Referral Fees to Doctors : Is it kosher?

In the healthcare industry, trust and ethics are paramount. Patients rely on healthcare professionals to guide them through critical medical decisions, expecting that these recommendations are based solely on their health needs. Financial incentives like referral fees raises questions about the influence of such incentives on medical decisions. Referral fees payments made by one doctor to another for referring patients has also sparked controversy in the Indian healthcare system. Some argue that these fees encourage collaboration.  

Then how do doctors collaborate? How do health-tech platforms refer patients to doctors? How do pharma companies educate doctors of the latest drug discovery or its latest products? Is giving free samples a financial incentive? Is hosting a conference to all doctors at a lavish hotel with all expenses paid so that the pharma company can explain its products an incentive?

The Indian Medical Council (Professional Conduct, Etiquette, and Ethics) Regulations, 2002, (“Regulations”) establish strict rules to prevent unethical practices like referral fees, commissions, and rebates. Section 6.4.1 explicitly bans physicians (emphasis added) from giving, soliciting, or receiving any form of gift, gratuity, commission, or bonus for referring, recommending or procuring any patient for medical, surgical or other treatment.  

The spirit of the Regulations is to provide “best for the patients”. Therefore, services for patient to identify the right doctors, specialists for a fee is certainly a benefit for the patients. 

A few case laws help determine the question of what is best for the patients and its various vicissitudes.

The landmark Supreme Court case, Apex Laboratories (P.) Ltd. v. Deputy Commissioner of Income Tax (DCIT), 442 ITR 1 (SC), addressed the legality of financial incentives in the form of referral fees. The Court ruled that gifting freebies or paying referral fees to doctors for business development is prohibited by the Indian Medical Council's regulations, thereby rendering these expenses inadmissible for tax deductions under Section 37(1) of the Income Tax Act, 1961. This ruling also went on to state that the medical practitioners hold the position as “quasi-fiduciaries”.  

In CIT v. Kap Scan and Diagnostic Centre (P.) Ltd., 25 com 92 (P&H), the Punjab and Haryana High Court ruled that referral fees paid by a diagnostic centre to doctors and nursing homes could not be allowed as deductible business expenses, as they were not in accordance with the Regulations and such payments opposed public policy.

Even in Tele-consulting, the Regulations are applicable to the Registered Medical Practitioners.

It is interesting to note that in Peerless Hospitex Hospital & Research Centre Pvt Ltd Vs PCIT, 137 359 (Cal), it was stressed the need to “divorce interpretation of tax statutes from a perceived immorality / violation of public policy. Interestingly, it noted that it is the physicians (Medical Practioners) who are subject to the Regulations and noted that there is a loop-hole of hospitals being outside the ambit of the Regulations. It also made a few strong observations to bring hospitals within the ambit of the Regulations. The relevant part of this Judgement is reproduced below for impact:

This Court expects that the Central Government and the State Government will take note of corruption in medical field by the hospitals, pathological laboratories, diagnostic centres and other allied health care industry as discussed in this judgment and in the interest of public and the society and to protect the poor and middle class patients from bearing the burden of these unnecessary hidden additional costs of these natures of commission, bonus, freebies etc. for their treatment, investigations etc. shall bring similar appropriate legislation or regulations like Indian Medical Council Regulations, 2002, to prevent or curb this misusing of legislative gap or loopholes by them including hospitals and to deter them from perpetuating commission of such offence since once receiving of such 'referral to doctors' have been held to be prohibited and unethical obviously the corollary to this would be unethical being giving of such commission/bonus/gifts etc. to induce such doctors and medical practitioners to violate the Medical Council Act, 1956 and Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulation, 2002, and they should also be equally penalized like medical practitioners who accept the same and only disallowance of such nature of expense under the Income Tax Act would not deter them from indulging and participating in these nature of prohibited, unethical and immoral act.

The jurisprudence underlines that Registered Medical Practitioners ensure that there is no over-treatment, increased healthcare costs or compromised patient care and ensure that patient care is not influenced by financial incentives. The responsibility is on the Registered Medical Practitioners to ensure there is no conflict of interest when they are in the noble profession, where the patient places her trust.

Author: Rajshree Shekhar, Associate, NovoJuris Legal

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