Designated health services (DHS) represent a specialized group of medical procedures and items that federal law has singled out for enhanced regulatory oversight. This designation identifies specific services where a patient referral from a physician to a healthcare entity could create a potential conflict of interest. The underlying purpose of this classification is to ensure that medical decisions are strictly based on the patient’s clinical need and not influenced by any financial benefit accruing to the referring physician. This framework ensures transparency and fairness in healthcare delivery, particularly when federal funds are involved. The law places strict limits on the financial ties between the doctor making the referral and the entity providing the service.
Why Certain Services Are Designated for Special Scrutiny
Federal regulation establishes a strong prohibition against physician self-referral for these specific services, primarily to safeguard government healthcare programs. The policy is designed to prevent a physician from making clinical decisions based on personal financial gain rather than the patient’s best medical interest. The core concern is that an existing financial relationship could incentivize a physician to order more services than are medically necessary, leading to overutilization.
This self-referral prohibition applies when a physician refers a patient covered by Medicare or Medicaid for a designated health service to an entity where the physician, or an immediate family member, maintains a financial relationship. Studies indicated that physicians with such financial ties tended to order a higher volume of services, resulting in increased costs for federal programs and potentially exposing patients to unnecessary procedures. The law is structured to remove any financial incentive for a physician to steer patients toward a specific facility, protecting the integrity of the clinical decision-making process.
The Specific Categories of Services
The regulatory framework defines 12 distinct categories of services that fall under the DHS classification, encompassing a broad range of diagnostic and therapeutic procedures. Among the most common are Clinical Laboratory Services, which include standard diagnostic testing used in routine or specialized patient care. Physical Therapy, Occupational Therapy, and Outpatient Speech-Language Pathology Services are also designated, focusing on rehabilitation and functional improvement administered by licensed specialists.
Radiology and certain other imaging services are included, covering advanced diagnostic tools such as magnetic resonance imaging (MRI), computerized tomography (CT) scans, and ultrasound services. Furthermore, Radiation Therapy Services and Supplies are designated, addressing both the treatment itself and the necessary medical equipment used during the procedures. These imaging and therapy services are often high-cost and represent areas where utilization can be easily influenced.
A range of medical supplies and equipment are also classified as DHS. This includes Durable Medical Equipment and Supplies, such as wheelchairs, walkers, and home oxygen equipment. Additionally, Parenteral and Enteral Nutrients, Equipment, and Supplies are covered, which involve clinically necessary nutritional therapies. The category for Prosthetics, Orthotics, and Prosthetic Devices and Supplies covers artificial devices and supports used to enhance mobility and bodily function.
Home Health Services are designated, encompassing clinical nursing or therapy services provided by a licensed home health agency to patients in their residences. The list also includes Outpatient Prescription Drugs, referring to medications dispensed in a clinical setting and billed to federal programs. Finally, Inpatient and Outpatient Hospital Services, which include hospital admissions, surgical procedures, and other reimbursable diagnostics, are classified as designated health services.
Prohibited Financial Connections
The prohibition on self-referrals is triggered by two specific types of financial connections between the referring physician and the entity providing the designated health service.
Ownership or Investment Interest
The first is an Ownership or Investment Interest, which involves any equity, stock, bond, or other instrument that grants the physician a stake in the entity. This type of relationship suggests that the physician stands to gain directly from the profits of the referred service.
Compensation Arrangement
The second type of connection is a Compensation Arrangement, which is broadly defined as any arrangement involving remuneration between the physician and the entity. This includes salaries, consulting fees, rental agreements for office space or equipment, and other payments. The law treats both direct and indirect financial relationships as problematic if they exist at the time of the referral.
The federal statute operates under a principle of strict liability, meaning that the intent behind the referral or the arrangement is irrelevant to determining a violation. If a financial relationship exists and a referral for a designated health service is made, the prohibition is triggered. This strict approach highlights the importance of structuring all physician-entity relationships to avoid the potential for any prohibited financial connection.