AB 1398 makes it unlawful for most parties in California workers’ compensation cases to refer injured workers to entities in which the referring party has a financial interest, and requires written disclosure of such financial interests when a claim for payment is presented. The bill covers a broad set of "interested parties"—employees, employers and insurers, claims administrators, attorneys, representatives, and providers—and applies to a wide range of services from medical care to transportation and interpreting.
The statute builds an anti-kickback framework into Division 4 of the Labor Code: it bans referral arrangements and circumvention schemes, prohibits presenting claims or accepting payment for services stemming from prohibited referrals, and creates criminal (misdemeanor) and civil penalties (including fines up to $15,000 per offense), licensing discipline, and voiding of eligibility determinations made in violation of the rule. The measure aims to reduce conflicted referrals and protect payers and injured workers from arrangements that drive up costs or distort care choices.
At a Glance
What It Does
The bill defines "financial interest" broadly and bars interested parties (including employers, insurers, claims administrators, attorneys, and providers) from referring or using services from an entity in which they hold such an interest. It requires a written disclosure of any financial interest to the third-party payer or entity receiving the claim at the time the claim for payment is submitted.
Who It Affects
Directly affects employers, workers’ compensation insurers, claims administrators and networks, treating providers, vocational evaluators, transportation and interpreter vendors, attorneys handling workers’ comp claims, and third-party payers who receive billing. It also reaches corporate officers who knowingly participate in prohibited referrals.
Why It Matters
This creates a statutory anti-kickback regime specific to California workers’ compensation with criminal sanctions, civil fines, licensing consequences, and a mechanism to void improperly obtained determinations—raising compliance obligations for virtually every participant in the claims ecosystem and shifting risk to payers who must avoid knowingly paying tainted claims.
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What This Bill Actually Does
AB 1398 builds a workers’ compensation–specific prohibition on conflicted referrals. The bill first lays out a broad definition of "interested party," which includes injured employees, employers and their insurers, claims administrators (broadly defined to include third-party administrators and joint powers authorities), attorneys, representatives (including family and staff), and providers.
It then defines the covered "services" expansively to include medical treatment and durable medical goods, utilization review, eligibility determinations (including permanent disability ratings and future earnings capacity evaluations), interpreter and transportation services, and administrative services like copying.
Under the bill, any interested party that refers a worker to an entity that will be paid under Division 4 must disclose in writing any financial interest to the third-party payer or other entity receiving the claim at the time the claim for payment is presented. More bluntly: don’t make referrals to entities in which you have a stake unless you disclose that stake in writing when billing.
The statute also identifies arrangements that constitute a "financial interest," including any ownership, debt, compensation, rebate, or agreements that tie compensation to referral volume or value.AB 1398 prohibits not only direct referrals where a financial interest exists, but also schemes intended to achieve the same result—cross-referrals or other arrangements designed to funnel referrals to a particular provider. It bans typical inducements: rebates, commissions, discounts, or other consideration offered or accepted as an inducement to refer.
The bill bars entities from presenting claims that arise from prohibited referrals and forbids payers from knowingly paying such charges or liens.For enforcement the bill packs multiple remedies: violations are misdemeanors (corporate officers who knowingly concur can also be guilty), the appropriate licensing boards may discipline licensees, the Insurance Commissioner, Attorney General, or district attorneys can seek civil penalties up to $15,000 per offense, and the statute declares any eligibility determination procured in violation to be void. The measure also carves out targeted exceptions—commercially reasonable loans and leases, passive ownership of publicly traded securities, employee-performed services, certain legal referrals, and physician referrals already exempted under Section 139.31—so not every business relationship is swept up by the ban.
The Five Things You Need to Know
The bill requires a written disclosure of any financial interest to the third-party payer or other entity at the time the claim for payment is presented.
A "financial interest" includes agreements where compensation is tied, in whole or part, to the volume or value of services produced by referrals.
Violations are misdemeanors and carry civil penalties up to $15,000 per offense enforceable by the Insurance Commissioner, Attorney General, or a district attorney.
Any determination regarding an employee’s eligibility for compensation (for example, a permanent disability rating) is void if the determining service was provided in violation of the statute.
Narrow statutory exceptions include commercially reasonable loans (at or above prime rate, adequately secured), leases with fixed rent and a term of one year or more, and passive ownership of publicly traded securities.
Section-by-Section Breakdown
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Definitions: who, what, and which services are covered
This subsection sets the scope. It gives expansive definitions for "interested party" (including employers, insurers, claims admins, attorneys, representatives, and providers) and lists covered "services," from medical care and durable goods to RU and interpreter or transportation services. For compliance teams, this means the rule reaches many actors and many service lines—not just physicians or medical vendors—so mapping referral flows and identifying where payments travel will be necessary.
Written disclosure obligation at time of billing
The bill requires that any interested party disclose a financial interest in an entity providing services to the third-party payer or entity that receives the claim, and it must be in writing when the claim for payment is presented. Practically, this forces providers and referrers to amend billing and claims workflows to capture and transmit disclosures at the point of billing, and it creates documentary evidence that regulators or payers can audit.
Ban on referrals, anti-circumvention rules, and payment prohibition
These subsections jointly prohibit referrals to entities in which the referrer has a financial interest (with limited exceptions), outlaw schemes intended to produce such referrals, and forbid presenting or paying claims derived from prohibited referrals. They turn the prohibition into an operational rule for payers: accept no claim that arises from a tainted referral and do not knowingly pay such claims. For providers and administrators, they forbid workarounds and typical incentive arrangements that tie compensation to referral volume.
Penalties, licensing consequences, and voiding of determinations
Violations are classified as misdemeanors; corporate officers who knowingly concur can be criminally liable. The provision authorizes disciplinary review by licensing authorities and requires referrals of attorney violations to the State Bar. It further allows civil penalties up to $15,000 per offense, enforceable by state enforcement bodies, and explicitly voids eligibility determinations obtained in violation—an aggressive remedy that can reopen previously decided claims.
Specified exceptions and interaction with other laws
The statute lists narrow exceptions that do not count as "financial interest," including commercially reasonable loans (with interest at or above prime and adequate security), leases with fixed rent and one-year terms, and passive ownership of publicly traded securities. It also exempts employee-performed services, certain legal referrals, and physician referrals already exempt under section 139.31, and preserves the applicability of other laws. These carve-outs leave room for legitimate commercial relationships but will require careful documentation to qualify.
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Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Injured workers — by reducing incentives for conflicted referrals that can skew care choices and by preserving the integrity of eligibility determinations (since determinations made in violation are void).
- Third‑party payers (insurers, employers) — by limiting referral-driven markups and creating statutory grounds to deny or claw back payments tied to prohibited referrals.
- Honest providers and vendors — who compete without paying or receiving referral inducements and can differentiate themselves through transparent billing and compliance.
Who Bears the Cost
- Providers and vendor networks that previously relied on referral arrangements or volume-based compensation — they must rework contracts, billing systems, and possibly give up revenue tied to referrals.
- Claims administrators, insurers, and employers — they must implement screening and documentation processes to detect disclosures and avoid knowingly paying tainted claims, increasing compliance burden.
- Attorneys and law firms handling workers’ compensation — they face added disclosure obligations and potential State Bar discipline where referrals violate the statute, affecting how they coordinate with medical‑legal providers.
Key Issues
The Core Tension
AB 1398 pits the legitimate public interest in preventing referral-driven conflicts and preserving claim integrity against the practical burdens of policing complex commercial relationships: a strong anti‑kickback rule reduces abuse but risks chilling vertically integrated care arrangements and creates heavy compliance and evidentiary demands on payers and providers with no single clear standard for innocent conduct.
The statute is deliberately broad in defining "financial interest," but the practical boundary between prohibited and permitted relationships will hinge on fact-intensive determinations. Proving a violation requires showing both a financial link and that a referral occurred because of that link; the bill also reaches indirect schemes and "should know" standards for circumvention, which injects evidentiary uncertainty and litigation risk.
Payers who deny or claw back payments based on suspected violations will need robust audit trails, and providers will need contemporaneous documentation to prove loans, leases, or investment holdings meet the statutory exceptions.
The voiding of eligibility determinations is a strong deterrent but creates operational risk: patients whose ratings or benefits are vacated may require re-evaluation, adding administrative and potential clinical disruption. The interplay with other state and federal anti‑kickback or professional conduct rules is not spelled out beyond a preservation clause, so parallel regulatory or civil actions remain possible.
Finally, enforcement is split across criminal, administrative, and civil channels (Insurance Commissioner, Attorney General, DAs, licensing boards, State Bar), which could lead to uneven application and variable standards of proof across forums.
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