For years, federal laws (and some state laws) have prohibited hospitals from paying physicians for referrals. Yet some hospitals continue unethical and illegal practices, possibly due to a perception of low risk.1,2

“The mentality is something like ‘The odds of getting caught are small, we will not be prosecuted, so it is worth the gamble,’” says Tom Ealey, professor of business administration at Alma (MI) College. The changing relationship between physicians and hospitals is another contributing factor. Employed physicians now outnumber self-employed physicians, according to a recent American Medical Association study on physician practice arrangements.3 Another factor is many hospitals are struggling financially. “In many areas, the competition between hospitals and systems is really brutal. That is not an excuse, but it is certainly a cause,” Ealey notes.

To survive in competitive markets, hospitals need a certain amount of market share. “High-quality physicians bring market share, and large paychecks bring high-quality physicians,” Ealey explains. The problem is that some paychecks are disproportionately large and clearly not justified by the revenue brought in by the physician. Thus, says Ealey, “the compensation appears to be bribes for filling beds and ordering ancillaries.”

Ethical concerns enter the picture if physicians put their own interests above patients’. “Some patients are steered toward services in order to fulfill an unethical and/or illegal business arrangement — or, worse, subjected to unnecessary services simply to generate revenue,” Ealey says.

Kickbacks are only possible if insurers overpay physicians or hospitals for some procedures or types of admissions, says Mark V. Pauly, PhD, professor of healthcare management, business economics, and public policy at the Wharton School of the University of Pennsylvania. “It is better to remove the incentive for high-profit referrals than to shame those who yield to temptation,” Pauly offers.

This can happen by payers not overpaying and hospitals not accepting overpayment — or, if they do, to fully disclose how that revenue is shared with physicians. “If they fully disclose, I would not regard that as clearly unethical,” Pauly suggests.

In reality, this rarely, if ever, happens. “I don’t think hospitals or networks ever share physician compensation information with patients, and I doubt they share it with insurers,” Ealey says. There is little transparency about these financial matters in the hospital sector, says Ealey, “other than mandated reports, which do not tell us much at a detail level.”

The problem is better handled on the payer side, Pauly says. For instance, insurance plans could offer network membership only to physicians and hospitals that do not engage in low-value referrals. For hospital leaders, there is little reason to take action. “Unless it affects their revenues from admissions or other services for which they are the referral partner, they have a hard time having clean hands,” Pauly says.

Influences over referrals, if handled well, can support informed choices and higher-value referral practices, argues Matthew DeCamp, MD, PhD, associate professor in the Center for Bioethics and Humanities at University of Colorado Anschutz Medical Campus.4

“The primary ethics concern, of course, is whether any method of influencing referrals, whether financial or nonfinancial, inappropriately affects what is best for the patient or their choices,” DeCamp says.

There also are justice-related concerns if referral practices put certain groups of patients at a disadvantage, DeCamp adds. For example, rural patients may be referred to urban centers that require unaffordable long-distance travel.

Some institutions are trying to shape referral practices to achieve better coordinated, higher-value care. “At the institutional level, a real need exists to ensure that these well-intentioned efforts actually function as intended,” DeCamp says. When referral programs are evaluated, costs and medical outcomes may be all that is considered. “It is paramount that hospital leaders understand the real-world experiences of patients and frontline clinicians when they decide whether referral programs are successful or not,” DeCamp says.


  1. U.S. Department of Justice. Kalispell Regional Healthcare System to pay $24 million to settle False Claims Act allegations, Sept. 28, 2018. Available at:
  2. U.S. Department of Justice. United States files lawsuit against West Virginia hospital, its management company, and its CEO based on kickbacks and other improper payments to physicians, March 25, 2019. Available at:
  3. Rama A. Payment and delivery in 2018: Participation in medical homes and accountable care organizations on the rise while fee-for-service revenue remains stable. Chicago: American Medical Association; 2019. Available at:
  4. DeCamp M, Lehmann LS. Guiding choice: Ethically influencing referrals in ACOs. N Engl J Med 2015;372:205-207.