19.68.010 as then provided, in material part:

            "It shall be unlawful for any person . . . to pay, or offer to pay or allow, directly or indirectly, to any person licensed by the state of Washington to engage in the practice of medicine and surgery, drugless treatment in any form, or dentistry, and it shall be unlawful for such person to request, receive or allow, directly or indirectly a rebate, refund, commission, unearned discount or profit by means of a credit or other valuable consideration in connection with the referral of patients. . . or in connection with the furnishings of medical, surgical or dental care, diagnosis, treatment or service, on the sale, rental, furnishing or supplying of clinical laboratory supplies or services of any kind, or  [[Orig. Op. Page 3]] any other goods, services or supplies prescribed for medical diagnosis, care or treatment.

            "Any person violating the provisions of this section is guilty of a misdemeanor.  (Italics ours.)"

            At issue was the applicability of this statute to a factual situation which may be briefly summarized as follows:

            Five licensed ophthalmologists were engaged in practice as a medical partnership called the Spokane Eye Clinic.  The same five ophthalmologists were also the sole owners of a corporation known as the Inland Empire Optical Company, which conducted an optical dispensing business.  The optical company was located on the main floor of a building owned by the corporation, and the five ophthalmologists leased space on the second floor for their offices.  An internal stairway connected the upstairs offices with the optical company on the main floor of the building.  Within or adjacent to the ophthalmologists' offices were several small signs, designed to be visible to their patients, which read:

            "For glasses we have an optical shop downstairs for your convenience.  However, please feel free to take your prescription to the optician of your choice."

            It was the customary practice for the ophthalmologists involved, when asked by a patient where to take his or her prescription for eyeglasses, to repeat, verbally, the essence of the posted signs.  The evidence disclosed that between 85 and 90 percent of the ophthalmologists' patients had their eyeglass prescriptions filled by Inland Empire Optical.  Although the company also filled prescriptions written by other ophthalmologists, they were, comparatively, insignificant in number.

            The legality of this arrangement under RCW 19.68.010, supra, was challenged by a competing retail optical dispensing business, Tom E. Day, Inc., and others.  The trial court ruled in favor of the plaintiffs and entered a decree (1) directing Inland Empire Optical Company to divest itself entirely of ownership of all material and equipment used  [[Orig. Op. Page 4]] in connection with the manufacturing and dispensing of eyeglasses; (2) restraining Inland Empire Optical Company from filling any prescription for eyeglasses written by the defendant doctors as long as the doctors owned stock or had any financial interest in the corporation; and (3) prohibiting the defendant doctors individually named in the decree,

            ". . .  'from referring patients for whom they have prescribed eyeglasses to any dispensing optical concern in which they have any financial interest or investment.' . . ."

            On appeal, however, the supreme court modified this decree to a significant extent, explaining:

            ". . . Defendant doctors, we believe, have a right to own stock in a dispensing optical company provided they neither directly nor indirectly either verbally or in writing, or by sign, symbol or gesture, or by physical arrangement of their offices, refer their patients to the optical company, or indicate in any way their hopes that the patient take his prescription there.  And the optical company has a right to own the equipment which it operates and the materials it uses in making and dispensing eyeglasses."  (76 Wn.2d 407 at pp. 420-21.)

            Accordingly, the supreme court went on to direct the following modification in the trial court's decree:

            ". . . the decree will be modified to allow the defendant doctors to retain ownership of their stock in Inland Empire Optical Company, and Inland Empire Optical Company its ownership of equipment and materials used by it in making and dispensing eyeglasses if, and on condition that, the doctors' offices, waiting rooms and laboratories are so physically separated from the offices of the optical company that patients have free and untrammelled access and exit to and from the doctors' offices without having to pass into or through the  [[Orig. Op. Page 5]] optical company's offices or closed premises; and on the further condition that the defendant ophthalmologists shall refrain from directly, indirectly or by inference, referring, directing, suggesting or inviting their patients to have their eyeglass prescriptions filled or eyeglasses repaired or altered by the Inland Empire Optical Company or any subsidiary firm controlled by it."

            This, as we have said, is the only reported appellate court decision involving chapter 19.68 RCW.  We should also note a subsequent amendment to RCW 19.68.010 which bears upon your present questions.  By § 1, chapter 26, Laws of 1973, 1st Ex. Sess., the legislature added to this statute the following proviso:

            ". . . PROVIDED, That ownership of a financial interest in any firm, corporation or association which furnishes any kind of clinical laboratory or other services prescribed for medical, surgical, or dental diagnosis shall not be prohibited under this section where the referring practitioner affirmatively discloses to the patient in writing, the fact that such practitioner has a financial interest in such firm, corporation, or association."

            This amendment explicitly recognizes that a practitioner can have an ownership interest in the firm to which he refers his patients for services prescribed for medical, surgical or dental diagnosis, provided he discloses to the patient that he has a financial interest in the firm.  Even predating the 1973 amendment the court in Day, supra, concluded that nothing in the act prevented an ophthalmologist from having an ownership interest in an optical company which dispensed eyeglasses to members of the public, including patients of the ophthalmologist, if there was no referral.

            Based upon the foregoing, our answer to your first question is in the negative.  Nothing contained in chapter 19.68 RCW purports to prohibit a licensed physician from owning part or all of a nursing home in which he is responsible for patient care; nor is there any such prohibition in any  [[Orig. Op. Page 6]] other existing law disclosed by our research.  Simply stated, it is not ownership that is restricted by the law but rather the physician's financial benefit derived from referring or supplying patients.

            Question (2):

            Your second question assumes that answer to your first question and asks:

            "What restrictions are there in existing laws upon a physician who holds a total or partial ownership in an institution for patient care when he is responsible for the care of any patient in that institution?"

            InDay,supra, the court held that a physician is prohibited by RCW 19.68.010 from receiving a profit as the result of a referral of patients.  Therefore, physicians were held to be prohibited from receiving ". . . the accumulation of profits, increase in value of common stock, growth in net worth, possible tax advantages, and right to a distribution of income . . ." (supra, at p. 418) from a corporation owned by them to which they had referred their patients because such a referral

            ". . . amounted to the receiving by them directly or indirectly of a rebate, refund, commission, unearned discount or profit or other valuable consideration . . . all as specifically prohibited by RCW 19.68.010 and 19.68.020."  (Supra, at pp. 418-419.)

            In addition to prohibiting a physician from receiving a profit as the result of a referral of a patient, RCW 19.68.010 also prohibits a physician from receiving a profit

            ". . .in connection with the furnishings of medical, surgical or dental care, diagnosis, treatment or service, on the sale, rental, furnishing or supplying of clinical laboratory supplies or services of any kind, drugs, medication, or medical supplies, or any other goods, services or supplies prescribed for medical diagnosis, care or treatment: . . ."  (Emphasis supplied.)

             [[Orig. Op. Page 7]]

            This statute thus addresses two subjects; "referral of patients" and "furnishing."  We have previously discussed the referral of patients as construed by the court inDay, supra.  The court has not reviewed the furnishing aspect of this statute.  The furnishing provision follows the referral of patients provision after the disjunctive "or"; therefore, the furnishing provision should be subject to the same statutory construction as the referral of patients provision.

            In essence, RCW 19.68.010 provides that when medical care is furnished by a physician, the physician is prohibited from receiving, directly or indirectly, any valuable consideration as the result of either the sale, rental or other furnishing to the patient of any goods, services or supplies prescribed for medical diagnosis, care, or treatment or the referral of the patient to any person or firm.  Valuable consideration can include any financial benefit resulting from the furnishing or referral.  Therefore, a physician can only furnish such supplies or services at the actual cost thereof.  The primary exception provided in RCW 19.68.010 is contained in the proviso quoted earlier.  A physician may refer patients to a laboratory in which he has a financial interest, for medical, surgical or dentaldiagnosis if he makes an affirmative written disclosure.  This exemption is limited to those situations where the referral is for the purpose ofdiagnosis.  No exemption is provided for any other situation in this section and violation is a misdemeanor.

            The legislature has also specifically provided in RCW 19.68.040 that a licensee who employs another licensee may receive compensation for professional services rendered by the employee‑licensee.1/   InDay, supra, the court held that  [[Orig. Op. Page 8]] in order to come within the licensed employee provision, a patient of ordinary understanding and reasonable prudence should reasonably understand that the licensed employee is working for and under the physician's personal direction and at the physician's responsibility.

            What all of this means, in direct answer to your second question, can be most clearly expressed if we first indicate those limited situations in which a physician can receive a financial benefit under the conditions set forth in your question.

            Provided that there is no referral, a physician may receive a financial benefit when the institution in which he has a financial interest furnishes services or goods that are not prescribed by the physician.  The physician can also receive a financial benefit for services performed by him or rendered by a licensed employee of the physician.

            Conversely, however, a physician is not entitled to receive a financial benefit from the services or goods furnished to patients of an institution in which the physician holds some ownership interest when the physician prescribes the services or goods that the institution furnishes to the patient, or when the physician refers the patient to the institution.

            Moreover, lest it be overlooked, we should add a further point with particular reference to the nursing home situation with which you are concerned.  Even in those situations in which the physician has not initially "referred" his patient to a nursing home in which he has an ownership interest, the referral prohibition of RCW 19.68.010 may be applicable to the services rendered therein.  If a physician prescribes, directs or orders the furnishing of

            ". . . medical, surgical or dental care, diagnosis, treatment or service, on the sale, rental, furnishing or supplying of clinical laboratory supplies or services of any kind, drugs, medication, medical supplies or any other goods, services or supplies prescribed for medical diagnosis, care or treatment . . ."

            he is prohibited from receiving any financial benefit as a  [[Orig. Op. Page 9]] consequence of his express or implied referral of a patient to a particular source for such services, materials or supplies.  Due to the nature of a nursing home and the limited sources of services or supplies which are ordinarily available to patients confined in such facilities, there could well be a strong presumption to the effect that a physician ordering or prescribing drugs, etc., for a resident of such a home has in fact referred the patient to the supplier or suppliers involved.

            We trust that the foregoing explanation will be of some assistance to you.

Very truly yours,

SLADE GORTON
Attorney General

JOHN H. KEITH
Assistant Attorney General