• Physician Self-Referral: Back on the Agenda or Out for Good?

    Physician Self-Referral: Back on the Agenda or Out for Good?

    by Amanda Bakowski JD ’17


    I. Introduction

    On June 25, 2015, the Supreme Court decided King v. Burwell, holding that the tax credits established by the Patient Protection and Affordable Care Act (“ACA”) are available to individuals purchasing health insurance on exchanges created by the federal government.[1] Although the subsidies were saved, other portions of the ACA may still be in jeopardy. Some lawmakers have their eye on Section 6001, for example. Section 6001, titled “Limitation on Medicare Exception to the Prohibition on Certain Physician Referrals for Hospitals,” amended Section 1877 of the Social Security Act (commonly known as the “Stark Law”).[2] Enacted in 1989 and expanded throughout the 1990s, the Stark Law limits physician referrals for designated health services funded by Medicare: physicians are prohibited from referring patients to facilities with which they have a financial relationship if the needed health services are payable by Medicare.[3] Such financial relationships may take the form of an ownership interest, investment, or a structured compensation arrangement.[4] But several exceptions have allowed self-referral relationships to continue in limited circumstances, including when physician investment is in the whole hospital rather than a department (“whole hospital exception”) or when the services are furnished in a rural area (“rural provider exception”).[5]

    Section 6001 of the ACA placed substantial new restrictions on the ability of physicians to refer Medicare patients to facilities in which they have a financial interest.[6] Under the Stark Law’s whole hospital exception, physicians were previously free to own hospitals and self-refer as long as the ownership interest was in the whole hospital rather than just a department.[7] 42 U.S.C. 1395nn, as amended by Section 6001, now prohibits physicians from filing self-referred Medicare claims if an ownership interest—regardless of the stake—was granted after December 31, 2010.[8] Those facilities with physician ownership as of December 31, 2010 were grandfathered in, thus allowing physicians to maintain the same ownership interest they had on March 23, 2010.[9] However, grandfathered hospitals that qualify for the whole hospital or rural provider exceptions are now prohibited from expanding their facility capacity—the number of operating rooms, procedure rooms, and beds for which the hospital was licensed as of March 23, 2010—unless an exception is granted by the Secretary of Health and Human Services.[10]

    Many see these new restrictions as effectively eliminating opportunities for new physician-owned hospital arrangements, as most physician-owned facilities rely to some extent on self-referrals in their operation.[11] Additionally, the limitations on expansion have halted the growth of physician-owned hospitals and caused confusion for those under construction when the ACA was passed.[12] Physician-owned hospitals can still operate and expand some services within the confines of the law.[13] But these workarounds may not be enough.

    In 2015, Representative Sam Johnson (R-TX) introduced two bills seeking to pull back these limitations on physician self-referral. H.R. 976 (the Patient Access to Higher Quality Health Care Act of 2015) would repeal the moratorium on self-referrals to physician-owned facilities completely, and H.R. 2513 (the Promoting Access, Competition, and Equity Act of 2015) would significantly loosen the restrictions imposed by Section 6001. At a hearing held by the Ways and Means Committee’s Health Subcommittee, “Improving Competition in Medicare: Removing Moratoria and Expanding Access,” H.R. 976 was presented as a proposal for improved competition by expanding access to physician-owned hospitals. Many Republican lawmakers supported easing restrictions on self-referral and agreed that the current restrictions reduce competition in health care.[14] The testimony provided by the American Hospital Association defiantly stated quite the opposite: “Physician self-referral represents the antithesis of competition.”[15]

    Some physicians have grounded their opposition to the self-referral restriction in concerns related to both professional autonomy and the community benefits that they believe result when physicians invest in hospitals.[16] Yet many other medical groups have publicly supported self-referral restriction, including the American Clinical Laboratory Association, the American Physical Therapy Association, the American Society of Clinical Pathologists, the American Society for Medical Technology, and the Blue Cross and Blue Shield Association.[17]

    While politicians and members of the medical community continue to discuss this issue, many questions remain unresolved. Are physician-owned facilities good for competition? Should regulations restrict physicians from having a financial investment in medical facilities at all? These very questions have provoked intense debate for several decades. In fact, physician self-referral has been referred to as “one of the most divisive issues confronting American medicine.”[18]

    II. The Problem with Self-Referral

    Lawmakers, scholars, and health care experts have identified several problems associated with physician self-referral arrangements. The primary concern over self-referral is that it leads to overutilization of services because physicians are incentivized to prescribe more, often unnecessary, services.[19] Studies have consistently shown that when self-referrals occur, the amount of services performed increases substantially.[20] Overutilization in self-referral is a natural temptation of the arrangement: the return on the investment depends on the number of patients that receive services at that facility, which is in part determined by the number of patients referred from the investing physician.[21] This setup may encourage the physician to increase not only the number of patients he or she refers but also the number of tests ordered for each patient. Overutilization becomes a public problem because of the reliance on third party payers, such as Medicare and Medicaid, and the way these programs are funded. For example, the Medicare Trust Funds are funded through payroll taxes and general revenue, including income taxes and Medicare premium taxes,[22] while Medicaid is jointly funded through the federal and state governments.[23] When overutilization occurs with Medicare and Medicaid patients, the costs incurred fall to the government and the taxpayers.

    Numerous studies have documented the overutilization caused by self-referral practices. One of the most egregious cases of increased utilization occurs in self-referral for diagnostic imaging. A comprehensive report of Medicare expenditures for advanced imaging services found that from 2004 to 2010, the number of self-referred MRI services increased by more than eighty percent, while MRI services completed without self-referrals increased only twelve percent.[24] This report also showed that providers’ referrals of imaging services substantially increased the year after they started self-referring, and that this was not due to a general increase in the use of these imaging services among all providers.[25] Earlier reviews of the empirical literature found that sixty to ninety percent of nonhospital radiography and sonography services were self-referred.[26] This phenomenon is not limited to imaging services. One study found that “self-referring urologists billed Medicare for 72 percent more specimens per prostate biopsy than non-self-referring urologists, yet the cancer detection rate was 12 percent higher for men treated by urologists who did not self-refer.”[27] Studies have found that not only are self-referring providers ordering more care, but often unnecessary care. One such study found that in the California Workers Compensation System, thirty-eight percent of MRI scans ordered by self-referring physicians were deemed medically inappropriate compared to twenty-eight percent of those ordered by non-referring physicians.[28] Therefore, the financial incentives that motivate physicians to self-refer can lead to excessive testing and treatment that are costly to the patient and the government without necessarily providing any immediate additional health benefits.

    Physician self-referral arrangements also present an ethical issue. Information asymmetry is a common phenomenon in health care: physicians know more than their patients, and patients must often rely on their physicians in decision-making.[29] Adding a financial incentive to self-refer patients in light of this asymmetry raises ethical questions. Some suggest that self-referral arrangements are unethical in that they incentivize physicians to not only overutilize services by taking advantage of the information asymmetry but also to cherry-pick patients.[30] The possibility that a patient may have benefitted more from receiving services at a different facility, but was referred to a physician-owned facility because it was financially beneficial for the referring physician, raises disturbing ethical questions.

    Finally, physician self-referral arrangements may, as the American Hospital Association suggests, actually be bad for competition.[31] Self-referral arrangements can distort the market when physicians cherry-pick more profitable patients and rely on procedures with higher reimbursement, leaving other hospitals unable to subsidize the care needed by the community for less profitable services like infectious diseases and emergency room care.[32] Community hospitals “rely on cross-subsidies from the well-reimbursed services targeted by physician-owned hospitals to support . . . essential but under-reimbursed health services. Revenue lost to specialty hospitals can lead to staff cuts and reductions in subsidized services such as inpatient psychiatric care.”[33] Therefore, self-referral to physician-owned hospitals may have seriously negative competitive consequences for community hospitals and their patients.

    III. The Case for Self-Referral 

    Many lawmakers, scholars, and practitioners support physician-ownership and physician self-referral. As the legislation introduced by Representative Johnson indicates, the debate is not over. In light of recently released data, self-referral advocates have gained much needed support.

    Some argue that physicians have sought to invest in medical facilities to supplement their decreasing income and that declining income itself has been a result of third-party payers’ emphasis on cost containment and prospective payment introduced during the 1980s.[34] Certainly physicians benefit by increasing their revenue through self-referral arrangements, which may be significant to general practitioners who typically make less than their specialist counterparts but are relied upon for referrals.[35] This point is especially relevant given that the demand for physicians is currently greater than the supply, and the Association of American Medical Colleges predicts that by 2025, demand for physicians will exceed supply by a range of 46,000 to 90,000.[36]

    The potential benefits of physician ownership are not limited to physicians themselves. Physician investment can provide additional community benefits. Physicians are often the first to see what services or technologies are needed in their community, so they may be more willing to invest in those services.[37] Physicians are more familiar with health care goods and services than the average investor and therefore could be more likely to make “good” investments.[38] The facilities themselves may become more efficient through the procurement of medical technologies and devices by physicians with expertise in how to use them.[39] Finally, when physicians are able to refer to facilities that they have invested in and know well, the continuity of service for patients increases; the physician and specialists may work together and communicate more easily, making both practices more efficient.[40]

    Interestingly, the very law that promised the demise of physician-owned hospitals also presented these hospitals with new opportunities for success. One program established by the ACA, the Hospital Value-based Purchasing Program, provides rewards (called “value-based incentive payments”) to hospitals that meet certain quality and performance standards.[41] In 2013, Kaiser Health News reported that “[o]f 161 physician-owned hospitals eligible to participate in the health law’s quality programs, 122 are getting extra money and 39 are losing funds. . . . That’s a stark contrast with other hospitals—74 percent of which are being penalized.”[42] Another portion of the law rewards hospitals with low readmission rates. Physician-owned hospitals again were successful in this arena, although some in the healthcare community highlighted that this may be an “unfair” result of cherry-picking healthier patients.[43] While the value-based rewards are often not substantial, they serve as evidence of the quality services these hospitals provide.[44]

    Additionally, the 2015 Hospital Consumer Assessment of Healthcare Providers and Systems Survey indicated that sixty-seven percent of the participating physician-owned hospitals received a four- or five-star rating.[45] Physician-owned hospitals represented 84 of the 251 hospitals (33%) that received 5-star ratings even though they represent only 5 percent of U.S. hospitals.[46] The Physician Hospitals of America stated that this result was “not altogether unexpected given that hospitals with physician ownership comprised seven of the top ten and forty-three of the top 100 hospitals in the country in the Hospital Value-Based Purchasing Program.”[47] Many physician-owners view these results as affirming their beliefs that physician-owned hospitals are providing some of the best medical care in the country and should not be limited in their ability to expand.[48] 

    IV. Conclusion

    The studies and reports of physician self-referral highlight a familiar struggle present in the American health care system: cost versus quality. A balance of these considerations is admittedly difficult to achieve, but for many years, opponents of self-referral seemed to have the upper hand by relying on data that self-referring physicians used more (and often unnecessary) services. Now, supporters of self-referral are striking back with evidence of the strong quality of services physician-owned hospitals provide, with the help of legislators like Representative Johnson who frame the debate in terms of competition. In light of the strides in quality made by physician-owned hospitals, Congress should consider scaling back the harsh restrictions on expansion of physician-owned hospitals and funding studies to determine which elements of the physician-owned hospitals have led to the increase in quality.


    [1] See King v. Burwell, 135 S. Ct. 2480, 2497 (2015).

    [2] See Centers for Medicare & Medicaid Services, Physician Self Referral, Cms.gov (last updated Jan. 5, 2015, https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfReferral/index.html?redirect=/PhysicianSelfReferral [https://perma.cc/LEB6-R4AU]).

    [3] See id.

    [4] See id.

    [5] See 42 U.S.C. § 1395nn(a)(1) (2012).

    [6] See id. § 1395nn(a)(1).

    [7] See id. § 1395nn(d)(3).

    [8] See id. § 1395nn(i)(1)(A).

    [9] See id. § 1395nn(i)(1)(D).

    [10] See id. § 1395nn(i)(1)(B).

    [11] See, e.g., Mark T. Morrell & Alex T. Krouse, Accountability Partners: Legislated Collaboration for Health Reform, 11 Ind. Health L. Rev. 225, 281 (2014); Michael O. Leavitt, Study of Physician-Owned Specialty Hospitals Required in Section 507(c)(2) of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Centers for Medicare & Medicaid Services ii (2005), https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Reports/downloads/RTCPhysSpecHosp.pdf [https://perma.cc/32DR-7W4A] (“The proportion of all Medicare cardiac cases in three cardiac specialty hospitals visited that were referred by physician-owners ranged from 61% to 82%. In the five orthopedic hospitals visited, physician-owners referred between 48% and 98% of the orthopedic cases, and in one surgery hospital, physician-owners referred 90% of the cases.”).

    [12] See Joshua E. Perry, An Obituary for Physician-Owned Specialty Hospitals, 23 Health Law. 24, 28–29 (2010).

    [13] See Victor L. Moldovan, The Future of Physician-Owned Hospitals, Bloomberg L. (Aug. 8, 2011), http://www.bna.com/the-future-of-physician-owned-hospitals [http://perma.cc/48DT-DJPY] (“[Hospitals can] add new services, joint venture for non-hospital based services such as outpatient imaging, radiation therapy, chemotherapy, and dialysis. They can also use their existing physical structures to meet new business opportunities as long as they don’t increase the aggregate number of beds, operating rooms or procedure rooms.”).

    [14] See Andrea L. Impicciche, John F. Williams III & Alyssa C. James, Health subcommittee holds hearing on physician-owned hospital expansion moratorium, Lexology (May 22, 2015), http://www.lexology.com/library/detail.aspx?g=5b42003b-bf81-48ec-8ee2-af763b524171 [http://perma.cc/QJR9-ZHPT].

    [15] Improving Competition in Medicare: Removing Moratoria and Expanding Access: Hearing Before the Subcomm. On Health of the H. Comm. on Ways and Means, 114th Cong. (2015) (statement of Rich Umbdenstock, President and CEO, American Hospital Association).

    [16] See id. (statement of Joe Minissale, President, Methodist McKinney Hospital).

    [17] See John K. Iglehart, The Debate over Physician Ownership of Health Care Facilities, 321 New Eng. J. Med. 198, 203–204 (1989).

    [18] Id. at 199.

    [19] Paula Tironi, The “Stark” Reality: Is the Federal Physician Self-Referral Law Bad for the Health Care Industry?, 19 Annals of Health Law 235, 236 (2010).

    [20] See, e.g., U.S. Gov’t Accountability Office, GAO-14-270, GAO Report: Medicare Physical Therapy (2014); U.S. Gov’t Accountability Office, GAO-12-966, GAO Report: Medicare (2012).

    [21] See Theodore N. McDowell, Physician Self Referral Arrangements: Legitimate Business or Unethical ‘Entrepreneurialism, 15 Am. J.L. & Med. 61, 65 (1989).

    [22] See How is Medicare Funded?, Medicare.gov, http://www.medicare.gov/about-us/how-medicare-is-funded/medicare-funding.html (last visited Nov. 1, 2015) [https://perma.cc/3WFW-MWQZ].

    [23] See Financing and Reimbursement, Medicaid.gov, http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Financing-and-Reimbursement/Financing-and-Reimbursement.html (last visited Nov. 1, 2015) [http://perma.cc/3SBN-TUTM].

    [24] GAO-12-966, supra note 20.

    [25] Id.

    [26] See, e.g., Brian E. Kouri, R. Gregory Parsons & Hillel R. Alpert, Physician Self-Referral for Diagnostic Imaging: Review of the Empiric Literature, 179 Am. J. Roentgenology 843, 843 (2002).

    [27] Jean M. Mitchell, Urologists’ Self-Referral For Pathology Of Biopsy Specimens Linked To Increased Use And Lower Prostate Cancer Detection, 31 Health Aff. 741, 741 (2012).

    [28]See Alex Swedlow et al., Increased Costs and Rates of Use in the California Workers’ Compensation System as a Result of Self-referral by Physicians, 327 New Eng. J. Med. 1502, 1502–1506 (1992).

    [29]See Gerald Bloom, Hilary Standing, and Robert Lloyd, Markets, information asymmetry and health care: Towards new social contracts, 55 Social Science and Med 2076, 2077 (2008).

    [30] See Ways and Means Committee Holds Hearing on Competition in Medicare, Association of American Medical Colleges (May 22, 2015), https://www.aamc.org/advocacy/washhigh/highlights2015/432850/052215waysandmeanscommitteeholdshearingoncompetitioninmedicare.html [https://perma.cc/JN6Z-422Q].

    [31] See Improving Competition in Medicare, supra note 15 (statement of Rich Umbdenstock, President and CEO, American Hospital Association).

    [32] See David Zientek, Physician Entrepreneurs, Self-Referral, and Conflicts of Interest: An Overview, 15 HEC F. 111, 125 (2003).

    [33] See Improving Competition in Medicare, supra note 15 (statement of Rich Umbdenstock, President and CEO, American Hospital Association).

    [34] See, e.g., Morgan R. Baumgartner, Physician Self-Referral and Joint Ventures Prohibitions: Necessary Shield Against Abusive Practices or Overregulation?, 19 J. Corp. L. 313, 319 (1993).

    [35] Chris Conover, Are U.S. Doctors Paid Too Much?, Forbes.com (May 28, 2013), http://www.forbes.com/sites/theapothecary/2013/05/28/are-u-s-doctors-paid-too-much/.

    [36] Physician Supply and Demand Through 2025: Key Findings, Ass’n Am. Med. Colleges (2015), https://www.aamc.org/download/426260/data/physiciansupplyanddemandthrough2025keyfindings.pdf [https://perma.cc/N7A8-UC5W].

    [37] See Zientek, supra note 32, at 121, 124; Steven D. Wales, The Stark Law: Boon or Boondoggle? An Analysis of the Prohibition on Physician Self-Referrals, 27 Law & Psychol. Rev. 1, 3 (2003).

    [38] See Zientek, supra note 32, at 124.

    [39] See McDowell, supra note 21, at 64.

    [40] See Zientek, supra note 32, at 116.

    [41] See Centers for Medicare & Medicaid Services, Hospital Value-Based Purchasing, Cms.gov (last updated Oct. 30, 2015, 2:33 PM), https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/hospital-value-based-purchasing/index.html?redirect=/hospital-value-based-purchasing/ [https://perma.cc/PU8F-6UGP].

    [42] Jordan Rau, Doctor-Owned Hospitals Prosper Under Health Law, Kaiser Health News (Apr. 12, 2013), http://khn.org/news/doctor-owned-hospitals-quality-bonuses/ [http://perma.cc/7W5R-2YVU].

    [43] See id.

    [44] See id. (“It’s more of a recognition that we are a facility that is doing things right.”).

    [45] See Physician-Owned Hospitals Excel in CMS Star Ratings, Physician Hospitals Am. (Apr. 23, 2015), http://www.physicianhospitals.org/news/228189/ [https://perma.cc/Q64A-NEX5]. See also Patient Survey (HCAHPS) – Hospital, Data.Medicare.Gov, https://data.medicare.gov/Hospital-Compare/Patient-survey-HCAHPS-Hospital/dgck-syfz [https://perma.cc/2CQC-U9G7] (full survey results).

    [46] Leslie Fossey, Hospitals with Physician Ownership Once Again Lead the Way in New CMS Quality Ratings, PR Newswire (Apr. 20, 2015), http://www.prnewswire.com/news-releases/hospitals-with-physician-ownership-once-again-lead-the-way-in-new-cms-quality-ratings-300068415.html [http://perma.cc/Z3Z8-S4WS].

    [47] See id.

    [48] See, e.g., The Spine Hospital of Louisiana Leading the Way in New CMS Quality Rating, NeuroMedical Ctr. (Apr. 24, 2015), http://www.theneuromedicalcenter.com/the-spine-hospital-of-louisiana-leading-the-way-in-new-cms-quality-ratings/ [http://perma.cc/2UZD-4AXH].

Comments are closed.