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For-Profit Enterprise ire Health Care. 1986. National Academy Press, Washington, D.C. An Exchange on For-Profit Health Care Arnold S. Relman and Uwe Reinhardt Professor Uwe E. Reinhardt Woodrow Wilson School of Public and International Affairs Princeton University Princeton, N] 08544 Dear Uwe: August 23, 1984 say that the public shouldn't be concerned about the "remuneration ranging from good to ex cellent" now being earned by people and in stitutions in the health-care "industry." "Somehow they expect health-care providers to behave differently from the purveyors of other goods and services." Why shouldn't the public expect health-care providers to be different from other "pur veyors"? Do you really see no difference be tween physicians and hospitals on the one hand, and "purveyors of other goods and services" on the other? Do you regard the health care system as just another industry, and physicians as just another group of businessmen? Where does the professional commitment to service fit into your view of medical care? Do hospitals have no responsibility to serve the commu nity, or do you reserve that obligation only for the public tax-supported hospitals? It seems to me that this issue goes to the heart of the matter we have been discussing in the IOM [Institute of Medicine] committee. As a physician, I believe the medical profes sion's first responsibility is to serve as a trusted agent and adviser for patients. Physicians should be adequately compensated for their time and effort, but not as businessmen. Unfortunately, too many physicians nowadays are succumbing to the lure of easy profits, and are becoming entrepreneurs. The investor-owned hospital corporations obviously are businesses and tend to think of health care as a business. It is also true that many voluntary hospitals are becom ing more businesslike in their orientation to wards sales, marketing, cost control and so forth. But does this mean that the health-care system really is fundamentally the same as any other business, or that we should encourage it to become so? As an economist, you may not see any dis tinction between the practice of medicine and I have just read your entertaining piece in the July 23 issue of Medical Economics, de- bunking the "cost-crisis" in health care, and I wanted to make a brief comment. In general, I agree with your argument- which has the usual Reinhardt style and pa- nache that as a nation, we could spend much more on health care if we wanted to (partic- ularly in the public sector). But it seems to me that you ignore the crisis caused by the mal- distribution ofthe burden ofthe cost. We have a crisis in the private sector because employers can't continue adding the rising costs of their employees' health insurance to the price of their products without becoming non-com- petitive in world markets. And we have a crisis in the public sector because the government, having made a commitment to provide care for the poor and the elderly, is no longer will- ing to pay the bills, and local taxpayers are unwilling to pick up the slack. So, I don't think you help the public understanding of our di- lemma by asserting that there is no "crisis." The problem is that we want to have our cake and eat it too. We want more and better health care, but we don't have a system of paying for it that distributes the cost equitably or assures equal access for all citizens. That is what I would call a real "crisis." Turning to another aspect of your article: I was puzzled by your comment about the eco- nomic behavior of"health-care providers." You 209

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210 a business, but that point of view would be strongly contested by many people outside of economics, including the great majority of health professionals. It would also be con- tested by almost anyone who has had a major personal encounter with medical care. Sick or frightened patients do not regard their phy- sicians as Hey would "purveyors of other goods and services," nor do they think of the hospital where they go for treatment as simply another department store. In any event, this is an issue that needs to be discussed in more depth at our committee meetings, and certainly deserves thoughtfi~1 consideration in our final report. With kindest regards. Sincerely yours, Arnold S. Relman, M. D. September 6, 1984 Arnold S. Relman, M.D. Editor New England Journal of Medicine 10 Shattuck Street Boston, MA 02115 Dear Bud: Many thanks for your letter of August 23rd concerning my recent piece in Medical Eco- nomics. For starters, let me mention that the piece was actually written by one oftheir editors, after an interview that, in turn, was based upon my paper entitled, "What Per- centage of its GNP Should a Nation Spend on Health Care?". Be that as it may, the thrust of the article is certainly mine, and I am willing to defend it. You register two criticisms against the piece: (a) that I mislead the public by ar- guing that cost is not Me essence of our health care crisis, and (b) Mat I do not expect physicians' behavior to be deferent Dom that of "purveyors of other goods and services." Let me respond to both criticisms in turn, with emphasis on Me seconcl, because it bears on the matter before our IOM committee. FOR-PROFIT ENTERPRISE IN HEALTH CARE It is my sense that you misread the intent of my remarks on costs. Because you are an astute reader, other readers may have mis- read it as well. Thus, I plead mea culpa for inadequate communication. Let me draw your attention to a sentence in the piece that really constitutes the heart of the argument: All I'm saying is that we're dodging the real issue when we pretend that God has spoken from on high and told us: "Sorry: folks, you can't spend any more on health care or you'll be running around naked!" lhe real issue and it's tough enough is how much we want to spend on health care, and how to ap- portion the cost ito individual members of society. ] Unfortunately, the editors eliminated the section in brackets from Me draft I had approved.] I do not believe, as you apparently do, that premiums for employee health insurance have rendered American business noncompetitive. In Europe and (I believe) in Japan, the bulk of health care is typically payroll financed. Col- lectively, German and French business firms bear a larger share of the nation's total health bill than do American firms. There are more compelling reasons why American business firms find it hard to compete abroad. Nor do I believe that our public sector could not absorb additional expenditures on health care. Let me not dwell on the $400 hammers we have no difficulty buying from our defense contractors. In 1983, we spent $22 billion on farm support programs expenditures de- signed to pay farmers not to grow food or to grow surplus food the government must store in its warehouses. A nation that can do this year after year has no case arguing that it can- not afford additional public health care expen- ditures. In sum, I stand by the argument that ref- erences to the percent of GNP [gross national product] we spend on health care, to the plight of business or of David Stockman, or to phy . . . . slclans average Income are smoke screens to hide the true dimension of the crisis before us: an apparent unwillingness of society's well- to-do to pay for the economic and medical maintenance of the poor. It is not an externally imposed economic or cost crisis; it is a moral crisis. That is what I meant by the statement that "the real issue is how to apportion the

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AN EXCHANGE ON FOR-PROFIT [IEALTH CARE cost of our health care to individual members of society." And, as you mention, you agree. Let me now come to the more important part of your letter. In it you argue that the American public should expect health care providers to be different from the "purveyors of other goods and services," and you wonder why I think otherwise. Furthermore, you ar- gue that this question goes to the heart of the matter before our IOM committee. In view of the central role you have played on the committee, I think that it is only fair to take your question head-on. Unfortunately, I shall not be able to attend the next two meet- ings. Permit me, therefore, to respond to your question with a commentary that goes much beyond the customary length of a letter. My ultimate objective will be to extract from you: (a) a positive definition of the kind of health care system you would find acceptable on eth- ical grounds, and (by a statement explaining precisely in what sense American physicians differ from other "purveyors of goods and ser- vices"-purveyors you do not seem to hold in high regard. I shall proceed with a series of pointed questions. Do I understand you to imply that you would like to see the U.S. health care system con- verted to something akin to the Swedish sys- tem? In Sweden, comprehensive health care is the responsibility of the county govern- ments. Most Swedish doctors are salaried em- ployees of the counties, that is, they are truly not-for-profit providers of health care. Only 5 percent of Swedish physicians are private, for- profit practitioners on the U. S. model. Are you not ultimately asking that such a system be introduced in the United States as well? Of course, in such a system physicians and others working in it would have to be paid the "good to excellent" wages earned by other "pur- veyors" in the economy, because the health sector must compete with other industries for the available pool of manpower. The time is long past when as vast and technically complex a sector as the health care sector could be run by missionaries and candy-stripers. It is a real industry now, whether we like it or not, and it must pay wages competitive with other in- dustries. Actually, I have never heard you make that plea for the Swedish system before our com 271 mittee, nor have I seen you make it in print. Let me therefore assume, in what follows, that you do not advocate the Swedish model out- right, but merely wish us to revert to the U. S. status quo circa 1970, that is, to the world as it was before the for-profit institutions ap- peared on the scene. It was a world in which physicians had the right to organize their prac- tice as private entrepreneurs on a for-profit or for-income or for-honorarium or for-whatever- you-want-to call-it basis, and in which they were supported by non-profit institutions that were financed by someone else, but freely available to physicians as their workshops. If this is the world to which you would have us return, then I must confront you with yet another set of questions, some of which may not be alto- gether tactful. These questions will center strictly on physicians and not on other parts of the health care industry. I would like to explore with you what role model your own profession has been to other purveyors of health care. Let me, then, turn your question around and ask: What, in the history of the American medical profession, aside from that profes- sion's own rhetoric, should lead a thoughtful person to expect from physicians a conduct significantly distinct from the conduct of other purveyors of goods and services? I do not deny that there have been grand and noble physi- cians among the lot, just as there have been grand and noble financiers, lawyers, and even economists. Rather, I am referring here to central tendencies, to the mainstream of American medicine as it has revealed itself through the ages to a paying public. What then, in the conduct of mainstream American medicine should have led a thoughtful person to expect from physicians a conduct distinct from other ordinary mortals who sell their goods and services for a price? And what in the his- tory of mainstream American medicine would you have serve as a role model for the emerg- ing for-profit institutions deliv~nn~ health car_ . ~ VlCeS r ~_ = ~ _ _ _^ HA ~_ _ ^ Surely you will agree that it has been one of American medicine's more hallowed tenets that piece-rate compensation is the sine qua non of high quality medical care. Think about this tenet. We have here a profession that openly professes that its members are unlikely

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212 to do their best unless they are rewarded in cold cash for every little ministration rendered their patients. If an economist made that as- sertion, one might write it off as one more of that profession's kooky beliefs. But physicians are saying itt Ordinary mortals, not blessed by profes- sional courtesy, experience the application of this piece-rate principle whenever they pass the physician's.cashier on the way out: one is asked to pay, on the spot, with cash or valid check. Indeed, it is not uncommon that one makes a down payment or even a complete prepayment for obstetrical care or surgery- "cash on the barrelhead," as lesser mortals would put it. Why would patients who un- dergo this routine not think of the physician as a regular business person? If you do not like the imagery, perhaps you object to fee-for- service compensation. Again, if you object to fee-for-service medicine, why have you not made this clear to our IOM committee? You will recall that, for many decades, our nation has been plagued by a maldistribution of physicians. Careful empirical research has established scientifically what was known to any cab driver all along: physicians, like ev- eryone else, like to locate in pleasant areas where there is money to be had. Thus, our favorite areas have been said to be vastly ov- erdoctored, while other areas, notably the in- ner cities, have been sorely underserved. As a nation we have been able to solve this prob- lem only through the importation of thousands of FMGs [foreign medical graduates]. (Let us thank them one and all!) Because I do not think ill of ordinary mortals, and because I think of physicians as ordinary mortals, I would not look down upon physicians for their locational preferences. They have simply behaved like certain Ivy League professors who lavish their pedagogic skills on the offspring of America's well-to-do instead of teaching students who really need them. But how does someone im- puting a more lofty social role to physicians reconcile the physicians' locational choices with the lofty ideal? Do you really believe that phy- sicians are more civic in their behavior than the rest of us? Do you think they could come even close to members of the voluntary fire brigade? Let me put the question to you even more bluntly: Do you sincerely believe that FOR-PROFIT ENTERPRISE IN HEALTH CARE our for-profit hospitals will leave in their wake as much neglect of uninsured, sick Americans as American physicians have, collectively, in the past and are likely to leave in the future? You ask me whether hospitals have no re- sponsibility to serve the community, and whether I reserve that obligation only for the public tax-supported hospitals. This question involves principles of law and principles of eth- ics, and I am neither a law yer nor an ethicist- just a little country economist from rural New Jersey. But perhaps I can make some headway by seeking guidance in your own profession's code of ethics. After all, the human capital of physicians (their training) has traditionally been largely tax-financed. Let us examine, then, what obligation for community service physicians believe they have shouldered in return for a largely tax-financed education. From that ethos we might derive some clues on the social ob- ligation of a hospital that is wholly investor- financed and not tax-financed. Specifically, if physicians believe they owe no community service for their public subsidies, can we le- gitimately saddle investor-owned hospitals with such an obligation? According to a recent article in Medical Eco- nomics Jack E. Horsley, I. D., "Who Can Sue You for not Rendering Care?" August 20, 1984), the AMA [American Medical Association] Principles of Medical Ethics include the fol- lowing tenet: Physicians are free to choose whom they will serve. Further on in the piece the author opines that "an AMA legal analysis states that 'a physician is not required to accept as patients all who apply to him for treatment. He may arbitrarily refuse to accept any person as patient, even though no other physician is available.'" (Italics added.) Finally, the au- thor advises the reader, "You have a perfect right to refilse patients who are not insured or on welfare." As we all know, many American physicians have acted on these ethical pre- cepts. They have refused to accept Medicaid patients because they considered the cash yield for treating such patients inadequate. They have "skimmed the cream," so to speak. You and some of your colleagues seem trou- bled now by the thought that for-profit hos- pitals may "skim the cream" and refuse to treat uninsured, poor patients. You have made much of this point in our committee meetings. Here

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AN EXCHANGE ON FOR-PROFIT HEALTH CARE comes yet another question for you: Given that the medical profession, in its own code of eth- ics, actually has laid the moral and legal foun- dation for such refusals, have you at any time prior to the emergence of for-profit hospitals ever railed against your own profession's code of ethics?* If so, I would love to see that lit- erature. If not, why have you not? You may have noted in our committee's public hearing last fall that the representative of the ASIA steadfastly refused to be goaded into saying something negative about for-profit hospitals, particularly on this issue. That was very decent of him, and very appropriate, too, because people in glass houses should not throw stones, as the old saw goes. My own thoughts on the matter, for what they are worth, are these. Society should not expect private physicians or private hospitals (for-profit or not) to absorb the cost of whatever social pathos washes onto their shores. We as a society have a moral duty to compensate the providers of health care for treating the poor. If providers do give some charity care, our thanks to them. Ultimately, however, it is the responsibility of the citizenry at large to pay for the economic and medical maintenance of their less fortunate peers. It follows that I do not consider it sensible to nit-pick over how much charity care for- profit hospitals do or do not give. Our com- mittee has wasted too much time on that ir- relevant question. In any event, to the extent that they refuse to render such care, they can point to the medical code of ethics as a moral justification for their policy, and they can but- tress their case by pointing to the neglect your profession has traditionally visited upon low *Incidentally, I am not saying that the medical profession departs from He celebrated Hippocratic Oath our medical graduates swear. As I read that oath, I see no reference in it to charity care. It is merely required that physicians do the utmost, without corruption, for patients whose house they do (choose to) enter. There is the added promise that "you will be loyal to the profession and just and generous to its members," and there is the wish that "prosperity and good repute be ever yours." I saw nothing explicit about charity care in the version I reviewed. Maybe there is a longer one that does make reference to it. If so, I stand to be enlightened. 213 income Americans. Examine, if you will, the data presented in the graph's overleaf. Would you interpret the sudden upswing in the phy- sician care received by America s poor since the mid 1960s as: (a) a massive attack of un- requited noblesse oblige seizing members of your profession shortly after 1964, or (b) a sud- den decrease in the health status of America's hitherto unusually robust and healthy poor, or (c) the emergence of federal financing of phy- sician care for America's poor, many of whom were sick all along? My money is on (c). If I am correct, the graphs are not exactly monuments to the beneficence of American medicine, are they? And, if I am correct, other "purveyors" prob- ably would have traced out similar graphs un- der similar circumstances, would you not agree? Real estate developers are one example that comes to mind; they have done much for the poor since federal funds began to pay them for it. If we pay the for-profit hospitals for treating the uninsured poor, they will treat them, too, as many American physicians (though not all) did in response to the onset of federal financ- ing. * And what of the profits the investor-owned hospitals will reap in the process? You will recall that you and I have had quite a few exchanges on the level of these profits. As you probably know, economists decompose a phy- sician's income into at least three parts: (a) a rate of remuneration for hours of work, (b) a rate of return to the investment in fixed facil- ities (the practice), and (c) a rate of return to the investment the physician has made in his or her own training. Research has shown the latter rate to be certainly on par with the rate- of-return to shareholders' equity earned in in- dustry, the hospital industry included. Recently I read that over 70 percent of all cataract extractions in this country are covered by Medicare. If you look up the prevailing charges for that operation and relate these to the time it takes to perform a cataract extrac- tion, you will arrive at a quite handsome hourly *I do not deny that even prior to Medicaid, some American physicians did treat some of our poor on a charity basis. It is also true that our fior-profit hospitals now do treat some uninsured poor on a charity basis.

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l 214 rate of physician remuneration for that kind of work. Properly viewed, it implies quite a handsome rate of return to the investments made by ophthalmologists in their training. My legendary inbred tact stops me from dwell- ing on the rates of return our nephrologists have been able to extract from taxpayers via the Medicare program. But let me raise the following question: If it is all right for physi- cians to earn a handsome rate of return on their investments, what is so evil about paying a handsome rate of return also to the non-M. D. s who have let their savings be used for the brick and mortar of health care facilities against nothing more than the piece of hope-and-prayer paper lawyers refer to as a"common stock certificate?" Do you think that, in its final re- port, our committee can fairly get into the issue ofthe rates of return earned by the share- holders of investor-owned hospitals without exploring also the rates of return physicians earn on their investments? Might you not agree that we had best drop that entire issue as well? So far, I have argued that, as individuals, American physicians have traditionally con- ducted themselves in a style that casts them into the role of a regular purveyor of a service. I do not judge it to be a style ordinary mortals need behold with awe. It is tempting to but- tress the case further with reference to the activities of organized American medicine. I shall refrain from reciting that history, how- ever, because Clark Havighurst of Duke Uni- versity has already done so quite effectively before our committee. Suffice it to say that one would be hard put to distinguish organized American medicine from the trade association of any other group of purveyors of goods and services. Would you not agree with that as well? In this connection, you may also wish to read Paul Feldstein's chapter"The Political Econ- omy of Health Care" in his book Health Eco- no7rucs. * In that chapter he demonstrates rather persuasively that the political activities of or- ganized medicine are best explained with a simple mode] of economic self-interest. Feld- stein asks, inter alla, why a profession that professes to be deeply concerned over the *New York: John Wiley and Sons, 1979. FOR-PROFIT ENTERPRISE IN HEALTH CARE quality of health care has been opposed so long to strict, effective periodic relicensing on the model of, say, periodic relicensing of airline pilots, all the while invoking the issue of qual- ity in the defense of restrictive licensure laws that exclude would-be competitors from the primary health care market. Economists are neither shocked nor surprised by such a pos- ture nor, however, does it persuade them that physicians stand much apart from the rest of mankind. You might argue that all I have said about American physicians is perfectly true, but be- side the point you wish to make: that such things just should not be true. But then I must repeat my earlier question, to wit: do you not really ask for a health system something like the Swedish one? I raise the issue again be- cause nothing short of such a revolution will rid our health system of the conflicts of interest you seem to deplore. At a minimum, you should want our system to be converted totally to nonprofit HMOs that pay physicians a salary and do not I repeat, do not distribute to physicians any year-end bonuses based on the HMO's economic performance. Is that your plea? You suggest that, when people are sick, they are often frightened and can, thus, be easily exploited by a for-profit provider. Is that true only when the provider is a for-profit institu- tion, but not true when the provider is a fee- for-service (i.e., for-profit) practitioner? Do you really believe that the executives of a for-profit hospital naturally lack the decency and integ- rity self-employed physicians naturally have? Let me ask you this question in yet another way. It is well known that the hourly remu- neration physicians earn for inpatient physi- cian services exceeds that for ambulatory physician care. Would you not agree that, given the entrepreneurial practice setup American physicians have always preferred, and given the pressure on physician incomes likely to come from a physician surplus, this disparity in hourly remuneration may lead to needless testing, hospitalization, and length of stay, even if all hospitals in our country were not-for- profit? I put to you the proposition that this ques- tion goes to the heart of our debate. Whatever the ownership of the hospitals in which Amer

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AN EXCHANGE ON FOR-PROFIT HEALTH CARE lean physicians work, the ethical standards by which our health care sector operates will ul- timately be driven by the ethical standards of our physicians. To make the case you have sought to make to our committee uncon- vincingly, in my view-you must present us at least with a testable theory according to which the ethical standards of essentially un- supervised, self-employed, fee-for-service physicians affiliated with nonprofit hospitals can withstand even the severest economic pressure (mortgage, kids in college, alimony, lovers with expensive tastes, and so on) in the face of ample opportunity to be venal, while the ethical standards of physicians affiliated with for-profit hospitals, or employed at a sal- ary by the latter, will wilt at the mere sug- gestion by some corporate officer to set aside medical ethics for the sake of corporate profits that do not even accrue, dollar for allegedly corrupt dollar, to the allegedly corrupt M. D. ? Make that case convincingly, and you will walk away with our committee. Until you do make that case convincingly, I shall continue to subscribe to the theory that, whatever erosion in medical ethics we shall observe in the future will be the product of excess capacity all around. When a nation de- cides to finance the operation of, say, only 90 percent of the human and material health care capacity it has put into place, there will be a scramble for the health~are dollar among health care providers. In that scramble, medical eth- ics may be bent. I hold to the proposition that it matters little if those who scramble for health care dollars define what they grab as "honor- aria," "income," or "profits." These are se- mantic differences of little practical import for, when faced with economic extinction, non- profit enterprises are unlikely to fight nicely nor, I suspect, will unsupervised, self-em- ployed, fee-for-service physicians. Let me assure you that all of us on the com- mittee appreciate and, indeed, share your con- cern over the quality of American health care. Unfortunately, you seem to be shooting at the wrong target. The AMIs, HCAs, and NMEs* *The acronyms refer to American Medical Inter- national, Hospital Corporation of America (HCA), and National Medical Enterprises (NME). 215 of the world strike me as nothing other than the logical end product of a trend originally nutured by none other than this country's medical profession. To be sure, it is a devel- opment which, from the profession's perspec- five, went out of control. But your profession nourished it along; physicians served as the role models. For better or for worse, we must now expect the for-profit corporations in health care to follow in your profession's tracks. Throughout this century, American medi- cine has prided itself on its rugged inilividu- alism. If one looked for die-hard champions of free enterprise and libertarian thought, one could always find them among our physicians. As Clark Havighurst remarked before our committee, American medicine fought val- iantly to defend its right to entrepreneurship in health care, and it fought just as valiantly to deny almost everyone else that right. It was a seductive strategy, but, alas, a dangerous one. Somewhere along the way the profes- sion's erstwhile, tight control over the distri- bution of entrepreneurial rights in health care slipped out of its hands. My guess is that the tension between the profession's claim for an exalted social position and its earthy fight for an exclusive entrepreneurial franchise ulti- mately strained the credulity and patience even of medicine's friends. And, thus, the individ- ual American physician finds him- or herself today reduced somewhat in stature, though not in wealth, almost a mere peer among an ever-increasing number of profit-oriented pur- veyors of health care, each competing vigor- ously for the health care dollar. If you deplore this outcome, you should have started writing eons ago. By now, as Paul E11- wood has put it, the targets you ought to want to hit are already much beyond our reach. We are left with the search for incentives that make our for-profit or for-income or for-honorarium providers of health care do good by doing well. It probably can be done, although I cannot guarantee it. We shall see. David Rogers once told me that I seem to be one of the few social scientists who does not hate physicians. He is right. I really do not hate physicians, nor do I begrudge them their income. I like them and respect them just about as much as I do other Americans (business people included) most of whom are

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216 very decent folk. This has not always been so. During my student days at Yale I did develop a certain disdain for physicians, but I write that off as a lack of maturity. You see, until those days I had thought of physicians as peo- ple somehow apart and above the rest of us. Naively, I had accepted the imagery physi- cians like to project of themselves. It was the dissonance between this imagery and the em- pirical record all around me that pained me enough to lash out in anger at your profession. Now I have mellowed. Years of both casual and careful empiricism have persuaded me that physicians really are not very different from other "purveyors. " If one accepts them on that level, they come across as truly fine pur- veyors expensive, to tee sure but truly fine, nevertheless. By and large, I like what they sell, and I like them, too. Write me off as an economist or, alterna- tively, call me a realist. But it so happens that I am more comfortable dealing with a well- trained, competitive, self-professed profes- sional entrepreneur who drives a Lincoln than I am with a well-trained, competitive, self- professed saint who insists on driving a Cad- illac. Chacun a son gout, I suppose. Until we meet again, with my best wishes, Sincerely, Uwe E. Reinhardt September 25, 1984 To: Professor Uwe E. Reinhardt Dear Uwe: Thanks for taking the time to give such a detailed and thoughtful response to my letter. For someone who declares that he really likes and respects physicians, you certainly have managed to roast the medical profession to a crisp. I shudder to contemplate the fate of a debating adversary you didn't like! The questions I was trying to raise with you concern broad issues of public policy and social philosophy. Does the concept of a profession, as applied to physicians and other health care professionals, have any meaning in our society and, if so, does that meaning imply ethical FOR-PROFIT ENTERPRISE IN HEALTH CARE obligations for health professionals that do not apply with equal force to businessmen? Are there differences between health care and other services that would justify different public ex- pectations for the behavior of health care in- stitutions and business firms? My purpose in writing to you was simply to solicit your views on these questions, because I consider them to be at the very heart of the problem our IOM committee is wrestling with. Some members of the committee apparently believe that there basically is no difference between health care and other goods and ser- vices, or between physicians (as they are, or ought to be) and businessmen. It, therefore, would be logical for them to conclude that the investor-owned health industry is a pseudo- problem. Others, starting from the opposite assumption, think that it is self-evident there is a problem which needs looking into. Oddly enough, our committee has so far devoted vir- tually no attention to this matter, despite its crucial importance for our deliberations. That is why I was hoping you would respond di- rectly to my questions and help generate some interest among our colleagues in giving Farther consideration to the issue. Unfortunately, you have avoided a direct answer by inveighing against the moral hy- pocrisy of the medical profession. You seem to be saying that since there are so many profit- oriented entrepreneurial physicians out there, and since "the ethical standards by which our health care sector operates will ultimately be driven by the ethical standards of our physi ,, ~ . . clans, low can 1, as a p ~yslclan, even raise questions about the ethics and social value of selling health care in a commercial market? Suppose I were not a physician and were asl~g the same questions about investor-owrled health care. Would your response be the same? Would you say that physicians will have to discipline themselves more effectively, or change their economic owclus operandi before we can even look into the for-profit industry? You have also dodged my questions by ask- ing a lot of your own. There isn't time for me to deal here with all the questions you have raised about my personal views, even if they were germane to our committee agenda-which they are not. Perhaps we can continue the dialogue on another occasion. However, some

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AN EXCHANGE ON FOR-PROFIT HEALTH CARE of my opinions are already on record. I enclose a copy of an article I wrote in Health Affairs ("The Future of^\ledical Practice") in case you haven't seen it. It summarizes many of my views about the fee-for-service system and en- trepreneurial health care, and it outlines some of the reforms I think physicians can and should institute. I haven't yet written about my con- cept of the "ideal" health care system because I am not at all sure I know what that is. I do, however, have pretty definite and well-known views about the ethical obligations of physi- cians, whatever the economic environment. I happen to believe that your description of physicians as "almost a mere peer among an ever-increasing number of profit-oriented pur- veyors of health care" is exaggerated. It has some truth, but it overlooks the basic element in our health care system, which is the relation between doctor and patient. That relation is based on trust by the patient and a commit- ment by the doctor to serve the patient's in- terest first. The fact that most doctors are also interested in being well paid for their services, whether by salary or on a fee-for-service basis, doesn't change the primacy of their ethical commitment to the patient. This commitment is unfortunately being more and more eroded by new economic forces, but it is still there, and it is one of the several reasons why health care is different from other economic goods and services. Other reasons include the vir- tually total dependence of the consumer on the advice of the physician, and the often in- timate and immediate relation of health care to the quality and quantity of life. You will probably attribute such views to the hubris of doctors, but I believe they are correct. Do you challenge these statements? If so, I hope you will tell the committee why. In my view, these ethical considerations ought to be part of our committee's agenda. They boil down to the question of whether there is something special about health care which makes distribution of health services in a commercial marketplace problematic and in- appropriate. A second issue (or set of issues) for our committee is whether there is in fact any empirical evidence of differences between not-for-profit and investor-owned health care in terms of process, product or broader social consequences. In my opinion, it would be as 217 serious an omission to avoid discussion of the first issue as it would be to assume, without objective examination of all the available evi- dence, that we know the answers to the sec- ond. With kindest regards. Sincerely yours, Arnold S. Relman, M.D. October 16, 1984 To: Arnold S. Relman, M. D. Dear Bud: Many thanks for your letter of September 25 concerning the issues before the IOM Com- mittee on For-Profit Health Care. Your letter, and especially your paper on "The Future of Medical Practice" enclosed with that letter, finally put to us concisely the central question that appears to have troubled you all along. I take it to be the following question: What revisions in the medical profession's code of ethics need to be made to minimize the conflicts of interest inherent in the transformation of health care from a labor-intensive to a more capital-intensive activity? This question is rather distinct from (al- though not totally unrelated to) the question we seem to have pursued during the past year, namely: Relative to health cone delivered by not-for-profit institutions, what eEect does Me for-profit motive have on (a) the quality of care, (b) the cost of care, and (c) access by Me poor to the care rendered by investor-owned institutions? The second question is obviously interesting in its own right and thus worth pursuing. But it is at best tangential to the first question which you now declare to lie at the heart of . . Our Inquiry. You seem to argue now that the primary focus of our inquiry should have been the phy- sician and not the hospital. If that is so, then you surely bear a good part of the blame for our straying from the course. After all, you have rather consistently oriented the commit- tee toward the for-prof~t hospital as the quin

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218 "essential threat to the quality and fairness of American health care. In your comments and letters to the committee, you have drawn our attention to the relative markups for-profit and nonprofit hospitals charge on ancillary ser- vices, to the relative ratios of total charges to total costs, to relative profit rates, and to rel- ative rates of charity care. None of these issues is really central to the issue you raise in your paper on "The Future of Medical Practice." In that paper the focus is squarely on the phy- sician. It is not clear to me whether the com- mittee will be able to shift so late in the game to zero in on the focus you now propose. In your paper you speak of the "commer- cialization" of health care, just as Eli Ginzberg in his well-known paper speaks of the "mo- netarization" of health care. These phenomena are, of course, American adaptations to an un- derlying change in the technology of health care: the increasing reliance of modem med- icine on sophisticated and expensive capital equipment. One need not be a confirmed Marxian economic determinist to believe that this underlying technological change lies at the heart of the changes you and Eli deplore. The shift from labor-intensive to more cap- ital-intensive medicine confronts society with two distinct questions: 1. Who should finance, own, and control the equipment and structures used in modern health care? 2. Should physicians ever be among the owners? Some societies for example, Canada and most European nations-appear to have de- cided that the capital used in health care should be financed and owned primarily by the public sector. In these societies, health-care capital is rarely owned by private investors, and not even by physicians. West Germany furnishes the only major exception to this pattern. (A1- though hospital care in that country is given almost exclusively by salaried physicians, some physicians do own small hospitals. Fur~er- more, the physicians in ambulatory care 611 their private offices with all sorts of laboratory and therapeutic equipment. NIany of Hem earn money simply by blowing hot air on patients' heads or by performing similarly weird capital FOR-PROFIT ENTERPRISE IN HEALTH CARE intensive procedures. More and more, West German physicians have become capitalists.) In the United States, we have increasingly looked to private capital markets as sources of financing health-care capital, ancl physicians rank prominently among the investors. We have answered both ofthe two questions raised above with a definite yes. Presumably, we believe that patients are competent enough to cope with whatever economic conflicts of interest physicians as capitalists face under this ar- rangement. In your paper you take issue with premises underlying the emerging pattern of capitalist medical practice in this country. As I interpret your policy recommendation on pages 17-18, you argue that physicians should not enter joint ventures with other entities in the ownership of health-care capital and, presumably, that they should not own expensive medical equip- ment as sole proprietors either. In making that recommendation you tacitly accept, do you not, that the physician's professional ethics are apt to be malleable that a physician who must worry about the break-even volume of an X-ray machine, laboratory, or treadmill exer- ciser is unlikely to be impervious to such eco- nomic pressures in composing treatments for patients. I am persuaded by that argument, particularly because I view physicians as reg- ular-issue human beings. Perhaps other mem- bers of the committee will be persuaded as well. You should press the argument at the next meeting, if only to test the waters. But suppose the committee agreed on the recommendation that, wherever it is techni- cally feasible, physicians should minimize the conflict of interest they already face under fee- for-service compensation by avoiding direct or indirect ownership of health-care capital. Would it necessarily follow from this recommendation that health-care capital should then also not be owned by other private laypersons? If you are prepared to make that argument, you should develop your case carefully. At this time I am still of the view that investor-owned hospitals, for example, are quite compatible with the strict code of medical ethics you espouse. As long as physicians can keep their noses clean of economic conflicts of interest in their role as the patients' agents, they should be able to act as their patients' powerful ombudsmen in

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AN EXCHANGE ON FOR-PROFIT HEALTH CARE dealing with investor-owned institutions. * That was the central thrust of the argument in my earlier letter of September 6. Do you have a problem with that line of reasoning? If so, voice it loudly and explicitly. It is my sense that our committee will arrive at some sucll proposition in its final report. It is my sense that at least some of the for- profit hospitals might go along with the strict code of ethics you would impose on physicians. In a paper he prepared for last year's Duke University Private Sector Conference on Health Care, for example, PICA chairman Don MacNaughton argued explicitly against joint cooperative economic arrangements between hospitals and physicians. Don seemed worried that, in the long run, such joint ventures might impair the image of the hospital industry. I think he is nght. It may not be good for the patient's fiscal and physical health to have both the physician's and the hospital's economic in- centives aligned in the same direction, namely, against the patient. Of course, if one throws this argument against joint ventures between fee-for-service physicians and hospitals, one should be prepared also to lob it with equal force against HMOs thealth maintenance or- ganizations]. One unfortunate feature of an H.MO is that, by "meshing" the physician's and the HMO's incentives in one direction, the physician may lose independence in his/ her role as the patient's ombudsman. That is precisely why the champions of the poor tend to be so alarmed whenever it is proposed to force the poor into H^MOs. Profit-sharing or bonus-giving HMOs are joint ventures. You mention in your letter that you have not yet developed your own conception of an ideal health care system one that minimizes the economic conflict of interest faced by phy- sicians. It is time that you work on the artic- ulation of such a system, lest your commentary be written off es destructive criticism. Perhaps you might begin by listing all of the arrange- ments to which you object. By a process of elimination you might then arrive at the set of acceptable arrangements. That set may in *I realize that a physician may have to please the hospital to enjoy privileges there. But that applies with equal force to nonprofit hospitals as well. 219 elude only "salaried medical practice." It might also include, however, the relatively more harmless fee-for-service system used in Can- ada in conjunction with essentially publicly owned or controlled hospitals. (Physicians in Canada own little capital.) If you wish the com- mittee to be responsive to your thinking, you cannot go on forever without offering more constructive criticism of our present system. Let me now come to some ofthe other ques- tions in your recent letter. Although you have chosen not to answer any of the pointed ques- tions I put to you in my previous letter-which is a pity I shall nevertheless try to answer yours. I am that nice of a guy. You ask me again whether I truly see no differences between physicians and other pur- veyors of goods and services. Honestly, I don't. Physicians are not the only purveyors whose work I am not technically competent to judge. The craftsmen who repair our cars and homes perform a similar agency role. Although we read of corrupt repairmen, just as we read about doctors who run Medicaid mills or push pills for profit, I have always been struck by the integrity of most of the craftsmen and busi- nessmen in whose ethics I must necessarily trust. Physicians really should not be offended when one-likens them to such "purveyors." You and Dr. Donald M. Nutter, in a recent piece in your journal, contrast the presumably venal "business ethic" with your profession's presumably more lofty code of ethics. If you ever sat in on the board meetings of large cor- porations, you would be surprised to learn how often business people forego easy profits for the sake of ethical standards. And you would be surprised to learn what they could get away with, if they were as venal as is implied in your use of the term "business ethic." I honestly believe that a corporation has as much concern over the decency with which it treats its cus- tomers as physicians have over their patients. In short, I stand by the conception of physi- cians I expressed in my letter of September 6. They are as decent as other human beings, and just as frail under severe economic pres- sure. Franldy, I remain a little puzzled by your own views on medical ethics. Sometimes you seem to suggest that physicians are endowed with a strong commitment to ethical conduct.

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220 If that is true, why do you worry so? At other times you lament the erosion of medical ethics in the face of capitalist medicine. If medical ethics erode so easily, what then does set phy- sicians apart from "other purveyors?" You ask me in your letter whether we (the IOM) shall have to wait for the medical profes- sion to clean up its act before we can even look into the for-profit hospital industry. The an- swer is: No, we don't have to wait, and we did not wait. After all, our committee is looking into the behavior offor-profit hospitals without even looking at the behavior of physicians. Un- fortunately, no major policy recommendations are likely to emerge from such a study. Be- sides, our inquiry into this facet misses the central question you raise, for reasons indi- cated above. Finally, you ask me whether there is some- thing special about health care which makes it problematic to distribute it through the mar- ketplace. The answer to that question depends on two issues. First, what distributional ethics do we wish to impose on health care? And, second, quite aside from the distributional ethics, do the consumers of health care possess sufficient consumer sovereignty to fend for themselves in the market for health care? The first of these questions involves social values. Most societies treat health care not as a consumer good, but as a community service that is to be distributed on an egalitarian basis, on the basis of medical need. While that lofty goal may not always be attained, it is at least espoused. It is my sense that Americans have now decided to treat health care as essentially a private consumer good of which the poor might be guaranteed a basic package, but which is otherwise to be distributed more and more on the basis of ability to pay. Mat I personally think about this ethic is uninteresting. In thinking about policy recommendations for the United States, I must take the prevailing ethic as a state of nature. For better or for worse, it now points to two-cIass medicine. The second question is a purely empirical one. The champions of free markets in health care obviously are persuaded that individual patients can muster adequate countervailing power even against systems in which the phy- sician's and the hospital's economic incentives are fully aligned against the patient. Paul Ell FOR-PROFIT ENTERPRISE IN HEALTH CARE wood seems to be in this school of thought. Frankly, I harbor some doubts on this point. I am not aware of any conclusive empirical research on the ability of patients with differ- ent health status and from different socioeco- nomic and demographic groups to muster elective countervailing power in the health care market. In this area we seem to proceed on preconceived notions, as any debate on the subject in our committee is apt to reveal. We certainly should discuss the issue, if only to bare our preconceptions. Until we meet again, Bud, keep on trucking. I salute you for having the courage to propose for your brethren a strict code of ethics on the ownership of health care capital. Unfortu- nately, you propose this code just at a time when your brethren have come increasingly to look upon the ownership of capital as a sub- stitute source of income, in the face of declin- ing patient-physician ratios. You propose to kill the goose expected to lay your brethren's future golden eggs. It takes guts to go to their fiscal jugular in this fashion. As to the success of your campaign, I can only sencl you that old Navajo salute: Mazeltov, With my best regards, Cordially, Uwe E. Reinhardt To: Professor Uwe E. Reinhardt Dear Uwe: December 3, 1984 I am afraid you misunderstood the point I was trying to make in my last (September 25th) letter. I never said, nor even implied, that the committee should abandon its analysis of investor-owned health care institutions in fa- vor of a new focus on the ethics of the medical profession. All I proposed was that we include in our report some discussion of the under- lying ethical and social questions (as they apply to both health care institutions and physi- cians). I believe that public policy choices de- pend at least as much on these underlying questions as on the empirical and historical

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AN EXCHANGE ON FOR-PROFIT HEALTH CARE questions to which we have devoted most of our attention so far. Clearly, it is of the utmost importance for us to marshal! and evaluate all the available evidence on the characteristics and behavior of for-profit hospitals and other investor-owned health care facilities. It is essential that we try to determine whether the type of ownership of health care services makes any difference to their cost, efficiency, quality, availability, and responsiveness to community need. We also should consider how the growing pres- ence offor-profit facilities has affected, and will affect, the viability of public and voluntary fa- cilities in the same community. These ques- tions have been high on our committee's agenda, as they should be, but I believe that our report should also recognize that there are other important considerations that the public and the government ought to be thinking about as they consider future policy on health care. Is there something special about health care that makes it socially undesirable for facilities to be owned by private investors, or for phy- sicians to be entrepreneurial businessmen? What will be the social consequences of the growing commercialization of our health care system? If we are to do a thorough job of eval- uating the for-profit phenomenon, I believe we should discuss these kinds of questions along with the other topics we have been consid- ering. I recognize that there may be no clearly right or wrong answers to such questions, and that we are not likely to get a committee con- sensus. Nevertheless, it would be a useful ex- ercise to at least lay out the issues. Our report will be widely read and quoted, and it seems to me that we would do a public service by at least pointing out the questions that need to be addressed and the arguments pro and con. I suspect that many committee members, whatever their opinions about for-profit health care, would agree with me on this point, and I hope you will too. We still have several months in which to prepare the first draft of our report, and I see no reason why it shouldn't be pos- sible to include some of this kind of analysis and still meet our deadline. I now want to comment on some of the views you express in the remainder of your letter: 1. You say that in the United States (as op 227 posed to Canada and most European nations), we have decided that "private capital markets" and physicians should "own and control the equipment and structures used in modern health care." I can't agree. Certainly, it is true that much private capital has recently been invested in health care, and the trend is grow- ing. That is what our report is all about. I see no evidence, however, that a political decision has been made to rely on this method of fi- nancing health care or that the implications of such a decision have even been explored or publicly discussed. As I see it, our report is one of the first steps in the process of exam- ining and debating public policy on this sub- ject. The growth of the investor-owned health care industry, and the extent of any future involvement of the medical profession in this industry, will depend on decisions yet to be made. Our report could influence those de- clslons. 2. Yes, you interpret me correctly. I do ad- vocate that physicians should neither enter joint business ventures with health care facilities (for-profit or not-for-profit) nor hold any equity interest in health care businesses. You raise the interesting question of physician owner- ship of expensive medical equipment. Exactly where the line should be drawn between per- missible, relatively inexpensive items of office equipment and impermissible, more expen- sive equipment in the office or elsewhere, is a difficult question that I cannot answer, but I recognize the problem. You may be inter- ested to know that the Judicial Committee of the AMA is currently studying conflicts of in- terest in physician ownership of health care capital and will shortly offer some quidelines. 3. You say that you believe physicians should avoid direct or indirect ownership of health- care capital, but you do not believe this stric- ture needs to be extended to other private investors. You think that investor-owned hos- pitals are compatible with the strict code of medical ethics I espouse because "as long as physicians can keep their noses clean of eco- nomic conflicts of interest in their role as the patients' agents, they should be able to act as their patients' powerful ombudsman in dealing with institutions." I agree that physicians must avoid con- flicts of interest if they are to represent their

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222 patients and protect them against exploitation by investor-owned health care businesses, and have urged this policy on many occasions. I am not convinced, however, that such a policy will be sufficient. Much depends upon how much authority and independence the medical profession will have in a system that may be increasingly dominated by for-prof~t corpora- tions and by business managers who focus pri- marily on the bottom line. For example, how effectively will doctors be able to represent their patients' interests when the doctors are employed by for-profit institutions, or when a for-profit hospital chain is the only game in town? Be that as it may, I find your position on this issue to be puzzling. You say that physi- cians need to be ombudsmen for their pa- tients, and yet you also insist that there are "no differences between physicians and other purveyors of goods and services." How could that be? Are salesmen and other commercial purveyors also supposed to be ombudsmen for their customers? 4. In defending your claim of no difference between doctors and businessmen, you say that "physicians are not the only purveyors whose work I am not technically competent to judge. The craftsmen who repair our cars and homes perform a similar agency role." And a little later, you say that businessmen and corpora- tions deal with their customers just as ethically as physicians do with their patients. I think you avoid the main issue here. Of course there are many services which, like medical care, consumers are technically in- competent to judge. And, of course, physi- cians are not inherently more virtuous or honest than business people, or maybe even than cor- porations. But I would maintain that there is something unique about the doctor-patient re- lation which clearly distinguishes it from the relation between a car mechanic, a home re- pairman, or any other commercial purveyor and his customer. It is not~that- there aren't experts other than doctors on whom clients or customers have to depend for technical advice. It is sim- ply that a sick patient is dependent upon his doctor in a peculiarly critical and intimate way that isn't matched by any commercial rela FOR-PROFIT ENTERPRISE IN HEALTH CARE tionship. Up to now, at least, society has rec- ognized this special relation by surrounding it with a network of legal and ethical constraints on the behavior of physicians which make it very clear that physicians are not to be re- garded simply as purveyors of expert services in a commercial market. The ethical obliga- tions of a car mechanic or any other purveyor are to be honest in his business dealings, and to over a good product or service, if the cus- tomer wants it enough to pay the price. An ethical physician's obligations to his patient go far beyond that. The sick patient must rely on the physician to ensure that he gets the services he needs, and to make choices for him, upon which the quality and quantity of his life may depend. Financial considera- tions are secondary. There are some superfi- cial resemblances, but no one who has ever been really sick would take your analogy be- tween a car mechanic and a physician very seriously. Some authors, in attempting to un- derstand how medical services differ from those ordinarily provided in a commercial market, draw the distinction between needs and wants. This strikes me as a useful and illuminating insight. Markets are driven by customers' wants; the medical care system is supposed to con- sider health needs. Maybe in the future, society will want to change this special relationship between doc- tor and patient by "deregulation" of the prac- tice of medicine, as .\Iilton Friedman and other Wee market zealots suggest. I doubt that very much, however, because most people under- stand how dangerous to health that radical step would be. 5. You suggest "Americans have now de- cided to treat health care as essentially a pri- vate consumer good of which the poor might be guaranteed a basic package, but which is otherwise to be distributed more and more on the basis of ability to pay." I can't agree. As with your earlier opinion about the role of pri- vate capital markets and physician entrepre- neurial ownership of health care facilities (page 2), I believe the issue hasn't been discussed or analyzed sufficiently to say what the Amer- ican people really do believe. It is certainly true that we have been drifting towards a mar- ketplace mechanism for distribution of health

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AN EXCHANGE ON FOR-PROFIT HEALTH CARE care, but the public hasn't given its approval of that trend, and many people haven't even thought about it. There are strong egalitarian feelings about health care in this country. I doubt that a two- tier system, such as would inevitably develop with market-determined distribution of health care, would be politically acceptable. In any event, I believe the issue is still open. One of our responsibilities in this study is to discuss the probable effects of an expanding for-profit sector on the distribution of care, so that in- telligent policy decisions can be made. Vol- untarism and cross-subsidization in our not- for-profit institutions formerly accounted for a large share of free care. If we replace these institutions with investor-ownership we will either require much larger tax subsidies for the poor, or we will have to deny the poor access to services. Given the choice, the public may decide that new policies favoring the pres- ervation of the voluntary system may be pref- erable to either of these outcomes. It is also conceivable that within 5 or 10 years, perhaps in a new political climate, a tax-supported na- tional health insurance system might be seen as a viable option again. 6. Finally, I want to respond to your com- ments where you urge me to offer my own version of the "ideal" health care system, lest my objections to the marketplace approach be written off as simply destructive criticism. In the first place, I don't see that the committee's report needs to be concerned with my per- sonal views or with anyone else's, for that matter. We are supposed to be analyzing the implications of investor-owned health care, not expressing any particular view of the "ideal" system. If there are cogent reasons to be con 223 corned about the for-pro~t approach, as I be- lieve there are, I don't see why those criticisms should be set aside simply because they are not coupled with a blueprint for the solution to all our health care problems. In criticizing the for-pro~t system, I fully recognize the limitations of the system it seems to be replacing. And in decrying entrepre- neurialism in investor-owned hospitals, I also decry similar behavior by voluntary hospitals and among physicians. I am frank to admit, however, that I am not sure what the best alternative would be. I do believe that we will need considerable reform in the present fee- for-service practice of medicine, and that we will also need more, not less, public regulation and subsidization of health care. But I still don't have a clear idea of what the "ideal" system for the United States would look like. All I am sure about at the moment is that a commercial marketplace isn't the answer. I apologize for the length of this missive, but your last letter was so interesting that I couldn't resist trying to set my own thoughts straight on the many provocative points you raised. I think that I have now said all that I should. If you choose to reply as I hope you will-I promise I will not attempt another re- buttal. You can have the last word. I have learned a lot from this exchange and have en- joyed it enormously. Thanks for staying with it. I will be looking forward to seeing you at one of our next committee meetings. With best regards. Sincerely yours, Arnold S. Relman, M.D.