Under a new Texas law, effective September 1, 2015, health maintenance organizations (HMOs) can no longer terminate a physician from their networks solely because the physician informs his or her patients about the full range of available health care providers, including out-of–network providers. Although physicians will have to make certain disclosures when referring a patient to an out-of-network provider, they no longer have to fear being terminated from the HMO network for doing so.

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Historically, when physicians refer patients for additional medical services, the physician has great latitude in where to send the patient, based on both patient preference and what the physician believes is in the best interest of the patient. In recent years, however, HMOs have attempted to limit referrals to out-of-network providers by sending letters threatening that if the physician did not discontinue referring patients to out-of-network providers and start referring their patients to in-network providers, they would be terminated from the HMO network.

HMOs are motivated to do this partly because paying out-of-network claims is significantly more expensive than paying in-network claims. For example, most HMOs have exclusive laboratory arrangements with large laboratories pursuant to which they receive deep discounts in exchange for ensuring the majority of the HMO’s business is sent to those labs. Out-of-network labs may cost significantly more. Further, HMOs may be in a position to perform more quality review and credentialing of in-network providers.

Physicians have objected to the perceived strong-arm tactics for both clinical and economic reasons. First, the physicians felt pressured to send patients to in-network providers even if these providers might not the best choice for the patient, or risk termination from the network. Second, some physicians increased out-of-network referrals to certain facilities because the physicians had legally permissible ownership interests in the out-of-network entities. In such cases, the physicians understandably did not want to stop making referrals to these entities.

The new law prohibits HMOs from terminating physicians merely for recommending out-of-network providers. However, the law also states that an HMO can require that prior to making an out-of-network referral, the physician must inform the patient: (i) that the patient has the right to choose an in-network or out-of-network provider; (ii) that the patient may incur higher out-of-pocket expenses if the patient chooses the out-of network provider; and (iii) whether or not the provider has a financial interest in a recommended out-of-network provider.

The new law thus provides physicians some relief, by allowing them to refer patients to the entity or provider they believe will be best for their patient, without fear of termination by the HMO. However, the law also attempts to protect patients by making sure they understand that an out-of-network provider's services may be more expensive for them, and in some cases there may be a financial reason why the physician is recommending a particular out-of-network provider.