Physicians have traveled far from the days of red-and-white poles outside barber shops, where the majority were charlatans dispensing tinctures reeking of alcohol. The 20th century witnessed the ascendancy of doctors to a priesthood of healers, trusted professionals who could translate astonishing scientific advances into better patient care. But financial pressures over the past 20 years have threatened medical practice for both physicians and patients. As policymakers and third-party payors sought to manage care and restrict costs, legislators tightened regulations on physician business ventures with the intent of limiting conflicts of interest.
The Fine Print
Regulation of fraud and abuse by providers originated in the Social Security Act. Criminal penalties awaited those who made misrepresentations for material gain or who engaged in practices that raised utilization unnecessarily, increased costs to the Medicare and Medicaid programs, or tied remuneration to referrals. Given the breadth and seriousness of the restrictions, the Department of Health and Human Services enumerated “safe harbors” to clarify the anti-kickback statutes.
Congress also passed the Ethics in Patient Referrals Act in 1988 to prevent physicians from referring Medicare patients to clinical laboratory services in which they had a financial stake. This law came to be known as Stark I, named after U.S. Representative Pete Stark, of California. In 1993 Stark II was passed to include Medicaid patients and to expand the scope of prohibited referrals to physical therapy, radiology services, home health services, outpatient prescription services, hospital services, and others.
Stark laws are civil statutes, and a transaction must fall entirely within published exceptions to be lawful. Penalties for Stark violations include $15,000 per incident, full restitution of illegal reimbursements, and exclusion from Medicare and Medicaid programs.
In the provider space, access to capital lags that in pharmaceuticals, biotechnology, and medical devices. This disparity threatens to cause a significant brain drain away from clinical services. Financing differences are influenced to some extent by the structure of the industry (low to negative hospital margins are widely known), but they also result from the special Stark regulations applied to providers.
It’s no secret that physicians have looked for additional sources of income. In the late 1990s, amid the dot-com millionaire boom, GDP growth, and rising stock prices, physicians’ real-dollar earnings fell nearly five percent. Pham et al. (Health Affairs, 2004) have studied several of their strategies—to increase service volume (e.g., botox treatments), increase prices (e.g., group consolidation), improve efficiency (e.g., open-access scheduling), and mitigate risk (e.g., refusing to take new Medicare patients). Not all were aligned with the noble expectations for doctors, though few were out of sync with accepted business practices.
The growth of ambulatory surgery centers and specialty hospitals made perhaps the most headlines, as the public debated whether they added value or merely cherry-picked from general hospitals. These centers were enabled by specific Stark Law exceptions that allowed ownership by surgeons, single specialties (e.g., gastroenterologists), mixed specialties, or hospital-and-physician partnerships. But to stay protected, an ambulatory surgery center had to be an extension of the physicians’ office practice pursuant to certain safe harbor conditions, and hospital investors could not be in a position to make or influence referrals.
Despite the danger of conflicts of interest and of weakening the doctor–patient relationship, physician investors have an unrealized potential to build enterprises beneficial to both patients and providers. Ownership confers increased control over operations and strategic planning. Such ventures might be especially responsive to consumer-driven choices in terms of cost, transparency, and convenience. And physician-owned centers could hasten the coordination of specialized centers of excellence and rationalize general hospital capacity.
The business risk to doctors remains daunting, however. Legal and financial advice, for example, would burn through modest up-front investments, undermining debt payments and return-on-equity targets.
Even though restricting physician access to capital safeguards against certain dangers, it also hinders innovation. The public seems not to mind that “minute clinics” in CVS and elsewhere are located directly next to dispensaries, as long as the service is economical and convenient.
Health care reform has focused largely on third-party payors, whether nationalized entitlement programs, employer-based private insurance, individual-based private insurance, or a mixture. But without greater liquidity in the provider space, implementation of new ideas—based on competition, consumerism, nodes of excellence—will be significantly delayed. It’s time to swing the pendulum back toward entrepreneurship in the regulation of physician-owned enterprises.
Jason Sanders is a fifth-year medical student at HMS.
The opinions expressed in this column are not necessarily those of Harvard Medical School, its affiliated institutions, or Harvard University.
