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Physician Ownership And Self-Referral: A Commentary

March 27th, 2008

Editor’s Note: This is the last in a series of posts in response to Jon Gabel’s article “Where Do I Send Thee? Does Physician-Ownership Affect Referral Patterns To Ambulatory Surgical Centers?,” published March 18 on the Health Affairs Web site. Rep. Michael Burgess (R-TX) began the series, which also featured Jerry Cromwell.

The tension between commerce and professionalism is not new. Maimonides warned against allowing “thirst for profit . . . to interfere with my profession . . . the great task of attending to the welfare of Thy creatures.”[1] In 1913, George Bernard Shaw famously opined that “the object of the medical profession today is to secure an income for the private doctor; and to this consideration all concern for science and public health must give way when the two come into conflict.” He added, somewhat reassuringly, “Fortunately, they are not always in conflict.”[2] In 1930 the American Medical Association (AMA) Judicial Council judged that the widespread practices of fee-splitting, commissions, and referral to physician owned diagnostic laboratories, which they referred to as “rake-offs,” were unethical.[3]

In the pre-Flexner era, medicine was an unregulated and largely unscientific enterprise. Physicians didn’t make much money, and dispensing of patent remedies and kickbacks for referrals were standard practice. But now, even where a more robust science base exists and where regulation has emerged as a concomitant of public concern and public responsibility for financing, there are limits to the effectiveness of regulation in dealing with these kinds of conflicts of interest. I suggest here that professional values must be a component of the solution.

Conflict of interest surrounds many professions, and is a particular challenge to professions in which the professional has greater knowledge and authority and the client (or patient) may be vulnerable. In settings like medicine, law, and investment brokerage, “caveat emptor” is an inadequate protection against exploitation or incompetence. Therefore, professional standards define the fiduciary relationship as one of trust, in which the professional is seen as the agent of the client or patient.[4]

Consequently, professional standards in medicine always begin with putting the patient’s interests first. This fundamental trust relationship has long been part of the core of medical ethics. A recent articulation of these values, Medical Professionalism in the New Millennium: A Physician Charter, was created initially by an international group within internal medicine practice, but was then adopted broadly by more than 130 professional associations.[5] The Charter reinforces the ancient traditions of the professions’ commitment to the primacy of patient welfare and addresses new challenges presented by the complex and highly commercial marketplace environment in which modern health care operates in many nations, including the United States.

Accordingly, the Charter includes an explicit commitment to managing conflicts of interest. This commitment stimulated a project, supported by the American Board of Internal Medicine (ABIM) Foundation and the Open Society Institute and reported in JAMA in 2006, that proposed guidelines for academic medical centers in their relationships with pharmaceutical and device industries.[6] These rather strict guidelines have now been adopted by a number of leading institutions and have inspired ongoing soul-searching and self-examination of the widespread influence of industry in medical education, continuing medical education, and physician prescribing habits. Meanwhile, a virtual industry of investigative journalism in recent years has led to one after another shocking articles identifying physicians’ overuse of procedures, especially in hospitals in which they share ownership, and overprescribing based on payments from or investments in the companies selling these products.[7]

Physician self-referral to ambulatory surgical centers (ASCs), as in this study, is another form of conflict of interest that can lead to several kinds of disruption of patient trust. One is the tendency to overprescribe and a reluctance to truly inform patients about their choices, a betrayal of the respect for patient autonomy. It can also be a betrayal of the professional responsibility to manage society’s scarce medical resources. In the case reported here, regardless of whether the procedures were indicated or not, it was clear that the well-insured were preferentially referred to the physician-owned facilities. This phenomenon potentially could be viewed as contributing to health care disparities, an important part of the nation’s shortfall in quality of care.

The risks of physician ownership have been documented by others. For example, an Institute of Medicine Committee on For-Profit Enterprise in Health Care reported in 1986 that “it should be regarded as unethical and unacceptable for physicians to have ownership interests in healthcare facilities to which they make referrals or to receive payments for making referrals.”[8] Of the regulatory and oversight approaches to restricting conflicts of interest, most notable and longstanding are the Stark regulations.

With the enactment in 1989 of the initial “Stark I” legislation, Rep. Pete Stark (D-CA) said with characteristic straightforwardness, “The integrity of our nation’s physicians is being threatened by seductive deals promoted by fast buck artists. Further proliferation of these ventures is bound to undercut public confidence in the medical profession.”[9] When his point is stated this way, Stark himself emphasizes the importance of maintaining public trust in the profession. Over the intervening years, further iterations of the Stark law have expanded its scope, to further restrict self-referral, while also limiting its impact, mainly through various exceptions related to on-site referrals designed to address concerns about added fragmentation and complexity for the patient. For example, convenience for the patient can be greatly increased by facilities within or near to the physician’s office.

Yet in most of the United States, the style of practice is fragmented, leading patients to have to be the “general contractor” of their own care.[10] Thus arises a legitimate concern with developing increasingly more rigid regulations, preventing physicians from referring to themselves or close colleagues, which may limit even further the coordination of care and the appropriate sharing of information and planning across multiple caregivers. This story illustrates that regulation alone will never be able to meet the goals of the modern quality-of-care movement, which include delivering the right care to the right patient in a predictable and reliable fashion and ensuring equity in health care services. How then to prevent abuses, corral overuse, and sustain the public trust in the profession?

If care is truly to be organized around the patient to be efficient and to produce desired outcomes — not just physician income, as noted by Shaw — then regulatory approaches are not adequate. Two other components are essential: a payment structure that does not create undue incentives for profit related to production or volume of services, and accountability for quality of care that includes the responsibility to reduce waste and overuse. A system that incorporates these components would support basic professional values, not undermine them, and would encourage the proper professional fiduciary relationship between physicians and patients.

Documents such as the Physician Charter identify values that public policies should find way to support, not erode. Campbell and colleagues found that although the core commitments of the Charter are widely embraced in the U.S., in some areas physicians reported that they would behave in ways that were in conflict with the stated values. Self-referral was one of those conflicts: approximately half of those surveyed reported that they would preferentially refer patients to services in which they had a financial interest.[11] It seems likely that commercial incentives (and perhaps also ignorance of current regulations) drive this behavior.

Medical societies and standard-setting specialty boards reinforcing ethical principles remain vitally important, but they are not enough. As a nation we must again grapple with the tension between seeing health care as a public good and as a marketplace commodity. Americans have always been undecided — or divided — on this question, and yet the core of much of quality-of-care policy rests on which conceptual framework we choose. A senior Australian health official facing the same tension writes, “In an ideal market the consumer would be sufficiently informed to choose from a range of options and purchase the most suitable product. . . . But healthcare is not, and will never be, an ideal market.” Thus, “ethically conducted medical treatment puts the healthcare needs of patients first, ahead of profit. Self-referral is an abrogation of the doctor’s ethical responsibilities and a breach of the doctor patient relationship.”[12]

As they experiment with new approaches to payment for services, policymakers should keep in mind what kinds of behavior these incentives are best suited to foster. George Bernard Shaw believed that the best way to avoid conflicts of interest in medical care was for physicians to be paid reasonably well — in his day, most were not. Although medical poverty is no longer a problem, how physicians are paid continues to drive many of these conflicts.

An important challenge now in the U.S. is how best to pay physicians for coordination of care and to reward them for the prudent use of resources that functions within the context of both the patient’s values and evidence-based medicine, rather than the pecuniary self-interest of physicians or investors. Recent commentators have focused on our fee-for-service system as being at fault for not supporting coordination of care and for driving volume of marginally effective and disaggregated care. Now would be a good time for those considering approaches to physician payment to revisit models such as salary and global payments.[13] The dramatic success of the Veterans Health Administration (VHA) in meeting quality standards — and in many cases exceeding quality of care in Medicare or in the private sector — suggests that physicians on salary can actually produce very good results.[14] They may also be more satisfied in their work and able to function within a more traditional ethical model.

Marc Rodwin agrees, stating that “an ethos can strongly affect conduct. It has certain advantages over external forms of regulation. And perhaps no regulatory approach can monitor all behavior or foresee the variety of situations that can arise. It is always hard to get people to do something they don’t want to do. Far more effective to convince people that they want to act in a certain way: for if they do, then there are fewer problems in ensuring compliance. Very possibly, the medical ethos promotes the conduct of physicians where patients are concerned.”[15]

Professionalism is a strong ally in the shared societal goals of improving quality of care. Payment models should support professional values, not contradict them. In an era where more available and meaningful quality measurement is becoming possible, and the growing acceptance of public reporting further enhances accountability, salary and global payment models may give us the greater confidence that patients and consumers need and may allow physicians to function in the best interests of the patient, rather than their bottom line.


1. M.D. Etziony, The Physician’s Creed: Anthology of Medical Prayers, Oaths, and Codes of Ethics Written and Recited Medical Practioners through the Ages (Springfield, Ill.: Charles C. Thomas, 1973), 28-31.

2. G.B. Shaw, The Doctor’s Dilemma: A Tragedy (Baltimore: Penguin Books, 1913), 35.

3. M.A Rodwin, Medicine, Money, and Morals: Physicians’ Conflicts of Interest (New York: Oxford University Press, 1993), 25-26

4. American Bar Association, Center for Professional Responsibility, “Model Rules of Professional Conduct

5. Medical Professionalism Project, “Medical Professionalism in the New Millennium: A Physician Charter,” Annals of Internal Medicine 136, no. 3 (2002): 243-246; Medical Professionalism Project, “Medical Professionalism in the New Millennium: A Physician Charter,” Lancet 359 (2002): 520-522; and Medical Professionalism Project, “Medical Professionalism in the New Millennium: A Physician Charter,” American Board of Internal Medicine Foundation

6. T.A. Brennan et al., “Health Industry Practices That Create Conflicts of Interest: A Policy Proposal for Academic Medical Centers,” Journal of the American Medical Association 295, no. 4 (2006): 429-433.

7. G. Harris and J. Roberts, “Doctors’ Ties to Drug Makers Are Put on Close View,” New York Times, 21 March 2007; and R. Abelson, “Possible Conflicts for Doctors Are Seen on Medical Devices,” New York Times, 22 September 2005.

8. B.H. Gray, The Profit Motive and Patient Care: The Changing Accountability of Doctors and Hospitals (Cambridge, Mass.: Harvard University Press, 1991), 198.

9. R.A. Morse and R.M. Popovits, “Stark’s Crusade: The Ethics in Patient Referrals Act of 1989,” Journal of Health and Hospital Law 22 (1989): 208-224.

10. K. Davis, “Rewarding Excellence and Efficiency: What Does it Mean and How to Get There?” (The Kimball Lecture presented at the American Board of Internal Medicine Foundation Summer Forum, Colorado Springs, Colo., 29 July-1 August 2006).

11. E.G. Campbell et al., “Professionalism in Medicine: Results of a National Survey of Physicians,” New England Journal of Medicine 147, no. 11 (2007): 795-802.

12. P.D. Fitzgerald, “The Ethics of Doctors and Big Business,” Medical Journal of Australia 175, no. 2 (2001): 73-75.

13. A.H. Goroll et al., “Fundamental Reform of Payment for Adult Primary Care: Comprehensive Payment for Comprehensive Care,” Journal of General Internal Medicine 22 (2007): 410-415; and J.C. Robinson, “Theory and Practice in the Design of Physician Payment Incentives,” Milbank Quarterly 79, no. 2 (2001): 149-177.

14. S.M. Asch et al., “Comparison of Quality of Care for Patients in the Veterans Health Administration and Patients in a National Sample,” Annals of Internal Medicine 141, no. 12 (2004): 938-945; and A.K. Jha et al., “Effect of the Transformation of the Veterans Affairs Healthcare System on the Quality of Care,” New England Journal of Medicine 348, no. 22 (2003): 2218-2227.

15. Rodwin, Medicine, Money, and Morals, 5-6.

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3 Responses to “Physician Ownership And Self-Referral: A Commentary”

  1. ptatt Says:

    Interesting discussion. It appears that CON legislation has major impact on the prevalence of specialty hospitals since the growth of these facilities from 1990-2003 is concentrated in areas that do not have this legislation in place. The newer specialty hospitals tend to be for-profit , physician owned and duplicate services already available in the community. While the health care market is currently unaffected by these specialty centers, many policy economist feel that they could in fact drive competition and reduce costs.

  2. Arvind Cavale Says:

    A very scholarly analysis, Dr. Cassel. While believing and agreeing with most of your arguments, I find some of your observations to be rather out of touch with ground reality.

    First, I disagree with your assumption that professionalism and profits cannot co-exist.
    Second, one cannot extrapolate the VHA results in the general population. Even the authors of the first study cited under Ref. # 14 accept significant limitations to their analysis. Besides, it is generally accepted that most Veterans with chronic diseases very seldom rely on the VHA alone for their chronic disease management. In fact most Veterans with chronic conditions are co-managed by their private physicians in additon to the VHA. Also, there are clear differences in quality of care among the various VHA centers.

    So a blanket statement such as “physicians on salary can actually produce very good results” can be very misleading. Eventually results depend on the integrity and professionalism of the physician, whether in private practice or on salary; and in current circumstances, on the degree of governmental and/or insurance interfence in the management of illnesses, especially chronic diseases. Why is it perceived to be wrong and unethical if a physician maximises profit while providing high quality care?

    Someone has to explain to me why both government and insurers make it more difficult for a patient to receive comprehensive care at a single location? For example, why is not possible for a newly diagnosed diabetic to get a specialist evaluation, diabetes education, nutritional counseling and needed laboratory studies in one sitting at one location, without someone crying “unethical”?

    Unless and until more common sense prevails, there are going to be those who will go to any length to maximise profits, even at the cost of quality. I hope you can address these real concerns, Dr. Cassell, before expecting practicing physicians to embrace your idealistic notions.

    I am also very disappointed that you use references from the New York Times, as though it is a scientific journal. Such references definitely degrade the objectivity and quality of this blog because they represent opinions of a biased newspaper rather than objectively written articles.

  3. RobertBurney Says:

    We must distinguish between doing procedures or tests “in the office” versus doing something in an ASC where the surgeon has an ownership interest along with other physicians. For the most part, ASCs provide higher quality care at a lower cost in time and money than competing hospitals. The surgeon’s major benefit from working in an ASC is the time saving, not the ownership dividend. It is not uncommon to do twice the number of procedures in a day at the ASC as could be done in the hospital. The patient gets better care, the surgeon spends less time, and the third party pays less. The only ethical issue is the indications for surgery.

    A more common conflict of interest is referral to colleagues under the same employer, as in multispecialty groups or university practices. Here again, the issue is indications.

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