RRANGEMENTS 
FINANCIAL 
BE/ PHYSICIANS AND HEALTH 
TWEEN 
BUSINESSES: PERSPECTIVES 
CARE 
CARE PROFESSIONALS 
OF  HEALTH. 
Management Advisory Report 
Richard P. Kusserow 
INSPECTOR, GENERA 
OAI-12-88-01411  May 1989  EXECUTIVE SUMMARY 
OBJECTIVES 
This inspection repons on results;of interviews conducted with health care professionals and 
regulatory agencies concerning the practice of physician ownership and self-referral. The pur
pose of these interviews was to elicit infonnation on the range of opinions that exist regarding 
twhe himpiactc of hfma nctial ahrraengeyme ntsr betewefen pehyrsici ansp anad ottheri heealthn catre esntit.ies  to 

BACKGROUND 
In the last 10 years, increasing attention has been focused on the fmancial arrangements that 
exist between physicians and the health care businesses to which they refer patients. In 1980, 
The New England Journal  by the journal' s editor, 
an influential article in  of Medicine 
Dr. Arnold Relman, elicited strong debate in the medical community concerning the ap
propriateness of such arrangements and the impact that they might have on medical judgments 
made by physicians in determining what services their patient's require. Since then, public 
scrutiny of those financial arrangements has increased. 
Despite the intense debate over this issue, few studies have been conducted to determine the 
extent of such arrangements between physicians and the health care businesses to which they 
refer patients, or the impact of such arrangements on utilization of services, cost and pricing, 
competitiveness, and quality of care. This inspection is one in a series of repons issued by the 
Office of Inspector General (OIG) on this subject. 
METHODOLOGY 
The OIG conducted opinion interviews with 143 State officials, 17 health care experts and as
sociation representatives, 8 Medicare carriers and over 40 Medicare providers. These inter-
views were conducted face-to-face or by telephone. 
FINDINGS 
Most respondents held strong opinions on the effect of physician ownership on the com
petitiveness of the market. The majority of State officials, nonphysician-owners and the 
associations we interviewed argued that physician ownership and self-referral has a nega
tive impact on the comp~titiveness of the health care market, since physicians control both 
supply and demand in such circumstances. Physician-owners argue that competition is 
heightened, since physician investment creates more health care entities among which to 
choose.  Cenain respondents argue that the practice can increase health care costs and diminish 
quality since, without competition for referrals, providers can act freely in regard to price 
and service. Title XIX, States ' attorneys, and the Medicaid Fraud Control Units (MFCU) 
representatives were especially concerned about costs, although representatives from medi
cal boards generally thought the practice has a neutral eJfect on ' both cost and quality of 
that their financial involvement will help to ensure good 
care. Physician-owners suggest 
quality of care and have no detrimental affect on costs. 
Respondents were split on whether Congress should act to regulate such arrangements. 
The majority of physician-owners and State Board representatives argued against Congres
sional action; most MFCU officials, title XIX officials, l1onphysician-owners and most of . 
the associations we intervie~ed argued for various kinds of congression~ intervention.  .......................................................................................................................................:.........................................
TABLE OF CONTENTS 
EXECUTIVE SUMMARY 
INTRODUCTION 
Background........................................... 
Objectives. 
Methodology .......................................... 
FINDINGS 
FUJ:=ITHERREPORTS 
ill  , "

INTRODUCTION
BACKGROUND
In the la~t 10 years, increasing attention has been focused on the financial arrangements that
exist between physicians and the health care businesses to which they refer patients. In 1980,
by the journal's editor, Dr.
an influential article in  The New England Journal of Medicine 
Arnold Relman, elicited strong debate in the medical community concerning the appropriate 
ness of such arrangements and the impact that they might have on medical judgments made by
physicians in determining what services their patients require. Since then, public scrutiny of
those financial arrangements has increased. 
In 1982, the Subcommittee on Oversight and Investigations, Committee on Energy and Com 
merce, U. S. House of Representatives, expressed its concern regarding the emergence of such 
arrangements. In 1988, a bill was introduced in the U.S. House of Representatives that would 
generally prohibit physicians from referring their patients to health care businesses in which 
they hold fmancial interests. That bill  The Ethics in Patient Referrals Act," was reintroduced 
in 1989 and is now pending. The Subcommittees on Health and Oversight, Committee on 
Ways and Means held a joint hearing on the bill in March 1989. Further hearings are an 
ticipated. 
Despite the intense debate over this issue, few studies have been conducted to determine the
extent of such arrangements between physicians and the health care businesses to which they
refer patients, or the impact of such arrangements on the use of services, cost and pricing, com 
, petitiveness, and quality of care. This inspection is one in a series of repons issued by the
Office of Inspector General (OIG) on this subject. 
OBJECTIVES
Section 203(c)(3) of the Medicare Catastrophic Coverage Act of 1988 mandated the Office of
Inspector General to conduct a study and repon to Congress concerning:
physician ownership of, or compensation from, an entity providing items or services 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 whi~h they are marketed to physicians; 
the potential of such ownership or compensation to influence the decision of a physician
regarding refeITals and to lead to inappropriate utilization of such items and services; and
the practical difficulties involved in enforcement actions against such ownership and com 
pensation arrangements that violate current anti-kickback provisions. . '
As pan of this study, the Office of Inspector General interviewed State officials, industry and 
association representatives, Medicare carriers, and Medicare providers regarding their perspec 
tives of physician ownership and self-referral. This inspection repons on the results of those 
interviews. The purpose of the interviews was to elicit information regarding the range of 
opinions that exist on the impact of fmancial arrangements between physicians and other. 
to which they refer patients. 
I health care entities 
METHODOWGY
The OIG conducted opinion interviews with the following:
. (1) one hundred and fony-three State officials in 50 States representing Medical Licensing
Boards responsible for the liCensing and disciplining of physicians, title XIX agencies 
responsible for administering State Medicaid programs, Medicaid Fraud Control Units 
(MFCUs) and State Attorney General' s offices responsible for pursuing cases of 
Medicaid fraud and abuse; 
(2)(cid:1) seventeen health care expens and representatives from numerous associations, includ 
America; 
ing the American Medical Association, American Imaging Association, American Clini 
cal Laboratory Association, American Society of Internal Medicine, American College 
of Radiologists, College of American Pathologists, and Consumer Federation of
.,.c.  (3)(cid:1) eight randomly-selected Medicare caniers responsible for review and processing of Part 
B claims submitted by providers, including Travelers of Connecticut, Empire of New 
York, Blue Shield ~f Florida, Blue Shield of Kansas City, Blue Shield of Michigan 
Occidental of California, Blue Shield of Arkansas, and Nationwide of West Virginia; 
(4)(cid:1) a subsample of over 40 Medicare providers selected in our national survey of providers, 
consisting of both physician-owners and nonphysician-owners.  FINDINGS
Most respondents held strong opinions on the effect of physician ownership on the competitive 
ness of the health care market. Some respondents strongly feel that the 
practice increases

competition by expanding the number of health care providers, while others feel just as
monopoly for physicians in the market.
strongly that the practice creates 
Health care providers and experts' are split on the competitive effects of physicians ownership 
and self-referral. Physicians who ,have become involved in such arrangements, and the as 
sociations that represent them, argue that their investments increase competition in the health 
care market by creating new entities providing services. Some observers, including health 
care providers who compete with physician-owners, see the practice as anti-competitive, with 
higher potential for overutilization of services and higher cost to consumers. Most State offi 
cials we interviewed agree with this view, although representatives from medical boards were 
less inclined to view the practice as anti-competitive than colleagues in the Medicaid Fraud 
Control Units (MFCUs) or title XIX offices. 
Nineteen of the 24 physician-owners we interviewed (79 percent) believe their investments
either contribute to increased competition or have a neutral effect on the market. Several 
physician-owners we interviewed argued that physicians see the need for service in a com 
munity before others, and consequently can contribute to improving access and the
availability of services through prudent investment. They suggested that such investments
also can enhance ,fpmpetition by creating more health care entities from which patients can
choose and that independent, non-physician owned entities simply resent the introduction of
new competitive forces in the marketplace. Proponents of this view cite the 1987 Federal
Trade Commission position that physician ownership and referral has pro-competitive effects,
including increased investment activity by physicians who identify a need in tb.eir community
and physician oversight to ensure better quality care for their patients.
Fifteen of the 23 nonphysician-owners (65 percent), 27 of the 36 :MFCU representatives (75 
percent), and 25 of the 49 title XIX representatives (51 percent) we interviewed believe the 
practice is essentially anti-competitive. For example, one :MFCU director stated that based on 
his experience, physicians would "invariably" refer their patients to the entity in which they 
had an interest. A director of a Medicaid agency in another State feels that "when a physician 
owns another health care entity he/she naturally refers each patient to his/her own facility, ex 
facilities which may be better or less expensive. 
cluding other"
Eleven of the 17 associations consulted (65 percent) shared this view. One association repre 
sentative argued:that other entities competing With the captive entity can not fairly compete on 
the basis of price, quality or service--because no matter how competitive they are in these 
areas, the physician will always refer to the entity in which he or she ha~ an economic interest. 
The physicians-owners are not putting their referrals into the stream of commerce," one con 
sumer advocate argued. "EventUally a deterioration in price and quality will result where com 
petition does not exist  .,... 
Respondents generally felt that the practice has little effect--either positive or negative--on 
quality of care. However, different respondents again argued both sides. 
Sixty-seven percent of the State officials interviewed. felt that physician ownership has no ef 
fect on quality of care or had no opinion on the matter. Nonphysician-owners were the most 
likely group to see the practice as detrimental to quality of care; almost half of the non-
physician-owners we interviewed expressed this opinion. Physician-owners were the most 
likely group to believe the opposite; 16 of 24, or 67 percent; considered their investments to 
have a positive effect on, the care patients receive. 
The respondents who consider physician ownership and self-referral to have a positive impact 
on health care feel it is primarily due to the physician s knowledge and concern for the busi 
ness. One respondent stated that physician ownership of health care entities to which they 
refer "provides continuity of care and could possibly assure better quality of care. " Some 
respondents thought that quality assurance would be a higher priority with physician-owners 
or investors. 
Other respondents thought that physicians might make good managers because they have a 
working knowledge of the product and services delivered. Some respondents, however, chal 
lenged this view. "In the limited partnership arrangements," argued one association repre 
sentative, "physicians have absolutely no connection with the management or day to day 
operations. How can a limited partner ensure quality?" 
Many physician-owners interviewed cited the ability of their investment dollars to meet a com 
munity need as one way to increase quality of care on a general scale. Accessipility of ser 
vices in rural and remote regions was stated as a possible advantage of physician investment 
in health care enterprises by several respondents. One Medicaid official noted: "If the 
the community. " 

physician sets up in a rural area where no health care businesses exist, it is a defmite benefit to
Most of the concerns expressed regarding quality of care were related to unnecessary testing. 
For example, one State official maintained that "poor or inadequate care may result if the 
physician is solely motivated to provide additional services from his business arrangements in 
order to increase revenues. " A nonphysician-owner argued that, in situations where a 
physician has a financial interest in another health care business, "(vJolume takes precedence 
over quality and medical necessity. 
The individuals \ve interviewed disagreed on the impact of physician ownership and self-refer 
ral on the total cost of health care. 
Generally, those who believe competition will decrease 

a result of these arrangements believe costs will eventually increase. Others believe that ar 
rangements between physicians and health care entities will  small
have no impact on cost; 
minority believe costs will decrease. Respondents further disagreed on the effect of such arrangements on the total cost of health
care. The MFCU and title XIX officials were especially concerned that financial arrangements
between doctors and other health care businesses will increase costs. Representatives of medi 
; cal boards and physician-owners believe costs will neither increase nor decrease as a result of
such arrangements. Few respondents in any of the groups we,interviewed believe costs would 
actually decrease as a result of physician financial involvement in the market.
Of those expressing concern regarding .higher costs, one State official remarked that "the finan 
cial incentives cause the costs to rise." Another stated: "If the physician is fmancially 
motivated, the obvious result will be an increase in prices." The director of a Medicaid 
agency feels that "physicians control the marketplace and drive up the costs.' They have a cap 
tive audience for their products and the patients invariably go where their doctor has sug 
gested." Some respondents argued that the issue of cost is directly related to the issue of 
competition; where competition is dimiJlished, providers can raise prices with impunity. 
These respondents believe that physician ownership impede competition and creates the pos 
sibility for inefficient and costly health care. 
Of the smaller group (4 percent of State officials, 25 percent of physician-owners) who feel
costs would decrease as a result of physician ownership and self-referral, several believe that
if doctors own a facility the proximity of the facility and the convenience to the doctor may
increase. 
decrease the cost to the patient. This group shared the view that the competitive impact of
competi 
physician ownership and investment affects costs; but they argue that the  increased 
not
tion created by new providers entering the market will cause prices and costs to  decrease, 
Respondents generally agreed that ethical questions come into consideration when 

physician-owner refers a patient to an entity in which he or  financial interest. 
she has 
Both those supporting and opposing physician ownership and referral believe that such arran 
gements can result in ethical dilemmas for physicians. Nineteen of the nonphysician-owners
(83 percent), 13 of the associations (93 percent), and 13 of the physician-owners (53 percent) 
we interviewed believe that a conflict of interest may exist with respect to such arrangements.
One-third of the representatives interviewed from State medical boards cited potential conflict
of interest as a disadvantage of the practice. .
s just one more factor other than medical necessity which can influence a physician 
decision " one respondent said. An association representative noted that, when a doctor orders 
a service or item, he acts as the consumer for the patient and should not have a competing 
fiduciary intere Medical ethics aside, this pra~tice violates tenets of basic business ethics, 
st. "
he argued. However, physician-owners and others that are supponive of the practice suggest 
that physicians can deal with ethical issues that arise and make the right decision. "  .s in the 
eye of the beholder " one physician-owner said. "It depends on whether the physician allows it 
to cloud his decision-making.  Not surprisingly, respondents disagreed on the needfor Congress to legislate in this area. 
Thirteen of the physician-owners (54 percent) and 26 of the State board representatives (57 
percent) we interviewed did not believe that congressional intervention in this area is war-
ranted. These respondents believe that abusive arrangements, when they exist, should be ad-
dressed on a case-by-case basis. Nonphysician-owners (87 percent) and the association 
r~presentatives (65 percent) we spoke to tend to argue that congressional intervention is 
needed. The IvIFCU representatives, States' attorneys, and title XIX representatives agreed. 
Physician-owners argue that post-payment and utilization review by third party payors is suffi
cient to address over-utilizers and abusers of the system, and that legislation to prohibit owner-
ship will simply "'bun the 99 percent of the physicians who are honest. " Most of the State 
respondents opposin.g congressional action believe physician ownership to be a State issue. 
Others oppose congressional intervention because they feel physician ownership is not a 
problem. "This is small ticket stuff, insignificant in terms of the total dollars being spent on 
health care," one official argued. One respondent felt that "there are much more important 
health issues and national problems than physician ownership. 
The majority of MFCU representatives, title XIX officialS, States ' attorneys, and nonphysician 
owners suppon Federal legislation of some kind. Many suppon laws to generally prohibit 
physicians from referring patic:mts to a health care entity in which they have a financial inter
est. Others advocate mandated disclosure of financial interest, or simply want Congress to 
draw the line between legitimate and illegitimate arrangements.  . '
FURTHER REPORTS
On May 1, 1989
, the GIG reported to Congress on the areas outlined in Section  203(c)(3) 
the Medicare Catastrophic Coverage Act. This report, "Financial Arrangments Between 
Physicians and Health Care Businesses: Repon to Congress," (OAI-12-88-01410), detailed in 
fonnation obtained from OIG surveys in regard to the nature, range and prevalence of owner-
ship and compensation arrangements between physicians and health care businesses. 
Information from the Medicare Part B Annual Data (BMAD) files was used to assess the use 
of selected ancillary services of patients associated with physician-owners or investors, as 
compared to the use of ancillary services of Medicare beneficiaries in general. Finally, the 
repon detailed the enforcement experiences of the GIG in connection with physician owner-
ship or compensation arrangements which violate Federal anti-kickback laws. 
The GIG also issued a Management Advisory Repon in April 1989, "Financial Arrangements 
Between Physicians and Health Care Businesses: . State Laws and Regulations, 
(GAI-12-01412). This repon described certain State laws and regulations which affect 
physician ownership and self-referral.
The OIG will produce additional repons on the subject of financial arrangements between 
referring physicians and other health care businesses. Repons focusing on physician owner-
ship and other market forces in the independent clinical laboratory, independent physiological 
laboratory and durable medical equipment industries will be issued in fall 1989.