If a doctor with an investment interest in a private nursing home prescribes nursing home care for Medicaid patients but does not pick a specific facility, is that a prohibited self-referral?

Plain-English summary

Senate Bill 8 of the 1993 General Assembly added Article 2B to Chapter 90 of the North Carolina General Statutes (the same Article addressed by other AG opinions of the same period). The Article prohibited health care providers from referring patients for "designated health care services" to entities in which the provider had an investment interest. A legislator asked the AG about a specific fact pattern involving a physician who held an investment interest in one of three private nursing homes in a county and treated Medicaid patients whose nursing home placement was decided by the county social services department.

The stipulated facts: (1) the physician was a "health care provider" under G.S. § 90-405(7); (2) the physician had an "investment interest" under G.S. § 90-405(9) in one of three private nursing homes in the county; (3) prescription of nursing home services qualified as a "designated health care service" under G.S. § 90-405(3); and (4) the patients received Medicaid through the county, and the decision about which nursing home to place each patient in belonged to the county, not the physician.

Chief Counsel John R. McArthur concluded that the physician was not making a prohibited referral. The analysis turned on the definition of "referral" in G.S. § 90-405(11):

"Referral" means any referral of a patient for designated health care services, including, without limitation:
(a) The forwarding of a patient by one health care provider to another health care provider or to an entity that provides any designated health care service; or
(b) The request or establishment of a plan of care by a health care provider, which includes the provision of designated health care services.

Both definitional prongs failed on the facts. Under (a), the physician was not "forwarding" the patient to "another health care provider or to an entity that provides any designated health care service." The physician's "forward" was to the county social services department, not to a nursing home. The county itself was not a "health care provider" and did not "provide" nursing home services; it only decided which independent private facility would house the patient. Under (b), the physician's "plan of care" did not designate a particular facility. The plan said "nursing home"; the county decided which one. Without that facility-specific element, the physician was not "establishing a plan of care" that included a self-referral.

That reading gave Article 2B real teeth in the cases where it should: a physician who refers a patient to a specific facility owned by the physician. It did not extend the prohibition into cases where the placement decision was made by an independent intermediary acting on the patient's behalf. The structural insight is that the Article 2B prohibition aims at the physician's choice to send patients to his or her own facility. When someone else makes that choice, the physician has not made a prohibited referral.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

NC's Article 2B substantive prohibition in G.S. § 90-406 was repealed in 1995 by Session Law 1995-484, leaving federal Stark Law and Anti-Kickback Statute as the primary federal restrictions on physician self-referral in NC. The federal definitions of "referral" differ somewhat from the 1993 NC framework. Modern Medicaid placement decisions are also subject to additional federal rules (including ASPE choice-of-facility guidance and CMS conditions of participation for nursing facilities). Anyone analyzing a current physician/nursing-home arrangement should look to federal Stark/Anti-Kickback and the current state Medicaid rules, not this 1993 NC statute.

Common questions

Q: What if the physician indirectly influenced the county's choice (e.g., by listing only one facility as suitable)?
A: The opinion does not address that scenario, but the answer would likely turn on whether the physician's involvement in the facility selection rose to "establishing a plan of care" that included the specific facility. A genuine independent decision by the county is outside the prohibition; a paper-thin pass-through where the physician effectively dictated the choice would likely be inside it.

Q: Does this opinion apply to Medicare patients as well?
A: The opinion addresses NC's Article 2B specifically, which was a state statute applicable to NC referrals regardless of payer. The fact pattern involved Medicaid patients because Medicaid is administered through county social services, which is what created the intermediary that broke the referral chain. For Medicare patients, federal Stark Law would have applied independently.

Q: What if there were no county intermediary and the physician simply told the patient where to go?
A: That would be a classic § 90-406 violation if the physician sent the patient to a facility in which the physician had an investment interest. Article 2B was written to stop exactly that pattern.

Q: Did this opinion create a loophole for physician investors in nursing homes?
A: Not really. The opinion's reading hinges on a genuine independent decisionmaker (the county) making the facility choice. A physician who controlled or influenced the choice would still be making the referral in substance, even with an intermediary in the picture. The opinion's logic is narrow.

Q: How does this fit with the same-day opinion on Article 2B's grace period?
A: Both opinions are from September 27, 1993, both signed by Chief Counsel John R. McArthur, and both deal with Article 2B. They address different questions (grace period for pre-existing interests vs. definition of referral) but share the same careful, narrow reading of the statute. McArthur was reading Article 2B for what it said and not extending it by implication.

Q: What kinds of facts would change the result?
A: Three big changes. First, if the physician designated a specific nursing home in the plan of care rather than just "nursing home." Second, if the county were merely a formal pass-through whose decisions were directed by the physician. Third, if the county itself operated nursing homes (making it an entity providing designated health care services).

Background and statutory framework

Article 2B was North Carolina's 1993 contribution to the wave of state-level physician self-referral restrictions that followed the federal Stark Law. The federal law focused on Medicare referrals; NC's law reached all payers. The structure was similar to Stark: define the prohibited universe of "referrals," define the prohibited universe of "investment interests," cross them, and prohibit the intersection.

The definitional choices in G.S. § 90-405 controlled much of the statute's practical scope. "Referral" in (11) had two prongs: forwarding a patient to another provider, or establishing a plan of care. Both prongs assumed the physician's voluntary action directed patient flow to a specific destination. When that direction was missing (as in the fact pattern in this opinion), the statute did not apply.

The opinion is also a good example of how AG opinions can helpfully delineate the operational scope of a new statute. Article 2B took effect in mid-1993; physicians, county officials, and nursing homes faced immediate practical questions about how the prohibition would apply to their existing patterns. Chief Counsel McArthur's narrow reading gave the regulated community a workable line: as long as the physician was not picking the facility, the physician was not making a prohibited referral.

When G.S. § 90-406 was repealed in 1995, this opinion's specific holding became moot. But the analytical framework (looking at who actually decides where the patient goes) survives in the federal Stark Law context, where similar questions arise about referrals through hospitalists, case managers, and other intermediaries.

Citations

• G.S. § 90-405(3) (definition of "designated health care service")
• G.S. § 90-405(7) (definition of "health care provider")
• G.S. § 90-405(9) (definition of "investment interest")
• G.S. § 90-405(11) (definition of "referral")
• G.S. § 90-407 (effect of Article 2B on referrals; subject of this opinion)
• Senate Bill 8 (1993; Article 2B of Chapter 90)

Source

• Landing page: https://ncdoj.gov/opinions/g-s-90-407/

Original opinion text

1) There is no dispute that the physician is a "health care provider" as defined by G.S. 90-405(7);

2) There is no dispute that the physician has an "investment interest" as defined by G.S. 90-405(9) in one of three private nursing homes in the county;

3) Prescription of nursing home services is a designated health care service" as defined in G.S.

90-405(3); and

4) The patients at issue in this question are patients who receive public assistance benefits,

Medicaid, through the county and the decision to place a patient in a nursing home is the decision

of the county.

Given the foregoing, if the physician prescribes nursing home care for some of his patients

receiving Medicaid, but does not recommend to the county a particular nursing home facility, is

he prohibited from continuing this practice under the provisions of Senate Bill 8?

The answer to this question hinges on whether the act of prescribing nursing home care for a

patient to the county constitutes a "referral" as defined by G.S. 90-405(11) and whether the

county is a "designated health care provider" or entity that provides a designated health care

service. The definition reads:

"(11) 'Referral' means any referral of a patient for designated health care services, including,

without limitation:

• a.
• The forwarding of a patient by one health care provider to another health care provider or to an entity that provides any designated health care service; or
• b.
• The request or establishment of a plan of care by a health care provider, which includes the provision of designated health care services. 'Referral' does not mean any designated health care service or any referral to an entity for a designated health care service which is provided by, or provided under the personal supervision of, a sole health care provider or by a member of a group practice to the patients of that health care provider or group practice."

The facts of this scenario provide that the nursing home facilities are private rather than owned and operated by the county. That leads to the conclusion that the county is not a health care provider or an entity that provides designated health care services as contemplated in this definition since it does not own and operate the nursing homes. More importantly, the physician does not designate a particular facility as a part of "a plan of care" for the patient. That decision rests solely with the county authorities. Therefore, the prescription of nursing home care for patients in this case are not "referrals" as defined and would not be prohibited by the new law.

I hope this provides the member with the information he or she needs. If this office can be of additional assistance, please do not hesitate to contact us.

John R. McArthur Chief Counsel