Many Alabama physicians, particularly orthopedic surgeons, currently employ physical therapists to serve their patients. This practice will become much less commonplace if the Alabama Board of Physical Therapy (the Board) gets its way. On June 20, 2006, the Board sent all Alabama licensed physical therapists and physical therapy assistants a notice of intended regulatory action seeking to amend Rule 700-X-3-.02. The proposed regulation makes it unlawful for a physical therapist to provide physical therapy or supervise the provision of physical therapy services to a patient that is referred by a physician or dentist that has a "referral conflict of interest" with the therapist unless an exception applies. The proposed regulation essentially redefines a "referral conflict of interest" and would prohibit a physical therapist from accepting a referral from a physician with whom he or she shares a financial interest on the grounds that it would constitute unprofessional conduct. (A summary of this notice can be found at http://www.pt.alabama.gov/pdfs/NoticeofIntendedAction_6_06.pdf.) There are several important exceptions in the proposed regulations. Significantly, the regulation grandfathers "referral conflicts of interest" that were in place prior to June 1, 2006 so long as the therapist files a certification with the Board within the six month period after the adoption of the proposed rule. It is important to note that this exception is only applicable to the therapists that were previously involved in the financial relationship and that new therapists would not be able to take advantage of this provision. In addition, the draft rule permits physical therapists to lease space from physicians or physician group practices so long as the rental payments are consistent with fair market value and are not determined by the revenues or profits of the physical therapy practice. Likewise, the proposed regulations permit physician ownership of therapy practices where there is only one physical therapy practice in a micropolitan statistical area or where the physician owns less than 5 percent of the shares of a publicly-owned corporation that owns the physical therapy practice. There are also exceptions for debt associated with the sale of a physical therapy practice to a therapist by a physician so long as the sale does not include any payments for the referral relationships. It is helpful to understand the Board's stated objective behind the regulations. In the cover memorandum for the regulation, the Board provides that it is implementing a "best practices" standard that will help "control healthcare costs" and serve the patients. The Board argues that the greatest threat to the "balance of competing interests" in healthcare costs involves the inherent conflicts of interest that arise within the context of referrals. The Board cites one study in which 84 percent of medical residents thought their colleagues were influenced by gifts from drug companies. As a result, the Board argues that therapists may be the recipients of questionable referrals when the physician has a financial relationship with the therapist. To fully understand the context for the proposed regulations, it is also helpful to be aware of the legislative objectives of many physical therapy associations. In a number of states other than Alabama, physical therapists are able to evaluate and treat patients without a physician referral. Many state associations are promoting the notion that any physician involvement in physical therapy practices is costly and unnecessary. These associations cite a report by the Office of Inspector General of the Department of Health and Human Services (OIG) that concluded many physician-owned therapy practices frequently did not comply with Medicare billing requirements. In this report, the OIG concluded that 91 percent of physical therapy services billed by physicians in the first six months of 2002 failed to meet Medicare requirements and that these failures accounted for improper Medicare payments of approximately $136 million. The OIG found that the total payments for physical therapy claims from physicians increased from $353 million in 2002 to $509 million in 2004, and that the number of physicians who billed the program for more than $1 million in physical therapy annually more than doubled in that two-year period. Many physicians question the validity and conclusions of this report and argue that physical therapists are really seeking greater financial reimbursement for their services in their efforts to eliminate the requirement for physician referrals. It should be noted that it is still uncertain at this time if the proposed regulations will be finally implemented in their current form. The Board itself may modify these rules in response to public comments received before Aug. 3, 2006. Moreover, under the Administrative Procedures Act, a joint committee of the Alabama Legislature has the opportunity to reject the proposed regulations. It is likely that physicians, particularly those that employ physical therapists, and physician groups will make their voices heard on the proposed regulations. Colin H. Luke is the Chairman of Balch & Bingham, LLP's Health Law Practice Group.