Department of Health and Human Servces


OFFICE OF


INSPECTOR GENERAL


STATE PROHIBITIONS ON HOSPITAL


EMPLOYMENT OF PHYSICIANS


, SERVIQ t-\ 

Richard P. Kusserow 

INSPECTOR GENERA 

1' 

d,(J NOVEMBER 1991 
OFFICE OF INSPECfOR GENERA


The mission of the Offce of Inspector General (OIG), as mandated by Public Law 95-452, as 

amended, is to protect the integrity of the Department of Health and Human Servces' (HHS) 

programs as well as the health and welfare of beneficiaries served by those programs. This 

statutory mission is carried out through a nationwide network of audits, investigations, and 

inspections conducted by three DIG operating components: the Offce of Audit Servces, the 

Offce of Investigations, and the Office of Evaluation and Inspections. The OIG also informs 

the Secretary of HHS of program, and management problems, and recommends courses to 

correct them. 

OFFICE OF AUDIT SERVICE 

The OIG's Office of Audit Servces (OAS) provides all auditing servces for HHS, either by 

conducting audits with its own audit resources or by overseeing audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors in 

carrg out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and efficiency throughout the Department. 

OFFICE OF INTIGATIONS 

The OIG's Offce of Investigations (01) conducts criminal, civil, and administrative 

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 

unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions 

administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 

control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 

OFFICE OF EVALUATION AN INSPECfONS 

The OIG's Office of Evaluation and Inspections (OEI) conducts short-term management and 

program evaluations (called inspections) that focus on issues of concern to the Department 

the Congress, and the public. The findings and recommendations contained in these inspection 

reports generate rapid, accurate, and up-to-date information on the effciency, vulnerability, 

and effectiveness of departmental programs. 

This report was prepared under the direction of Mark R. Yessian, Ph. , Regional Inspector 

General, Offce of Evaluation and Inspections, and Martha B. Kvaal, Deputy Regional 

Inspector General, Office of Evaluation and Inspections, Region I. Participating in this project 

were the following people: 

Boton Region 

Russell W. Hereford, Ph. 

Lori B. Rutter 

Project Leader 

Headquarrs 

Alan S. Levine 

W. Mark Krushat 

Barbara R. Tedesco 
Department of Health and Human Servces


OFFICE OF


INSPECTOR GENERAL


STATE PROHIBITIONS ON HOSPITAL


EMPLOYMENT OF PHYSICIANS


, SERVICtn t-\~ 

Richard P. Kusserow 

INSPECTOR GENERA 

1' 

~~d,(J OEI-Ol-91-00770 
EXECUTIVE SUMMARY


PUROSE 

The purpose of this study is to assess State laws prohibiting hospital employment of 

physicians. It responds to a congressional request that the Office of Inspector General 

study the effect of these laws on the availabilty of trauma and emergency care 

servces. Our study focuses on (1) the extent to which hospitals across the country are 

prohibited from hiring physicians; (2) the general impact of these prohibitions 

hospital operations; and (3) their more specific impact on hospitals' abilty to provide 

emergency servces and comply with the Federal patient transfer law. 

BACKGROUN 

State prohibitions on hospital employment of physicians derive from laws requiring 

that individuals must be licensed to practice medicine. In some States, judicial 

decisions dating to the 1930's have interpreted these laws to preclude hospitals from 

employing physicians for the purpose of practicing medicine. The rationale for the 

prohibitions on employment of physicians is based on the potential for conflct 

between a physician s loyalty to the patient and the financial interests of the 

corporation. Opponents of the prohibitions contend that the doctrine is a vestige of 

an earlier era and that in the current health care system hospitals need the authority 

to control all aspects of health care delivery and personnel within their walls, including 

medical care. 

The Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) requested that the 

Office of Inspector General study whether these prohibitions have a particular impact 

on hospital emergency departments. 

Our study uses data from (1) a mail survey of a national random sample of hospital 

administrators; (2) intervews with a purposive sample of over 50 hospital 

administrators, medical association and hospital association officials, and other 

individuals knowledgeable on issues related to the corporate practice of medicine; and 

(3) a review of legal and policy literature. 

FIINGS 

Few States prohibit hospitals from emplog physiians. 

Only five States -- California, Colorado, Iowa, Ohio, and Texas -- clearly 

prohibit hospitals from employing physicians. Even in these States, certain 

tyes of hospitals and providers are exempt from these prohibitions. 
In some other States, there is uncertainty over whether State laws defining the 

practice of medicine preclude hospitals from employing physicians. 

State prohiitns on hospitl emplot of physins have some advere impact on 

hopitl opeatins. 

Thirty-eight percent of hospital administrators responding to the survey from 

the five States that prohibit hospital employment of physicians indicate that 

these prohibitions impose legal, recruitment, or administrative costs. 

Forty-one percent respond that the prohibitions make it more difficult to staff 

medical servces. 

Twenty-four percent say that the prohibitions make it more difficult to staff 

basic emergency servces. 

Thirty percent say that the prohibitions make it more difficult to provide 

specialty emergency servces. 

However thee prohibitns do not appear to present a major over aU proble for hospitls. 

Thirty-three percent of hospital administrators responding to the survey from 

the five States that prohibit hospital employment of physicians report that they 

are not even aware that these prohibitions apply in their State. 

Hospital administrators in these five States cite a number of factors other than 

prohibitions on hospital employment of physicians as more important 

limitations on their abilty to assure specialty coverage in their emergency 

departments. These factors include a shortage of specialty physicians, low 

reimbursement rates, fear of increased malpractice liabilty, and disruption of 

their private practices.


When asked about the impact of the Federal patient transfer law on their 

hospital, none of the administrators responding from the five States identified 

prohibitions on physician employment as an obstacle to compliance. 
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 

TABLE OF CONTENTS


PAGE 

EXECUTIVE SUMMAY 

INTRODUcrION 

Purpose 

Methodology 

Background 

FINDINGS . . . . . . . . . . . . . . . . . . . 4 

Summary and Conclusion. . . . . . . 

APPENDIX A: Methodology ..................................... A­


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


iii 

INTRODUCTION


PUROSE 

The purpose of this study is to assess State laws prohibiting hospital employment of 

physicians. It responds to a provision in the Omnibus Budget Reconciliation Act of 

1990 requesting that the Office of Inspector General study the effect of these laws 

on the availability of trauma and emergency care servces. 

Our study focuses on (1) the extent to which hospitals across the country are 

prohibited from hiring physicians; (2) the general impact of these prohibitions on 

hospitals; and (3) their more specific effect on hospitals' abilty to provide emergency 

care servces and comply with the Federal patient transfer law. 

METHODOLOY 

Our study utilized three primary data-gathering approaches (see appendix A): 

(1) We mailed a survey regarding issues related to hospital emergency 

department coverage to a national random sample of 598 hospital administrators; 

nationwide, 447 (74.7 percent) responded. This analysis utilzes a subsample of 115 of 

those hospitals from States that prohibit hospital eD;ployment of physicians. 

(2) We conducted intervews with a purposive sample of more than 50 hospital 

administrators, medical society and hospital association officials, and other individuals 

knowledgeable on issues related to the corporate practice of medicine. 

(3) We reviewed and analyzed statutes, case law, and literature on the 

corporate practice of medicine.


BACKGROUN 

Prohibitns on Hospital Emplont of Physins: Th Corprate Practie of Med 

State prohibitions on hospital employment of physicians derive from laws requiring 

that individuals must be licensed to practice medicine. In some States, these laws have 

been interpreted to preclude hospitals from employing physicians for the purpose 

practicing medicine. While physicians may be employed for nonpatient care duties 

(e. teaching or administration), hospitals may not receive professional fees when 

physicians treat patients. 

Prohibitions on hospital employment of physicians are a subset of a larger issue 

referred to as the corporate practice of medicine doctrine. This doctrine arouses 

passionate debate among those versed in its intricacies. Articles discussing the 

corporate practice of medicine have included such titles as "An Outmoded Theory in 

Need of Modification "Z "An Anachronism in the Modern Health Care Industry, 
The Growth of the Medical-Industrial Complex May Be Hazardous to Your 

Health "4 and "Pressure to Serve Two Masters."s On a more fundamental level, the 

debate over the corporate practice of medicine doctrine is an argument over who will 

control the delivery of medical care. This contention focuses on whether physicians 

should make decisions free of external constraints or whether outside parties (a 

hospital administrator, for example) should be able to exert control over physician 

behavior. 

Ratinale for Corprate Practie Prohibitns 

The rationale for prohibiting employment of physicians is described in a number 

legal decisions that date to the 1930's. The California Supreme Court in 1932 

determined that it is impossible to separate the regulated practice of care from the 

business practice because "either one may extend into the domain of the other."6 A 

1938 decision in the same State held that letting a corporation hire and control 

physicians would lead to "divided loyalty and impaired confidence" between the 

interests of the corporation and the primacy of the patient s needs. 

An Ilinois case of the same era reiterated that a corporation s "employees must owe 

their first allegiance to their corporate employer and cannot give the patient anything

better than a secondary and divided loyalty. 

That court also concluded that "to practice a profession requires something more than 

the financial abilty to hire competent persons to do the actual work. It can be done 

only by a duly qualified human being, and to qualify something more than mere 

knowledge or skill is essential. The qualifications include personal characteristics, such 

as honesty, guided by an upright conscience and a sense of loyalty to clients or 

patients, even to the extent of sacrificing pecuniary profit, if necessary. 

In 1975 a Federal court upheld a Texas ruling that denied a license to a clinic 

organized to provide health care to low-income patients, because the board of 

directors did not comprise physicians. The court's opinion summarizes a range of 

issues related to corporate practice prohibitions: "Who and what criteria govern the 

selection of medical and paramedical staff members? To whom does the doctor owe 

his first duty -- the patient or the corporation? Who is to preserve the confidential 

nature of the doctor-patient relationship? Who is to dictate the medical and 

administrative procedures to be followed? Where do budget considerations end and 

patient care begin?"lo


Oppon to Corprate Practie Prohibitns 

Opponents of prohibitions on hospitals' ability to employ physicians maintain that the 

legal doctrine is a vestige of an earlier time, when health care was "a cottage industry, 

made up of independent professionals operating as solo practitioners."u Today 

health care industry differs substantially from the one in which the corporate practice 

prohibition originated. "Financial pressure on both the individual and system levels is 
causing the provision of medical care to be approached quite differently."12 The 

emergence of health maintenance organizations, provider networks, and other 

managed care approaches means that "the fee and the number and tye of units of 

servce authorized are increasingly being monitored and controlled, very often by 

parties outside of the traditional health care provider community. "13 

A former general counsel to the American Hospital Association reported that the 

corporate practice prohibition adversely affects hospitals in particular. "The ancilary 

servces that contribute to medical treatment of the patient are usually performed by 

hospital employees. If a hospital may not legally practice medicine, may it practice 

nursing or pharmacy? How is the hospital to direct and correlate and make them 

available to the physician when he needs them in the treatment of his patient? It is 

essential if hospitals are to continue as centers of organized medical care, that their 

governing boards have authority to exercise the kinds of control over personnel -­

including certain professional personnel -- without which the boards cannot discharge 

their responsibilty to make the various servces available when they are needed."14 

Potentil Impact on Emeen Seres 

Prohibitions on hospital employment of physicians might affect emergency care 

adversely in one of two ways. First, these laws could limit the availabilty of basic 

emergency physicians. Second, prohibitions on employing physicians could adversely 

affect hospitals' ability to have available specialty servces (such as neurosurgery, 

plastic surgery, and orthopaedics) required by traumatized patients or obstetrical 

servces for women who enter the emergency department in active labor. 

Under the Federal patient transfer lawlS hospitals must meet a number of specific 

requirements regarding examination and treatment of persons with emergency medical 

conditions and women in labor. Medicare-participating hospitals must provide for an 

appropriate medical screening examination for any individual who comes to a hospital 

emergency department. If the person has an emergency medical condition, the 

hospital must either provide further examination and treatment necessary to stabilze 

the medical condition 
 under narrow circumstances, provide for the appropriate 

transfer of the individual to another medical facility. This statute defines the term 

emergency medical condition" and specifies conditions under which a transfer to 

another medical facilty is appropriate. Subsequent amendments to the statute also 

include as a condition of participation in Medicare that hospitals maintain a list of 

physicians who are on call for duty to provide treatment necessary to stabilze an 

individual with an emergency medical condition. 
FINDINGS


FEW STATE PROHIIT HOSPITAL FROM EMWYIG PHYSICIAS. 

On fie State Caliornia Colorad, Iowa, Ohio, and Tex clearl prohibit hopitls frm emplog physins. Even in thee States, cerain type of hospitls and provi are expt frm thee prohibitns. 

With the recent passage of legislation in North Dakota16 and Montana17 expressly 

permitting hospitals to employ physicians, only the five States cited above clearly 

prohibit the practice. Hospitals in these five States comprise 23 percent of all U. 

hospitals. IS


Even in these five States, the prohibition on hospital employment of physicians does not apply in all situations, according to those we intervewed and our legal review. 

The exceptions to the prohibition are based on factors such as hospital auspices 

physician specialty, or organizational arrangement. In California, for example, the

prohibition does not apply to clinics operated by university medical schools or to 

public hospitals. In Iowa, Colorado, and Ohio, teaching hospitals may hire faculty as 

well as residents and interns for purposes of education. In Iowa, pathologists and 

radiologists are exempt from the provisions. In 1991, Texas enacted legislation 

permitting public hospitals to employ physicians directly, providing statutory authority 

for a practice that was already widespread among many rural hospital districts. Health 

maintenance organizations in each of these five States also are able to hire physicians 

either directly or through contracts with physician groups. 

In some othe States, thee is unertainty over whethe State laws deing me the practie of preclu hospitls from emplog physins. 

In some States the lack of clarity over whether prohibitions on the corporate practice 

of medicine apply to hospital employment of physicians creates some confusion. Legal 

literature on the subject reveals that the application to hospitals of general provisions forbidding nonlicensed persons from practicing medicine simply has been ignored or 

not enforced in recent years. 

Two recent State court decisions raise the possibilty that hospital employment of 

physicians might be prohibited, even though the decisions do not address that specific

issue. A 1991 Kansas Supreme Court decisionzo and a 1988 judgment from the 

Washington State Supreme Court strengthened general restrictions on the 

corporate practice of medicine by ruling that non physicians may not be partners 

medical practices. These decisions, however, fail to distinguish between general 

corporations and licensed hospitals. According to individuals we intervewed in these 

two States, health care providers are concerned that a literal interpretation of the 

decisions could pose threats to the arrangements that many hospitals use to provide 

medical staff. 
STATE PROHImONS ON HOSPITAL EMPWYMNT OF PHYSICIAS 

HAVE SOME ADVERSE IMACf ON HOSPITAL OPERATIONS. 

Ih-eght peent of hospitl adinistrators respondg to the suey frm the fie States 

that prohiit hopitl emplot of physins inate that thee prohibitns impoe 

lea recr or adintratie costs. 

Legal costs can be incurred in two broad areas. First, hospitals must assure that 

physician-hospital contracts do not violate the State prohibition on corporate practice 

of medicine. According to administrators and attorneys we intervewed, these 

contracts are fairly standard and do not pose a major problem. 

Second, and more importantly, legal issues may arise when a hospital wishes to change 

its organizational structure, either to take advantage of new business opportunities or 

to address financial pressures. State prohibitions on the corporate practice of 

medicine make the legal requirements governing organizational arrangements more 

complex and cumbersome. For example, prohibitions on hospital employment of 

physicians mean that a hospital may not own a medical practice. In California 

hospitals may form medical foundations, as a way of controllng medical practices 

although the specifications for such an arrangement are detailed and specific. 

Similarly, in Ohio we discovered some rather complicated arrangements that hospitals 

undertake to manage medical practices. 

State prohibitions on hospital employment of physicians can make recruitment more 

diffcult by limiting medical staffing options that are available in States that permit 

hospitals to employ physicians. Prohibitions on employment do not allow hospitals to 

offer financial guarantees to physicians. These guarantees could be used to alleviate 

medical school debts or expenses associated with establishing a new practice. 

Several people we intervewed noted that the prohibition on employing physicians 

presents a particular difficulty for hospitals attempting to recruit physicians in rural 

areas, where including financial guarantees in a recruitment package would make the 

offer more attractive to physicians. 

In locations where competition with health maintenance organizations (HMOs) is 

vigorous, the prohibition on hospital employment of physicians may limit hospitals 

abilty to compete for physicians. Because HMOs are able to offer salaries, income 

guarantees, and regular working hours to physicians, hospital administrators with 

whom we spoke believe that these organizations have a competitive advantage in 

recruitment efforts. 

Finally, hospital administrators contend that the prohibition on hospital employment of 

physicians can impose administrative costs by limiting their leverage over members 

their medical staff. Administrators assert that these costs are incurred not only 

staffing servces but, more important, by limiting their abilty to control the practice 

patterns and costs of individual physicians. The prohibition on a hospital's abilty to 

receive any part of the physician fee means that hospitals are not able to develop risk­
sharing arrangements directly with physicians. Administrators contend that such 

arrangements would improve their abilty to control costs by giving physicians a stake 

in the hospital's cost containment efforts. 

Fort-one peen of hopitl adinistrators respondg to our suey frm th fie State inate that thee prohiitns make it more dif to staff meal seres. 

State prohibitions on hospital employment of physicians deprive hospitals of one 

option they believe could help them provide medical staff in their facilties. In four 

areas of operations -- inpatient servces, outpatient clinics, basic emergency care, and 

specialty emergency care -- administrators indicate that being able to employ 

physicians would help meet some of their needs. 

One particular problem cited by administrators we intervewed was diffculty in 

developing outpatient clinics owing to a lack of physician coverage. Because they 

believe that clinic patients are not covered by insurance, physicians fear that they will 

not be paid for medical servces provided to them. If a hospital were able to use 

salaried physicians, it could establish a hospital-owned group practice based in the 

outpatient department. One official said that if hospitals were able to hire physicians 

it would be easier to develop a hospital-based perinatal practice focusing on primary 

care for newborns, or an obstetrical practice for low income women. Another 

administrator advocated the establishment of a hospital-based pediatric practice that 

could also provide coverage for the emergency room. 

Twen-four peent of hospital adinistrators responding to our suey from the fie 

States say that the prohibitns make it more dif to staff bas emen seres. 

Basic emergency medical servces are provided to patients when they present at the 

hospital emergency department. These servces include identification, evaluation, and

assessment of the patient's condition; treatment and administration of medical care; 

and stabilzation of the patient's condition. In recent years, emergency medicine has 

been recognized as a distinct medical specialty,2s with over 13 000 practitioners. 

In States where hospital employment of physicians is permitted, our survey data show 

that some administrators do take advantage of the employment option available to 

them. Twenty-six percent of respondents from the States that permit employment said 

that they employ physicians for provision of basic emergency servces. 

In the five States that prohibit hospital employment of physicians, 89 percent of 

administrators report that they contract for servces with either one physician group, 

individual physicians, or emergency department management companies to provide 

basic coverage. These arrangements are used by 76 percent of hospitals in States that 

permit hospitals to employ physicians.

Thir peen of hopital adistrators respondg to our suey from the fie State say 

that the prhiitns on hoitl emplot of physins make it more di provi specilt emen seres. 

Notwthstanding the responses of the administrators from these five States, our data 

suggest that being able to employ physicians for specialty emergency care may not 

make a difference. Even in those States where the option of physician employment is 

available, hospitals are no more likely to hire physicians to provide specialty 

emergency servces. Ninety-three percent of administrators responding to our survey from States that permit hospitals to employ physicians use on-call members of their 

active medical staff, rather than directly employed staff, to provide specialty coverage in the emergency department, as do 95 percent of those administrators responding 

from States that prohibit employment of physicians. 

HOWEVER, STATE PROHImONS ON HOSPITAL EMPWYMNT OF 

PHYSICIAS DO NOT APPEA TO PREENT A MAOR OVERA 

PROBLEM FOR HOSPITAL.


Th-three peent of hospitl adtrators responding to the suey from the fie States that prohiit hopital emplot of physicins report that the are not even aware that 

thee prohibitns apply in the State. 

It is possible that for administrators who are unaware of the prohibitions on employing 

physicians, these prohibitions have become a part of day-to-day operations and do not 

merit separate consideration. Perhaps they have not dealt recently with the 

prohibitions on hospital employment of physicians, or they may consider these issues 

to fall within the domain of some other department of the hospital, such as legal 

affairs or medical staffing servces. 

We found no recent cases in which hospitals had been prosecuted or had faced 

disciplinary actions for employing physicians in these States. Nevertheless, these 

ins itutions run a risk if they do not consider or are not aware of the prohibitions on 

hospital employment of physicians when they undertake such efforts as restructuring 

operations or recruiting physicians. 

Hospil adistrators in thee fie State ci a nuer of factors othe than 

prohiitns on hopitl emplot of physiians as more importnt litins on the abil to ase specilt coverage in their emen depart. The factors inlu 

a shortage of specilt physicins low reiurem rates fear of ineased malpractie libil and disptin of their priate practies. 

Only 20 percent of hospital administrators responding in these five States cite State 

prohibitions on hospital employment as a factor limiting their ability to assure specialty 

coverage. Six-three percent of the administrators indicate that a general shortage of 

specialty physicians causes problems in assuring specialty coverage in the emergency 
, 

department, and six percent respond that low reimbursement rates are an obstacle 

to getting physicians to serve on specialty on-call panels. Other factors that 

administrators cite more frequently than prohibitions on hospital employment of 

physicians are physician fears that their exposure to malpractice liabilty will increase 

physician concerns about disrupting their private practices, and fear of sanctions under 

the Federal patient transfer law (COBRA). 

FIGUR 

Factors Afecting Hospita' Abilty To Asre Speciaty Emergency Coverae 

100% 

II 80% Physi She

Low 

Mapr Ri 60% 

IT Pr 

COBR 

40% 

DI MD Emloym Laws 

20% 

Pege of Ac! Ci Fa 

Note: N = 115 hospital administrators from California, Colorado, Iowa, Ohio, and Texs responding to OIG/OEI mail survey, May 1991. Total exceeds 100% because of multiple responses. 

Our intervews supported the survey findings that the prohibition on hospital 

employment of physicians is a relatively unimportant factor in providing emergency 

coverage. As one administrator said If all of a sudden we were allowed to hire 

doctors, it wouldn t make a difference. It's not an emergency room issue." Another 

indicated that even if laws prohibiting employment of physicians were repealed, any 

impact would be "evolutionary, not revolutionary. 

Hospitals in all States confront a number of problems related to emergency 

department coverage, in addition to those identified here. Forty eight percent of 

administrators responding to our survey from the five States report that their abilty to 
, 

assure specialty coverage in the emergency department has become more difficult over 

the past two years. Other recent studies have cited financial problems associated with 

trauma centers , use of emergency rooms for primary care servces , and 

overcrowding29 as important problems confronting emergency care. A forthcoming 

OEI report will examine problems associated with the availability of specialty coverage 

in hospital emergency departments in more detail. 

Wh aske about the impact of the Fedal pati transer law on th hopit none 

of the adtrators responding to the suey from thee fie States id prohibitns 

on physin emplo as an obstacle to complince. 

In the five States that prohibit hospital employment of physicians, 49 of the 115 survey 

respondents reported actions their hospital had taken in response to the patient 

transfer law, and 62 administrators commented on the impact of the law on their 

hospital. We analyzed these responses, and found that none of the comments related 

to a hospital's inabilty to employ physicians as a problem in their abilty to comply 

with the patient transfer requirements. 

Attorneys we intervewed corroborated these findings. One attorney noted that 

prohibitions on hospital employment of physicians have never been raised as a defense 

in any patient transfer case. Other individuals we spoke with raised a number 

issues related to the patient transfer law, yet no one was able to relate these concerns 

to State laws that prohibit hospitals from employing physicians. 

SUMY AN CONCLUSION 

Our study has found that State prohibitions on hospital employment of physicians are 

not a major national problem. Only five States continue to prohibit hospitals from 

employing physicians, and even in those States numerous exceptions apply, based on 

hospital auspices, physician specialty, or organizational arrangement. Only a minority 

of hospital administrators responding to our survey from the five States believe that 

these prohibitions present a problem; one-third of administrators in those States are 

not aware that these provisions apply. 

Even among the administrators citing difficulties caused by the prohibitions, its relative 

importance is minor. With respect to emergency servces, for example, those we 

surveyed cite factors such as a shortage of specialty physicians, low reimbursement 

rates, malpractice liabilty, and disruption of practice as more important limitations on 

their ability to provide specialty coverage than are State prohibitions on hospital 

employment of physicians. 

Other administrators consider State prohibitions on hospital employment of physicians 

to be only one factor influencing hospital-medical staff relations. One California 

hospital administrator s comment summarizes the remarks of others Most of us are 

able to accommodate through other mechanisms what repeal would accomplish. 

APPENDIX A


METHODOWGY 

Leal Anlysi 

We reviewed statutory language and court decisions from the States that prohibit 

hospitals from employing physicians. The prohibitions are based on the following 

statutes: 

California Business and Professions Code, Section 2400; 

Colorado Revised Statues, Sections 12-36- 129; 

Iowa Code Annotated, Sections 147.2 and 148.13; 

Ohio Revised Code, Sections 4731.22, 4731.41, and 1701.03; 

Texas Revised Civil Statutes, Article 4495b. 

We also reviewed case law on decisions interpreting the corporate practice of 

medicine, as well as legal and policy literature. Relevant decisions and articles are 

identified in appendix B. 

Sample Selectin and Natinal Surey


This study uses data from a survey of a random national sample of hospital 

administrators on issues related to emergency room care. The sample universe 

consisted of all acute short-term hospitals that had an emergency department from the 

Health Care Financing Administration Provider of Servce file. The sample was 

selected using stratified simple random sampling with six strata: 

Small rural hospitals (fewer than 100 beds) 

Small urban hospitals


Medium rural hospitals (100 - 299 beds)


Medium urban hospitals


Large rural hospitals (300 or more beds)


Large urban hospitals


Due to prior knowledge that California prohibits hospital employment of physicians 

hospitals in that state were sampled at a higher rate than the remaining States. Six 

strata were defined for California and also for the remaining States, for a total of 

strata. Originally, 637 hospitals were selected for the survey, but due to mergers and 

closures, the sample size was decreased to 598. 

Surveys were distributed on May 10, 1991, to these 598 hospitals, with a follow-up 

mailing to nonrespondents on May 31. Responses were received from 447 hospitals, a 

response rate of 74.7 percent. Of these 447 hospitals, 115 (25.7 percent) responded 

from the five States that prohibit hospital employment of physicians, forming the data 
base for the analysis in this study. A sample size of 115 hospitals provides estimates 

within :t ten percent of the true value at the 95 percent confidence level. Except 

where identified specifically as coming from the full national sample, all percentages in 

the text refer to the 115 hospitals in the five States. 

The survey contained questions to determine whether hospital administrators believe 

that their State prohibits hospitals from employing physicians. In some States, some 

administrators indicated that their States did have such a prohibition. Follow-up 

telephone calls to State hospital associations to verify the applicabilty of the 

prohibition, however, revealed that the State had either repealed the prohibition, or 

that the provisions were substantially ignored. Based on the survey results and these 

discussions, California, Colorado, Iowa, Ohio, and Texas were identified as having and 

enforcing State prohibitions on hospital employment of physicians. Table A-I displays 

the sample and response size for each of these States. 

TABLE ADitnoution of Sureyed Hospita and Respondents by State 

STATE NUER NUER 

HOSPITAL HOSPITAL 

SURVEYED REPONDING 

(% of Tota) (% of Tota) 

California 81 (51.9%) (47.0%) 

Colorado (5.2%) (7.0%) 

Iowa (7.7%) (9.6%) 

Ohio 16 (10.3%) (13.0%) 

Texas 39 (25.0%) (23.5%) 

TOTAL 156 (l(X10%) 115 (l(X10%) 

Inters 

Our intervews included telephone and in-person discussions with ten hospital 

administrators from Caliornia and three administrators from Massachusetts. We 

focused our intervews on California, because that State had been identified previously 

as prohibiting hospital employment of physicians. 

A ­
We also intervewed by telephone or in person, officials with state hospital associations 

in Arizona, California, Colorado, Georgia, Ilinois, Iowa, Kansas, Massachusetts 

Mississippi, Montana, Ohio, Texas, and Washington, and representatives of regional 

hospital associations in California. We intervewed State medical society officials in 

California, Iowa, Massachusetts, and Texas. (In some cases, intervews were 

conducted with more than one member of these groups. 

Our intervews also included representatives of the American Medical Association 

American Hospital Association, and American College of Emergency Physicians. We 

also intervewed seven attorneys identified to us as familar with issues related to the 

corporate practice of medicine. 

A ­


, 

, , , , 

APPENDIX 


ENNOTE 

1. P.L. 101-508, Section 4008(c). 

2. John Wiorek, liThe Corporate Practice of Medicine Doctrine: An Outmoded 

Theory in Need of Modification Journal of Legal Medicine , no. 3 (1987), pp. 465­

492. 

3. Jeffrey F. Chase-Lubitz The Corporate Practice of Medicine Doctrine: 

Anachronism in the Modern Health Care Industry, Vanderbilt Law Review 44 (1987), 

pp. 445-488. 

4. Stanley Wohl Is Corporate Medicine Healthy for America? The Growth of the 

Medical-Industrial Complex May Be Hazardous to Your Health Business and Society 

Review (Fall 1984), pp. 16-20. 

5. Donald P. "Rocky" Wilcox Medicine and the Law: Pressure to Serve Two 

Masters Texas Medicine 82 (June, 1986), pp. 67-69. 

6. Painless Parker v. Board of Dental Examiners 216 Cal. 285, 14 P.2d 67 (1932). 

7. State Board of Medical Examiners v. Pacifc Health Corp. 12 Cal. 2d 15682 P. 

429 (1938). 

8. Dr. Allison, Dentit, Inc. v. Allison 360 Ill. 638, 196 NE 799 (1935). 

9. Ibid.


10. Garcia v. Texas State Board of Medical Examiners 284 F. Suppl. 434, W.D. Texas 

(1974). 

11. Arnold J. Rosoff The Business of Medicine: Problems with the Corporate 

Practice Doctrine Cumberland Law Review 17 (1987), pp. 485-503. 

12. Ibid. 

13. Ibid. 

14. Alanson W. Wilcox Hospitals and the Corporate Practice of Medicine Cornell 

Law Review 45 (1960), pp. 432-487. 

15. 42 U. c. sections 1395cc and 1395dd.

, 

, , 

16. North Dakota House Bil No. 1426, approved March 21, 1991, provides that: 

It is permissible for a hospital 'incorporated as a nonprofit corporation to 

employ a physician provided that the employment relationship between 

the physician and hospital is evidenced by a written contract containing 

language to the effect that the hospital's employment relationship with 

the physician may not affect the exercise of the physician s independent 

judgment in the practice of medicine, and the physician s independent 

judgment of medicine is in fact unaffected by the physician s employment 

relationship with the hospital. Under this section a hospital may not be 

deemed to be engaged in the practice of medicine. 

17. Montana Senate Bil No. 146, effective October 1, 1991, permits: 

practicing medicine as the partner, agent, or employee of or in joint 

venture with a hospital, medical assistance facilty, or other licensed 

health care provider. However: 

(I) The partnership, agency, employment, or joint venture 

must be evidenced by a written agreement containing 

language to the effect that the relationship created by the 

agreement may not affect the exercise of the physician 

independent judgment in the practice of medicine; 

(II) The physician s independent judgment in the practice 

of medicine must in fact be unaffected by the relationship; 

and 

(III) The physician may not be required to refer any 

patient to a particular provider or supplier or take any 

other action the physician determines not to be in the 

patient' s best interest. 

18. The Resource Information Center at the American Hospital Association informed 

us that in 1989 there were 6 720 hospitals in the United States. The number of 

hospitals in each of the five States examined here were: 

California -- 560 (8.3%) 

Colorado -- 88 (1.3%) 

Iowa -- 135 (2.0%)


Ohio -- 226 (3.4%)


Texas -- 538 (8.0%)


Subtotal, five States -- 1 547 (23.0%) 

19. Morgan J. Ordman The Corporate Practice of Medicine Illinois Bar Journal 

April 1988, pp. 464-465; John Wiorek The Corporate Practice of Medicine Doctrine: 

An Outmoded Theory in Need of Modification Journal of Legal Medicine , no. 3 

(1987), pp. 465-492; Alanson W. Wilcox Hospitals and the Corporate Practice of 

Medicine Cornell Law Quarterly, 45 (1960), pp. 432-487. 

20. Early Detection Center, Inc. v. Wilson et aI Kansas Supreme Court, No. 65 328 

(May 1991). 
, 

21. Morrell v. Ehsan 110 Wn. 2d 555, 756 P.2d 129 (June 1988). 

22. The clinic must conduct medical research and health education, and must provide 

health care through a group of 40 or more physicians; the physicians and surgeons 

must be independent contracts representing at least 10 board-certified specialties; and 

no less than two-thirds of the physicians must practice on a full-time basis at the clinic. 

23. One example provided was that a hospital enters into a trust agreement, with the 

hospital (which provides the capital to fund the venture) as beneficiary and a physician 

servng as trustee at the pleasure of the hospital. The physician trustee also serves as 

majority shareholder in a professional corporation, with shares purchased by the 

hospital-physician trust. The professional corporation owns and operates the practice 

and distributes net revenues back to the trust as dividends. The trust then can 

distribute this trust income back to the hospital as beneficiary. 

24. According to one source, employment would ensure that physician referrals to the 

employing hospital are not subject to fraud and abuse laws. Contracts that require 

repayment of some value, in order to avoid IRS proscriptions on inurement to a 

physician from a tax-exempt hospital, run the risk of violating Medicare-Medicaid 

kickback provisions. See "Finally, Positive Thinking on Physician Recruitment Action 

Kit for Hospital Law July, 1990. 

25. See "Definition of Emergency Medicine and the Emergency Physician Annals of 

Emergency Medicine , no. 10, (October 1986), for a full discussion of the emergency 

medicine specialty. 

26. The totals exceed 100 percent because some administrators indicated that they 

use more than one approach to staffing basic emergency servces. 

27. U.S. General Accounting Office Trauma Care: Lifesaving System Threatened by 

Unreimbursed Costs and Other Factors May 1991, Report No. GAOIHRD-91-57. 

28. Use of Emergency Rooms by Medicaid Recipients OEI-06-90-00180. 

29. Andrew S. Bindman, Kevin Grumback, Dennis Keane, Loren Rauch, and John 

Luce Consequences of Queuing for Care at a Public Hospital Emergency 

Department lAM 266, no. 8 (August 28, 1991), pp. 1091- 1096.