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For-Profit Enterprise in Health Care (1986)

Chapter: 8 Physicians and Entrepreneurism in Health Care

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Suggested Citation:"8 Physicians and Entrepreneurism in Health Care." Institute of Medicine. 1986. For-Profit Enterprise in Health Care. Washington, DC: The National Academies Press. doi: 10.17226/653.
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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

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

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 .

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

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

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.

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,

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

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.

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.

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,

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

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

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

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.

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

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

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. 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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. 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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. 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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.

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"[This book is] the most authoritative assessment of the advantages and disadvantages of recent trends toward the commercialization of health care," says Robert Pear of The New York Times. This major study by the Institute of Medicine examines virtually all aspects of for-profit health care in the United States, including the quality and availability of health care, the cost of medical care, access to financial capital, implications for education and research, and the fiduciary role of the physician. In addition to the report, the book contains 15 papers by experts in the field of for-profit health care covering a broad range of topics—from trends in the growth of major investor-owned hospital companies to the ethical issues in for-profit health care. "The report makes a lasting contribution to the health policy literature." —Journal of Health Politics, Policy and Law.

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