Department of Health and Human Servces

OFFICE OF

INSPECTOR GENERAL

STATE PROHIBITIONS ON HOSPITAL

EMPLOYMENT OF PHYSICIANS

, SERVIQ
t-\ 
Richard P. Kusserow 
INSPECTOR GENERA 
1' 
d,(J  NOVEMBER 1991  OFFICE OF INSPECfOR GENERA

The mission of the Offce of Inspector General (OIG), as mandated by Public Law 95-452, as 
amended, is to protect the integrity of the Department of Health and Human Servces' (HHS) 
programs as well as the health and welfare of beneficiaries served by those programs. This 
statutory mission is carried out through a nationwide network of audits, investigations, and 
inspections conducted by three DIG operating components: the Offce of Audit Servces, the 
Offce of Investigations, and the Office of Evaluation and Inspections. The OIG also informs 
the Secretary of HHS of program, and management problems, and recommends courses to 
correct them. 
OFFICE OF AUDIT SERVICE 
The OIG's Office of Audit Servces (OAS) provides all auditing servces for HHS, either by 
conducting audits with its own audit resources or by overseeing audit work done by others. 
Audits examine the performance of HHS programs and/or its grantees and contractors in 
carrg 
out their respective responsibilities and are intended to provide independent 
assessments of HHS programs and operations in order to reduce waste, abuse, and 
mismanagement and to promote economy and efficiency throughout the Department. 
INTIGATIONS 
OFFICE OF 
The OIG's Offce of Investigations (01) conducts criminal, civil, and administrative 
investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 
unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions 
administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 
control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 
AN 
OFFICE OF EVALUATION  INSPECfONS 
The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management and 
program evaluations (called inspections) that focus on issues of concern to the Department 
the Congress, and the public. The findings and recommendations contained in these inspection 
reports generate rapid, accurate, and up-to-date information on the effciency, vulnerability, 
and effectiveness of departmental programs. 
This report was prepared under the direction of Mark R. Yessian, Ph.  , Regional Inspector 
General, Offce of Evaluation and Inspections, and Martha B. Kvaal, Deputy Regional 
Inspector General, Office of Evaluation and Inspections, Region I. Participating in this project 
were the following people: 
Boton Region  Headquarrs 
Russell W. Hereford, Ph.  Project Leader  Alan S. Levine 
Lori B. Rutter  W. Mark Krushat 
Barbara R. Tedesco  Department of Health and Human Servces

OFFICE OF

INSPECTOR GENERAL

STATE PROHIBITIONS ON HOSPITAL

EMPLOYMENT OF PHYSICIANS

, SERVICtn 
t-\~ 
Richard P. Kusserow 
INSPECTOR GENERA 
1' 
~~d,(J  OEI-Ol-91-00770  EXECUTIVE  SUMMARY

PUROSE 
The purpose of this study is to assess State laws prohibiting hospital employment of 
physicians. It responds to a congressional request that the Office of Inspector General 
study the effect of these laws on the availabilty of trauma and emergency care 
servces. Our study focuses on (1) the extent to which hospitals across the country are 
prohibited from hiring physicians; (2) the general impact of these prohibitions 
hospital operations; and (3) their more specific impact on hospitals' abilty to provide 
emergency servces and comply with the Federal patient transfer law. 
BACKGROUN 
State prohibitions on hospital employment of physicians derive from laws requiring 
that individuals must be licensed to practice medicine. In some States, judicial 
decisions dating to the 1930's have interpreted these laws to preclude hospitals from 
employing physicians for the purpose of practicing medicine. The rationale for the 
prohibitions on employment of physicians is based on the potential for conflct 
between a physician s loyalty to the patient and the financial interests of the 
corporation. Opponents of the prohibitions contend that the doctrine is a vestige of 
an earlier era and that in the current health care 
system hospitals need the authority 
to control all aspects of health care delivery and personnel within their walls, including 
medical care. 
The Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) requested that the 
Office of Inspector General study whether these prohibitions have a particular impact 
on hospital emergency departments. 
Our study uses data from (1) a mail survey of a national random sample of hospital 
administrators; (2) intervews with a purposive sample of over 50 hospital 
administrators, medical association and hospital association officials, and other 
individuals knowledgeable on issues related to the corporate practice of medicine; and 
(3) a review of legal and policy literature. 
FIINGS 
Few States prohibit hospitals from emplog physiians. 
Only five States -- California, Colorado, Iowa, Ohio, and Texas -- clearly 
prohibit hospitals from employing physicians. Even in these States, certain 
tyes of hospitals and providers are exempt from these prohibitions.  In some other States, there is uncertainty over whether State laws defining the 
practice of medicine preclude hospitals from employing physicians. 
emplot 
State prohiitns on hospitl  of physins have some advere impact on 
hopitl opeatins. 
Thirty-eight percent of hospital administrators responding to the survey from 
the five States that prohibit hospital employment of 
physicians indicate that 
these prohibitions impose legal, recruitment, or administrative costs. 
Forty-one percent respond that the prohibitions make it more difficult to staff 
medical servces. 
Twenty-four percent say that the prohibitions make it more difficult to staff 
basic emergency servces. 
Thirty percent say that the prohibitions make it more difficult to provide 
specialty emergency servces. 
However thee prohibitns do not appear to present a major over aU proble for
hospitls. 
Thirty-three percent of hospital administrators responding to the survey from 
the five States that prohibit hospital employment of 
physicians report that they 
are not even aware that these prohibitions apply in their State. 
Hospital administrators in these five States cite a number of factors other than 
prohibitions on hospital employment of physicians as more important 
limitations on their abilty to assure specialty coverage in their emergency 
departments. These factors include a shortage of specialty physicians, low 
reimbursement rates, fear of increased malpractice liabilty, and disruption of 
their private practices.

When asked about the impact of the Federal patient transfer law on their 
hospital, none of the administrators responding from the five 
States identified 
prohibitions on physician employment as an obstacle to compliance.  ................................................ 
. . . . . . . . . . . . . . . . .. 
. . ..   ... .   ...  .  .....     . .....     .... ..     ..... .     .....     . .....     . .....     ..... .     ..... .     .....     . .....     . .....     ..... .     .....  .    .....     . .....     .....    ....    ....    ....    ....    ....    ....    ....    ....    ....    ....    ....    ....    ....    ....    ...   ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  ..  .. ..  
TABLE OF CONTENTS

PAGE 
EXECUTIVE SUMMAY 
INTRODUcrION 
Purpose 
Methodology 
Background 
FINDINGS  . . . . . . . . . . . . . . . . . . . 4 
Summary and Conclusion. . . . . . . 
APPENDIX A: Methodology  ..................................... A

APPENDIX B: Endnotes 
......................................... B

iii   INTRODUCTION

PUROSE 
The purpose of this study is to assess State laws prohibiting hospital employment of 
physicians. It responds to a provision in the Omnibus Budget Reconciliation Act of 
1990  requesting that the Office of Inspector General study the effect of these laws 
on the availability of trauma and emergency care servces. 
Our study focuses on (1) the extent to which hospitals across the country are 
prohibited from hiring physicians; (2) the general impact of these prohibitions on 
hospitals; and (3) their more specific effect on hospitals' abilty to provide emergency 
care servces and comply with the Federal patient transfer law. 
METHODOLOY 
Our study utilized three primary data-gathering approaches (see appendix A): 
(1) We mailed a survey regarding issues related to hospital emergency 
department coverage to a national random sample of 598 hospital administrators; 
nationwide, 447 (74.7 percent) responded. This analysis utilzes a subsample 
of 115 of 
those hospitals from States that prohibit hospital eD;ployment of physicians. 
(2) We conducted intervews with a purposive sample of more than 50 hospital 
administrators, medical society and hospital association officials, and other individuals 
knowledgeable on issues related to the 
corporate practice of medicine. 
(3) We reviewed and analyzed statutes, case law, and literature on the 
corporate practice of medicine.

BACKGROUN 
Med 
Prohibitns on Hospital Emplont of  Corprate Practie of 
Physins:  Th
State prohibitions on hospital employment of physicians derive from laws requiring 
that individuals must be licensed to practice medicine. In some States
, these laws have 
been interpreted to preclude hospitals from employing physicians for the purpose 
practicing medicine. While physicians may be employed for nonpatient care duties 
(e.  teaching or administration), hospitals may not receive professional fees when 
physicians treat patients. 
Prohibitions on hospital employment of 
physicians are a subset of a larger issue 
referred to as the corporate practice of medicine doctrine. This doctrine arouses 
passionate debate among those versed in its intricacies. Articles 
discussing the 
corporate practice of medicine have included such titles as "An Outmoded Theory in 
"Z "
Need of Modification  An Anachronism in the Modern Health Care Industry,  The Growth of the Medical-Industrial Complex May Be Hazardous to Your 
"4 and " "s On a more fundamental level
Health  Pressure to Serve Two Masters. , the 
debate over the corporate practice of medicine doctrine is an argument over who will 
control the delivery of medical care. This contention focuses on whether physicians 
should make decisions free of external constraints or whether outside parties (a 
hospital administrator, for example) should be able to exert control over physician 
behavior. 
Ratinale for Corprate Practie Prohibitns 
The rationale for prohibiting employment of physicians is described in a number 
legal decisions that date to the 1930's. The California Supreme Court in 1932 
determined that it is impossible to separate the regulated practice of care from the 
"6 A 
business practice because "either one may extend into the domain of the other.
1938 decision in the same State held that letting a corporation hire and control 
physicians would lead to "divided loyalty and impaired confidence" between the 
interests of the corporation and the primacy of the patient s needs. 
An Ilinois case of the same era reiterated that a corporation 
s "employees must owe 
their first allegiance to their corporate employer and cannot give the patient anything
better than a secondary and divided loyalty. 
That court also concluded that "to practice a profession requires something more than 
the financial abilty to hire competent persons to do the actual work. It can be done 
only by a duly qualified human being, and to qualify something more than mere 
knowledge or skill is essential. The qualifications include personal characteristics, such 
as honesty, guided by an upright conscience and a sense of loyalty to clients or 
patients, even to the extent of sacrificing pecuniary profit, if necessary. 
In 1975 a Federal court upheld a Texas ruling that denied a license to a clinic 
organized to provide health care to low-income patients, because the board of 
directors did not comprise physicians. The court's opinion summarizes a range of 
issues related to corporate practice prohibitions: "Who and what criteria govern the 
selection of medical and paramedical staff members? To whom does the doctor owe 
his first duty -- the patient or the corporation? Who is to preserve the confidential 
nature of the doctor-patient relationship? Who is to dictate the medical and 
administrative procedures to be followed? Where do budget considerations end and 
patient care begin?"lo

Oppon 
to Corprate Practie Prohibitns 
Opponents of prohibitions on hospitals' ability to employ physicians maintain that the 
legal doctrine is a vestige of an earlier time, when health care was "a cottage industry, 
made up of independent professionals operating as solo practitioners."u Today 
health care industry differs substantially from the one in which the corporate practice 
prohibition originated. "Financial pressure on both the individual and system levels is  causing the provision of medical care to be approached quite differently."12 The 
emergence of health maintenance organizations, provider networks, and other 
managed care approaches means that "the fee and the number and tye of units of 
servce authorized are increasingly being monitored and controlled, very often by 
parties outside of the traditional health care provider community."13 
A former general counsel to the American Hospital Association reported that the 
corporate practice prohibition adversely affects hospitals in particular. "The ancilary 
servces that contribute to medical treatment of the patient are usually performed by 
hospital employees. If a hospital may not legally practice medicine, may it practice 
nursing or pharmacy? How is the hospital to direct and correlate and make them 
available to the physician when he needs them in the treatment of his patient? It is 
essential if hospitals are to continue as centers of organized medical care, that their 
governing boards have authority to exercise the kinds of control over personnel -
including certain professional personnel -- without which the boards cannot discharge 
their responsibilty to make the various servces available when they are needed."14 
Emeen Seres 
Potentil Impact on 
Prohibitions on hospital employment of physicians might affect emergency care 
adversely in one of two ways. First, these laws could limit the availabilty of basic 
emergency physicians. Second, prohibitions on employing physicians could adversely 
affect hospitals' ability to have available specialty servces (such as neurosurgery, 
plastic surgery, and orthopaedics) required by traumatized patients or obstetrical 
servces for women who enter the emergency department in active labor. 
lS hospitals must meet a number 
Under the Federal patient transfer law
of specific 
requirements regarding examination and treatment of persons with 
emergency medical 
conditions and women in labor. Medicare-participating hospitals must provide for an 
appropriate medical screening examination for any individual who comes to a hospital 
emergency department. If the person has an emergency medical condition, the 
hospital must either provide further examination and treatment necessary to stabilze 
the medical condition 
 under narrow circumstances, provide for the appropriate 
transfer of the individual to another medical facility. This statute defines the term 
emergency medical condition" and specifies conditions under which a transfer to 
another medical facilty is appropriate. Subsequent amendments to the statute also 
include as a condition of participation in Medicare that hospitals maintain a list of 
physicians who are on call for duty 
to provide treatment necessary to stabilze an 
individual with an emergency medical condition.  --  -- 
FINDINGS

FEW STATE PROHIIT HOSPITAL FROM EMWYIG PHYSICIAS. 
On fie  Caliornia Colorad, Iowa, Ohio, and  clearl prohibit
State  Tex 
hopitls frm 
emplog physins. Even in thee States, cerain type of hospitls and
provi 
are expt frm thee prohibitns. 
With the recent passage of legislation in North Dakota16 and Montana17 expressly 
permitting hospitals to employ physicians, only the five States cited above clearly 
prohibit the practice. Hospitals in these five States comprise 23 percent of all U. 
hospitals. IS

Even in these five States, the prohibition on hospital employment of physicians does
not apply in all situations, according to those we intervewed and our legal review. 
The exceptions to the prohibition are based on factors 
such as hospital auspices 
physician specialty, or organizational arrangement. In California, for example, the
prohibition does not apply to clinics operated by university medical schools or to 
public hospitals. In Iowa, Colorado, and Ohio, teaching hospitals may hire faculty as 
well as residents and interns for purposes of education. In Iowa, pathologists and 
radiologists are exempt from the provisions. In 1991, Texas enacted legislation 
permitting public hospitals to employ physicians directly, providing statutory authority 
for a practice that was already widespread among many rural hospital districts. Health 
maintenance organizations in each of these five States also are able to hire physicians 
either directly or through contracts with physician groups. 
Imn soeme  othe States, thee is unertainty over whethe State laws deing the practie of
preclu hospitls from emplog physins. 
In some States the lack of clarity over whether prohibitions on the corporate practice 
of medicine apply to hospital employment of physicians creates some confusion. Legal 
literature on the subject reveals that the application to hospitals of general provisions 
forbidding nonlicensed persons from practicing medicine simply has been ignored or 
not enforced in recent years. 
Two recent State court decisions raise the possibilty that hospital employment of 
physicians might be prohibited, even though the decisions do not address that specific
issue. A 1991 Kansas Supreme Court decisionzo and a 1988 judgment from the 
Washington State Supreme Court  strengthened general restrictions on the 
corporate practice of medicine by ruling that non physicians may not be partners 
medical practices. These decisions, however, fail to distinguish between general 
corporations and licensed hospitals. According to individuals we intervewed in these 
two States, health care providers are concerned that a literal interpretation of the 
decisions could pose threats to the arrangements that many hospitals use to provide 
medical staff.  STATE PROHImONS ON HOSPITAL EMPWYMNT OF PHYSICIAS 
HAVE SOME ADVERSE IMACf ON HOSPITAL OPERATIONS. 
Ih-eght peent of hospitl adinistrators respondg to the suey frm the 
that prroehiict hro pitl emplot of physins inate that thee prohibitns ifmiep oStea tes 
adintratie 
lea  or  costs. 
Legal costs can be incurred in two broad areas. First, hospitals must assure that 
physician-hospital contracts do not violate the State prohibition on corporate practice 
of medicine. According to administrators and attorneys we intervewed, these 
contracts are fairly standard and do not pose a major problem. 
Second, and more importantly, legal issues may arise when a hospital wishes to change 
its organizational structure, either to take advantage of new business opportunities or 
to address financial pressures. State prohibitions on the corporate practice of 
medicine make the legal requirements governing organizational arrangements more 
complex and cumbersome. For example, prohibitions on hospital employment of 
physicians mean that a hospital may not own a medical practice. 
In California 
hospitals may form medical foundations, as a way of controllng medical practices 
although the specifications for such an arrangement are detailed and specific. 
Similarly, in Ohio we discovered some rather complicated arrangements that hospitals 
undertake to manage medical practices. 
State prohibitions on hospital employment of physicians can make recruitment more 
diffcult by limiting medical staffing options that are available in States that permit 
hospitals to employ physicians. Prohibitions on employment do not allow 
hospitals to 
offer financial guarantees to physicians. These guarantees could be used to alleviate 
medical school debts or expenses associated with establishing a new practice. 
Several people we intervewed noted that the prohibition on employing physicians 
presents a particular difficulty for hospitals attempting to recruit physicians in rural 
areas, where including financial guarantees in a recruitment package would make the 
offer more attractive to physicians. 
In locations where competition with health maintenance organizations (HMOs) is 
vigorous, the prohibition on hospital employment of physicians may limit hospitals 
abilty to compete for physicians. Because HMOs are able to offer salaries, income 
guarantees, and regular working hours to physicians, hospital administrators with 
whom we spoke believe that these organizations have a competitive advantage in 
recruitment efforts. 
Finally, hospital administrators contend that the prohibition on hospital employment of 
physicians can impose administrative costs by limiting their leverage over members 
their medical staff. Administrators assert that these costs are incurred not only 
staffing servces but, more important, by limiting their abilty to control the practice 
patterns and costs of individual physicians. The prohibition on a hospital'
s abilty to 
receive any part of the physician fee means that hospitals are not able to develop risk sharing arrangements directly with physicians. Administrators contend that such 
arrangements would improve their abilty to control costs 
by giving physicians a stake 
in the hospital's cost containment efforts. 
Fort-one peen of hopitl adinistrators redspionfd g to our suey frm 
th fie State
inate that thee prohiitns make it more  to staff meal seres. 
State prohibitions on hospital employment of physicians deprive hospitals of one 
option they believe could help them provide medical staff in their facilties. In four 
areas of operations -- inpatient servces, outpatient clinics, basic emergency care, and 
specialty emergency care -- administrators indicate that being able to employ 
physicians would help meet some of their needs. 
One particular problem cited by administrators we intervewed was diffculty in 
developing outpatient clinics owing to a lack of physician coverage. Because they 
believe that clinic patients are not covered by insurance, physicians fear that they will 
not be paid for medical servces provided to them. If a hospital were able to use 
salaried physicians, it could establish a hospital-owned group practice based in the 
outpatient department. One official said that if hospitals were able to hire physicians 
it would be easier to develop a hospital-based perinatal practice focusing on primary 
care for newborns, or an obstetrical practice for low income women. Another 
administrator advocated the establishment of a hospital-based pediatric practice that 
could also provide coverage for the emergency room. 
Twen-four peent of hospital adinistrators dresipofnd ing to our suey from the fie 
States say that the prohibitns make it more  bas emen seres. 
to staff 
Basic emergency medical servces are provided to patients when they present at the 
hospital emergency department. These servces include identification, evaluation, and
assessment of the patient's condition; treatment and administration of medical care; 
and stabilzation of the patient's condition. In recent years, emergency medicine has 
2s with over 13 
been recognized as a distinct medical specialty, 000 practitioners. 
In States where hospital employment of physicians is permitted, our survey data show 
that some administrators do take advantage of the employment option available to 
them. 
Twenty-six percent of respondents from the States that permit employment said 
that they employ physicians for provision of basic emergency servces. 
In the five States that prohibit hospital employment of physicians, 89 percent of 
administrators report that they contract for servces with either one physician group, 
, or emergency department management companies to provide 
individual physicians
basic coverage. These arrangements are used by 76 percent of hospitals in States that 
permit hospitals to employ physicians.
 peen of hopital adistrators respondg to our suey from thed  i
Thir  fie State say 
hoitl emplot 
that the prhiitns on  of physins make it more 
provi specilt emen seres. 
Notwthstanding the responses of the administrators from these five States, our data 
suggest that being able to employ physicians for specialty emergency care may not 
make a difference. Even in those States where the option of physician employment is 
available, hospitals are no more likely to hire physicians to provide specialty 
emergency servces. Ninety-three percent of administrators responding to our survey
from States that permit hospitals to employ physicians use on-call members of their 
active medical staff, rather than directly employed staff, to provide specialty coverage
in the emergency department, as do 95 percent of those administrators responding 
from States that prohibit employment of physicians. 
HOWEVER, STATE PROHImONS ON HOSPITAL EMPWYMNT OF 
PHYSICIAS DO NOT APPEA TO PREENT A MAOR OVERA 
PROBLEM FOR HOSPITAL.

Th- adtrators 
three peent of hospitl  responding to the suey from the 
emplot  fie States
that prohiit hopital  of physicins report that the are not even aware that 
thee prohibitns apply in the State. 
It is possible that for administrators who are unaware of the prohibitions on employing 
physicians, these prohibitions have become a part of day-to-day operations and do not 
merit separate consideration. Perhaps they have not dealt recently with the 
prohibitions on hospital employment of physicians, or they may consider these issues 
to fall within the domain of some other department of the hospital
, such as legal 
affairs or medical staffing servces. 
We found no recent cases in which hospitals had been prosecuted or had faced 
disciplinary actions for employing physicians in these States. Nevertheless, these 
ins itutions run a risk if they do not consider or are not aware of the prohibitions on 
hospital employment of physicians when they undertake such efforts as restructuring 
operations or recruiting physicians. 
nuer 
Hospil adistrators in 
emthepe lfoiet  State ci a  of factors otlhie ttihnans  
prohiitns on hopitl  of physiians as more importnt  on the
abil  ase  emen depart.  inlu 
to  The 
specilt coverage in threeir iurem  factors 
al isbhoirlta ge of specilt physicins low  rates fear of ineased malpractie
and disptin of their priate practies. 
Only 20 percent of hospital administrators responding in these five States cite State 
prohibitions on hospital employment as a factor limiting their ability to assure specialty 
coverage. Six-three percent of the administrators indicate that a general shortage of 
specialty physicians causes problems in assuring specialty coverage in the emergency  , "
six 
department, and  percent respond that low reimbursement rates are an obstacle 
to getting physicians to serve on specialty on-call panels. Other factors that 
administrators cite more frequently than prohibitions on hospital employment of 
physicians are physician fears that their exposure to malpractice liabilty will increase 
physician concerns about disrupting their private practices, and fear of sanctions under 
the Federal patient transfer law (COBRA). 
FIGUR 
Asre 
Speciaty Emergency Coverae 
Factors Afecting Hospita' Abilty  To 
100% 
II Physi She
80% 
Low 
Mapr Ri
60%  Pr 
IT 
COBR 
40% 
Emloym Laws 
DI MD 
20% 
Ac!
Pege 
of 
Ci Fa 
Note: N = 115 hospital administrators from California, Colorado, Iowa, Ohio, and Texs responding to OIG/OEI mail survey,
May 1991. Total exceeds 100% because of multiple responses. 
Our intervews supported the 
survey findings that the prohibition on hospital 
employment of physicians is a relatively unimportant factor in providing emergency 
coverage. As one administrator said  If all of a sudden we were allowed to hire 
doctors, it wouldn t make a difference. It's not an emergency room issue.
" Another 
indicated that even if laws prohibiting employment of physicians were repealed, any 
impact would be "
evolutionary, not revolutionary. 
Hospitals in all States confront a number of problems related to emergency 
department coverage, in addition to those identified here. Forty eight percent of 
administrators responding to our survey from the five States report that 
their abilty to  , "
assure specialty coverage in the emergency department has become more difficult over 
the past two years. Other recent studies have cited financial problems associated with 
trauma centers  , use of emergency rooms for primary care servces  , and 
overcrowding29 as important problems confronting emergency care. A forthcoming 
OEI report will examine problems associated with the availability of specialty coverage 
in hospital emergency departments in more detail. 
ithd   
Wh aske about the impact of the Fedal pati transer law on  hopit  none 
adtrators 
of the  responding to the suey from thee  prohibitns 
emplo  fie States 
on physin  as an obstacle to complince. 
In the five States that prohibit hospital employment of physicians, 49 of the 115 survey 
respondents reported actions their hospital had taken in response to the patient 
transfer law, and 62 administrators commented on the impact of the law on their 
hospital. We analyzed these responses, and found that none of the comments related 
to a hospital's inabilty to employ physicians as a problem in their abilty to comply 
with the patient transfer requirements. 
Attorneys we intervewed corroborated these findings. One attorney noted that 
prohibitions on hospital employment of physicians have never been raised as a defense 
in any patient transfer case. Other individuals we spoke with raised a number 
issues related to the patient transfer law, yet no one was able to relate these concerns 
to State laws that prohibit hospitals from employing physicians. 
SUMY AN 
CONCLUSION 
Our study has found that State prohibitions on hospital employment of physicians are 
not a major national problem. Only five States continue to prohibit hospitals from 
employing physicians, and even in those States numerous exceptions apply, based on 
hospital auspices, physician specialty, or organizational arrangement. Only a minority 
of hospital administrators responding to our survey from the five States believe that 
these prohibitions present a problem; one-third of administrators in those States are 
not aware that these 
provisions apply. 
Even among the administrators citing difficulties caused by the prohibitions, its relative 
importance is minor. With respect to emergency servces, for example, those we 
surveyed cite factors such as a shortage of specialty physicians, low reimbursement 
rates, malpractice liabilty, and disruption of practice as more important limitations on 
their ability to provide specialty coverage than are State prohibitions on hospital 
employment of physicians. 
Other administrators consider State prohibitions on hospital employment of physicians 
to be only one factor influencing hospital-medical staff relations. One California 
hospital administrator s comment summarizes the remarks of others  Most of us are 
able to accommodate through other mechanisms what repeal would accomplish.   APPENDIX A

METHODOWGY 
Leal Anlysi 
We reviewed statutory language and court decisions from the States that prohibit 
hospitals from employing physicians. The prohibitions are based on the following 
statutes: 
California Business and Professions Code, Section 2400; 
Colorado Revised Statues, Sections 12-36-129; 
Iowa Code Annotated, Sections 147.2 and 148.13; 
Ohio Revised Code, Sections 4731.22, 4731.41, and 1701.03; 
Texas Revised Civil Statutes, Article 4495b. 
We also reviewed case law on decisions interpreting the corporate practice of 
medicine, as well as legal and policy literature. Relevant decisions and articles are 
identified in appendix B. 
Sample Selectin and Natinal Surey

This study uses data from a survey of a random national sample of hospital 
administrators on issues related to emergency room care. The sample universe 
consisted of all acute short-term hospitals that had an emergency department from the 
Health Care Financing Administration Provider of Servce file. 
The sample was 
selected using stratified simple random sampling with six strata: 
Small rural hospitals (fewer than 100 beds) 
Small urban hospitals

Medium rural hospitals (100 - 299 beds)

Medium urban hospitals

Large rural hospitals (300 or more beds)

Large urban hospitals

Due to prior knowledge that California prohibits hospital employment of physicians 
hospitals in that state were sampled at a higher rate than the remaining 
States. Six 
strata were defined for California and also for the remaining States, for a total of 
strata. Originally, 637 hospitals were selected for the survey, but due to mergers and 
closures, the sample size was decreased to 598. 
Surveys were distributed on May 10, 1991, to these 598 hospitals, with a follow-up 
mailing to nonrespondents on May 31. Responses were received from 447 hospitals, a 
response rate of 74.7 percent. Of these 447 hospitals, 115 (25.7 percent) responded 
from the five States that prohibit hospital employment of physicians, forming the data  base for the analysis in this study. A sample size of 115 hospitals provides estimates 
within :t ten percent of the true value at the 95 percent confidence level. Except 
where identified specifically as coming from the full national sample, all percentages in 
the text refer to the 115 hospitals in the five States. 
The survey contained questions to determine whether hospital administrators believe 
that their State prohibits hospitals from employing physicians. In some States, some 
administrators indicated that their States did have such a prohibition. Follow-up 
telephone calls to State hospital associations to verify the applicabilty of the 
prohibition, however, revealed that the State had either repealed the prohibition, or 
that the provisions were substantially ignored. Based on the survey results and these 
discussions, California, Colorado, Iowa, Ohio, and Texas were identified as having and 
enforcing State prohibitions on hospital employment of physicians. Table A-
I displays 
the sample and response size for each of these States. 
TABLE A-
Ditnoution of Sureyed Hospita and Respondents by State 
NUER  NUER 
STATE 
HOSPITAL  HOSPITAL 
SURVEYED  REPONDING 
(% of Tota)  (% of Tota) 
California  81 (51.9%)  (47.0%) 
Colorado  (5.2%)  (7.0%) 
Iowa  (7.7%)  (9.6%) 
Ohio  16 (10.3%)  (13.0%) 
Texas  39 (25.0%)  (23.5%) 
TOTAL  156  (l(X10%)  115  (l(X10%) 
Inters 
Our intervews included telephone and in-person discussions with ten hospital 
administrators from Caliornia and three administrators from Massachusetts. We 
focused our intervews on California, because that State had been identified previously 
as prohibiting hospital employment of physicians. 
A  We also intervewed by telephone or in person, officials with state hospital associations 
in Arizona, California, Colorado, Georgia, Ilinois, Iowa, Kansas, Massachusetts 
Mississippi, Montana, Ohio, Texas, and Washington, and representatives of regional 
hospital associations in California. We intervewed State medical society officials in 
California, Iowa, Massachusetts, and Texas. (In some cases, intervews were 
conducted with more than one member of these groups. 
Our intervews also included representatives of the American Medical Association 
American Hospital Association, and American College of Emergency Physicians. We 
also intervewed seven attorneys identified to us as familar with 
issues related to the 
corporate practice of medicine. 
A 
  , " , " , ", " , "
APPENDIX 

ENNOTE 
1. P.L. 101-508, Section 4008(c). 
2. John Wiorek, liThe Corporate Practice of Medicine Doctrine: An Outmoded 
Theory in Need of Modification  Journal of Legal Medicine  , no. 3 (1987), pp. 465
492. 
3. Jeffrey F. Chase-Lubitz  The Corporate Practice of Medicine Doctrine: 
Anachronism in the Modern Health Care Industry,  Vanderbilt Law Review  44 (1987), 
pp. 445-488. 
4. Stanley Wohl  Is Corporate Medicine Healthy for America? The Growth of the 
Medical-Industrial Complex May Be Hazardous to Your Health  Business and Society 
Review  (Fall 1984), pp. 16-20. 
5. Donald P. "Rocky" Wilcox  Medicine and the Law: Pressure to Serve Two 
Masters  Texas Medicine  82 (June, 1986), pp. 67-69. 
6. Painless Parker  v.  Board of Dental Examiners  216 Cal. 285, 14 P.2d 67 (1932). 
7. State Board of Medical Examiners  v.  Pacifc Health Corp.  12 Cal. 2d 15682 P. 
429 (1938). 
8. Dr. Allison, Dentit Allison  360 Ill. 638, 196 NE 799 (1935). 
, Inc.  v. 
9. Ibid.

10. Garcia  v.  Texas State Board of Medical Examiners  284 F. Suppl. 434, W.D. Texas 
(1974). 
11. Arnold J. Rosoff  The Business of Medicine: Problems with the Corporate 
Practice Doctrine  Cumberland Law Review 17 (1987), pp. 485-503. 
12. Ibid. 
13. Ibid. 
14. Alanson W. Wilcox  Hospitals and the Corporate Practice of Medicine  Cornell 
Law Review 45 (1960), pp. 432-487. 
15. 42 U.  c. sections 1395cc and 1395dd.
 , " , " , "
16. North Dakota House Bil No. 1426, approved March 21, 1991, provides that: 
It is permissible for a hospital 'incorporated as a nonprofit corporation to 
employ a physician provided that the employment relationship between 
the physician and hospital is evidenced by a written contract containing 
language to the effect that the hospital's employment relationship with 
the physician may not affect the exercise of the physician s independent 
judgment in the practice of medicine, and the physician s independent 
judgment of medicine is in fact unaffected by the physician s employment 
relationship with the hospital. Under this section a hospital may not be 
deemed to be engaged in the practice of medicine. 
17. Montana Senate Bil No. 146, effective October 1, 1991, permits: 
practicing medicine as the partner, agent, or employee of or in joint 
venture with a hospital, medical assistance facilty, or other licensed 
health care provider. However: 
(I) The partnership, agency, employment, or joint venture 
must be evidenced by a written agreement containing 
language to the effect that the relationship created by the 
agreement may not affect the exercise of the physician 
independent judgment in the practice of medicine; 
(II) The physician s independent judgment in the practice 
of medicine must in fact be unaffected by the relationship; 
and 
(III) The physician may not be required to refer any 
patient to a particular provider or supplier or take any 
determines not to be in the 
other action the physician 
patient' s best interest. 
18. The Resource Information Center at the American Hospital Association informed 
us that in 1989 there were 6 720 hospitals in the United States. The number of 
hospitals in each of the five States examined here were: 
California -- 560 (8.3%) 
Colorado -- 88 (1.3%) 
Iowa -- 135 (2.0%)

Ohio -- 226 (3.4%)

Texas -- 538 (8.0%)

Subtotal, five States -- 1 547 (23.0%) 
19. Morgan J. Ordman  The Corporate Practice of Medicine  Illinois Bar Journal 
April 1988, pp. 464-465; John Wiorek  The Corporate Practice of Medicine Doctrine: 
An Outmoded Theory in Need of Modification  Journal of Legal Medicine  , no. 3 
(1987), pp. 465-492; Alanson W. Wilcox  Hospitals and the Corporate Practice of 
Medicine  Cornell Law Quarterly,  45 (1960), pp. 432-487. 
20. Early Detection  Wilson et aI  Kansas Supreme Court, No. 65 328 
Center, Inc.  v. 
(May 1991).  , "
21. Morrell  v.  Ehsan  110 Wn. 2d 555, 756 P.2d 129 (June 1988). 
22. The clinic must conduct medical research and health education, and must provide 
health care through a group of 40 or more physicians; the physicians and surgeons 
must be independent contracts representing at least 10 board-certified specialties; and 
no less than two-thirds of the physicians must practice on a full-time basis at the clinic. 
23. One example provided was that a hospital enters into a trust agreement, with the 
hospital (which provides the capital to fund the venture) as beneficiary and a physician 
servng as trustee at the pleasure of the hospital. The physician trustee also serves as 
majority shareholder in a professional corporation, with shares purchased by the 
hospital-physician trust. The professional corporation owns and operates the practice 
and distributes net revenues back to the trust as dividends. The trust then can 
distribute this trust income back to the hospital as beneficiary. 
24. According to one source, employment would ensure that physician referrals to the 
employing hospital are not subject to fraud and abuse laws. Contracts that require 
repayment of some value, in order to avoid IRS proscriptions on inurement to a 
physician from a tax-exempt hospital, run the risk of violating Medicare-Medicaid 
kickback provisions. See "Finally, Positive Thinking on Physician Recruitment  Action 
Kit for Hospital Law 
July, 1990. 
25. See "Definition of Emergency Medicine and the Emergency Physician  Annals of 
Emergency Medicine  , no. 10, (October 1986), for a full discussion of the emergency 
medicine specialty. 
26. The totals exceed 100 percent because some administrators indicated that they 
use more than one approach to staffing basic emergency servces. 
27. U.S. General Accounting Office  Trauma Care: Lifesaving System Threatened by 
Unreimbursed Costs and Other Factors  May 1991, Report No. GAOIHRD-91-57. 
28. Use of Emergency Rooms by Medicaid Recipients  OEI-06-90-00180. 
29. Andrew S. Bindman, Kevin Grumback, Dennis Keane, Loren Rauch, and John 
Luce  Consequences of Queuing for Care at a Public Hospital Emergency 
Department  lAM  266, no. 8 (August 28, 1991), pp. 1091-1096.