Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter.
Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 151
Q Physicians end En~epreneurismin
O Heath Care
The effects on patients of the profound
changes taking place in the ownership and
control of health care institutions may be
lessened to the extent that patient care de-
cisions remain with physicians. In the past,
physicians have been relatively indepen-
dent of institutions and, as an ideal, have
been ethically bound to put a patient's in-
terests ahead of the physician's own self-
interest and the institution's economic in-
terests. This chapter examines the impli-
cations of the powerful entrepreneurial and
competitive forces that are in many ways the
result of governmental policy and that are
coming to pervade health care (1) as they
involve physicians who practice within for-
profit organizations, (2) as objects of insti-
tutional marketing or cost-control efforts in
which economic incentives are used, and (3)
as entrepreneurs who assume the economic
risk of investing in health care businesses
outside of their own practices. What effects
will these changes have on physicians' core
ethical and legal obligation: primary fidelity
to the interests of their patients? This ob-
ligation requires physicians to fulfill a role
often described as "fiduciary" (Miller, 1983),
because it has Tong been clear that the phy-
sician's own economic self-interest can con-
flict with the best interests of patients.
The fiduciary aspects of a physician's role
are premised on the special nature of health
151
care: that its need arises when the person
is vulnerable and depenclent, that the choices
to be made may involve arcane knowledge
and high stakes, and that only someone who
is not perceived to be acting primarily out
of self-interest can enjoy the trust on which
success depends. The need for physicians
to act as fiduciaries was increased, according
to the traditional analysis, by the rise of health
insurance, which insulated patients from
many of the direct economic consequences
of medical care and hence reinforced the
willingness of "consumers" of health care to
leave decisions regarding consumption of
services to the "sellers," namely, physi-
cians.
Of course, the physician's ethical position
is not merely a matter of altruistic ideals; it
has also been in the profession's enlightened
self-interest for physicians to believe in a
way that would justify society's willingness
to defer to the self-regulation of the profes-
sion and to protect its privileges and auton-
omy. Public Bust in the professional integrity
of physicians has also been reflected in nu-
merous other advisory and decision-making
roles that are assigned to physicians and that,
in many cases, are based as much on as-
sumptions of the high moral character and
objectivity of physicians as on technical ex-
pertise. Thus, physicians certify people as
fit parents (e.g., in decisions about artificial
OCR for page 152
152
insemination), as fit for civil society (under
civil commitment laws), as eligible for ben-
efits under disability programs, and so forth.
Some tempering of the imagery of the
powerful physician and powerless patient
seems warranted today in light of such fac-
tors as the increasing sophistication of pa-
tients and increased recognition of patients'
rights in medical decision making (Presi-
dent's Commission, 19821. Nevertheless, the
"fiduciary/advocate" role remains at the heart
of the relationship between health care
professionals en c! patients. It is also integral
to the relationship between the profession
itself and a society that continues to rely on
the integrity of the medical profession in a
multitude of ways.
There are two essential senses in which
physicians have fiduciary responsibilities to
their patients. The first, examined in this
chapter, is in the application of professional
expertise to particular patient care decisions
about whether to hospitalize, operate, pre-
scribe, test, discharge, or refer. Such de-
cisions should not be based on the economic
interests of the professional who is making
the decision or is giving professional advice.
The second area of fiduciary responsibility,
examined in Chapter 9, is in assuring pa-
tients that other professionals or organiza-
tions to which the physician entrusts or refers
them are worthy of their trust.
ECONOMIC INCENTIVES AND
ETHICAL OBLIGATIONS
The expression of the physician's ethical
obligations to the patient has long been seen
as subject to influence by economic and or-
ganizational arrangements. It is significant.
for example, that powerful defenses and suc-
cessful critiques of the traditional fee-for-
service payment system have been stated in
such terms. Professionally generated codes
of ethics, most notably those of the Amer-
ican Medical Association, long held that de-
partures from fee-for-service arrangements
between independent physicians and indi
FOR-PROFIT ENTERPRISE IN HEALTH CARE
vidual patients held potential for dividing or
diluting physicians' loyalties. A philosopher
recently stated the argument thusly:
Those who wish to eliminate fee for service may
overlook the fact that the physician-patient re--
lationship is one of deep intimacy and trust. The
patient's monetary power, large or small, is the
symbol attesting to the fact that the physician is
the agent of the patient. Surprisingly, '4unholy
mammon" more adequately protects the fidu-
ciary-covenant relationship of physician and pa-
tient than if the former is salaried by a company,
the military or the government (Benjamin,
1981:64).
Under the influence of earlier versions of
this argument, the language of ethics was
used in arguments against many practices
that have subsequently gained wide and even
universal acceptance-including third-party
payment, salaried practice, and prepaid
health care.
Yet, fee-for-service has also been criti-
cized for the incentives it provides physi-
cians to serve their own economic interests.
It has long been observed that a kind of
conflict of interest is present whenever the
person who is consulted about the need for
services is also the most likely provider (for
a separate fee) of the services that are rec-
ommended (Straw, 1911~. Fee-for-service
incentives encourage provision of margin-
ally necessary or even unnecessary services
and the substitution of more generously
compensated for less well compensated ser-
vices. This was not widely seen as a problem
when most physicians were primary care
providers (who had to "live with" the results
of their treatment and referrals) and when
physicians had relatively few tests and pro-
cedures to offer. The growth of technolog-
ical sophistication and subspecialization has
resulted in increased concern about the in-
centives of fee-for-service medicine, partic-
ularly when linked with the widespread and
generous insurance programs that have been
developed over the past few decades, which
give both physicians and patients the feeling
OCR for page 153
PHYSICIANS AND ENTREPRENEURISM
that the physicians' choices have no eco-
nomic impact on patients.
The incentives present in fee-for-service
health care are neither new nor concealed,
and they are probably understood by most
patients. Large numbers of Americans re-
tain a preference for arrangements (epito-
mized by fee-for-service) that preserve their
freedom to select or to change their own
physicians. The criticisms and defenses of
the private, fee-for-service mode of organiz-
ing health care are well known and need not
be rehearsed farther here, except to note
that certain criticisms (about stimulating un-
necessary services) and defenses (about
stimulating responsiveness to patients' needs
and desires) both rest on the belief that eco-
nomic rewards affect physician behavior.
However, recent years have seen a growth
in public policies and private initiative
methods to eliminate or attenuate the ef-
fects of the incentives inherent in the fee-
for-service mode of organizing health care:
HMOs, prospective rate setting, programs
that encourage or require a second opinion
prior to surgery or screening prior to hos-
pitalization, various utilization review pro-
grams, and so forth. Of course, alternatives
to fee-for-service payment create their own
incentives, possibly encouraging under-
treatment of patients and failing to encour-
age productivity.
All compensation systems from fee-for-
service to capitation or salary present some
undesirable incentives for providing too many
services, or too few. No system will work
without some degree of integrity, decency,
and ethical commitment on the part of
professionals. Inevitably, we must presume
some underlying professionalism that will
constrain the operation of unadulterated self-
interest. The question is not to find a set of
incentives that is beyond criticism, but to
seek arrangements that encourage the phy-
sician to Unction as a professional, in the
highest sense of that term. Certain changes
that are occurring in our increasingly entre-
preneurial health care system could under
153
mine patients' trust in their physicians and
society's trust in the meclical profession. For
those who believe that the professionalism
of the physician is an essential element in
ensuring the quality of health care and the
responsiveness of institutions to the best in-
terests of patients, an important question is
whether that professionalism will be under-
mined by the increasingly entrepreneurial
health care market in which physicians play
a major part.
INVESTMENTS AND INCENTIVE
ARRANGEMENTS
If the fiduciary aspects of professionalism
are indeed vulnerable to changes in the phy-
sicians' economic incentives, significant
1 . . . ·
cnanges in p nyslclans economic arrange-
ments with health care organizations could
shift the balance on which the fiduciary role
rests, possibly leading to excesses in the
pursuit of self-interest by physicians or in
the pursuit of economic goals (at the expense
of quality) by health care organizations. Cer-
tain entrepreneurial and competitive de-
velopments in health care are creating
situations that raise old and new questions
about the organizational and economic ar-
rangements that may affect the probability
that the physician's behavior will embody
the ethical ideal of primary fidelity to the
patient's interest. In particular, physicians'
investments in health care organizations and
bonus incentive arrangements designed to
influence physicians' decisions in organiza-
tions in which they practice may have the
potential to bias physician decision making
in ways that may not serve patients' inter-
ests.2
These two types of arrangements involve
economic rewards that are affected by pa-
tient care decisions, although separate from
the income derived directly from the ser-
vices provided by the physician. Until re-
cent years, this would have run afoul of a
provision in the AMA's ethical principles
that held that "a physician should limit the
.
OCR for page 154
154
source of his professional income to medical
services actually rendered by him . . . to his
patients." However, this provision has been
dropped, perhaps because it was becoming
common for physicians to derive income from
testing done on their own laboratory or X-
ray equipment and from services provided
by nurses, nurse-practitioners, and other
health professionals whom they employ. To-
day, opportunities for physicians to generate
personal income from services that they do
not themselves provide are taking on new
dimensions and scale.
Physicians' lovest~nents in Health Care
Investments by physicians in health care
organizations are not new and have never
been limited to their own office practices,
although little systematic information is
available on the nature and extent of such
entrepreneurial activities. Nevertheless, it
must have been relatively common in the
past, because it was addressed by and found
acceptable by the largest professional asso-
ciation, the American Medical Association,
whose ethical standards have Tong permitted
physician ownership of pharmacies, hospi-
tals, nursing homes, and laboratories.3 Un-
doubte~y such investments were sometimes
motivated by the promise of economic re-
turns and sometimes by the physicians' in-
tent to meet the community's need for
facilities or services that would not have been
available without such investment.
One form of physician investment that had
potential for influencing patient care deci-
sions seems to have declined over the years
the direct ownership of hospitals by physi-
cians. The first surveys of hospitals in the
1920s showed more than 40 percent of gen-
oral hospitals to be for-profit (White, 19821.
In many cases the proprietors of these small
hospitals (an average of just over 30 beds)
were physicians (Starr, 1982:165, 219~. By
the mid-1960s, these independent proprie-
tary hospitals had declined to only 15 per-
cent of all general hospitals; their farther
FOR-PROFIT ENTERTRISE IN HEALTH CARE
decline since then has been a by-product of
the growth of investor-owned hospital com-
panies, whose early growth came largely from
acquiring such hospitals. Indeed, ofthe hos-
pitals acquired separately (that is, not ac-
quired via the acquisition of a chain of
hospitals) by the four major hospital man-
agement companies up to 1984, 60 percent
were of the independent proprietary type
that were commonly owned by physicians
(Hoy and Gray, 19861. Such acquisitions did
not always eliminate physician ownership,
because hospital management companies
sometimes traded shares of their stock for
the hospitals they were acquiring. How-
ever, in these cases the ownership interest
that remained with physicians was substan-
tially diluted (i.e., in a large company rather
than in a particular hospital). Physician own-
ership was eliminated completely in the many
hospitals that were sold for cash. Thus, the
growth of investor-owned hospital compa-
nies at least initially reduced the potential
conflict of interest that occurs when physi-
cians own the facilities to which they admit
patients.
However, the decline of hospital owner-
ship by physicians appears to be an excep-
tion to a very different entrepreneurial trend.
Although documentation of ownership is
sparse, many observers have noted a rapid
growth in recent years in many new types
of entrepreneurial activities by physicians.
In addition to older forms of investment in
hospitals, pharmacies, and laboratory and X-
ray equipment (often in their own offices),
physicians are major investors in many new
types of freestanding or noninstitutional
health care centers that have come into being
in recent years and that aggressively market
their services.4 A 1982 report to the Federal
Trade Commission listed 29 types of cen-
ters, including abortion services, birthing
centers, alcohol and drug abuse treatment
centers, occupational health centers, house
call services, home health care services,
emergency room contract management ser-
vices, freestanding urgent care centers, car
OCR for page 155
PHYSICIANS AND ENTREPRENEURISM
diopulmonary testing services, genetic
counseling programs, freestanding surgery
centers, freestanding dialysis centers, op-
tometric services, retail dental offices, bald-
ness clinics, respiratory therapy services,
parenteral nutrition services, optometric
centers, podiatry centers, and sports med-
icine centers (Trauner et al., 1982~. This list
could easily be extended.
Much of this entrepreneurial activity ap-
pears to be for laudable purposes to make
certain surgical, diagnostic, and other ser-
vices available in less-expensive settings; to
increase the convenience of services to pa-
tients; to provide capital that sometimes
would otherwise not be available. However,
purposes must be distinguished from the
details of economic arrangements and the
incentives they create.
These freestanding centers are created
under a wide variety of arrangements, de-
pending on tax laws, state laws on the cor-
porate practice of medicine, and various local
circumstances. Physicians are the sole
investors in many ofthese enterprises, some
of which are virtually indistinguishable from
physicians' office practices and some of which
are distinguished only by a catchy name or
extended hours. Some new enterprises are
joint ventures between physicians and hos-
pitals or other health care organizations
(Morrisey and Brooks, 1985~. Although no
systematic data exist, many of these joint
ventures involve not-for-profit hospitals, with
the joint venture typically established through
a for-profit subsidiary. Some centers are
franchise or turnkey operations in which
investor-owned organizations (some of which
are publicly traded companies) build a fa-
cility (such as a radiologic imaging center or
a cataract surgery center) and take local phy-
sician-investors as minority partners. Some
ofthese physician investors may operate the
facility and practice therein, and some may,
by design, be likely referral physicians (Wal-
lace, 1984; Holoweiko, 1984:1231.
Several diverse causes may underlie the
apparent surge in physicians' making new
155
kinds of investments either in expensive
technologies for their own practices or in
new types of health care organizations out-
side of their own practices. Contributing
factors include the following:
· Incentives created by regulatory pro-
grams (such as certificate of need) that have
applied to hospitals but not to doctors' prac-
tices, thereby encouraging the purchase or
leasing of expensive technologies (e.g., CT
scanners) by physicians and Me growth of
freestanding centers built around these
technologies
· The tendency of payment mechanisms
to value technology-intensive care over other
services, making it more profitable for phy-
sicians to spend time on technological nro-
cedures (Schroeder, 1985)
- - ~
· Incentives created by third-party pay-
ers for shifting services from inpatient to less
expensive outpatient settings
~ Changes in technology that made some
services (e.g., cataract surgery) more feasi-
ble on an outpatient basis
· The increasing economic complexity of
medical practice, making it more important
for physicians to operate in a businesslike,
economically calculating fashion
· Tax law changes and sophisticated tax
advisers, which have undoubtedly stimu-
lated physicians' interest in certain invest-
ments
· The removal, under pressure from the
Federal Trade Commission, of many restric-
tions on truthfi~T advertising in the profes-
s~ons
· State laws against the corporate prac-
tice of medicine that have given physicians
an advantage over other entrepreneurs in
establishing certain kinds of facilities5
~ Economic pressures resulting from the
growing supply of physicians, which have
undoubtedly stimulated interest in new
sources of income and in organizations over
which physicians, as owners, can have sub-
stantial control
· Competitive conditions that make health
OCR for page 156
156
care institutions more concerned with mar-
ket share and that stimulate interest in joint
ventures
· The general increase of physician ex-
perience in practicing medicine in organi-
zations larger than the solo practices that
were once typical.
With such a large and complex group of pos-
sible stimuli, entrepreneurism among phy-
sicians is a movement of considerable force.
Finally, by making open entrepreneurism
by physicians less unusual, the growth of
physician entrepreneurism may itself have
stimulated more such activity.
Incentive Bonus Arrangements
The possibility for secondary gain from
patient care decisions also arises from bonus
arrangements established by health care in-
stitutions to encourage staE physicians to
make treatment decisions that are favorable
to the institution's financial interests (Cap-
ron and Gray, 1984; Tatge, 1984a; Adams
and Klein, 1985~. Such arrangements have
been advanced as one possible solution to a
problem created by Medicare's adoption of
a prospective payment system for hospitals
but not for physicians.6 Under cost-based
reimbursement, hospitals and physicians
were both rewarded for the provision of ad-
ditional services, a situation that is generally
acknowledged to have contributed to the
rapid growth of health care expenditures.
However, Medicare's change to rates set on
a prospective per-case basis for hospitals,
but not for physicians, gave hospitals an in-
centive to reduce expenses, but left un-
changed the economic incentives for
physicians who order the tests and decide
when the patient is ready for discharge.
Concern quickly developed among hospitals
about their economic vulnerability to the
consequences of physicians' decisions.
Hospitals have responded in several ways.
Most have cleveloped or purchased data sys-
tems to enable monitoring of physicians'
FOR-PROFIT ENTERPRISE IN HEALTH CARE
patterns of care and identification of those
physicians whose practice patterns (such as
long lengths of stay or high rates of ordering
tests) might cause the hospital to lose money
on their Medicare patients. Beyond this,
hospitals' strategies differ. Some hospitals
decided to rely on educational efforts and
appeals to physicians' loyalties and concern
for the well-being of the hospital. At an un-
known number of hospitals, physicians' ad-
mithng pnvileges may be at stake. Two-~irds
of the physicians in a 1984 AMA survey re-
ported that their hospital had set guidelines
to reduce patients' lengths of stay; approx-
imately 40 percent of these physicians said
that their hospital had tried to reduce the
number of diagnostic tests ordered, and ap-
proximately 30 percent said their hospital
had attempted to reduce the number of
treatment procedures prescribed (American
Medical Association, 1984b). (Proprietary
hospitals were less likely than nonproprie-
tary hospitals to have taken these actions,
but the differences were small.)
An alternative or complementary strategy
adopted by an unknown number of hospitals
and other types of providers (such as HMOs)
is to give physicians a direct economic stake
in the well-being ofthe institution by setting
up arrangements that re-align the physi-
cians' economic incentives with the insti-
tution's economic incentives (Iglehart, 1984;
Sandrick, 1984; Goldsmith, 1982; Richards,
1984~. This can be done by giving or selling
physicians an equity interest in the orga-
nization so they share in profits as owners
(Modern Healthcare, 1984; Simier, 1985),
or by creating a new entity-often a joint
venture between a hospital and some or all
of its medical staff through which both ex-
pense and income cloliars flow (Ellwood,
1983a,b; Tatge, 1984b; Shortell, 19841. Many
joint ventures have the additional purposes
of emphasizing cooperation with key phy-
sicians, maintaining or enhancing a hospi-
tal's market share, or improving community
access to care (Sachs, 1983; Strum, 1984;
Shortell et al., 19841.
OCR for page 157
PHYSICIANS AND ENTREPRENEURISM
Incentive bonus arrangements have been
utilized as an alternative to such equity ar-
rangements.7 What is involved is the crea-
tion of a pool of money and a formula for
sharing it. Whether (and how much) money
goes into the pool depends on whether the
institution makes money or loses money un-
der its fixed-rate reimbursement. The pos-
sible formulas for sharing it are many,
including payments made equally among all
staff physicians, in proportion to number of
patients admittecI, in proportion to contri-
bution to the pool, and so forth.
The implementation of such incentive bo-
nus arrangements has been impeded by un-
resolved questions about whether a nonprofit
institution's tax-exempt status might be
jeopardized by such an arrangement and
whether such arrangements might violate
Medicare and Medicaid fraud and abuse laws
Outgo, 1984a; Wallace, 1985; Elmquist, 1985;
Adams and Klein, 19851. Thus, it is not known
how successful they will be In encouraging
physician behavior that serves the interests
of the institution. Nor is anything systematic
known about the positive or negative effects
on patients that might result.
THE PROBLEM: ISSUES AND OPTIONS
Several arguments can be offered in favor
of physicians' economic linkages with health
care organizations that are outside of their
own practices and that provide them with
secondary sources of income from their own
patient care decisions. First, it has been ar-
gued that physicians can better exercise
leverage on behalf of patients and on behalf
of quality in organizations in which they have
an ownership interest (Guidotti, 1984~.
Available evidence allows no test of this ar-
gument. (The general topic of physician in-
fluence on institutions is explored in Chapter
9.) Second, in an environment in which cost
containment has high priority (reflected in
Me growth of prospective payment and over
methods that reward provision of services
at less cost) and in which there is reason to
157
believe that many services that have been
provided in the past have been of marginal
value at best, arrangements that increase
physicians' sensitivity to the economic con-
sequences of their decisions are not neces-
sariTy suspect and could even be beneficial.
Incentives that encourage the provision of
fewer hospitalizations, shorter lengths of stay,
or fewer tests may not be harmful to patients
and may indeed be beneficial in many cases.
(Ofcourse, not all new arrangements reward
reduced use of services. For example, giv-
ing primary care physicians an economic in-
terest in an ambulatory surgery facility or a
diagnostic imaging center could stimulate
the provision of unnecessary services.)
Third, and more fundamentally, it can be
argued that the more competitive health care
environment of the future will make it in-
creasingly necessary to bridge the historical
gap between institutions (such as hospitals)
and the independent physicians who prac-
tice therein and whose patient care deci-
sions generate income and expenses for the
institution. Arrangements that allow insti-
tutions and their medical staffs to organize
as a single unit for example, with regard
to competing on price for the business of
particular employers or payers-may pro-
vide health care organizations with com-
petitive advantages unless payers or patients
come to see these arrangements as not work-
ing in their interests. loins ventures and other
economic arrangements that make partners
of hospitals and medical staffs are perhaps
the most common formal arrangements by
which this may be accomplished, although
alternatives by which hospitals build loyalty
and induce cooperation by making them-
seIves more valuable to their medical staffs
also exist (Goldsmith, 19821.
The Problem
There is a potentially beneficial side to
increased physician awareness of the eco-
nomic consequences of their patient care
decisions or recommendations. However,
OCR for page 158
158
the committee is concerned about two pos-
sible negative ejects arrangements, whereby
physicians gain secondary income from their
patient care decisions through investments
in organizations that provide the services
that they recommend or through incentive
bonus arrangements with an institution in
which they provide care. The primary con-
cern is the unnecessary creation of conflicts
of interest that may detract from the ap-
pearance or the fact that the physician is
primarily concerned with the patient's in-
terest, and that this conflict of interest may
create patient distrust and produce undue,
harmful effects on physicians' patient care
1 . .
aeclslons.
Some committee members had an addi-
tional concern about the effects of bonus
incentives and physician investments,
namely, that the credibility and moral
standing of the medical profession itself might
be harmed, and the distinction between
professionals and businessmen might be fur-
ther eroded. In addition to making it in-
creasingly difficult for patients to trust a
physician's advice, physicians' statements on
scientific and policy questions in society might
more often be dismissed as self-serving. Some
of these concerns are similar to concerns
raised earlier about bonus incentive ar-
rangements in HMOs. Such arrangements
were criticized as similar to split fees, kick-
backs, rebates, and bribes; as constituting
payments to physicians for services they
provide to a third party rather than to the
patient; and as "perverting the doctor-pa-
tient relationship into an article of com-
merce" (Geist, 1974:1304~.
The Evidence
Empirical studies do not yet exist on the
impact on patient care decisions of the new
forms of physician entrepreneurism or of in-
centive bonus plans for DRG patients. How-
ever, studies on laboratory and X-ray use
show a direct relationship between physi-
cian ownership and utilization.8 A study of
FOR-PROFIT ENTERPRISE IN HEALTH CARE
the use of X-ray by physicians caring for
aged persons under a medical assistance
program in California in 1965 showed that
nonradiologists who provided "direct X-ray
services" to patients (i.e., using their own
equipment) used diagnostic X-ray on almost
twice as many patients as did physicians who
referred patients to radiologists for X-ray work
(Childs and Hunter, 19721. A 1983 study by
HCFA's Region V offices found that average
per-patient reimbursement was 34 percent
higher in laboratories in which primary phy-
sicians had an ownership interest than in
"non-practice-related laboratories," be-
cause of higher prices (perhaps because it
was not necessary to compete for business)
and higher utilization levels. The HCFA
study also cited a 1981 study by Blue Cross/
Blue Shield of Michigan, which found that
practice-related laboratories averaged 14.16
services per patient, as compared with 9.94
services per patient in nonpractice-related
laboratories. Similarly, a small study of six
laboratories by the Michigan Medical Ser-
vices Administration fount] that patients re-
ferred by physicians who had ownership
interest in the laboratories had 41 percent
more tests ordered than did patients re-
ferred by nonowners (State of Michigan,
1981~.
Survey evidence also shows that the rate
of laboratory test ordering by physicians was
higher for physicians who did tests "in house"
than for physicians who referred their test-
ing out; among those who referred their tests
out, rates oftesting were higher among phy-
sicians who purchased tests and billed pa-
tients than among physicians who referred
their patients to laboratories that billed pa-
tients directly (Danzon et al., 19841. Clearly,
as the analysis by Schroeder and Showstack
(1978) suggested, physician ownership of
testing and laboratory equipment can sub-
stantially increase their income.9 The pro-
liferation of such testing and the level at
which it has been reimbursed are a partial
explanation of the finding that physicians'
incomes have risen faster than fees for their
OCR for page 159
PHYSICIANS AND ENTREPRENEURISM
own services (Bedisch, 1978; Tuba and Sul-
vetta, 1985~. Studies have also shown phy-
sicians to change the volume of services
provided to patients in response to price
controls or changes in payment levels (Hol-
ahan and ScanIon, 1978; Rice, 1984~.
It is also well known that prepaid group
plans (e. g., HMOs) have substantially lower
(an average of 35 percent) rates of hospital
use than other plans, and that plans in which
physicians are paid salaries have lower rates
of hospital use than do plans that pay phy-
sicians on a fee-for-service basis (Luft,
1981:388~. Also suggestive of the influence
of economic factors on physician decision
making is the rapid change in patterns of
hospital use that has accompanied changes
in economic incentives in recent years-
particularly increased cost-sharing by pa-
tients and the onset of Medicare's prospec-
tive payment system. Although these changes
do not affect physicians' incentives directly,
lengths of stay in hospitals have declined for
several years. The Health Care Financing
Administration (1985) reported that the av-
erage number of days per Medicare bill for
aD short-stay hospitals declined from 9.3 days
in fiscal year 1983 to 7.4 days in fiscal 1984
under the prospective payment system (PPS).
Data Dom the AMA's National Hospital Pane}
Survey show that the decline in length of
stay began well before PPS was imple-
mented, and that the sharp decline among
patients age 65 and over (Dom 10.4 days in
the first quarter of 1981 to 8.8 days in the
third quarter of 1984) has also been accom-
panied by a smaller decline in the lengths
of stay for those below age 65 who, of course,
are not covered by PPS (from 5.9 to 5.6 days
during the same period) (Freko, 1985~.
This evidence itselfis adequate to confirm
the common sense conclusion that invest-
meets and economic arrangements that re-
ward physicians finar~ciaDy for making certain
patient care decisions (e.g., ordering lab tests)
will bias physicians in favor of making such
decisions, although little data are available
to demonstrate whether particular patients
159
benefit. Although specific ejects of the newer
and emerging types of arrangements have
yet to be studied, the committee believes
that serious concern about these arrange-
ments is warranted. The committee's spe-
cific conclusions and recommendations are
presented after an analysis of the types of
policy options that are available.
Policy Options
The problem of investments or incentive
arrangements that enable physicians to de-
rive secondary income from their patient
care decisions can be approached through
three types of policies: (1) policies to require
disclosure of such arrangements, (2) policies
aimed at eliminating or minimizing the eco-
nomic benefits that might be obtained from
such arrangements, or (3) policies that would
discourage or forbid such arrangements.
Disclosure
There is general agreement that the fi-
duciary aspects of the physician's role re-
quire at minimum that at least certain conflicts
of interest be disclosed to patients or to re-
ferring physicians or to third-party payers.
For example, disclosure to patients of phy-
sicians' financial interest in facilities to which
referrals are made is an element of American
Medical Association policy on conflict of in-
terest (American Medical Association,
1984a:14; 1984c), and HCFA's "program in-
tegrity" regulations require disclosure to
HCFA of information about the ownership
and control of home health agencies (45 CFR
Sec. 420.201~. Disagreements arise about
what should be viewed as a conflict of in-
terest. Is ownership in an independent clin-
ical laboratory any more of a conDict of interest
than ownership of laboratory equipment in
a physician's own practice? Is ownership of
a few hundred shares of stock in the mul-
tinational hospital company that owns the
local hospital a conflict of interest? Ob-
viously, clear distinctions are Circuit to draw.
OCR for page 160
160
There is also disagreement about the form
disclosure should take and when it should
be made. Doubt is also expressed about pa-
tients' ability to make use of knowledge about
physicians' ownership interest in such facil-
ities as laboratories or pharmacies. How-
ever, even when individual patients are
unable to make effective use of disclosures
about economic linkages, such information
could be used to guide some of the review
and emerging monitoring activities of third-
party payers, professional review organiza-
tions, employers, organized consumer
groups, and local health care coalitions. Such
organizations may also find themselves in a
position to define and demand such disclo
sures.
Curbing Benefits from Economic
Linkages
Several possible approaches fall into this
category, including
· Development of payment systems (e.g.,
capitation, salaries, or low levels of reim-
bursement for certain procedures) that min-
imize the incentives for self-dealing or self-
referral. For example, changes in reim-
bursement rules in recent years have re-
duced the amount of profit that can be built
into the markup of laboratory tests for Med-
icare patients.
~ Third-party payers could establish rules
against paying for certain services that are
provided by the person who orders or rec-
ommends the services. Such rules are ob-
viously less practical for surgeons (whose
practices require that they make recom-
mendations about the need for their own
services) than for primary care physicians
who refer patients to surgical centers in which
they have an ownership interest or for phy-
sicians who order diagnostic testing or home
health services from organizations in whic
they have an ownership interest. An ex-
ample of such a rule is the Medicare regu-
lations that forbid physicians from certifying
FOR-PROFIT ENTERPRISE IN HEALTH CARE
that a patient needs home health services if
the physician has a significant ownership in-
terest in the home health agency (at least 5
percent of the agency's assets) or a signifi-
cant contractual relationship with it (i.e.,
business transactions involving at least
$25,000 or 5 percent of the agency's oper-
ating expenses for the year) (45 CFR Sec.
405. 170).
· Third-party payers can establish rules
against paying for the wholesaling and re-
tailing of testing, as in Bailey's suggestion
regarding the overuse of laboratory testing:
"moving the physician out of the financial
transaction in testing via direct billing
laws-is the only workable means of dis-
couraging testing based on economic incen-
tives" (Bailey, 1979~. Such rules would not
be unprecedented. In Canada's Ontario
province, for example, the physician who
bills (and is paid) is the one who does the
testings not the Dhvsician who orders the
testing. In the United States the Federal
Deficit Reduction Act of 1984 restricted
physicians from marking up the price oftests
sent to outside laboratories, although this is
believed to have strongly stimulated the ac-
quisition and use of laboratory equipment
in physicians' offices (Gallivan, 1985~.
~ Pre-admission certification and second
opinion programs, already user! in many areas
for some expensive procedures, such as ma-
Jor surgery.
· Utilization review and peer review pro-
grams, such as HCFA's professional review
organization (PRO) program and the review
activities of other third-party payers.
· Maximum return-on-equity arrange-
ments could be formulated by HCFA and
major third-party payers for the total fees
collected by a physician per year for use of
laboratory equipment in the physician's of-
fice, to eliminate incentive for overuse of
such equipment.
OCR for page 161
PHYSICIaNS AND ENTREPRENEURlSM
Rules Forbidding Certain Conflicts
of Interest
Practicality precludes attempts to elimi-
nate all conflict of interest from professional
practice. However, certain types of arrange-
ments have been or could be forbidden un-
c:ler rules certifying organizations eligible to
treat patients or receive reimbursement, state
medical practice acts, or the standards of
professional organizations.
The Medicare and Medicaid antilraud and
abuse law prohibits the offering, solicitation,
payment, or receipt of"any remuneration
(inclucling any kickback, bribe, or rebate)
directly or indirectly, overtly or covertly, in
cash or in kind" in return for referring (or
to induce a referral) of any indiviclual to re-
ceive service for which payment wiD be made
under the Medicare or Medicaic] law (Sec-
tions 1877(b) and 1909(b) of the Social Se-
curity Act). Uncertainty now exists about
the applicability of the current Medicare fi:aud
and abuse laws to bonus incentive arrange-
ments. To the extent Mat such bonuses might
induce physicians to admit their patients to
a particular hospital, the law seems appli-
cable. To the extent that such bonuses en-
courage physicians to reduce utilization of
ancillary services and to shorten patients'
lengths of stay, bonuses seem consistent with
the intention of the Medicare prospective
payment system, although not necessarily
consistent with the patient's interests. Some
health lawyers have called for changes or
clarification of the law, noting its breadth
and vagueness, urging removal of criminal
penalties, and suggesting that it be specified
that the law is intended to discourage pro-
vision of unnecessary medical services (Ad-
ams and Klein, 19851. However, the
possibility that bonus incentives will confuse
the physicians' fiduciary responsibilities and
divide their loyalties should also be consicl-
ered.
There seems to be less uncertainty about
the application of this fraud and abuse stat-
ute to the mode of distribution of profits
761
Tom joint ventures. The fraud and abuse
law is seen as prohibiting the distribution of
profits according to the amount of business
generated through referrals, but not pro-
hibiting the distribution of profits according
to percentage of ownership of the venture
(American Hospital Association, 1985~.
State medical practice laws, which make
"unprofessional conduct" grounds for revo-
cation or suspension of physicians' licenses,
could provide another means of controlling
conduct, but the lack of agreement among
professional codes of ethics about the ac-
ceptability of the alleged conflicts of interest
in this area renders state laws of little actual
usefulness. The American College of Phy-
sic~ans' code of ethics, for example, holds
that:
The physician should avoid any business arrange-
ment that might, because of personal gain, in-
fluence his decisions in patient care. Activities
of physicians relating to Me business aspects of
his own or his group's practice should be guided
by the principle that such activities be intended
for the reasonable support of that practice and
for the effective provision of quality care for pa-
tients (Amencan College of Physicians, 1984:21).~2
A very different standard was adopted by
the American Medical Association's House
of Delegates in December 1984: "Physician
ownership interest in a commercial venture
with the potential for abuse is not in itself
unethical.' The AMA standard does call for
certain precautions including, at minimum,
disclosure to patients and, at maximum,
making alternative arrangements for care of
the patient (American Medical Association,
1984c).~2
THE COMMIrrEE'S VIEW
The committee strongly affirms that phy-
sicians have, and should continue to feel,
fiduciary or agency responsibilities toward
their patients. Trust is an important, often
essential aspect of the physician-patient re-
lationship, and patients' trust in the fidelity
of their physicians to the patients' interest,
OCR for page 162
162
like patient confidence in the physicians'
skills, must be warranted Various forms of
physician linkages to medical entrepreneu-
rial activities threaten the basis of that trust
by creating new and powerful conflicts of
interest. Only if one believes that medical
training renders physicians impervious to
the ejects of economic incentives or that
patients can adequately cope with physi-
cians' conflicts of interest can one be indif-
ferent to economic conflicts of interests
resulting from physicians' investments.
Although there is a paucity of data on the
effects of these arrangements on medical cle-
cision making, the committee believes bo-
nus incentive arrangements and physician
investments could pose greater problems for
physicians' fiduciary role under several con-
clitions:23
· The more direct the link between the
physician's patient care decisions and the
rewards of the incentive bonus arrangement
or investment. (One hospital company's
practice of sharing operating room revenues
with surgeons is an example of a very direct
link between decisions and payoffs; arrange-
ments in which revenues are shared with
large groups of physicians, who make dis-
tributions to individual physicians in equal
shares is an example in which the relation-
ship between a patient care decision and the
benefit is rather remote.)
· The greater the economic rewards at
stake, both in absolute terms and as a per-
centage of the physician's regular practice
income.
· When the economic rewards from the
incentive arrangement or investment derive
not from the physician's own professional
services but from the services of other
professionals or other organizations to whom
a referral is made.
· When physicians whose patient care
decisions affect their incentive arrange-
ments or investments are relatively insu-
lated from the consequences of those
decisions for the patients involved. (For ex
FOR-PROFIT ENTERPRISE IN HEALTH CAM
ample, when a physician who has no con-
tinuing relationship with a patient makes a
referral to another organization in which he
or she has an ownership interest but where
others assume responsibility for care.)
· When the physician's investment is pri-
marily motivated by, and makes sense in
terms of, pursuit of economic gain rather
than by improvement in the quality of the
physician's own practice.
· When the investments or incentives are
not understood by patients, making it im-
possible for them to protect themselves from
any negative consequences, for example, by
seeking care from someone who does not
have the same conflict of interest.
Because the forms of physician invest-
ments, joint ventures, and incentive ar-
rangements are so varied and because
developments are taking place so rapidly and
under such varied circumstances, simple
rules and guidelines regarding economic
conflicts of interest are difficult to state. The
committee divided the terrain into three
categories, for purposes of recommenda-
lions. To some extent, the market will dis-
cipline arrangements that lead to
inappropriate care, particularly if there are
disclosure standards and if monitoring sys-
tems focused on outcome (as well as process)
measures are further developed and agres-
sively used.
1. Investments in equipment or personnel
in a physician's practice.
As a general rule, the committee recom-
mends use of physician compensation systems
that break the link between the decisions phy-
sicians make in treating their patients and the
rate of return they earn on investments in
their medical practice.
Technical equipment of varying degrees
of complexity and cost and support person-
ne} with different types of skills and exper-
tise are integral to any setting in which
medical care is provided. They provide es-
sential information and services and often
OCR for page 163
PHYSICIANS AND ENTREPRENEURISM
provide convenience to both doctor and pa-
tient. The capital outlays and ongoing ex-
penditures that they entail must, of course,
be recovered if the enterprise is to remain
viable. However, charges for the use of
equipment and the services of ancillary per-
sonne! can provide physicians with signifi-
cant income beyond the income generated
through charges for their own services, ex-
pertise, skill, and time. Whether this is so
depends on the level of charges and volume
of use, a matter that is directly affected by
the physician's patient care decisions. The
larger the capital costs that must be re-
covered and the larger the margin between
expenses and charges, the greater the in-
centive to make a self-dealing patient care
decision.
However, the possibility of undue eco-
nomic influence on medical decision-mak-
ing is involved as is the operation of medical
practices for the benefit and convenience of
patients. In the committee's view, this issue
is best adclressecl by payment incentives
rather than through proscriptive rules. Al-
ternative approaches should be explored,
particularly for costs above some threshold.
They might include paying set charges for
certain kinds of patient care visits (say, a
"major comprehensive visit") rather than
paying separately for the use of items of
equipment; paying only for the recovery of
capital costs for certain expensive equip-
ment (that is, de-coupling payment Tom level
of usage); development of capitation or pre-
payment approaches that inclucle a fixed
percentage for capital expenditures.
2. Physicians' investments in facilities to
which referrals are made.
It should be regarded as unethical and un-
acceptable for physicians to have ownership
interests in health care facilities to which they
make referrals or to receive payments for
making referrals. In the absence of prohibi-
tions on such arrangements that reward phy-
sicians for writing prescriptions, making
referrals, and ordering tests, it is essential
163
that disclosure standards be developed to make
certain that patients, referring physicians, and
ird-party payers are aware that the conflict
of interest exists so that they can respond ap-
propriately.
The trend toward arrangements whereby
physicians are given an economic induce-
ment to make particular referral decisions
is to be deplored and should be rejected in
strong terms by professional associations, in
state medical practice laws, and in condi-
tions of reimbursement of third-party pay-
ers.24 These inducements include, but are
not limited to, arrangements where physi-
cians are given or sold an ownership share
in a facility to which they make referrals.
Such arrangements are inconsistent with the
physician's fiduciary responsibility to pa-
tients, and they are inconsistent with the
ethical and moral stance that society is en-
titled to expect of the medical profession.
Although some such arrangements (such as
physician ownership of pharmacies) are not
new and have perhaps even attained a mod-
icum of respectability through familiarity,
they have also in all probability been re-
sponsible for cynicism and distrust on the
part of some patients.
The practice of physicians referring pa-
tients to facilities in which they have eco-
nomic interest has long been debated. Recent
data from a national survey of physicians
shows that two-thirds believed it was a con-
flict of interest for physicians to refer pa-
tients to a hospital or other clinical facility
in which they have an ownership interest
(Musacchio et al., 19861. The proliferation
of new types of facilities and economic ar-
rangements needs more attention from the
medical profession and in public policy. The
committee's statement is intended to stim-
ulate debate. The committee recognizes that
its general statement about conflict of in-
terest in physician investment may be prob-
lematic under circumstances that it did not
contemplate for example, referrals within
group practices or within HMOs. There may
also be examples of joint ventures in which
OCR for page 164
164
physicians' capital is an essential element
en c! which are designed to provide cost-ef-
fective care under local control and account-
ability. It may be possible to build sufficient
disclosure and organizational accountability
to patients to minimize the conflict-of-in-
terest danger. However, the committee does
not believe the problem is adequately dealt
with by guidelines stating that so Tong as
there is clisclosure and patients are not ex-
ploited by inappropriate utilization, physi-
cians can enter into any lawful contractual
relationship. Such exhoratory guidelines
provide no standard against which to mea-
sure the acceptability of an arrangement.
The committee believes that the starting point
for policy on this issue should be that phy-
sicians should not have an economic stake
in making one referral rather than another.
That is the encT sought by the committee's
recommendation.
Examples can be cited where the rela-
tionship between the referral decision and
the economic return is minuscule, as when
physicians own a few shares of stock in the
hospital company that owns the hospital to
which they admit their patients. The cu-
mulative weight of all of the physician's ad-
missions in a whole year would perhaps have
only a nominal impact on the physician's
equity interest in the company. Neverthe-
less, the committee believes it unwise for
physicians to own such shares because of the
principle stated above.
Investments by physicians in companies
to which they do not refer patients do not
raise the primary concern of this chapter:
the creation of conflicts of interest that are
inconsistent with physicians' fiduciary re-
sponsibilities toward their patients. How-
ever, many committee members believe that
public trust in, and the moral authority of,
the medical profession in general will be
eroded if physicians treat medicine not only
as a profession but also as a field of invest-
ment opportunity. Thus, they believe that
the reputation and credibility ofthe medical
profession would be enhanced by general
FOR-PROFIT ENTERPRI SE IN HEALTH CARE
physician avoidance of investments in 1nves-
tor-owned health care companies, .as well as
in companies that manufacture and sell
products used in medical care.
First, the committee believes that the
highest values and ideals that should guide
the work of the health professional are in-
consistent with physicians viewing the field
of health care as an arena of investment op-
portunities. Second, although this is hardly
a new concern, the more that spokespersons
for the values and concerns of health and
medical care are seen as speaking from a
position of economic self-interest, the less
seriously those concerns will be taken by
policymakers and by the public.
The committee's concerns and ideals may
sound naive and even precious to those who
are already convinced that health profes-
sionals and institutions are, first and fore-
most, pursuers of their own economic self-
interest, and they may sound unnecessary
to those who believe that physicians are able
to maintain objectivity about all things med-
ical, no matter how their pocketbooks might
be affected. The committee, however, does
not accept either of these views. It believes
that it is in the interests of both the health
care of the American people and of the med-
ical profession itself for physicians to be as
free of economic conflict of interest as pos-
sible. If members of the medical profession
invest their money in the 90 percent of the
economy outside of health care, they can
speak with more moral authority on health
matters.
3. Incentive bonus plans in health facilities
and HMOs.
Bonus incentive plans under which physi-
cians receive a share in surplus revenues gen-
erated by an organization in which they
practice pose a danger to the physicians' ob-
ligation of primary fidelity to the patients' in-
terests, except when patients are a party to
the agreements. In the absence of prohibi-
tions on incentive bonus arrangements, it is
essential that disclosure standards be devel-
oped to make certain that patients, referring
OCR for page 165
PHYSICIANS AND ENTREPRENEURISM
physicians, and third-party payers are aware
that the conflict of interest exists so that they
can act accordingly.
Bonus incentives (like some other ar-
rangements, such as joint ventures) have been
proposed as a way to get medical stab mem-
bers more interested in cost containment or
in marketing (generating new business). One
of the smaller investor-owned hospital com-
panies proposed sharing operating room
revenues with surgeons who use the facility
and another has proposed a profit-sharing
plan based on splitting surplus revenues, if
any, derived in the care of Medicare pa-
tients for whom revenues are fixed under
the DRG prospective payment systems
(American Medical News, 1985~. While these
arrangements are now so unusual as to be
newsworthy, they could become common if
they are not objected to firmly. When bonus
incentives are offered to physicians by the
organizations in which they work or by third-
party payers, even if done as an antidote to
the established incentives offee-for-service,
such incentive plans place the physician in
an unnecessary and unacceptable conflict of
interest. Indeed, they appear to be de-
signed to do so.
The circumstance under which incentive
bonuses might be acceptable is if patients
were a party to the agreement. That is, the
closer the agreement approximates a cir-
cumstance in which a group of patients
themselves agree to the inclusion of eco-
nomic incentives in the provision of a de-
fined set of services for a negotiated price,
the less such incentives contravene the eth-
ical obligations of the physician toward the
patient. Thus, it would be one matter if pa-
tients, who had alternative sources of care,
were to agree to an HMO contract that in-
cluded a provision that incentive bonuses
were to be included in physicians' compen-
sation arrangements. It would be quite an-
other matter if a hospital offerer] incentive
bonuses to physicians for the care of Med-
icare patients, who not only were not a party
to the agreement but who would often be
165
without alternative sources of care at the
time they need services. Under such cir-
cumstances, putting patients on notice that
such incentive bonuses are being used in
the hospital would not alter the fundamental
breech of the physician's ethical obligation
to the patient.
The committee is concerned about incen-
tive arrangements that are designed to in-
fluence physician behavior. It recognizes that
there may be some circumstances in which
its recommendation may apply poorly, if at
all-for example, in the compensation of
hospital-based physicians or salaried phy-
sicians (for whom "bonuses" in the form of
salary increases could hardly be ruled out).
However, the committee supports efforts by
professional associations, third-party pay-
ers, and regulatory authorities to identify
and address situations in which economic
incentives are being offered that are inim-
icable to the patient's interests.
CONCLUSION
The fiduciary/advocate role of physicians
has been, and remains, an important re-
straint on self-interested actions by profes-
sionals and needs continued, explicit
endorsement from professional organiza-
tions, educators, and public bodies. It is in
the interest of the health care professions as
well as society to have confidence and trust
in physicians' fidelity to patients. While some
conflicts of interest are inherent in long-es-
tablished aspects of our health care system
(e.g., the traditional fee-for-service, piece-
work system in which the same physician
frequently acts both as advisor and provider
of the service), it is desirable that conflicts
of interest be avoided when possible. De-
velopments discussed in this chapter also
reinforce the importance of surveillance of
inappropriate use of health services, includ-
ing at ambulatory sites, as recommended in
Chapter 6.
OCR for page 166
166
NOTES
alto illustrate, a 1985 newsletter directed to hospital
administrators advises as follows:
Too many doctors treat "marketing" as a dirty
word. Don't let them get away with it. Be direct.
Ask doctors how they plan to send their kids to
college. Share marketing data. Offer names of
doctors who can use their services....TIP. Just
one busy surgeon means $1.5 million per year
for the average hospital. One busy internist
S750,000. One busy Ob/gyn $600,000. A busy
GP? $500,000. (Health Care Competition Week,
August 1985~.
2In the view of some, the organizational form of health
care institutions may itself affect the professional per-
formance of physicians who practice therein. Some of
the distrust of for-profit health care organizations un-
doubtedly has such a basis, as does the belief that the
not-for-profit mode of organizing hospitals is in many
ways particularly compatible with the ideals of medical
professionalism (Majones, 1984~. There is, of course, a
more skeptical view: that the not-for-profit forlorn served
to allow income maximization by the physicians that
practiced therein (Pauly and Redisch, 1973; Feldstein,
1979:191-196).
3However, as Veatch (1983:130) notes, until the 1980
revision in the AMA code of ethics, it was held uneth-
ical for physicians to profit in proportion to the work
they referred to such facilities. The AMA code contin-
ues to hold that it is unethical for "the physician to
place his own financial interest above the welfare of
his patients" (American Medical Association, 1984a: 14~.
4Some data on physician ownership of laboratories
comes from a 1983 study by lICFA's Region V offices,
which found that 75 percent of laboratory testing in
1981 was done by independent laboratories (the re-
mainder being done directly in physicians' offices), and
that one-fourth of the 535 certified independent lab-
oratories in the region were owned entirely or partially
by physicians involved in primary care; such "practice-
related" ownership increased to 42 percent among the
85 laboratories that were certified in the most recent
period studied (the 9 months ending July 30, 1982)
(Health Care Financing Administration, 19831. Frag-
mentary information on physician ownership of free-
standing primary care or emergency centers cone from
a 1983 AMA survey of physicians. Of the only 9 percent
of physicians who provided care in such a facility, 13
percent said their facility was physician owned (AMA,
1984e:181.
sThe American Medical Association's Office of Gen-
eral Counsel now identifies only three states (Texas,
Colorado, and California) Mat have effective laws against
the corporate practice of medicine (B. J. Anderson,
personal communication, June 24, 1985~. Rosoffs re-
cent analysis of the corporate practice of medicine doc
FOR-PROFIT ENTERPRISE IN HEALTH CARE
trine notes that most states still have laws prohibiting
the practice of medicine by a lay corporation, but that
the enforcement of these laws has declined because of
exceptions that developed in the employment of resi-
dents and interns, because of an exception built into
the 1973 Federal HMO act, and because of the de-
velopment and growth since the 1960s of professional
corporations. Nonetheless, Rosoff contends that "state
laws against corporate practice pose a significant threat
to innovation in health care practice. They are 'legal
landmines,' remnants of an old and nearly forgotten
war, half-buried on a field fast being built up with new
forms of health care organizations. Occasionally, usu-
ally at the instigation of those who resist the change
now taking place, one is detonated, with distressing
results" (Rosoff, 1984:41. Although concluding that the
doctrine is outmoded and deserves reconsideration,
Bosom warns against wholly scrapping it, because "some
concerns regarding lay involvement in medical deci-
sionmaking are valid" (Rosoff, 1984:5~.
6Interestingly, the incentives of Medicare's pro-
spective payment system may stimulate a reduction in
another type of incentive compensation agreement be-
tween hospitals and physicians the compensation of
hospital-based physicians (radiologists, pathologists,
anesthesiologists). Under prospectively set, per-case
rates, ancillary services become a cost to the institution
rather than the revenue source they were under cost
reimbursement. Whereas incentive compensation
methods (such as percentage of the department's gross
or net revenues) have been common among hospital-
based physicians in the past (Steinwald, 1983), an in-
crease in salaried compensation (or equivalent con-
tractual arrangements) can be expected. In any event,
from the standpoint of the fiduciary theory, incentive
compensation of these categories of physicians is of
little concern since they seldom act in an advisory ca-
pacity for patients.
7Although such bonus systems for physicians have
never been common, they have existed for some time,
sometimes in subtle forms. Documentation is sketchy,
but arrangements have been reported whereby hos-
pitals provide physicians with office space or other ser-
vices (such as billing or recordkeeping), with the cost
to physicians dependent on their admission patterns at
the hospital. Arrangements whereby hospitals offer in-
come guarantees to recruit physicians to communities
can contain tacit or implicit expectations of repayment
in the form of use of the hospital. Moreover, incentive
bonus plans have been a feature of some HMOs for
years (Somers, 1971:84 85), although the most com-
prehensive available summary of research on HMOs
mentions no systematic studies of the effects of phy-
sician incentive plans in lIMOs (LuEt, 1981~. However,
a Kaiser Permanente official was quoted years ago as
saying that Kaiser's incentive compensation arrange-
ments with physicians had had no "significant effect on
OCR for page 167
PHYSICIANS AND ENTREPRENEUR1SM
utilization experience" (Palmer, 1971:85). Recently,
Mark Blumberg, M. D., Director of Special Studies of
the Kaiser Foundation Health Plan, indicated again
that although some Kaiser regions use bonus systems
and some do not, there appear to be no associated
regional variations in utilization (personal communi-
cation, April 26, 19851. However, no formal studies
have been done. Furthermore, it is not known whether
the apparent laclc of impact is due to the amounts that
are involved, to the structure of the bonus (e.g., that
it is tied to the experience of a group of physicians, not
to individual physicians' experience), to the fact that a
healthy organizational bottom line will show up in fu-
ture salaries even without a formal bonus system, or
to some other factor.
Data showing associations should not be confused
with causal data. For example, high use of X-rays by
physicians who own their own equipment may be due
to the economic incentives of ownership or due to the
propensity of high users of X-ray to want to have their
own equipment.
sit should be noted, however, that ownership itself
is not the only route for generating income via testing.
Profits can also be generated by physicians when they
bill third parties for testing that they purchase from
independent laboratories. The HCFA study cited in
the text found that 72.5 percent of Medicare (Part B)
and Medicaid payments for laboratory testing was paid
directly to physicians rather than to laboratories, al-
though 75 percent of the testing was being done in
independent laboratories (Health Care Financing Ad-
ministration, 1983~. The average payment to physicians
was approximately 250 percent above their cost.
2°Redisch provides an estimate of the magnitude of
this phenomenon by noting that, between 1955 and
1971, physician income rose by 7.2 percent per year,
while fees rose by only 4.4 percent per year, and the
average hours per week and weeks per year that phy-
sicians practiced actually fell slightly. "The mainte-
nance of this high rate of income growth under these
conditions was accomplished by increasing physician
productivity through dramatic increases in nonphysi-
cian resource intensity of medical care" (Redisch, 19785.
The role of payment systems' rewards for the use of
high technology can be seen in changes in the relative
income of practitioners in different specialties (Schroe-
der, 19859.
VIA similar approach has long been a tenant of Brit-
ain's Royal College of Physicians, having been adopted
in 1922:
It is undesirable that any Fellow or Member of
the College should have anv financial interest
(whether direct or indirect) in any Company or
Institution having for its object the treatment of
disease for profit, other than the receipt by him
from such Company or Institution of (1) a fixed
salary, or (2) fees, for such services as he may
render to such Company or Institution in his
167
capacity of medical practitioner (Royal College
of Physicians, 1959:49)
Similar is Relman's call for the medical profession to
"declare as an article of its ethical code that doctors
should derive income in health care only from their
professional services and not from any kind of entre-
preneurial interest in the health care industry" (Rel-
man, 1983:16).
Tithe entire language of the statement on physician
investments that was adopted by the AMA House of
Delegates in December 1984 is as follows:
Physician ownership interest in a commercial
venture with the potential for abuse is not in
itself unethical. Phvsicians are free to enter law-
ful contractual relationships, including the ac-
quisition of ownership interests in health facilities
or equipment or pharmaceuticals. However, the
potential conflict of interest must be addressed
by the following:
1. The physician has an affirmative ethical
obligation to disclose to the patient or referring
colleagues his or her ownership interest in the
facility or therapy prior to utilization.
2. The physician may not exploit the patient
in any way, as by inappropriate or unnecessary
utilization.
3. The physician's activities must be in strict
conformance with the law.
4. The patient should have free choice either
to use the physician's proprietary facility or ther-
apy or to seek the needed medical services else-
where.
5. When a physician's commercial interest
conflicts so greatly with the patient's interest as
to be incompatible, the physician should make
alternative arrangements for the care of the pa-
tient.
Regarding incentive bonus arrangements whereby
physicians would share surpluses (or losses) generated
by hospitals under Medicare diagnosis-related groups
(DRG), the recommendation adopted by the AMA
Council of Delegates was much less tolerant:
The AMA has long held as a policy that physi-
cians are not entitled to derive a profit which
results directly or indirectly from services de-
livered by other health care providers who are
not their employees or agents. Thus, the phy-
sician is not entitled to derive a profit which
results from services provided by the hospital
under DRG payments (American Medical As-
sociation, 1984d).
23There can be little doubt that making an invest-
ment creates financial and psychological pressure to
derive a return; in subtle or obvious ways, incentives
generally tend to bias decision making in ways that
reward the decision maker (LuEt, 1983~. However, not
all investments are alike. Distinctions can be made
between investments in training, investments in es
OCR for page 168
168
tablishing a practice, and investments designed to pro-
duce an economic return from sources other than the
physician's professional practice. The physician enter-
ing practice who must pay back loans of $25,000 for
debts incurred in medical education surely has an in-
centive to make decisions that are economically re-
warding, as does the physician who has had to make a
large capital outlay to establish or buy into a practice.
So long as health care is primarily in the private sector,
such pressures on physicians seem inherent in the prac-
tice of medicine; another mode of organizing care would
present a different set of pressures and incentives (Me-
chanic, 1974a; 1974b:288; Glaser, 1970~. Some pres-
sures can be balanced by other factors, such as
professional values, continuing relationships with pa-
tients, concern about the opinions of peers, although
there is some evidence that the influence of these fac-
tors is less than is often suggested (Freidson, 1974~.
24There may, however, be exceptional circumstan-
ces in which the meaning and motivation of such in-
vestments cast them in a different light. For example,
in some isolated rural areas, the scarcity of capital and
expertise may leave few alternatives to physician in-
vestment if certain facilities and services are to be made
available. General prohibitions on such investment
should make allowances for these exceptional circum-
stances.
REFERENCES
Adams, Cary M., and Lynne S. Klein (1985) Med-
icare and Medicaid Anti-Fraud and Abuse Law: The
Need for Legislative Change. HealthSpan 2January):l9-
24.
American College of Physicians (1984) Ethics Man-
ual. Philadelphia, Pa.: American College of Physicians.
American Hospital Association (1985) Medicare-
Medicaid Anti-fraud and Abuse Amendments: Appli-
cation to Hospital Activities Under the Medicare Pro-
spective Payment System (Office of Legal and Regulatory
Affairs, Legal Memorandum, Number Two) Chicago,
Ill.: American Hospital Association.
American Medical Association (1984a) Current
Opinions of the Judicial Council of the American Med-
ical Association 1984. Chicago, Ill.: American Med-
ical Association.
American Medical Association (1984b) SMS Report
3(August).
American Medical Association (1984c) Judicial Coun-
cil Report C: Conflict of Interest Guidelines (Adopted
by the AMA House of Delegates, December 19843.
American Medical Association (1984d) Judicial Council
Report D: Ethical Implications of Hospital-Physician
Risk-Sharing Arrangements under DRGs (Adopted by
the AMA House of Delegates, December 1984~.
FOR-PROFIT ENTERPRISE IN HEALTH caRz
American Medical Association (1984e) Socioeco-
nomic Characteristics of Medical Practice, 1984. Chi-
cago, Ill.: American Medical Association.
American Medical News (1985) Kickback Plan by
Hospital Hit June 28/July 5~:1,34.
Bailey, R. M. (1979) Clinical Laboratories and the
Practice of Medicine. Berkeley, Calif.: McCutchan.
Benjamin, Walter W. (1981) A Reflection on Phy-
sician Rights and the Medical Common Good. Linacre
Quarterly (February):62-72.
Capron, Alexander Morgan, and Bradford H. Gray
(1984) Between You and Your Doctor. Wall StreetJour-
nal (February 6~.
Childs, Alfred W., and E. Diane Hunter (1972) Non-
Medical Factors Affecting Use of Diagnostic X-ray by
Physicians. Medical Care lO]uly-August):323-335.
Danzon, Patricia Munch, Willard G. Manning, Jr.,
and M. Susan Marquis (1984) Factors Affecting Lab-
oratory Test Use and Pnces. Health Care Financing
Review 5(Summer):23-32.
Ellwood, Paul (1983a) The MESH Method for Help-
ing Doctors and Hospitals Work Together. Excelsior,
Minn: InterStudy.
Ellwood, Paul (1983b) When MDs Meet DRGs. Hos-
pitals 57(December 16~:62-66.
Elmquist, Marion (1985) Incentive Plan Can Add
Doctors to Savings Team. Modern Healthcare 15danuary
4~:24.
Feldstein, Paul J. (1979) Health Care Economics.
New York: Wiley.
Freidson, Eliot (1974) Doctoring Together: A Study
of Professional Social Control. New York: Elsevier.
Freko, Deborah (1985) Admissions Drop Again, Cost
per Case Up. Hospitals 59(February 1~:35-38.
Gallivan, Mary (1985) Physician Offices Invade Clin-
ical Laboratory Market. Hospitals 59~0ctober 16~:84-
94.
Geist, Robert W. (1974) Incentive Bonuses in Pre-
payment Plans. The New England Journal of Medicine
291(December 12~:1304-1306.
Glaser, William A. (1970) Paying the Doctor: Systems
of Remuneration and Their Effects. Baltimore, Md.:
Johns Hopkins University Press.
Goldsmith, leg (1982) Can Hospitals Survive? The
New Competitive Health Care Market. Homewood,
Ill.: Dow Jones-Irwin.
Guidotti, Tee L. (1984) Limiting MD Investment in
Health Field Ill-Advised. American Medical News
(September 14~:31.
Health Care Financing Administration (1983) Di-
agnostic Clinical Laboratory Services in Region V (#2-
05-2004-119. Mimeograph.
Health Care Financing Administration (1985) HCFA
Background Paper ton Medicare Prospective Payment
System Monitoring Activities] January).
Holahan, John, and William Scanlon (1978) Price
Controls, Physician Fees and Physician Incomes from
OCR for page 169
PHYSICIANS AND E3ITREPRENEURISM
Medicare and Medicaid. Washington, D.C.: Urban In-
stitute.
Holoweiko, Mark (1984) Doctor Entrepreneurs: Are
They Hurting the Profession? Medical Economics (Au-
gust 20~:116-133.
Hoy, Elizabeth W., and Bradford H. Gray (1986)
Trends in the Growth of the Major Investor-Owned
Hospital Companies. This volume.
Iglehart, John K. (1984) Report of the Ninth Duke
University Medical Center Private Sector Conference.
The New EnglandJournal of Mediane 311Quly 19~:204-
208.
Juba, David, and M. Sulvetta (1985) A Decomposi-
tion of Medicare Part B Payment for Physicians' Ser-
vices. Washington, D.C.: Urban Institute.
LuEt, Harold S. (1981) Health Maintenance Orga-
nizations: Dimensions of Performance. New York: Wiley.
Left, Harold S. (1983) Economic Incentives and
Clinical Decisions. Pp. 103-123 in Bradford H. Gray,
ea., The New Health CareforProfi:t. Washington, D.C.:
National Academy Press.
Majones, Giandomenico (1984) Professionalism and
Nonprofit Organizations. Journal of Health Politics,
Policy and Law. 8(Winter):630-659.
Mechanic, David (1974a) Patient Behavior and the
Organization of Medical Care. Pp. 67-87 in Laurence
R. Tancredi, ed. Ethics of Health Care. Washington,
D. C.: National Academy of Sciences.
Mechanic, David (1974b) Politics, Medicine, and So-
cial Science. New York: Wiley.
Miller, Frances H. (1983) Secondary Income from
Recommended Treatment: Should Fiduciary Princi-
ples Constrain Physician Behavior? Pp. 153-169 in
Bradford H. Gray, ed. The New Health Care for Profit.
Washington, D.C.: National Academy Press.
Modern Healthcare (1984) Mayo Subsidiary Selling
Equity to Hospitals, Doctors as It Sets Up Labs.
14June):106.
Morrisey, Michael A., and Deal C. Brooks (1985)
Hospital-Physician Joint Ventures: Who's Done What?
Hospitals 59(May 1~:74-78.
Musacchio, Robert A., Stephen Zuckerman, Lynn
E. Jensen, and Larry Freshnock (1986) Hospital Own-
ership and the Practice of Medicine: Evidence from
the Physician's Perspective. This volume.
Palmer, Walter K. (1971) Finances and Planning. Pp.
71-87 in Anne R. Sommers, ed. The Kaiser-Permannte
Medical Care Program. New York: The Common-
wealth Fund.
Pauly, Mark, and Michael Redisch (1973) The Not-
For-Profit Hospital as a Physicians' Cooperative. Amer-
ican Economic Review 63(March):87-99.
President's Commission for the Study of Ethical
Problems in Medicine and Biomedical and Behavioral
Research (1982) Making Health Care Decisions. Wash-
ington, D.C.: U.S. Government Printing Office.
Redisch, Michael A. (1978) Physician Involvement
769
in Hospital Decision Making. Pp. 217-243 in Michael
ZuLkoff, Ira E. Raskin, and Ruth S. Hanft, eds. Hos-
pital Cost Containment: Selected Notes for Future Pol-
icy. New York: Prodist.
Relman, Arnold S. (1983) The Future of Medical
Practice. Health Affairs 2(Summer):5-19.
Rice, Thomas (1984) Physician-Judicial Demand for
Medical Care: New Evidence from the Medicare Pro-
gram. Pp. 129-160 in R. Schemer and L. Rossiter, eds.
Advances in Health Economics and Health Services
Research. Vol. 5. Greenwich, Conn: JAI Press.
Richards, Glenn (1984) How Do Joint Ventures Af-
fect Relations with Physicians? Hospitals 58(December
1~:68-74.
Rosoff, Arnold J. (1984) The "Corporate Practice of
Medicine" Doctrine: Has Its Time Passed? Supple-
ment to Health Law Digest 12(December).
Royal College of Physicians (1959) The Charter and
By-Laws of the Royal College of Physicians of London
and the acts of Parliament Especially Relating Thereto.
London: Harrison and Sons.
Sachs, Michael (1983) Help Your Physician "Bro-
kers" Make Profits. Modern Healthcare 13(April):86.
Sandrick, Karen (1984) Medical StaE-Administration
Relations under PPS. Hospitals 58(April 16~:79-82.
Schroeder, Steven A. (1985) The Making of a Med-
ical Generalist. Health Affairs 4(Summer):26-46.
Schroeder, Steven A., and Jonathan A. Showstack
(1978) Financial Incentives to Perform Medial Proce-
dures and Laboratory Tests: Illustrative Models of Of-
fice Practice. Medical Care 16:289-298.
Shaw, Bernard (1911) The Doctor's Dilemma, Get-
ting Married, and the Sheu~cag-up of Blanco Posnet.
New York: Brentano's.
Shortell, Stephen M. (1984) 10 Guidelines for Suc-
cess of Hospital-Physician Partnerships. Modern
Healthcare 14(August 1~:132-136.
Shortell, Stephen M., Thomas M. Wicl~zer, and John
R. C. Wheeler (1984) Hospital-Physician Joint Ven-
tures: Results and Lessons from a National Dernon-
stration irz Primary Care. Ann Arbor, Mich: Health
Administrative Press.
Simler, Shelia (1985) Development Company Plans
to Use Joint Ventures to Build Surgicenters Modern
Healthcare 15January 4:22.
Somers, Anne R. (ed.) (1971) The K~iser-Perm~nente
Medical Care Program. New York: The Common-
wealth Fund.
Starr, Paul (1982) The Social Transformation of
American Medicine, New York: Basic Books.
State of Michigan (1981) Utilization of Medicaid Lab-
oratory Services by Physicians wiWwithout Ownership
Interest in Clinical Laboratories: A Comparative Anal-
ysis of Six Selected Laboratories. State of Michigan
Department of Social Services, Medicaid Monitoring
Section.
Steinwald, Bruce (1983) Compensation of Hospital
OCR for page 170
170
Based Physicians. Health Services Research 18
(Spring) 1~.
Strum, Arthur C., jr. (1984) Selling the Medical Staff
and Hospital as a Package. Hospitals 58(May 16~:98-
101.
Tatge, Mark (1984a) Illinois Hospital Awaits IRS Rul-
ing on Prototype Physician Inventive Plan. Modern
Healthcare 14June):23-24.
Tatge, Mark (1984b) Physicians, Rochester, NY,
Hospital Enter Joint Venture to Protect Market. Mod-
ern Healthcare 14(December):26.
Trauner, Joan B., Harold S. Luft, and Joy O. Robin-
son (1982) Entrepreneurial Trends in Health Care De-
livery: The Development of Retail Dentistry and
Freestanding Ambulatory Services. San Francisco, Calif.:
FOR-PROFIT ENTERPRISE IN HEALTH CARE
Institute for Health Policy Studies, University of Cal-
ifornia.
Veatch, Robert M. (1983) Ethical Dilemmas of For-
Prof~t Enterprise in Health Care. Pp. 12~-152 in Brad-
ford H. Gray, ed. The New Health Care for Profit.
Washington, D.C.: National Academy Press.
Wallace, Cynthia (1984) Investors Cool on Hospital
Companies While Interest in Alternatives Heats Up.
Modern Healthcare 14Quly):120-121.
Wallace, Cynthia (1985) Hospitals' Joint Ventures,
Incentive Plans May Violate Fraud, Abuse Laws. Mod-
ern Healthcare 15January 49:23-24.
White, William D. (1982) The American Hospital
Industry Since 1900: A Short History. Advances in Health
Economics and Health Services Research 3:143-170.
Representative terms from entire chapter:
care decisions
