;-"'.  ... '-
FINANCIAL ARRANGEMENTS 
BETWEEN PHYSICIANS AND 
HEALTH 
BUSINESSES' 
ARE 
CONGRESS 
REPORT  TO 
.. SERViCE" 
t-'" 
,..I 
L \..-. 
OFFICE OF INSPECTOR GENERAL 
OFFICE OF ANALYSIS AND INSPECTIONS 
MAY 1989  OFFICE OF INSPECTOR GENERAL 
The mission of the Office of Inspector General (OIG) is to promote the efficiency, effective
ness, and integrity of programs in the United States Department of Health and Human Ser
vices (HHS). It does this by developing methods to detect and prevent fraud, waste and 
abuse. Created by statute in 1976, the Inspector General keeps both the Secretary and the Con
gress fully and currently informed about programs or management problems and recommends 
corrective action. The OIG performs its mission by conducting audits, investigations and in
spections with approximately 1 200 staff sttategically located around the country. 
OFFICE OF ANALYSIS AND !NSPECTIONS 
This repon is produced by the Office of Analysis and Inspections (OAl), one of three major of
fices within the OIG. The other two are the Office of Audit and the Office of Investigations. 
The OAI conducts inspections which are typically shon-term studies designed to detennine 
program effectiveness, efficiency, and vulnerability to fraud or abuse. 
This repon responds to a congressional request for information on the practice of physician 
ownership and self-referral contained at Section 203(c)(3) of the Medicare Catasttophic 
Coverage Act of 1988. 
This inspection was carried out under  Steeley, Chief, Health Care 
the direction of  Barry 
Branch, Office of Analysis and Inspections. Principle panicipants in this study were the fol
lowing people: 
Office of Analysis and Inspections  Office of Audit 
Mark Krushat  Joseph Kwiatanowski 
Penny Thompson 
Jack Molnar  Office of Investigations 
Bob Katz 
Natalie Coen  Raisa Qttem-
Cesari9 w 
John Traczyk

Office of General Counsel 
Lisa Foley 
Additional contributors to the study are listed in appendix E to this report.  ' .,."
FINANCIAL ARRANGEMENTS

viAl 
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r-.... ~.  "'" A  Ur"\ .  n  L I n 
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CARE BUSINESSES 
CONGRESS 
REPORT  TO 
RICHARD P. KUSSEROW 
INSPECTOR GENERAL 
OAI-12-88-01410  MAY 1989
 ................,...................,.......................................................................

" .
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TABLE OF CONTENTS 
EXECUTIVE SUMMARY 
BACKGROUND .........................................................

New Trends in Health Care Delivery ..........................................

Effects on the Health Care Market ............................................

Previous Studies Regarding Physician Ownership. . . . . 

Federal and State Activity ..................................................

AMdditioEnalSTtepsHContOemplDated..O........L.......O........G........Y......... ......

PurposeandObjectives..................................................... 
EvaluabilityAssessment ....................................................

StudyApproach......................................................,.... 
FINDINGS ..............................................................

Nature and Range of Arrangements .........................................

Many Physicians Have Invested in Health Care Businesses to Which They 
Make Referrals ............................................... 
Many Health Care Entities are Owned by Referring.
Physicians .............. . 
The Structure of Ownership or Investment Varies 
Investment Opponunities are Often Developed by Physicians Themselves. . . . . . . 
ImpactofArrangementsonUtiIization.......... " 
Patients of Physician Laboratory Owners Received More Services. . . .. . . 
Patients of Physicians Associated with DMEs Show No Difference in Receipt 
Services.............................................. ..... 
of 
EnforcementExperiences.........................................,........ 
Enforcement of Current Federal Anti-Kickback Laws is Challenging. . . . 
TTtil;'7!1tinn "
SUMMARY .............................................................

ExtentofAITangements ....................................................

Tmn!ll't nn 
Pr1o"'-""ceduralRecommendations................................................ 
OptionsforPolicymakers ...................................................

FunherRepons ...........................................................
 ---  ...
.""... ..... 
EXECUTIVE SUMMARY 
PURPOSE 
In June 1988, Congress mandated that the Office of Inspector General (OIG), U.S. Depart 
ment of Health and Human Services (HHS), conduct a stUdy on physician ownership and com
pensation from health care entities to which they make referrals. Section 203(c)(3) of the 
Medicare Catastrophic Coverage Act (MCCA) of 1988 directed the GIG to report to Congress 
by May 1, 1989 on: 
physician ownership of, or compensation from, an entity providing items or ser 
vices to which the physician makes referrals and for which payment may be made 
under the Medicare progralU; 
the range of such arrangements and the means by which they are marketed to 
physicians; 
the potential of such ownership or compensation to influence the decision of a 
physician regarding referrals and to lead to inappropriate utilization of such items 
and services; and 
the practical difficulties involved in enforcement actions against such ownership 
and compensation arrangements that violate current anti-kickback provisions. 
BACKGROUND 
Physician ownership of, and compensation from, entities to which they make referrals is a 
practice which has received marked attention only in the past 10 years. New trends in the way 
health care is delivered in the United States have created a market and impetus for investment 
profit health care. As physicians have become investors or financial partners of health 
in for-
care entities for which they also generate business through referrals, public examination of the 
potential conflicts of such arrangements has increased. 
In recent years, legislators have moved to strengthen Federal laws prohibiting payment for 
have acted to require disclosure of financial interests to patients; the 
referrals. Certain States 
State of Michigan has prohibited referral of patients to any entity in which the physician has a 
financial interest. Additional Federal and State actions are being contemplated, including a 
bill introduced recently in the 1O1st Congress, "The Ethics in Patient Referrals Act;" which 
would generally prohibit physicians from referring Medicare patientS to entities in which they 
hold a financial interest. 
METHODOLOGY 
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financial involvement with other health care entities and the nature of such arrangements. 
One survey was directed at physicians; the other was directed at independent clinical 
laboratories, independent physiological laboratories, and durable medical equipment suppliers.  ;_- --------
+ ~ ;-_.- _ 
Claims information from the Health Care Financing Administration s (HCFA) Pan B 
Medicare Annual Data (BMAD) flies for 1987 was used to assess utilization patterns for 
patients of physician-owners identified through our survey of health care businesses. Third 
State officials, industry representatives, health care expens and a subsample of provider 
respondents to our survey were interviewed or consulted. 
MAJOR FINDINGS 
Many Physicians Have Financial Relationships wiih Health Care Businesses to Which 
They Refer Patients 
Twelve percerit of physicians who bill Medicare have ownership or investment in
terests in entities to which they make patient referrals. 
Referring physicians invest in a wide range of businesses, including clinical and 
physiological laboratories; durable medical equipment suppliers; home health agen
cies; hospitals; nursing homes; ambulatory surgical centers; and health main
tenance organizations. 
Eight percent of physicians billing Medicare have compensation arrangements 
with entities to which they refer patients. These arrangements include space rental 
agreements, employee arrangements, consulting agreements, and management ser
vices conn-acts.

Many Health Care Entities are Owned by Referring Physicians 
Nationally, at least 25 percent of independent clinical laboratories (ICLs), 27 per-
cent of independent physiological laboratories (IPLs), and 8 percent of durable 
medical equipment suppliers (DMEs), are owned in whole or in pan by referring 
physicians. 
The prevalence of ownership or investment varies by State. In some States, such 
as Arkansas and California, a larger than average percentage of ICLs, IPLs, and 
DMEs are physician owned. In other States, such as Michigan, the percentage of 
entities which are owned by physicians is much smaller than average. 
Patients of Physician Laboratory Owners Received More Services 
Patients of referring physicians who own or invest in ICLs received 45 percent 
more clinical laboratory services than all Medicare patients in general, regardless
of place of service. They also received 34 percent more services directly from in-
dependent clinical laboratories than all Medicare patients in general. This in
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cost the Medicare program $28 million nationally in 1987. This figure does not in
clude any costs associated with increased utilization resulting from physician 
ownership interest in entities other than independent clinical laboratories. 
Patients of physicians known to be owners or investors in IPLs use 13 percent 
more physiological testing services than all Medicare patients in general. 
III  Patients of Physicians Associated with DMEs Show No Difference in Receipt of Services 
Patients of physicians known to be owners or investors in DIvIE suppliers use no 
more DME services than all Medicare patients in general. However, significant 
variation exists on a State by State basis. 
PROCEDURAL RECOMMENDATIONS

Based on the results of this study, we are making recommendations that HCFA pursue the 
necessary legislative and regulatory changes to: (1) require entities billing Medicare to dis
close the names of their physician-owners and investors to the program; and (2) require claims 
submitted by all entities providing services under Medicare Pan B to contain the name and 
provider number of the referring physician. 
OPTIONS FOR POLICYMAKERS 
We have identified six options legislators and administrators may wish to pursue in order to 
address the higher use of services by patients of physician-owners and investors. These in
clude: 
Implement a post payment utilization review by carriers directed at physicians who 
own or invest in other health care entities. 
Require physicians to disclose financial interest to patients. 
Improve the enforcement of current anti-kickback authorities. 
Institute a private right of action for anti-kickback cases. 
Prohibit physicians from referring patients to cenain types of entities in which they 
have a fmancial interest. 
Prohibit physicians from referring patients to any entity in which they have a finan
cial interest.
 BACKGROUND 
Physician ownership of, and compensation from, entities to which they make referrals is a 
practice which has received marked attention only in the past 10 years. New ttends in the way 
health care is delivered in the United States have created a market and impetus for investment 
profit health care. As physicians have become investors or financial panners of health 
in for-
care entities for which they also generate business through referrals, public examination of the 
pOtential conflicts of such arrangements has increased. The professional as well as mass 
media has critically examined such arrangements. Several regional studies have been con 
ducted to detennine if such arrangements lead to over use of services by physicians in a posi 
tion to profit from medical decisions made for their patients. 
In recent y~ars, legislators have moved to sttengthen Federal laws prohibiting payment for 
referrals. Cenain States have acted to require disclosure of financial interests to patients; the 
State of Michigan has prohibited referral of patients to any entity in which the physician has a 
fmancial interest. Additional Federal and State actions are being contemplated, including a 
bill inttoduced recently in the 1O1st Congress, "The Ethics in Patient Referrals Act " which 
would generally prohibit physicians from referring Medicare patients to entities in which they 
hold a financial interest. 
New Trends in Health Care Delivery 
Many expens argue that, while self-referral has always existed, investment or ownership by 
physicians in other, free-standing facilities is a relatively new phenomenon that has resulted 
from changes in the way health care is reimbursed and delivered. These changes include: 
(1) the shift from inpatient to outpatient settings for the delivery of care; (2) cost containment 
strategies directed at physicians; and (3) the 'introduction of new technologies. 
The Shift from Inpatient to Outpatient Settings for the Delivery of Care 
Cost containment sttategies implemented by the Federal Government and other third 
party payors have caused shifts in how, where, and at what cost health care is 
delivered. One of the primary agents of change has been the prospective payment sys 
tem (PPS) instituted by Medicare in 1983, which established reimbursement to hospi 
tals at predetermined fixed rates. Largely as a result of FrS, many services once 
performed in hospitals are now performed in outpatient settings, creating a new nexus 
of health care delivery in non-hospital, community settings. 
Cost Containment Strategies Directed at Physicians 
A number of other changes in reimbursement policy have directly affected non-hospi 
tal based physicians. The Deficit Reduction Act of 1984 (DEFRA) established the 
Medicare Panicipating Physician Program. Under this program, a panicipating 
physician agrees to accept Medicare assignment on all claims, in return for increased 
billing allowances and listing in a directory of physicians available to Medicare  ..;.~.."  p(;:
beneficiaries. The DEFRA also imposed a fee freeze for physicians from July 1984 to 
May 1986 for participating physicians and from July 1984 to December 1986 for non-
participating physicians. In addition, a direct billing policy was implemented by 
Medicare for laboratory services, preventing physicians from billing for laboratory ser
vices performed in a laboratory which is independent of their offices. 
While PPS has been somewhat successful in conttoIling expenditures under Medicare 
Part A (Medicare s hospital insurance program), the physician pay freeze and other 
measures enacted to curb Part B spending (Medicare s supplementary insurance 
program) have not been as successful. Medicare Part B expenditUres have continued 
to rise despite these cost containment measures. 
Because physician services account for most of the Part B expenditUres (around 60 per-
cent), Medicare administrators are continuing to pay attention to reimbursement 
strategies to contain costs in this area. Dr. William Roper, former Administrator of the 
Health Care Financing Administration (HCFA) which manages the Medicare program 
stated in testimony before the Subcommittee on Health, the Committee on Ways and 
Means in September 1988 that "(t)otal Medicare spending on physicians ' services is 
large and growing rapidly. " He went on to say that, since the introduction of PPS, in-
patient hospital costs have grown at a rate of 6 percent per year while physician costs 
have grown at rate of 15 percent! A number of different strategies, including capita
tion, managed care, and a resource-based relative-value scale for reimbursement of 
physician services, are being considered to attack the continued growth in outlays. 
The Introduction of New Technology 
New technology can also affect how and where health care is delivered. Magnetic 
resonance imaging (MRI) is one example. Sophisticated services once found only in 
hospital settings can now be delivered in community settings, assuming resources are 
there to purchase the necessary technology. Such technology is becoming more and 
more important to the practice of "state of the art" medicine. 
Effects on the Health Care Market 
The shift from inpatient to outpatient settings for the provision of care, together with reimbur
sement policies which seek to contain outlays for physicians ' services, have created certain 
market reactions which some argue have dramatically affected the rate of physician ownership 
in other health care entities. For example, an incentive exists for physicians or others to create 
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tablish laboratories in their offices.
durable medical equipment, or to set up MRI facilities to meet patient needs in the community. 
At the same time, physicians may seek to protect or supplement their incomes by investing in 
such facilities providing services to their patients. 
by Dr. Arnold S. ReIman 
In 1980, an article in  The New England Journal of Medicine 

described the rise of the "medical-industrial complex," a new growth industry which supplies  ::!!
health care for profit. Dr. Reiman wrote that the key to conttol of this complex lies in the 
hands of physicians, but noted that any financial associations between physicians and industry 
can undermine that role. He went on to say that "(a)s the visibility and importance of the 
private health care industry grows, public confidence in the medical profession will depend on 
the public s perception of the doctor as an honest, disinterested trustee. That confidence is 
bound to be shaken by a fmancial association between the practicing physicians and the new 
medical-industrial complex. 
Articles describing the practice of physician ownership and self-referral, most focusing on 
New York Times, LA. Times,  and 
limited pannerships, have appeared in the  Business Week, 
numerous smaller publications. "The CBS Evening News " discussed the practice as it affects 
the laboratory industry in a segment broadcast in March 1989. 
Christian 
In December 1988, a series of articles on physician investment appeared in the 
This series of articles described the practice of ownership and self-referral 
Science Monitor. 
as "one of the most divisive issues confronting American medicine today. " It reported on one 
case where a private radiologist in Philadelphia had lost most of his business to a physician-
owned radiological lab that opened up a block away from him. The private radiologist com
plained that "a few of the (doctors) just turned off the spigot" after they invested in their own 
facility, not allowing him to compete; the president of the physician-owned lab argued that the 
physicians ' investment allowed them to purchase new technology that the community needed. 
The Wall Street  entitled, "Doctor-Owned Labs Earn Lavish Profits in a 
An article in  Journal 
Captive Market," appeared in March 1989. The article reponed on a case in California in 
which a radiologist was threatened with the loss of referrals if he did not offer an investment 
opportunity to the referring physicians. The radiologist refused, and the referring physicians 
subsequently opened their own lab. The anicle also described variances in pricing between 
physician-owned and non-physician owned labs. 
Previous Studies Regarding Physician Ownership 
Despite the increasing interest in the practice of physician ownership and self-referral, few 
studies have been conducted in this area. Among those that have been conducted are a 1981 
study by the State of Michigan; a 1983 Health Care Financing Administtation (HCFA) Region 
V study; a May 1984 Blue Cross Blue Shield of Michigan study; and a 1988 survey by the 
American Medical Association (AMA). 
The 1981 study by the State of Michigan targeted Medicaid utilization of clinical laboratory 
services, It found that Medic:tid recipients referred for clinic  laboratory services by 
physician-owners had an average of 41 percent more testS than those referred by non-owners, 
Physician-owners also referred more of their patients for tests than did non-owners. 
The May 1983 HCFA Region V study did not find any appreciable difference in Medicare 
utilization between what they called "practice related" laboratories and "non-practice related" 
laboratories. However, patients of practice related laboratories had more batteries of tests  done, and a greater number of "miscellaneous procedure" codes billed than patients of non-
practice related laboratories.
The May 1984 Blue Cross Blue Shield of Michigan study reviewed all laboratory procedures 
billed in a single calendar quarter. Data were analyzed for 148 laboratories as well for two 
subsamples of 20 laboratories each: one with known physician ownership (other than 
pathologist), and the other with a known absence of physician ownership. For the physician-
owned group, the average number of services per patient and the average payment per patient 
were roughly 20 percent higher than the averages for all laboratories, and roughly 40 percent 
higher than the averages for the nonphysician-owned group. 
In response to increasing interest in financial partnerships between physicians and other health 
care businesses, the AM...A asked questions conceming fina..r1cial interests as pa..rt of its semi-
annual telephone survey of physicians in Fall 1988. As a result of these interviews, the AMA 
estimated that 7 percent of physicians have an ownership interest in a health care entity to 
which they refer. The AMA also reponed that an additional 3 percent of its members have 
refer. 
ownership interests in facilities to which they  do not 
Other studies are now in progress. The General Accounting Office (GAO) began a review of 
the practice of physician ownership and self-referral in June 1988. That study is currently on-
going and will repon on activity in two States, Maryland and Pennsylvania. 
Federal and State Activity 
Federal Anti-Kickback Laws: In 1972, Congress outlawed payments for referrals of busi 
ness payable under the Medicare or Medicaid programs. In 1977, Congress strengthened this 
prohibition when it passed the Medicare and Medicaid Anti-Fraud and Abuse Amendments. 
As amended in 1977, the anti-kickback law provides criminal penalties for knowingly and 
10 
willfully soliciting, receiving, offering or paying anything of value in return for the referral of 
a health care item or service payable under the Medicare or Medicaid program. Such a trans-
action is deemed fraudulent and a felony punishable by a fine of up to $25,
000 and imprison 
ment for not more than 5 years. 
On its face, the anti-kickback provision is very broad, covering indirect or coven bribes, kick-
backs and rebates, as well as direct or oven ones. In 1985, the Third Circuit U.S. Coun of Ap
peals dramatically demonstrated how broad the provision was intended to be.  United States 
In 
the co un found that, "  !!'ose of the payment was to induce future refer
v.  Greber,  .if  one 
rals, the Medicare statute has been violated.  (Emphasis added. 
is considered authoritative throughout the health care community. Its reasoning was 
Greber 
The court 
recently adopted by the Ninth Circuit Coun of Appeals in  United States  v,  Kats. 
found that the anti-kickback statute is violated unless the payments are "wholly and not in 
cidentally attributable to the delivery of goods and services.  l3 Further, the same circuit in 
has emphasized the imponance of determining the fair market value of 
United States  v.  Lipkis 
services rendered when analyzing ownership and compensation arrangements.  ----
---- 
Greber cases that physician ownership and 
It is within the framework of the  , Kats  and  Lipkis 
compensation arrangements are frequently viewed, even though there are no reponed coun 
decisions which analyze the applicability of the anti-kickback statute to specific kinds of arran 
gements. The current view of Federal authorities is that physician ownership does  in and 
not, 
violate the anti- indicate that 
of itself,  kickback laws. At the same time,  Greber  and  Kats 
returns on investment, whether or not related to volume of physician referrals, might con 
stitute a violation of the statute if such returns are intended to induce referrals. The factual set 
ting of allY particular a.rra.Tlgemenr is critic  to tb.e a.Tl  ysis. 
In 1987, Congress passed the Medicare and Medicaid Patient and Program Protection Act. 
This legislation expanded the anti-kickback sanctions by authorizing the Office of Inspector 
General (GIG) to exclude from the federal health care programs anyone who violates the anti-
kickback statute. 
In view of the broad language of the anti-kickback statute, as well as the coun s interpretation 
the Medicare and Medicaid Patient and 
of that language under  Greber  (and later  Kats), 
Program PrOtection Act of 1987 also required the Secretary of the U. S. Department of Health 
and Human Services (HHS) to develop regulations clarifying what types of arran gements or 
conduct would not be subject to prosecution under the anti-kickback authorities.  These 
safe harbors " were specified in a Notice of Proposed Rulemaking (NPRM) published January 
23, 1989. 
The NPRM proposes a safe harbor for physicians with investment interests in large publicly 
held corporations, but does not do so for any other types of investment or ownership arrange 
ments. Likewise, the proposed rule establishes a safe harbor for certain compensation arrange 
ments (space and equipment rentals, personnel services and management conn-acts) that meet 
established criteria that limit the pOtential for abuse. Ownership or compensation arrange 
ments that fall outside these safe harbors are not exempt from prosecution under the anti-kick-
back authorities. 
The only explicit Federal prohibitions which currently exist on physician ownership and self-
concern home intravenous (IV) drug therapy and home health agencies. The 
referral  per se 
Medicare Catasn-ophic Coverage Act of 1988 prohibits a home IV therapy provider from 
providing services to a Medicare patient when such services have been ordered by a physician 
with a financial interest (including financial interest held through an immediate family mem 
ber) in the provider. Some exceptions are made, such as for a sole rural provider or financial 
interest in a publicly traded company. Federal regulations also prohibit physicians from cer 
tifying the home health plan of care for a beneficiary when they own more than 5 percent of 
t_hEu"-,  hun_mup_.-  h-p--.~--lt-h-  ~-p0'P--.n--r.'v/ w"-h--ir-.-h-  "w_mn  nr-r n-v .i r-lp--. thp. r.~rp. 
State Laws: While many States have anti-kickback laws similar to the Federal statute, only 
Michigan directly forbids referral to an entity in which a physician has a financial interest. 
Several States are "unfriendly;; to such ventures; New York, for example, has considered nor 
certifying some physician-owned laboratories. In addition, a number of States require 
physicians to disclose their financial interests to patients before referral. For a more com- prehensive discussion of State laws, see the OIG repon "Financial Arrangements between
Physicians and Health Care Businesses: State Laws and Regulations," issued in April 1989.
Laws Prohibiting Referrals to Physician-owned Facilities
One State directly forbids the referral of patients to entities in which the physician has
an ownership interest. Michigan s Public Health Code forbids "directing or requiring
an individual to purchase or secure a drug, device, tteatment, procedure or service
from another person, place, facility or business in which the licensee has a financial in 
terest. ,,
Laws Requiring Disclosure to Patients
Arizona, California, Delaware, Florida, Massachusetts, Minnesota, Nevada, Pennsyl 
vania, VIrginia, Washington, and West VIrginia specifically require disclosure 
of finan

cial interests under cenain circumstances to patients.
Those laws requiring disclosure of financial interest to patients vary in their strin~ency.
For example, Florida's law only applies to equity interests of 10 percent or more. 8
Minnesota s disclosure law applies to "significant financial interest" and stipulates that
the disclosure must be made "in advance and in writing to the patient and must in 
clude...a statement that the patient is free to choose a different health care provider." 19
Both the Pennsylvania and Virginia disclosure laws apply to "any fmancial interest in
the facility or entity" to which the physician makes a referral and require that the
physician "advise the patient of his freedom of choice in the selection of a facility. ,,
Additional Steps Contemplated
The Congress has expressed continued concern regarding the practice of ownership and self-
referral. The Subcommittee on Oversight and Investigations, Committee on Energy and Com 
merce, expressed itS distress regarding the emergence of such arrangements as early as 1982.
In February 1989, Representative Fortney (pete) Stark introduced H.R. 939, the "Ethics in
Patient Referrals Act." This bill generally would prohibit Medicare providers from accepting
referrals from physicians with an ownership interest or compensation arrangement with the
provider. The bill provides for cenain exceptions, including group practice arrangements, sole
rural providers, and prepaid plans. The bill also authorizes the Secretary of HHS to establish
other exceptions that he deems to have little risk of program or patient abuse. The Committee
on Ways and Means, Subcommittee on Health, held hearings on the bill on March 2, 1989.
Several States are also reviewing the practice. The New York State Health Commissioner
created an ad hoc committee to meet with the public this year and gather comments on ethical
or other concerns the public may have regarding the practice. Funher hearings are scheduled.
The Health Care Committee of the Florida House of Representatives is currently collecting in 
fonnation on the practice and may conduct a study on such arrangements in Florida. METHODOLOGY 
Purpose and Objectives 
In June 1988, Congress mandated that the Office of Inspector General, U.S. Department of 
Health and Human Services, conduct a study on physician ownership and compensation from 
:ll ttl care entities to which they make refeITals. Section 203(c)(3) of the Medicare 
Catastrophic Coverage Act of 1988 directed the OIG to repon to Congress by May 1, 1989 on: 
physician ownership of, or compensation from, an entity providing items or ser 
vices to which the physician makes referrals and for which payment may be made 
under the Medicare program; 
the range of such arrangements and the means by which they are marketed to 
physicians; 
the potential of such ownership or compensation to influence the decision of a 
physician regarding referrals and to lead to inappropriate utilization of such items 
and services; and 
the practical difficulties involved in enforcement actions against such ownership 
and compensation arrangements that violate current anti-kickback provisions. 
Evaluability Assessment 
Before beginning this study, the OIG investigated existing sources of information on owner-
ship or investment, and referrals by physicians. The study team assessed the feasibility 
using such sources of information in addressing the issues of interest to the Congress. 
Currently, no complete infonnation is held by Medicare carriers (who process Part B claims 
for the program), the States, or the Federal Government regarding the ownership of entities 
which are Medicare providers. Not all State Secretary of State offices maintain information 
on corporations and partnerships originating in their States. Infonnation that is maintained 
generally does not include a full listing of owners, partners, or investors. Boards of Medicine 
do not obtain such infonnation, although we found one (West Virginia) which maintains 
ownership information on all registered medical corporations which are wholly owned by 
medical doctors. 
Another potential source of information investigated by the GIG was HCFA Form 1513, "Dis 
closure of Ownership and Control Interest Statement " As a condition of participation, cer 
tification, licensure or recertification under the Medicare program, a health care entity (sole 
proprietorship, partnership, corporation) must make disclosure of ownership and financial in 
terest on this form. One purpose of the information is to identify entities that are owned by in 
dividuals who have been convicted of a criminal or sanction able offense related to 
participation in programs established by title XVIII, XIX, or XX.  In assessing whether HCFA Form 1513 could be used as a basis of information for detennin
ing the extent of physician ownership or investment in other health care entities which are 
Medicare providers, the OIG discovered several limitations to its use. First, the form does 
nOt 
require a listing of all investors.. Instead, for the most part, only individuals having an interest 
of 5 percent or more must be listed. Second, physicians are not required to be expressly iden 
tified. Thus a physician owner may be identified by his name only, without a M.
D. designa
tion. Third, maintenance of the form is uneven. Fonns have not always been completed in 
the past by providers, nor have they submitted updates when new investors are added or 
ownership changes hands. Lastly, the HCFA regional offices are only required to maintain
this information for independent clinical laboratories, not all types of Medicare providers. 
Other possible sources of ownership information that were subsequently researched during the 
course of this study included the Offices of the State Attorney Generals; Medicaid Fraud Con
ttol Units; local medical societies; State Public Welfare Provider Review and Sanction Of
fices; State revenue offices; State peer review organizations; municipal offices that maintain 
city or town directories; State, city, and county courthouses; State insurance commissions; 
State Departments of Commerce; and Medicare provider audit groups. None of these or
ganizations maintained infonnation on ownership of health care businesses. 
At the same time, no existing infofmation is maintained by most Medicare carriers regarding 
the referral activity of physicians. Claims submitted by health care entities do not generally 
contain the name or provider number of the referring physician.
As a result of this evaluability assessment, the OIG study team developed a study design that 
would collect original data on ownership and other financial arrangements between 
physicians and other health care entities. The OIG also developed a mechanism for assessing 
utilization that was patient-based, rather than physician-based, due to the lack of specific data 
on physician referrals and the availability o~ data on beneficiaries ' use of services. 
Study Approach 
In order to gather information in all the areas outlined in Section 203(c)(3) of MCCA
, the OIG 
study team collected data from the following sources. First, two surveys of health care 
providers were conducted to detennine the prevalence of physician financial involvement with 
other health care entities and the nature of such arrangements. Second, claims infonnation 
from the Health Care Financing Administration s Part B Medicare Annual Data (BMAD) files 
for 1987 was used to assess utilization patterns for patients of physician-owners identified 
through our surveys. Third, State officials, industty representatives, health care experts and a 
subsample of provider respondents to our survey were interviewed or consulted. 
Surveys of Health Care Providers 
The OIG study team conducted two surveys of Medicare-participating providers, using 
a two-stage random sample. During the fIrSt stage of sampling, eight Medicare car
riers were randomly selected, with the probability of selection proportionate to total 
amounts reimbursed under Medicare in 1986. The eight carriers selected were  Travelers of Connecticut; Empire Blue Cross Blue Shield of New York; Nationwide of 
West VIrginia; Blue Shield of Florida; Blue Shield of Michigan; Blue Shield of Kansas 
City; Blue Shield of Arkansas; and Occidental of California. These carriers repre 
sented approximately 30 percent of amounts reimbursed under Medicare Part B in 
1986. 
At the second stage of sampling, two sets of providers were selected. In the 
fIrSt set, 
000 provider numbers representing physicians (500 in each carrier) were randomly 
selected and surveyed regarding their ownership interests in health care businesses to 
which they make referrals. In the second set, 1, 133 provider numbers representing 
health care businesses (from 91 to 180 per carrier) were selected and surveyed regard 
ing their business structure, owners, pdncip::ll pa.rties, and health care providers with 
whom they have compensation arrangements. The health care businesses surveyed 
were of three types: independent clinical laboratories (ICLs), independent physiologi 
callaboratories (IPLs), and durable medical equipment suppliers (DMEs). These three 
classes of providers account for approximately 50 percent of Part B claims for ancil 
lary services.

High response rates were experienced with both surveys. The survey of physicians 
met with a 92 percent response rate overall, including 443 mailings (11 percent) which 
were undeliverable due to provider number address inaccuracies. The survey of health 
care businesses met with a 99.9 percent response rate including 121 (11 percent) where 
a response was not required because the entity had gone out of business. In total 
218 responses were made to the physician survey (2,690 from active Medicare 
011 to the survey of health care entities. For further detail regarding 
providers) and 1 
the response rates and technical components of the surveys, see appendix A. 
BMAD claims Information 
Based on information obtained from the entity survey described above, the OIG study 
team developed a list of physicians known to be owners or investors in other health 
care businesses. This list of physicians was matched to carrier provider number files. 
Physicians with designated specialty codes indicating radiology or pathology (non-
referring specialties) were dropped from the IPL and ICL analysis, respectively, since 
such physicians are not in a position to refer patients. 
Using the HCFA BMAD fIle, patients who had seen referring physician-owners or in 
vestors were identified. For patients associated with physicians who have investment 
or ownership interest in an ICL, use of laboratory services was compared to the use of 
such services by all beneficiaries in the fIle. A similar analysis was conducted for 
patients of physicians associated with IPLs and DMEs. For further detail regarding the 
BMAD file and our analysis, see appenilix B.  Interviews
In order to collect detailed information concerning the nature of physician ownership 
and compensation arrangements, a number of providers responding to our two surveys 
were interviewed. Forty physician-owners identified through our physician survey 
were interviewed to collect detailed information on these arrangements. Twenty-four 
physician-owned entities and 23 non-physician owned entities identified through our 
survey of health care businesses were also interviewed. 
In addition to these interviews, we consulted with various industty groups and associa 
tions regarding their positions on physician ownership and self-referral. These groups
included the American Medical Association (AMA), the American College of Radiol 
ogy (ACR), the American Society of Internal Medicine (ASIM), the College of
American Pathologists (CAP), the American Clinical Laboratory Association (ACLA),
and the American Imaging Association (AIA).
We also conducted interviews with 143 State officials regarding: (1) their perspectives
, and experiences with, physician ownership and self-referral; and (2) the existence
and enforcement of State laws which may prohibit self-referrals, kickbacks, or require
disclosure of fmancial interests to patients. The officials interviewed included repre 
sentatives from State licensing boards, Medicaid Fraud Control Units (MFCUs), State
Attorney General offices, and title XIX offices. Finally, the OIG study team consulted
with knowledgeable investigators and attorneys within the OIG concerning their ex 
periences with the enforcement of Federal anti-kickback laws as they apply to abusive
ownership or compensation arrangements. -.. .~.. ....... ....... ............. ......... ......,

FINDINGS 
Nature and Range of Arrangements 
Many Physicians Have Invested In Health Care Businesses to Which They Refer Patients 
Twelve percent of physicians who bill Medicare have ownership or investment in 
t.P.T..P.c.:ut .i n~. .. tip  tn ",hi,..h th",  ...,..tr",  M",n" .-f'",.u.......,.... . 
Referring physicians invest in a wide range of businesses. They hold interests not 
only in independent clinical and physiological laboratories and durable medical 
equipment suppliers, which we specifically studied, but also in home health agen 
cies, hospitals, nursing homes, ambulatory surgical centers, and health main 
tenance organizations. 
Eight percent of physicians billing Medicare have compensation arrangements 
with entities to which they refer. These arrangements include space rental agree 
mentS, employee arrangements, consulting agreements, and management services 
contracts. 
Of the 2,690 active Medicare providers responding to our physician survey, 322 claimed to 
have an ownership interest in a health care business to which they refer patientS (other than 
physician office laboratories). Projected and weighted nationally, then, 11.8 percent of 
physicians billing Medicare have an ownership or investment interest in entities to which they 
make referrals. 
Most ownership interests are held directly by the reponing physician, although a few 
physicians reponed that they held ownership interests indirectly through immediate family 
members. Eight physicians, for example, iqdicated that they held an ownership interest 
through a family member in diagnostic imaging centers, and five reponed such an indirect in 
terest in clinical or other physiological laboratories. 
Interests are held in a wide array of businesses. Exhibit 1 illustrates the breakdown of interest 
by type of business. 
Two hundred and six of the active Medicare providers surveyed reponed having a compensa 
tion arrangement with an entity to which they refer. Most of these arrangements involve space 
rental to or from the entity, and employee or consultant fees. Exhibit 2 indicates the type of 
compensation arrangement reponed by the physicians surveyed.  s e 
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Many Health Care Entities are Owned by Referring Physicians 
Nationally, at least 25 percent of independent clinical laboratories, 27 percent of in-
dependent physiological laboratories, and 8 percent of durable medical equipment 
suppliers, are owned in whole or in pan by referring physicians. 
The prevalence of ownership or investment varies by State. In some States, such 
as Arkansas and California, a larger than average percentage of ICLs, IPLs, and 
DMEs are physician owned. In other States, such as Michigan, the percentage of 
entities which are owned by physicians is much smaller than average. 
One hundred ninety-five entities in our sample (17 percent) have compensation ar
rangements with referring physicians. Some entities have both physician-owners 
and compensation arrangements with other physicians. 
Of the three industries we studied, the highest rate (27 percent) of physician ownership or in-
vestment is found in the independent physiological laboratory industry. The lowest rate (8 per-
cent) is in the durable medical equipment industry. These rates reflect conservative estimates, 
since they reflect only physician ownership or investment which is ~oth direct and immediate. 
Physicians may also hold interests through other family members. In addition, physicians 
may hold interests in parent companies which in turn own other health care businesses. In 
such cases the owner of the entity surveyed was reponed as another company; we did not at-
tempt to collect ownership information on the parent company. (Sixteen entities in our survey 
reponed that they are owned by another company. 
Exhibit 3 represents the rate of ownership, by industry, and indicates whether entity ownership 
interests are held by referring physicians (such as internists), non referring physicians (such as 
pathologists or radiologists), or physicians whose specialty is unknown. (Where at least one 
referring physician has an ownership interest, the entity is counted as referring physician 
owned. ) As the exhibit demonsttates, a significant ponion of physician ownership is ac
counted for by referring physicians. The actual rate of referring physician ownership is 
probably higher, since at least some of the physicians whose specialties are unknown can be 
presumed to be referring physicians. 
Exhibit 4 illustrates the extent of physician ownership or investment in each industty, by State. 
As these figures illusttate, there is significant variability in the rate of referring physician 
ownership according to State. The carriers with the least amount of physician ownership are 
Kansas City, Michigan and New York. Differences in practice patterns in Kansas City, along 
with the existence of State policies unfriendly to such ventures in Michigan and New York, 
may help to explain these variances. Interestingly, laws in California and Florida which re-
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One hundred ninety-five entities of the 1, 133 businesses surveyed (17 percent) had one or 
more compensation arrangements with referring physicians. One hundred and six 
of the 195 
entities reporting such arrangements (54 percent) were independent clinical laboratories. 
Types of arrangements reponed by all types of entities included management/consulting agree
ments, space rental to and from the entity, and personnel services.   
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The Structure of Ownership or Investment Varies 
Of the 208 entities with known physician-owners or investors in our sample of 1, 133 health 
care businesses, 145 (70 percent) are established as corporations or similar structures, 50 (24 
percent) as parmerships, and 13 (6 percent) as sole proprietorships. In conn-ast, 87 percent of 
the non physician owned entities are established as corporations, and only 4 percent as partner-
ships, with the remaining functioning as sole proprietorships. 
Pannerships which included physicians typically have a much larger number of limited 
parmers (average of 31) than partnerships between non physicians (average of 2). Few 
of the 
limited panners in physician pannerships were non physicians. Physician partnerships in
volved an average of 27 physician limited panners, with one pannership composed of 122 
" 0) '-~H"u"t  1U~. IIJl1. '" 1-'a.J. U '" 
We requested supporting documentation (such as offerings, prospectuses, anicles of incorpora
tion and conn-acts) from the entities we sampled. While physician-owned companies are more 
likely to be structured as limited pannerships than non physician owned companies, we 
received few prospectuses and offerings in connection with these ventures. 
Of the 18 prospec
tuses and offerings we received for physician partnerships, none established a requirement for 
a specific rate of referral by investing physicians or indicated that profits are disttibuted in 
direct proportion to volume of referrals made. 
Offerings and prospectuses received, however, did indicate that expectations may exist on the 
pan of the entity with respect to physician referrals. For example, certain offerings indicated 
that the venture anticipated referrals from physician panners or that the viability of the busi
ness depended on such referrals. Other entities noted in their materials to us that the offering 
of stock or units of pannerships was made only to practicing physicians in the area. Some en
tities in our sample are structured in such a way as to require divestiture of financial interest 
by a physician upon his or her retirement from the medical profession. 
Investment Opportunities are Often Identified by Physicians Themselves 
Physicians reponing ownership or investment interests in health care businesses to which they 
refer patients most often said that they learned of such arrangements through personal contact 
with anOther associate (either a doctor, accountant, or stock broker). Only three physicians 
reponed learning of an investment opportunity through contact from an investment firm. Al
though much attention has been paid to so-called "deal-makers," or third patties who act as 
brokers for the development of arrangements betWeen physicians and other health 
care busi
nesses, information collected through our physician survey did not suggest that this activity is 
prevalent. However, it is unclear to what extent the "personal associates" identified by 
physicians in our survey acted as agents for Other third parties in soliciting interested 
physician-investors. 
Information collected through the survey was borne out through interviews. Many of the 
physician-owners interviewed stated that they became aware of investtnent or ownership op
ponunities through personal contact with associates. One physician owner stated that he be- came aware of an opponunity to invest in a lab "at a backyard barbecue at (another) doctor 
house. " A large number of physician-owners stipulated that they simply saw a need in the 
community, and rose to meet it 
When asked whether physicians approached businesses or were sought out as investors in busi
ness, many of those interviewed indicated that both occurred. Several respondents believed 
that while businesses generally sought out physicians in the past, physicians have become in
creasingly aware of these opportunities and now seek them  them on their own. A 
OUt or create 
consumer advocate suggested that, when such investment opponunities were new, third party 
brokers or "deal-makers" generally initiated them; now, he argued, the practice is common 
enough that financially astute physicians establish such deals on their own. One association 
representative stated that, in some industries, physicians are demanding investment oppor
tunities in entities to which they refer and threatening to establish their own business if such 
an opponunity is not afforded them. 
Impact of Arrangements on Utilization 
Patients of Physician Laboratory Owners Received More Services 
Patients of referring physicians who own or invest in ICLs received 45 percent 
more clinical laboratory services than all Medicare patients in general, regardless 
of place of service. They also received 34 percent more services from independent 
clinical laboratories than all Medicare patients in general. This increased utiliza
tion of clinical laboratory services by patients of physician-owners cost the 
Medicare program $28 million in 1987. This figure does not include any costs as
sociated with increased utilization resulting from physician ownership interests in 
entities other then independent clinical laboratories. 
Patients of physicians known to be owners or investors in IPLs received 13 percent 
more physiological testing services than all Medicare patients in general. 
The extent of increase in the use of services by patient associated with laboratory 
owners or investors varies by state. 
Patients of referring physicians known to be owners or investors in clinical laboratories 
received, on the average, 45 percent more clinical laboratory services than all Medicare 
patients in general, regardless of place. Clinkallaboratorj services may be delivered in a 
variety of settings including independent clinical laboratories, physician s offices and hospital 
outpatient departments. They also received 34 percent more laboratory services from clinical 
laboratories than all Medicare patients in general. (See Exhibit 5.  The actual effect is probab
ly higher, since ihe control group (all parienrs) includes the comparison group (patients who 
seen 
have seen physician-owners).  If the control group consisted of patients who have 
 not 
physician-owners, we would expect to see an even more dramatic effect. 
Likewise, patients of physicians known to be owners or investors in ~hysiologicallaboratories 
use 13 percent more physiological services than patients in general.  (See Exhibit 6. ) Since 
physicians generally billed for physiological testing services in 1987 rather than the   
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laboratories that actually performed the tests, we were unable to extend the analysis by place 
of service as we did with clinical laboratories, above. 
The extent of difference in receipt of services varies by State. In two States, West Virginia 
and New York, there was no difference in experiences between patients of physician-owners 
of clinical laboratories and all patients in general. However, in the six remaining States there 
was a statistically significant increase in the use of services by patients of physician-owners.

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Michigan. Exhibits 7 and 8 illustrate the State by State results for patients associated with 
physicians who are clinical and physiological laboratory owners. Again, the differences by 
state may be explained by local practice patterns or State law influences. It is interesting to 
note that the existence of disclosure laws in Florida and California, or the more stringent law 
in Michigan, have not prevented us from seeing increased utilization in those States. 
We saw a similar effect on utilization associated with the existence of compensation arrange
ments between laboratories and physicians. Patients of physicians with compensation arrange
ments with clinical laboratories, for example, use 32 percent more laboratory services than all 
Medicare patientS in general. See appendix B for more detail. 
Based on our analysis of utilization patterns for patients of physician-owners of clinical 
cost the 
laboratories, the difference in utilization for clinical laboratory services  alone 
Medicare program $28 million in 1987. This figure does not include costs associated with dif
ferences we demonstrated in utilization by patients of physician-owners in the physiological 
laboratory industry, or differences in utilization by patients of physicians with other types of 
financial arrangements (Le., compensation arrangements). 
Patients of Physicians Associated with DMEs Show No Difference in Use of Services 
Patients who saw physician-owners or investors in D:rvIEs received no more 
durable medical equipment than all Medicare patients in general. However, sig
nificant variation exists on a State by State basis. 
Patients of physicians who are D:rvIE owners or investors do not use any more durable medical 
equipment than all Medicare patients in general. In addition, we did not find any significant 
differences between all D~y4'.E services fu.."1lished to Medicare beneficiaries or DME services 
furnished directly by DME suppliers. However, the data showed significant State by State 
variation. While in the aggregate there was no effect on 
the utilization of D:rvIE services, 
beneficiaries of physicians in Florida who own show a statistically significant increase in 
utilization while in West Virginia and Kansas City, this same group or beneficiaries show a sig 
nificant decrease in utilization of services. Exhibits 9 and 10 illustrate the results of our 
analysis for D:rvIEs.
We saw a similar effect on utilization associated with the existence of compensation arrange
ments between DME providers and physicians. See appendix B for more detail.  s  f 
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..)  Enforcement Experiences 
Enforcement of Current Federal Anti-Kickback Laws Is Challenging 
In the past two years the OIG has pursued 442 cases under the anti-kickback 
authorities which involve physician ownership or compensation arrangements. 
Most (416) were cases involving physician compensation and many (338) arose 
out of one large investigation in Philadelphia, Pennsylvania. 
Recent legislative and regulatory developments will aid the GIG in addressing 
abusive arrangements.

A number of obstacles exist which make enforcement of current anti-kickback laws, as they re-
late to physician ownership or compensation arrangements, challenging. Investigations 
ownership arrangements are complex and labor-intensive. In order to convince a judge or jury 
that the anti-kickback statute has been violated, certain facts can be helpful. These include, 
but are not limited to: 
amount of return is related to referral volume in any way; 
(1) whether the 
(2) whether opportunities to invest are offered only to those in a position to refer busi 
ness, or if those in a position to refer greater amounts of business are offered a 
greater investment opportunity; 
investing physicians ' referrals are monitored by the entity; 
(3) whether the 
(4) whether restrictions are placed on n-ansferability of the investment interest; 
(5) whether the return on investment IS excessive in light of the nature of the business. 
risk; and 
(6) whether the amounts invested reflect the capital needs of the entity, etc. 
Since many of these arrangements are structured differently, such analysis requires significant 
legal support. 
Physician compensation cases involving payments for referrals are somewhat easier to pursue 
principally because they have moved from the realm of contracts and stock options to the 
much shadier realm of "deals --cash payments off-the-books, paid under a veil of secrecy, ex 
orbitant rent payments which do not reflect fair market value, or Other payments which dis 
guise their true purpose. As a result, it is easier to show that the arrangement is a sham, that 
medically unnecessary services were generated to receive a payoff, and that false claims were 
generated to obtain money. However, some of the same difficulties in enforcement exist with 
respect to these arrangements, including legal complexities. 
Such cases are also difficult to explain to a fact-fmder, unless the business arrangement clearly 
specifies payment for referral. Federal prosecutors are more likely to prosecute where the  scheme has an element of corruption, the parties to the arrangement are involved in a number 
of abusive practices, or there is direct cost to the Medicare program or its beneficiaries. Even 
overt kickback cases are difficult to prove, where there is no "paper ttail." In these instances 
the case must be developed with wires and interviews. 
For these reasons, such cases have often been assigned a low priority at the Department of Jus
resources have been directed at criminal cases where hann to patients or the 
tice. Instead, 
Government  more easily demonstrated. 
Ca..11 be 
However, recent legislative and regulatory developments have helped pave the way for more 
effective and aggressive enforcement in this area. The Medicare and Medicaid Patient and 
Program Protection Act of 1987, which allowed the OIG to sanction providers who were pre
viously subject only to cnrniila! action, obviates the need for the CIG to rely on the Depart
ment of Justice to prosecute offenders. The "safe harbor" regulation, once promulgated as 
fmal rule, will help put providers on notice that they may be subject to criminal prosecution or 
civil sanctions if their business arrangements do not qualify for a safe harbor. The OIG Fraud 
Alert forewarns regional investigators, Medicare carriers, health care providers and the public 
as to the sttuctural and other facts the DIG deems instructive in reviewing arrangements for 
potential abuse.  SUMMARY 
Extent of Arrangements 
Our survey data reveals that financial arrangements between physicians and health care en
tities to which they may make referrals are common. However, since the data presented repre
sents a " snapshot in time" and no baseline data exists with which to judge it, it is impossible to 
detennine if the number of fmancial arrangements between referring physicians and other 
health care entities is increasing, decreasing or remains stable. Even so, we consider the 
prevalence of arrangements reponed in our findings as significant. 
It is imponant to note that, while much attention is given to the percentage of physicians who 
are involved in such arrangements, the more relevant question for the Medicare program is the 
percentage of health care providers that have financial arrangements with physicians (since it 
is the health care providers, not the physicians, who are being reimbursed for these ancillary 
serviCes). As the data demonstrates, the percentage of physician ownership or investment 
varies by type of provider; we have seen a greater degree of physician investment in the 
laboratory industries than in the DME industry. It also varies by State, with Arkansas, Califor
nia, West VIrginia and Connecticut markets heavily weighted with physician-owners and in
vestors. Without baseline data, we are unable to determine if this uneven distribution 
represents a ttend in one direction or another. 
Impact on Utilization 
We have also demonsttated that patients who have been seen by physician-owners or investOrs 
in the laboratory industries, or for that matter physicians with other kinds of financial arrange
ments with laboratories, tend to use significantly more services than Medicare patients in 
general. While we have demonstrated an association rather than a causality, this finding--con
sistent with previous small-scale studies in this area--is quite ttoubling. 
While we have demonstrated a remarkable effect on utilization of services attributable to 
physician ownership in the ICL and IPL industries, no such effect occurred in the DME in
dustry. This may be due to the elasticity and consumability of laboratory services; that is, an 
unlimited number of tests may be ordered for any given patient. In DME, many goods are 
non-consumable; hence, one patient can at the most receive one wheelchair, not an infinite 
number of wheelchairs. Cenainly the utilization effect we have seen in the laboratory in
dustries is cause for concern to the Medicare program, especially in light of the fact that the 
methodological approach supponed the most conservative finding possible. 
Procedural Recommendations 
Regardless of action Lhat might be taken on the options we have identified below for 
policymakers, certain steps should be pursued which will make funher analysis and ongoing 
monitoring of arrangements between physicians and other health care entities possible. We 
are making recommendations that HCFA pursue the necessary legislative and regulatory chan- ges to: (1) require entities billing Medicare to disclose the names of physician-owners and in
vestors to the program; and (2) require claims submitted by all entities providing services 
under Medicare Pan B to contain the name and provider number of the referring physician. 
Options for Policymakers 
A number of policy options exist which might serve to address the issue of higher utilization 
of services by patients of referring physician-owners. A sample of these options is delineated 
below. However, the choice of these options may not depend alone upon the results of this 
study. For example, we have not collected quantitative data regarding the impact of physician 
ownership and self-referral on competition, quality of care, or availability of services. These 
dimensions of the policy issue were outside the scope of our study. However, the choice 
policy options may be driven, at least in pa.rt, on a.'1 assessment of these other factors. 
Implement a focused post payment utilization review by carriers. 
Carriers now conduct post payment utilization review based on claims submitted 
under Medicare. One policy option is to implement such review directed at 
physician-owners or investors. 
This option would require several modifications to the current system of collecting 
information. First, in order to identify the targeted group, health care entities would 
have to disclose their physician-owners or investors, along with their Medicare 
provider numbers, to HCFA and the carriers. Second, the name and provider num
ber of the referring physician must be entered on each claim submitted by the health 
care entity. Third, provider number reform must be instituted. If physicians and 
health care entities are allowed to use more than one provider number, the difficulty 
of this review is increased. Fourth, resources must be made available in the carriers 
to cany out such a program. 
While this approach would focus the program s attention on possible abusers only, 
there are several disadvantages to this approach. If the carriers found that a 
physician-owner ordered 20 percent more tests than his non-investing peers, it is 
not clear that such a finding would lead to adjudication in favor of the program. 
Peer review might not suppon a rIDding of "relative over-use" of tests as sufficient 
justification, by itself, for sanction or exclusion. In such cases, it is 
difficult to 
demonstrate that the tests ordered were in fact unnecessary; the program might ex
perience a high reversal rate in cases before Administrative Law Judges. 
In addi
tion, such focused utilization review is timely, costly and difficult to administer at 
the carrier level. A previous study issued by the OIG found that current
/ost pay
ment utilization review requirements are not being met by the carriers.  -""" """"'" "';,.;.,......" 
Require physicians to disclose financial Interests to patients, as a condition of par
ticipation, when making referrals to an entity In which they have an Interest. 
As detailed earlier in the repon, at least eleven States currently have laws which re-
quire physicians to make some form of disclosure to patients when they refer those 
patients to facilities in which they have financial interests. While we have not un
denaken a causal study of the effect of disclosure requirements on physician or 
patient decision-making, the t'NO States in our sa..-nple that do have disclosure laws- 
California and Florida--experienced the same higher utilization rate among patients 
of physicians owners as did other States without disclosure laws. 
While this option is perhaps the least onerous of all those described in this section 
it may also be the least likely to influence actual patterns of use of services. 
Patients have little basis with which to judge the efficiency, quality, or even pricing 
of one facility versus another. Patient choice in this environment may have little 
meaning. 
Improve the enforcement of current anti-kickback authorities. 
With recent regulatory and legislative developments which have paved the way for 
more aggressive enforcement of current anti-kickback laws, abusive arrangements 
between physicians and other health care entities may be effectively addressed. 
The Medicare and Medicaid Patient and Program Protection Act of 1987, the "safe 
harbor" regulations, and the OIG Fraud Alen have combined to create a positive en
vironment for enforcement Placement of additional resources at the OIG to pursue 
these cases would also suppon the goal of improved enforcement. 
While legal actions against arrangements that violate the current anti-kickback laws 
will deal with abusive arrangements, and perhaps deter the development of other 
abusive arrangements, GIG enforcement activity cannot effectively address 
physicians who refer patients for more services than their peers, in absence of other 
relevant facts. However, disclosure of fmancial interests by physicians to the 
Medicare program, together with post payment utilization review by carriers, might 
aid the OIG in targeting cases and reviewing arrangements under its current anti-
kickback authority. 
Institute a private right of action for anti-kickback cases. 
rnncbrAr..".,..".. ", "".A,_., ."~ ".J..".n. , 1.1.1 A;""h"  '.n.~ " ."....v.C...'..;.;,!."..'... l"..",6..;C~'l""u,";",v..".  "".,.h~;"..,.Ju.  n"V",LnL l";.!i  .u.u1.V'1"" p"~,~7'' \  u....  ...~...~"'u...
to bring actions against other private parnes engaging in conduct prohibited under 
current anti-kickback law. Consideration should be given to the appropriate private 
remedy, given the current civil enforcement scheme which only permits program ex
clusion. However, a private right of action would encourage self-policing among 
health care providers and allow the Government an additional source of cases 
model of the 
brought against abusive arrangements. If enacted under the 
 qui tam  .. 
False Claims Act, the private right of action would be subject to departmental con 
tt'ol and supervision. 
Prohibit physicians from referring patients to certain types of entities in which they 
have a financial interest.
This option would allow the Congress to prohibit physician referrals to certain 
types of entities in which they have financial involvement. This approach has prece 
dent in the Medicare Catastt'ophic Coverage Act of 1988, which barred physician 
referrals to home IV therapy providers in which they have a financial interest. 
Based on our finding that patients of physician-owners in these industries use more 
logical tar-
laboratory services that patients in general, the laboratory industries are 
gets for such restrictions. However, this option may result in certain unintended 
consequences, such as a negative effect on availability of services; reduced competi 
tion; or a drive of services into the physician office laboratory market. In order to 
address some of these issues, legislation might provide exceptions for sole rural 
a legitimate community need in providing services. 
providers or others who meet -
Compliance with such legislation may be difficult to ensure. If ownership of health 
care entities is not disclosed to the Medicare program, then financial involvement 
by physicians might be unseen by the OIG or other enforcement officials. Potential 
for "gaming" the restriction is also evident. Financial involvement might be hidden 
through indirect or non-immediate interests, e.g., through family members or a hold 
ing company. 
Prohibit physicians from referring patients to any entity In which they have a finan
cial interest.
, which reflects the intent of "The Ethics in Patient Referrals Act,
This option
would generally prohibit physicians from referring patients to health care entities in
which they have a financial interest. As with the previous option, legislation thus
constructed may result in certain unintended consequences, such as a negative ef 
fect on availability of services; reduced competition; or a drive of services into the
physician-office laboratory market. In order to address some of these issues, legisla 
tion might provide exceptions for sole rural providers or others who meet a 
legitimate community need in providing services, as does the current bill pending
before the Congress.
ComDliance with such lelrislation mav be difficult to ensure. If ownership of health 
care entities is not disclosed to the Medicare program, then financial involvement 
by physicians might be unseen by the GIG or other enforcement officials. Potential 
for "gaming" the restriction is also evident. Financial involvement might be hidden 
through indirect or non-immediate interests, e.g., through family members or a hold-
Ing company.  Additional Reports 
The OIG will issue several additional repons focusing on physician ownership and 
Other
market forces in the independent clinical laboratory, independent physiological laboratory, and 
durable medical equipment industries in Fall 1989. Additional analysis 
will be conducted con
cerning the nature and extent of physician compensation 
an-angements.  , "  , " 
, " 
ENDNOTES 
1. 
Testimony of William L. Roper, M.D., before the Subcommittee on Health, Committee on 
Ways and Means, U.S. House of Representatives, September 29, 1988. 
2. The OIG  Of 
has recently conducted a study on physician office laboratories (POLs).  See 
fice of Inspector General, Office of Analysis and Inspections, "Quality Assurance in 
Physician Office Laboratories," OAI-05-88-00330, March 1989. 
3. 
Arnold S. ReIman  The New Medical Industrial Complex,  New England Journal of 
October 23, 1980. 
Medicine, 
4. 
Robert P. Hey and Barbara Bradley, "$450 billion industry spawns fraud, abuse,  Chris 
December 7, 1988; "MD' s investments reap controversial profits 
tian Science Monitor, 
Christian Science Monitor December 8, 1988; "Patient care vs. physicians ' investments, 
Christian Science Monitor December 12, 1988. 
5. 
Michael Waldholz and Walt Bogdanich  Wann Bodies: Doctor Owned Labs Earn Lavish 
Profits in a Captive Market,  February 28, 1989, p. 1. 
The Wall Street Journal. 
6. 
Medical Services Administration, State of Michigan Department of Social Services, 
Utilization of Medicaid Laboratory Services by Physicians With/Without Ownership In 
terest in Clinical Laboratories: A Comparative Analysis of Six Selected Laboratories, 
July 9, 1981.

7. U.S. Department of Health and Human' Services, Health Care Financing Administration 
Division of Health Standards and Quality, Region V  Diagnostic Clinical Laboratory Ser 
vices in Region V " #2-05-2004- , May 1983. 
8. 
Blue Cross and Blue Shield of Michigan, Medical Affairs Division, "A Comparison of 
Laboratory Utilization and Payout to Ownership," May 9, 1984. 
9. 
Mathematica Policy Research, AMA Socioeconomic Monitoring System Autumn Survey, 
1988. 
10. 42 D.  c. Section 1320a- 7b.

11. 760 F.2d 68 (3rd Cir. 1985). A company providing holter monitor services submitted 
claims to Medicare and forwarded a portion of the reimbursement to the referring 
physician. The operator of the holter monitoring enterprise, who was also a physician, 
was prosecuted. In this defense, the physician argued that the payments he made were for 
legitimate services, e.g., for interpreting test results. 
12. 760 F.2d at 69.  13. Case No. 87-5108 (April 3, 1989). In this case, the coun upheld the conviction of an 
owner of a clinic who received payments from a medical services company, which col
lected blood and urine samples and forwarded them to a laboratory. The court upheld a 
jury instruction that read  It is not a defense that there might have been other 
inter alia, 
reasons for the solicitation of a remuneration by the defendants, if you find that one of the 
material purposes for the solicitation was to obtain money for the referral of services. 
14. 770 F.2d 1447 (1985). In this case, the coun examined a medical management company 
which was providing services to a physician group. This company entered into an arran
gement with a laboratory which returned 20 percent of its revenue obtained from the 
physician group s referrals back to the management company. The defendant alleged that 
these payments were fair compensation for "specimen collection and handling services, 
770 F.2d at 1449. The coun rejected this defense, holding: "The fair market value of 
these services was substantially less than the (amount paid), and there is no question that 
(the laboratory) was paying for referrals as well as the described services.  Ibid, 
15. 42 V.  C. Section 1320a-7(b)(7). 
16. Pub.L. 100-93, Section 14.

17. Mich. Compo Laws Ann. Section 333. 16221 (e)(iv). 
18. Fla. Stat. Section 455.25. 
19. Minn. Stat. Ann. Section 147.091(p)(3). 
20. FA. Act 66, Section 2, and Va. Code Section 54-278. 
21. Prepared statement of the Subcommittee, Subcommittee on Oversight and Investigations, 
Committee on Energy and Commerce, U. S. House of Representatives, March 5, 1982. 
22. Unlike results associated with clinical laboratories, this number tested as statistically non-
significant nationally. This is probably due to small numbers of beneficiaries in the 5 per-
cent BMAD sample associated with physician-owners of these entities, particularly in 
Arkansas, Kansas City, and Connecticut. 
23. Office of Inspector General, Office of Analysis and Inspections, "Medicare Caniers' Per
formance of Program Integrity Functions. " OAI-04-88-oo71O. August 1988.  APPENDIX A
METHODOLOGY 
This appendix presents the details of the two surveys conducted by the Office of Inspector 
the same basic design. The 
General. Both surveys were conducted simultaneously and used 
Office of Audit developed and administered, by mail, a survey of a sample of physicians in 
current practice and presumably billing the Medicare program. The Office of Analysis and In
spections surveyed, again by mail, a sample of entities providing ancillary services to the 
Medicare population. 

Design 
Both surveys used a two stage cluster design to sample the desired elements. At the initial 
stage, Medicare Pan B carriers were selected at random, with replacement, with probability 
proponional to size. The size of a carrier was determined using the total Medicare dollar 
amounts paid by each carrier in 1986~ Eight carriers were selected. The following table shows 
the carriers selected and the probability associated with each carrier. 
Distribution of Sampled Carriers by Reimbursed Amount Source: 1986 BMAD 
Probability
Carrier  Reimbursed  of Selection 
Arkansas BS  $ 189,533,042.  1.0% 
Florida BS
 $ 1,425,407,061.00  7.4% 
Michigan BS
 $ 774 109,935. 
BS of Kansas City
 $ 155,282,982. 
BS of Greater NY
 $ 1,186,874 282. 
Occidental Ca
 $ 1,525,825,170. 
Travelers CT
 $ 244 404 358.  1.3% 
Nationwide WVa  $ 119,594,198. 
Total Selected  $ 5,621,031,028.  29. 
All Other Carriers  $13,513,861 042.  70. 
National Total
 $19,134,892,070.  100. 
The second stage differed depending upon the element of interest, either physicians or entities 
providing ancillary services. The second stage sampling sttategy and the results of the sam
pling process will be discussed separately for each survey.  .. --.----- - . -------
Office of Audit Physician Survey 
For the second stage of this survey, each carrier was asked to provide a list of physician num 
bers used by the carner for billing purposes. Each number on the list was considered an ele 
ment for purposes of sampling. For each carrier, a simple random sample of 500 numbers 
identified by the car 
was selected. The name and address of the owner of each number was 
rier and a questionnaire was sent. Follow up questionnaires were sent to those physicians for 
whom a response had not been received within two weeks. Subsequent to the second mailing, 
telephone calls were made to those physicians not responding to the second mailing. 
It was recognized early that the physician provider numbers we were using could represent 
either single physicians or groups of physicians. We were not able to distinguish between 
these two occurrences in all carriers prior to mailing the survey instruments. We have con 
sidered a single physician and a physician group as essentially the same. Thus, our findings 
represent the proportion of individual billing numbers identified to Medicare. This should be 
kept in mind when interpreting our results. To avoid cumbersome language, we will refer to 
these billing numbers as physician provider numbers. 
A total of 4 024 were actually selected. Twenty-nine of these numbers were dropped prior to 
mailing the questionnaires. These 29 included numbers for which no address was available or 
the physician identified was under active investigation by our office. Overall, 81 percent of 
the 4 024 physicians selected responded to the questionnaire. The following table gives a 
breakdown of this response rate. 
Office of Audit Physician Survey Responses by Category 
Physician Numbers Selected  024 
Inappropriate numbers or Physician under 
Investigation  (29) 
Survey Questionnaires Mailed  995 
Responses Outstanding 334 (8.4%) 
Responses Returned (Undeliverable) 443 (11.1 %) 
Responses Received 218 (80.6%) 
Responses Indicating No Active 
Medicare Panicipation or 
Tu.n~~t"'l":.".~(' \tn'.r.1_M._P. lv ~plp('tpn Nnmhp, 528 
Active Medicare Providers  690 
Only active Medicare providers are used in the analysis to detennine rates of ownership or 
compensation. The 2,690 represents 67.3 percent of the questionnaires mailed and 83.6 per-
cent of the responses received.  ,.,:-.

'::! .. 
Office of Analysis and Inspections Entity Survey 
For this survey, a sttatified design, using simple random sampling within each sttata, was 
employed. Three types of entities were studied which constituted the three strata. Inde 
pendent clinical laboratories (ICL) and durable medical equipment (DME) suppliers were 
identified using data supplied by the Health Care Financing Administration s (HCFA) sample 
of Part B services. A 5 percent sample of all beneficiaries receiving services is contained in 
the Part B Medicare Annual Data (BMAD) files collected by HCFA. For each of the eight car
riers selected, we generated a list of ICLs and DMEs known to have billed for services in 
1987. Using these lists, ~ simple random sample of 60 provider numbers were selected. 
there were less than 60 numbers, then all of the numbers were included in the sample. 
A third group of entities included in this survey are known as Independent Physiological 
Laboratories (IPL). These entities are independently established, non-physician providers of 
physiological services (Ref: HCFA Carrier Manual). Because these entities were not required 
to bill the Medicare program directly for services performed until April of 1988, the BMAD 
files could not be used to generate lists for sampling. The IPL lists were therefore generated 
by the carriers at our request. These lists were then used to select the 60 entities, or as many 
as were available, for inclusion in the survey. 
In those carriers where we had less than 60 entities of one type or more, we attempted to in-
crease the sample size of remaining group(s) of entities if possible. The sample design, as con
440 entities. Because not all of the carriers had the designated minimum 
structed, called for 1 
number of subject entities, the final sample size is 1  133. Each entity selected was mailed a 
survey instrument. Follow up mailings were made two weeks later and subsequent follow up 
by telephone was used to insure response to the survey. Due to authority vested with the In
spector General, subpoenas were issued, where necessary, to insure a complete follow up. The 
following three tables provide a detailed br~akdown of the number of survey insttuments sent 
and the responses received. 
Results of Sampling 
Independent Clinical Laboratories 
Carrier  Number  Sample Lost to  Percent 
In BMAD  Size  Responses  Followup  Response 
Arkansas BS  93. 
Florida BS  141  96. 
Michigan BS 98. 
nDC.")  V-~I  .Tro.T.i:U_l:1_i:!_.:I_ -~1LY  .;:l"t"  .;:I"t"  ~oJ  1  0:71 J.. ")01. 
BS of Greater NY  102  95. 
Occidental CA  273  85. 
Travelers of CT  98.4% 
Nationwide WVa  94. 
TOTAL  770  396  374  94.4% 
Weighted Average  94.  Durable Medical Equipment Suppliers 
Carrier  Number  Sample
 Lost to  Percent 
In BMAD  Size  Responses
 Followup  Response 
96.4% 
Arkansas BS 
Florida BS  309  95. 
Michigan BS  141  92.4% 
BS arKansas City  97. 
B S of Greater 
 146  86. 
Occidental CA  220  86. 
Travelers of CT  96. 
Nationwide WVa  96. 
TOTAL  024  470  437  93. 
Weighted Average  95. 
Independent Physiological Laboratories 
Carrier  Number  Sample
 Lost to  Percent 
In Carrier  Size  Responses
 Followup  Response 
75. 
Arkansas BS 
275  64. 
Florida B S

Michigan BS
 76. 
BS of Kansas City
 92. 
BS of Greater NY
 77. 
Occidental CA  73. 
Travelers of CT  84. 
Nationwide WVa  84. 
TOTAL  508  267  200  74. 
Weighted Average  81.5% 
The lost to follow up category includes: (1) those entities that were found to be out af busi
ness; and (2) those entities which we were unable to locate through efforts of our own or those 
of the carrier, and were presumed out of business. 
Utilization Analysis 
Data collected by HCFA and the Medicare carriers does not include information to determine 
completely ownership or compensation relationships that may exist among the various 
providers that bill for services to beneficiaries. Nor does information exist as to the identity of 
providers that have referred a beneficiary for services billed by other providers. To overcome 
these difficuities and use HCFA' s BIviAD data, the entity survey described above provided the 
names of any and all physicians maintaining ownership and/or compensation arrangements 
with the sampled entities.  The carriers were asked to divulge all provider numbers associated with each physician iden 
tified in the entity survey. Matching these provider numbers with those numbers found in the 
BMAD billing data allowed us to establish groups of beneficiaries known to have had services 
from physicians with ownership or compensation arrangements. The rates for various services 
in this group of beneficiaries can then be compared to the overall rates of services for all 
beneficiaries.  APPENDIX B
ANALYSIS 
This appendix provides the detailed tables and analysis supporting the results presented in the 
body of this report. The data is reponed in sections defined by subject matter in the title. 
Proportion of Physicians Reporting Ownership and/or Compensation 
Tables B 1 and B2 provide detailed breakdowns by carrier of the number of physicians, or 
physician groups, reporting ownership (Table Bl) and compensation arrangements (Table B2), 
physicians not responding to the survey were assumed to reflect the 
For L.~ese tables, those 
same distributions as those responding, both with respect to active participation in the 
Medicare program and the proportion indicating ownership and compensation arrangements, 
Thus, the number reported in the columns headed "Physicians Sampled" reflects those 
physicians who either responded or we were unable to locate and whose questionnaires were 
were assumed to be in-
undeliverable. Physicians associated with undeliverable questionnaires 
active in the Medicare program for purposes of this survey. 
The weighted proportion of physicians reporting ownership or compensation arrangements is 
based upon only those physicians also reporting that they actively bill the Medicare program. 
Our results estimate that there are approximately 560,000 physicians registered with Medicare 
carriers, of which only approximately 399,000 actually are active in Medicare. Also, Tables 
Approximately 26 percent of the 
B 1 and B2 do not give mutually exclusive counts. 
physicians responding (un weighted percent) reported both ownership and compensation arran 
gements. 
The data reported in this survey represents responses that are self reported by the sampled 
physicians or physician groups. In an attempt to verify the accuracy of the responses, two 
separate approaches were taken. First, two random 10 percent sub samples of all the selected 
physician provider numbers were drawn, by carrier. Given the physicians associated with 
these numbers, auditors endeavored to establish any ownership or compensation arrangements 
these physicians might have through independent sources. The sources used included State 
and local government offices as well as Federal offices located in each region. 
The fIrst subsample consisted of 402 physician provider numbers. We were able to identify 
five physicians, active in the Medicare program, with ownership or compensation arrange
ments. All five of these physicians had responded to our survey. Two of these five physicians 
responded to the survey that they had no ownership or compensation arrangements with Other 
entities billing the Medicare program. We did nOt establish whether these two physicians 
referred patients to the entities so identified. 
The second sample consisted of 400 physician provider numbers. With this sample, we found 
eight physicians meeting our criteria. Seven of these physicians had responded to our survey 
and again, two responded they had no ownership or compensation arrangements with entities  """" 
"" 
~ ""'""' ,. .,...  ."""""';  '"" " "".........  ..""....  ..... .;""-"'-.
to which they referred patients. Again, we did not establish the actual referral practices of 
these two physicians. 
A second approach was to match the physician provider numbers obtained from this survey 
with those collected in the survey of entities. This match found 88 physician provider num
bers. That is, 88 of the physicians selected at random from the eight carriers to receive a 
physician survey questionnaire were subsequently identified by the data collected in the sur
vey of entities as physicians with either ownership or compensation a..TTa-Tlgements from our 
sample of independent clinical laboratories, durable medical equipment suppliers or inde
pendent physiological laboratories. Sixty-five of these 88 physicians responded to the survey 
instrument. Of these 65, 14 (21 percent) indicated on the physician survey that they had no 
ownership or compensation arrangements with other entities to which they referred patients. 
J.'
f'.  could  ,.n",l .....f'.........1 "  tt...TT1 
... .""...u~...  ..""..""........... 1" 
While the conclusions that can be drawn from these two methods of verification are limited, it 
seems apparent that the self reponed nature of the physician survey did not lead to gross 
misstatements of fact on the pan of the physicians. At worst, we may be understating the true 
extent of physician financial relationships that exist. Consequently, we believe that our results 
are an accurate representation of the proportion of physicians who have fInancial relationships 
with other entities, to which they refer patients, and who also bill the Medicare program. 
Utilization Analysis 
The analysis of the effect of physician ownership and compensation arrangements on utiliza
tion of services was conducted by defining two groups of beneficiaries. The fIrSt group was 
defined as all beneficiaries in the carrier BMAD sample with at least one service of the type 
under study. For independent clinical laboratories, this was all beneficiaries with at least one 
service billed to Medicare using the HCFA Common Procedure Code System (HCPCS) where 
the fIrSt digit of the HCPCS was an '  For durable medical equipment suppliers, the 
8' or a 
of the HCPCS was an ' E' and for independent physiological laboratories, the 
fITst digit 
HCPCS codes listed in appendix C were used. Essentially, this group constituted the control 
composed of beneficiaries showing at least one service 
group. The comparison group was 
billed as in the conttol group and also showing a billing for services received from a physician 
known to have an ownership or compensation arrangement with an entity selected in the en
tity survey. All services fora beneficiary so identified were included in the comparison group, 
This form of analysis has two important implications that should be kept in mind when inter
preting the results. First, this approach represents a conservative analysis. The comparison 
group is not excluded from the control group and the comparison group is composed only of 
beneficiaries identified through the entities included in the sample. Those beneficiaries of 
physician owned entities not included in the sample are included in the control group but not 
in the comparison group. An imponant effect of this type of construction is to reduce any ap
parent difference found in utilization rates calculated for each group. Second, any differences 
found should be interpreted as showing an association only between groups and utilization 
because the data lacks the information necessary to 
rates. Causality cannot be established 
detennine which physician prescribed the service billed on behalf of the beneficiary.  Tables B3 through B 12 present the results of the above analysis. For clinical laboratory ser
vices and durable medical equipment services, four types of tables are given. Two tables give 
utilization rates by carrier where the comparison group is composed of beneficiaries seen by 
physicians with a known ownership interest in the entity tabled. One table uses all services, 
regardless of source and the second uses only those services delivered in (or by) the entity. A 
second set of two tables presents the same infonnation when the beneficiary was seen by a 
physician with a compensation arrangement with the entity. 
Only two tables are presented for services involving independent physiological laboratories, 
that is, all services from all sources for beneficiaries of physicians who own (Table B 11) and 
all services from all sources for beneficiaries of physicians with compensation arrangements 
with IPLs (Table B 12). This is due to the fact that lack of direct billing by IPLs in 1987 did 
not allow us to identify IPLs in the BMAD sample data. 
Included in these tables is a column labeled "Ratio." This is the ratio of the utilization rate for 
the comparison group to that of the conttol group. The weighted average of this ratio, along 
with the upper and lower bounds of the 90 percent confidence interval, are given at the bottom 
of each table. This ratio gives the relative increase in the utilization rate of the comparison 
group when compared to the corresponding control group. If the confidence interval includes 
the value 1.00 then one should infer that, on the average, there is no difference in the utiliza
tion rates between the two groups. Student s t-test is provided to test the statistical sig
nificance of the differences between the utilization rates within each carrier. Large absolute 
values of this test statistic would indicate that the observed differences are probably nOt due to 
random chance. 
Analysis of Utilization Comparison and Control Groups 
Of particular concern for this utilization analysis is the OCCUITence of bias due to adverse selec
tion of the comparison group of beneficiaries. This can occur either among the beneficiaries 
or the physicians. By using only those beneficiaries with at least one service in the calculation 
of the utilization rates, we have created homogenous groups, at least with respect to type and 
quantity of services used. This provides some prOtection against bias due to beneficiaries. 
As to the physicians, the only infonnation available in the BMAD data with which to test for 
any bias is the carrier designated specialty of the physician. Because clinical laboratory ser
vices shows the greatest increase in utilization due to physician ownership and compensation 
this will be the focus of an examination of bias due to adverse physician selection. A criticism 
of the utilization analysis with respect to clinical laboratory services, might be that physicians, 
normally associated with high use of clinical laboratory services by vinue of their specialty, 
are the majority of those physicians establishing ownership in independent clinical 
laboratories. To test this, we looked at the distribution, by specialty, of the weighted propor
up and the comp~-ison group. The weighting is 
tions of physicians in both the control  J;;!o
across carriers. The following table gives the proportions of Medicare providers in five 
categories. These categories represent a recoding of the specialty codes used by Medicare car
riers (see appendix D).  Weighted Distribution of Providers by Specialty and Ownership Status

Clinical Laboratory Services

Provider Type  Conttol  Comparison 
Group  Group 
Physicians: 
Medical, Primary Care  59.  50. 
Medical, Not Primary
 11.2%  10. 
Surgeons
 18.  16. 
Others

Clinical Laboratory  10. 
Other Entity 
'lTU"- l,d
 l  1. .fvVv\ .(v\  0I1V-  100. 
This table shows a decrease in the proportion of primary care physicians, an expected increase 
in the proportion of services delivered by Clinical laboratories and an increase in the propor
tion of physicians in the ' Other' category. If we look at the distribution of physicians only, 
then the following table, again using weighted averages across carriers, is derived. 
Weighted Distribution by Specialty and Ownership Status, Physicians Only 
Clinical Laboratory Services 
Provider Type  Conttol  Comparison 
Group  Group 
Physicians: 
64.  59. 
Medical, Primary Care

Medical, Not Primary
 '12.  12. 
Surgeons
 19.  19. 
Other

Total  100.  100. 
This version of the table still shows the decrease in the proportion of primary care physicians 
and the increase among the ' Other ' type of physicians. What is imponant in this comparison 
is the fact that the ' Medical, Not Primary ' group of physicians contains those specialist most 
proponion of 
likely to use clinical laboratory services according to conventional wisdom. The 
this category in both groups is essentially equal. This would indicate that physicians normally 
associated with higher use of clinical laboratory services are not overrepresented in the com
parison group.

Because of referrals patterns inherent in medical care delivery and the lack of referring 
physician identification on bills in the BMAD data, it is not possible to detennine to what ex-
tent this difference in proponions might contribute to the differences seen in utilization rates 
for clinical laboratory services. However, the analysis represented here would indicate that 
the difference in utilization rates among beneficiaries is not due to any over representation of  ~_- .._  j:  ~..." ....-
physician providers associated with greater use of these services. Thus, any bias due to ad-
verse selection of physician providers would appear to be minimal. 
Calculation of Payments 
The calculation of payments associated with this report is given only for physician ownership 
in the case of independent c1inicallaboratories. To do this we must estimate a savings based 
on th.e element of selection, which for this study is the independent clinical laboratory. Thus it 
is not possible to make such an estimate for independent physiological laboratories as our 
selection was not from the BMAD data. Durable medical equipment suppliers showed no sig 
nificant effect due to physician ownership. 
'T.'lt.U- I;; .lcV_ U11V__W_. .l1l5 La\.U..1.l-v _ ; \,.u..u~w...;n,  U..\l.~.. ~U U~.I.U~Uk~\-.i.l U.l Ul\.....l."1'1~~-"~"U~ .u...."1'~U..L.~  "..'.U l~U..... "'.....l. l"""' hvA,,""'",'"f"",",",,,;""""",  1"'1 M"" Hl h;"h thp
1-""'" "....-.. 
sampling was based, by carrier. 
Carrier Total Num.  Number of ICLs Sampled  Prop. 
of ICLs  Total  Unowned  Owned  Owned 
Arkansas BS  25. 
Florida BS  141  33. 
Michigan BS  20. 
BS of Kansas City 
BS of Greater NY  102  17. 
Occidental Ca  273  30. 
Travelers CT  34. 
Nationwide WVa  42. 
U sing the BMAD data, we determined the total number of beneficiaries receiving services and 
the total allowed amounts for all of the labs in the sample. This information is shown in the
following table. 

Carrier  Number of Benes.  Total Allowed 
Unowned Owned  Unowned  Owned 
Arkansas BS  827  280  110,711  $ 60,705 
Florida BS  16,519  906  $1,075,730  $ 395,848 
Michigan BS  18,629  180  279,873  $ 176 950 
BS of Kansas City  811  229  300,417  $ 33,303 
BS of Greater NY  23,390  633  134 536  $ 80 824 
Occidental Ca  860  364  650,481  $ 136, 146 
Travelers CT  10,355  152  543,401  $ 148,234 
Nationwide WVa  830  234  43,576  864 
U sing these two tables, it is possible to calculate a savings per independent c1inicallaboratory 
and project this to the total estimated savings per carrier (the BMAD sample is a 5 percent 
sample of beneficiaries). Since each carrier, and the subsampling therein, is independent of 
another, a projection to the nation can be made for each carrier in the sample. The average of 
these individual estimates represents a valid projection to the nation for the increase in al 
lowed amounts in 1987 that can be associated with physician ownership of independent c1ini- , ,- 
/",\~~  ... -,-' -
callahoratories. The following table shows costs of $28. 1 million due to increased utilization 
associated with physician ownership of independent clinical laboratories. The 90 percent con 
fidence interval of this estimate has a lower limit of $13.7 million and an upper limit of $42.4 
million. 
Carrier  Sampling  Est Costs  Est Costs  National 
Fraction  in Sample  Per carrier
 Estimate 
Arkansas BS  1.0%  $10,577  211 ,545  $21, 154 509 
Florida BS 7.4%  $76,365 $ 3,473,385  $46,937,637 
Michigan BS 0%'  $27, 177 810,713  $20,267,833 
BS of Kansas City $19,004 380,072  $47,509,056 
BS of Greater NY $ 1,615 48,441  $, 781,309 
V~"'l:U,."I'_H_U._U l  (v'U"'I " V.V(\0/1V-  q"':~~Vh' vMv~'"   It ~ ?7(, 4'1  $40;955;260 
Travelers CT  1.3%  $35,303  762,091  $58,622 375 
Nationwide WVa  ($ 3,422)  68,433)  ($11,405,495) 
Average  $28,102,811 
90% Confidence Interval  Lower Limit  $13,780,546 
Upper Limit  $42,425,075  Table B1 
Estimates of Rates of Physician Ownership
N umber 
Percent of 
Indicating 
Carrier  TOtal Num. Physicians Active  Active with 
Physicians Sampled Physicians  Relationship Relationship 
Arkansas BS  173  493  396  16. 
Florida BS  39,905  432  313  20.4% 
Michigan BS  840  420  278 
BS of Kansas City  214  449  362 
BS of Greater NY 38, 847  474  351 
Occidental Ca  32,432  482  391  15. 
Travelers CT  927  465  354  13. 
Nationwide WVa  549  446  245  10. 
Weighted Average  11.8% 
Table B2
Estimates of Rates of Physician Compensation Arrangements 
Number  Percent of 
Carrier	 Total N urn.  Physicians Acnve  Indicating  Active with 
Physicians  Sampled  Physicians  Relationship  Relationship 
Arkansas BS  173  493  396  12.4%

Florida BS  39,905  432  10.

Michigan BS  21,840  420  278

BS of Kansas City  214  449  362

BS of Greater NY 38, 847  474  351

Occidental Ca  32,432  482  391

Travelers CT  927  465  354

Nationwide WVa  549  446  245

Weighted Average  Table B3 
Comparisons based on Lab Services

All Services

Physicians with Ownership

Beneficiaries of 
Carrier  All Beneficiaries  Physician-Owners 
Std  Std 
Avg  Err  Avg  Err  Ratio  T- Test 
Arkansas BS  11, 13~  5.3  196  1.32  612 
Florida BS  73,270  760  11.3  1.40  23. 985 
Michigan B S  36,289  1,481  18.  0.51  1.87  16. 318 
BS of Kansas City  403  274  1.56  207 
BS of Greater NY  40, 320  636  0.30  1.02  330 
Occidental Ca  53,018  649  11.4  1.30  354 
Travelers CT  236  186  10.  1.70  11.387 
Nationwide WVa  981  220  1.00  000 
Weighted Averages  1.45 
90% Confidence Interval	 Lower Limit  1.28 
Upper Limit  1.63 
Table B4 
Comparisons based on Lab Services

Services from ICL Only

Physicians 
'-:lith Ownership

Beneficiaries of 
Carrier  All Beneficiaries  Physician-Owners 
Std  Std 
Avg  Err  Avg  Err  Ratio  T- Test 
Arkansas BS  332  782  1.42  600 
Florida BS 46,332  803  1.35  18.418 
Michigan BS 22,280  8.4  025  12.  1.52  209 
BS of Kansas City 396  123  12.  1.06  326 
BS of Greater NY 25, 165  455  760 
Occidental Ca 39,207  092  1.32  591 
Travelers CT 10, 121  013  1.55  589 
Nationwide WVa  942  4.4  0.41  1.05  0.454 
Weighted Averages  1.34 
90% Confidence Interval  Lower Limit  1.04 
Upper Limit  1.65  ... 
("';...., 
Table B5 
Comparisons based on LAB Services
All Services 
Physicians with Compensation 
Beneficiaries of 
Carrier  All Beneficiaries  Phy wi Comp 
Std  Std 
Err  AvO'  EIT  Ratio  T- Test 
/:I 
Arkansas BS  11 , 135  789  1.28  5.423 
Florida BS
 73,270  114  1.00  000 
Michigan BS
 36,289  740  12.  0.30  1.29  089 
JDJ~~  ~v.+. V.......n.....~"u."" 
n" '"'UJ
 v,~Av(\-~,  5.5  178  1,55  214 
BS of Greater NY
 40,320  8.4  1.29  182 
Occidental Ca
 53,018  426  11.1  1.26  060 
Travelers CT  236  10.  1.15  1.59  211 
Nationwide WVa  981  176  1.17  1.414 
Weighted Averages  1.32 
90% Confidence Interval	 Lower Limit  1.21 
Upper Limit  1.43 
Table 86 
Comparisons based on LAB Services 
Services'from ICL Only
Physicians with Compensation 
Beneficiaries of 
Carrier  All Beneficiaries  Phy wi Comp 
Std  Std 
Avg  Err  Avg  Err  Ratio  T- Test 
Arkansas BS  332  545  11.289 
Florida BS  46, 332  1.03  344 
Michigan BS  22,280  8.4  110  1.06  776 
BS of Kansas City  396  1.29  1.38  1.391 
BS of Greater NY  25, 165  1.38  196 
Occidental Ca  39,207  280  10.  1.54  931 
Travelers CT  10, 121  1.08  1.49  2.493 
Nationwide WVa  942  1.33  030 
Weighted Averages 1.00 
90% Confidence Interval  Lower Limit 
Upper Limit  1.18  ....  ....
Table B7 
Comparisons based on DME Services

All Services

Physicians with Ownership

Beneficiaries of 
Carrier  All Beneficiaries  Physician-Owners 
Std  Std 
i'A\ .v--g- 
 EIT  Avg  Eli  Ratio T- Test 
Arkansas BS  345'  132  1.01  1.31  1.826 
Florida BS  7,434  522  0.35  1.16  2.490 
Michigan BS  942  7.3  1.57  627 
BS or Kansas City  II  .c t::  ...J,U.c  JJ:. JJ:  "'t. ~  f\  "/7"'t  f\  "v::"':1)  '10J" 'J:.:U  
BS of Greater NY  703  1.43  1.53  1.808 
Occidental Ca  5,479  6.4  247  1.02  162 
Travelers CT  914  13.  1.52  589 
Nationwide WVa  653  1.03  132 
Weighted Averages  6.4  6.4  1.00 
90% Confidence Interval  Lower Limit 
Upper Limit  1.21 
Table 88 
Comparisons based on DME Services 
Services from DME Supplier Only 
Physicians with Ownership 
Beneficiaries of 
Carrier  All Beneficiaries  Physician-Owners 
Std  Std 
Avg  Err  Avg  Err  Ratio T- Test 
Arkansas BS  343  132  1.01  1.31  1.826 
6 0. 
Florida BS  378  521  1.14  214 
Michigan BS  931  7.4  1.57  690 
1 0. 
BS of Kansas City  773  916 
BS of Greater NY  671  1.46  1.49  1.635 
1 0. 
Occidental Ca  169  230  647 
Travelers CT  866  14. 1, 8. 1.64  630 
0 0. 
Nationwide WVa  625  542 
Weighted Averages  6.4  6.4  1.00 
90% Confidence Interval  Lower Limit 
Upper Limit  1.22  . ,...

Table B9 
Comparisons based on DME Services

All Services

Physicians with Compensation

Beneficiaries of 
Carrier  All Beneficiaries  Phy wi Comp 
Std  Std 
Avg  Err  Avg  Err  Ratio  T- Test 
Arkansas BS  345  2.43  1.16  0.409 
Florida BS
 7,434  1.10  1.18  906 
Michigan BS
 942  1.210 
BS of Kansas City
 776  0.36  "f..  J1..  o~Jn:1  .c...  1...1J::.'J1" A" 
BS of Greater NY
 703 
Occidental Ca
 5,479  6.4 
Travelers CT
 914 
Nationwide WVa  653  1.03  1.13  742 
Weighted Averages  6.3  1.05 
90% Confidence Interval	 Lower Limit 
Upper Limit  1.36 
Table B1 0

Comparisons based on DME Services
Services from DME Suppliers Only 
Physicians wlth Compensation 
Beneficiaries of 
Carrier  All Beneficiaries  w/Comp 
Phy 
Std  Std 
Avg  Err  Avg  Err  Ratio  T- Test 
Arkansas BS  343  2.43  1.16  0.409 
Florida BS
 378  1.14  1.19  962 
Michigan BS
 931  7.4  1.257 
BS of Kansas City
 773  1.59  1.534 
BS of Greater NY
 671 
Occidental Ca
 169 
Travelers CT
 866 
Nationwide WVa  625  1.07  1.13  714 
Weighted Averages  6.4  1.07 
90% Confidence Limit  Lower Limit 
Upper Limit  1.38  Table B11 
Comparisons based on IPL Services
All Services
Physicians with Ownership
Beneficiaries of
Carriers All Beneficiaries  Physician-Owners
Std  Std 
Avg  Err  Avg  Err  Ratio  T- Test 
Arkansas BS  8~0  1.4  0.41  1.50  1.705 
Florida BS 292  1.7  181  1.9  1.12  209 
Michigan BS 10,808  1.7  183  1.18  985 
BS of Kansas City 564  1.5  1.5  1.00  000 
BS of Greater NY 8,417  1.6  1.25  850 
Occidental Ca 741  1.5  712  1.7  1.13  851 
Travelers CT 674  1.5  0.33  1.80  635 
Nationwide WVa  556  1.5  1.5  1.00  000 
Weighted Averages  1.5  1.7  1.13 
90% Confidence Interval  Lower Limit 
Upper Limit  1.29 
Table B12 
Comparisons based on IPL Services
All Services
Compensation
Physicians  w~th 
Beneficiaries of
Carrier All Beneficiaries  Phy wi Comp
Std  Std 
Avg  Err  Avg  Err  Ratio  T- Test 
Arkansas BS  880  1.4  1.86  724 
Florida BS 292  1.7  361  1.6  1.961 
Michigan BS 10,808  1.7  082  1.8  1.06  162 
BS of Kansas City  564  1.5  134  1.9  1.27  288 
BS of Greater NY 417  1.6  1.9  1.19  1.427 
Occidental Ca 741  1.5  518  1.8  1.20  883 
Travelers CT 674  1.5  1.6  1.07  587 
Nationwide WVa  556  1.5.  1.7  1.13  1.789 
Weighted Averages 1.5  1.8  1.18 
90% Confidence Interval  Lower Limit  1.01
Upper Limit  1.34  APPENDIX C

HCFA COMMON PROCEDURE CODING SYSTEM (HCPCS) 
Codes used to define Independent Physiological Labs. 
70450  71250  71550  72125  72140 
72192  72196  73200  73220  73700 
73720  74150  74181  76070  76700 
78000  78001  78003  78007  78010 
78015  7~O16  78102  78103  78104 
78170  78186  78202  78215  78216 
78282  78290  78300  78305  78306 
78310  78445  78600  78606  93258 
93259  93262  93263  93266  93268 
93269  93270  93720  93721  93722 
93740  93850  93860  93870  93890 
93910  93950  93960  M0520  M0525 
M0526  M0530  M0535  M0560  M0570 
M0575  MO580  M0585  M0590  M0592 
Codes used to define Magnetic Resonance Imaging Services. 
These Services are included in the definition of IPLs. 
70540  70550  70551  70552  72141 
72142  72143  72144,  73221  73721 
75552  76400  APPENDIX D
RECODING OF CARRIER PROVIDER SPECIALTY 
Carrier Specialty Codes Included 
Category Created 
Physician, Medicai  General Practice 
Primary Care  Family Practice 
Internal Medicine 
Pediatrics 
Geriatrics 
Physician, Medical,  Allergy
Other than Primary  Cardiovascular Disease
Dennatology
Gasttoenterology
Neurology
Physical Medicine and Rehabilitation
Psychiatry
Pulmonary Disease
Radiology 
Nuclear Medicine 
Nephrology 
Physician, Surgeon(cid:1) General Surgery 
Oncology, Laryngology, Rhinology 
Neurological Surgery 
OB - Gynecology 
Ophthalmology 
Orthopedic Surgery
Plastic Surgery 
Proctology 
Thoracic Surgery
Urology 
Hand Surgery 
Podiatry - Surgical Chiropody 
Other Physician(cid:1) Anesthesiology 
Gynecology (Osteopaths only) 
Manipulative Therapy (Osteopaths only) 
Obstemcs (Osteopaths only)
Ophthalmology, Otology, Laryngology, Rhinology (Osteopaths only)
Oial Surgery (Dentists only)
Pathologic Anatomy; Clinical Pathology (Osteopaths only)
Pathology
Peripheral Vascular Diseases or Surgery (Osteopaths only)
Psychiatry, Neurology (Osteopaths only) 
Roentgenology, Radiology (Osteopaths only) 
Radiation Therapy (Osteopaths only) 
, Chiropractor, Licensed 
Optometrist  Category Created  Carrier Specialty Codes Included 
Miscellaneous 
Other Physician 
(cont.)

Clinical Laboratory
 Independent Laboratory (Billing independently) 
Other Entities  Medical supply company with C.

Medical supply company with C.

Medical supply company with C.

Medical supply company not included above

Individual CO

Indi vidual CP 
lndi vidual CPO 
Individuals not included in 55, 56, 57 
Ambulance service supplier, e.g., private 
Public Health or Welfare Agencies 
Voluntary Health or Charitable Agencies 
Psychologist (Billing independently)

Portable X-ray Supplier (Billing independently)

Audiologists (Billing independently) 
Physical Therapist (Billing independently) 
Clinic or other group practices 
All other, e.g., Drug and Department Store

Unknown

Unknown
 APPENDIX E
ADDITIONAL CONTRIBUTORS TO THE REPORT 
Office of Analysis and Inspections 
Headquaners  New York  Chicago 
Brian Ritchie Dawn McDonald Phillip Onofrio 
Jennifer Cryor  Tracey Kennedy  Margaret Shell 
Bill Counihan  Pamela May 
Aquilla Box 
Philadelphia  San Francisco  Atlanta 
Joe Goodyear  Neil Merino  Jim Wilson 
Nancy Molyneaux  Mollyann Brodie 
Roben Gibbons 
CoITinne M. Harol 
Office of Audit 
Headquaners  Boston  New York 
George Reeb  William Hornby  Raymond 1. Yak 
John Hapchuk  Herve Guerette  James P. Edert 
Janet Rankin  Hank Vanderbeek  Romula Capisttano 
Rose Hatten Steve Conway  Roben Huot
Robert Champagne  Margaret Wallace 
Philadelphia  Atlanta  Chicago 
James Maiorano  Gerald Dunhan  Paul Swanson 
Joanne Jackson  Bernard Rach  Allen Peters 
Joseph Cardamone  Tammie Anderson 
Robert Templeton 
Dennis Hannan 
Dallas  Kansas City  San Francisco 
Joseph Smith  Dennis Dewitt  Gordon Fickel 
c.B. Goff  John Harrington  Gerald McGee 
Gary Gunter  Anna Greenhalgh 
Ton Son Lam 
Akop Baltayan 
Paul Scott 
Michael Montgomery 
Office of General Counsel 
Elizabeth Weiss, Thomas Crane