Professional Profiteering?: The Ethics of Physician Entrepreneurship David A. Hyman Perspectives in Biology and Medicine, Volume 35, Number 3, Spring 1992, pp. 318-329 (Article) Published by Johns Hopkins University Press DOI: https://doi.org/10.1353/pbm.1992.0023

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PROFESSIONAL PROFITEERING? THE ETHICS OF PHYSICIAN ENTREPRENEURSHIP DAVID A. HYMAN*

The propriety of physican investment in facilities to which they refer patients, known as physician entrepreneurship, has been hotly debated

for the past several years. The subjct has received attention from physicians [1-4], lawyers [5-7], philosophers [8-10], regulators [5, 6, 11],

newspaper reporters [12-14], and Congressmen [5, 15, 16]. They have proffered solutions ranging from an absolute ban on investment, to mandated or voluntary disclosure, to no restrictions whatsoever. The

ethical appropriateness of these arrangements has remained a vexing issue, and resolution of the problem has been left to the consciences of

individual physicians. Such conduct occupies an uneasy middle ground between fee splitting and ownership of stock in a drug company, precluding universal acceptance or rejection. Yet few issues raise such controversy among physicians. Proponents hail the entrepreneurial instincts of doctors and logically point to the encouragement of such

activities by cost-containment efforts, assert that business enterprises behave at least as ethically as physicians, and note that fee-for-service practice raises the same conflict-of-interest issues as these newer ar-

rangements [2, 4, 17]. Critics, however, argue that such conflicts of inter-

est are destroying the public's view of the profession and are also inimical to the profession's view of itself [1, 18]. Where, then, is one to draw the line between ethical and unethical

conduct in the face of such entrepreneurial arrangements? Medicine is

a profession, bound by ethical principles. Medicine is also a business, whereby its practitioners hope to earn a living. Neither aspect could long exist without the other, but their accommodation to daily practice is often a matter of tension [20]. There will always be conflicts between profession and business, fiduciary principles and caveat emptor. Current difficulties seem to be due to a fundamental modification in the

*Address: Mayer, Brown, & Piatt, 190 South LaSaIIe Street, Chicago, Illinois 60603. © 1992 by The University of Chicago. All rights reserved. 0031-5982/92/3503-0787101.00.

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dynamic balance between these two poles. As the Institute of Medicine's Committee on For Profit Enterprise in Health Care posed the issue,

"certain changes that are occurring in our increasingly entrepreneurial health care system could undermine patient's trust in their physicians and society's trust in the medical profession. For those who believe that the professionalism of the physician is an essential element in ensuring the quality of health care ... an important question is whether that professionalism will be undermined by the increasingly entrepreneurial health care market in which physicians play a major part" [19]. One preliminary matter, for those who doubt this is an ethical issue

at all. The last twenty years of medical ethics has focused almost exclusively on clinically related issues such as the treatment of incompetent patients, brain death, surrogacy, and the like. It would be easy to conclude that ethics has to do only with patient care dilemmas. It has been largely forgotten that physicians have long considered the character of the profession, as reflected in its business-related dealings, to be an ethical issue. It is telling to note that in the American Medical Associa-

tion's most recent collection of the opinions of the Council on Ethical and Judicial Affairs [22], over 75 percent relate to such nonclinical mat-

ters as advertising, fees, records, hospital and interprofessional relations, and conflict of interest. Virtually none of the opinions address the cutting edge ethical issues that make for bold headlines and professional ethicists.

What exactly is physician entrepreneurship? Generally speaking, it involves the receipt of income in one way or another for making a "referral" of some sort. Such secondary income may be as infinitesimal as writing a prescription for a drug produced by a company in which the physician owns stock. This return would be so attenuated as to effectively eliminate any incentive. But consider the doctor who sells the

patient a drug or medical device for which he has just written a prescription. The physician's incentive is to write prescriptions for drugs he has in stock and to encourage their use in marginal cases. Similar issues are raised by physician involvement in walk-in clinics that financially "encourage" the use of profitable laboratory and x-ray procedures [21]. Another arrangement involves the "sale" of a physician's practice to a hospital. The physician continues to practice as usual, but the hospital has ensured that it will receive many "captive referrals." Finally, there are investment interests in facilities to which patients are referred, such as clinical laboratories, imaging centers, ambulatory surgery centers, home health-care agencies, physical therapy centers, durable medical equipment suppliers, and the like. All have in common the fact that the physician-investors also refer patients. Some of these arrangements promise extravagant returns on minimal investment and appear to in-

duce blatant overutilization. Others appear to be more legitimate investPerspectives in Biology and Medicine, 35, 3 ¦ Spring 1992

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ments, bringing sophisticated equipment to underserved areas and offering only competitive returns. All of these varying arrangements raise the same issue—a conflict of interest between financial incentives and

professional behavior. To be fair, it is clear that conflicts of interest are endemic to the

medical profession; any arrangement for providing health care—especially fee-for-service practice—raises the same problem as physician entrepreneurship. Yet, the underlying reasons for that problem should not escape attention. Conflict of interest is not a new issue for the medi-

cal profession, because any system of compensating professionals is

problematic. One cannot create a system that is without any inappropri-

ate incentives. Open-ended reimbursement provides increased income

to those who overutilize, and capitation creates the opposite incentive. This does not mean that any system is equally acceptable because all are equally flawed. The proper question "is not to find a set of incentives

that is beyond criticism, but to seek arrangements that encourage the physician to function as a professional, in the highest sense of that term" [19].

What is there to be said for this claim—that the profession of medicine as profession requires that physicians refrain from certain entrepre-

neurial arrangements? If a profession is simply a matter of expertise without accompanying obligations, not much. Yet the practice of medicine is more than simply technical expertise or know-how. Although professionals are expected to be good at what they do, they are also expected to profess something. In the case of medicine, physicians pro-

fess concern for and loyalty to the sick. A physician is someone that patients can consult without fear their trust will be betrayed or their plight will be ignored or exploited. The physician is expected to consult the patients' wants and needs and not his or her own self-interest in deciding what is to be done. This sublimation of self-interest is a necessary element of the professional stance. Even the American Medical

Association, which sanctions many entrepreneurial arrangements,

firmly and explicitly acknowledges that "[u]nder no circumstances may the physician place his own financial interest above the welfare of his patient. The prime objective of the medical profession is to render ser-

vice to humanity; reward or financial gain is a subordinate consideration" (Opinions 4.05) [22].

Physicians enter the lives of the sick and infirm. They profess to "keep them from harm" by acting as fiduciary trustees for their interest. Physicians are not obliged to be selfless in the choosing of their patients, but once chosen, they are not to be exploited. The standard is not caveat emptor, the general rule of the marketplace. As Justice (then Judge) Cardozo put it, "many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by 320

David A. Hyman ¦ Professional Profiteering

fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive is then the standard of behavior." This is not a claim

about altruism—rather, trustworthiness is the fundamental issue [23].

One cannot be a trustee if one is not worthy of trust. Most people would hesitate to place their health and pocketbook in the hands of someone subject to hidden incentives and loyalties that were inevitably inconsistent with their own. Mutual confidence and trust is necessary if the doctor-patient relationship is to be formed at all. It is helpful to recall that this problem has a history. The conflicts of

interest raised by fee splitting, receiving rebates or discounts, and owning nursing homes or hospitals are analogous to those created by physician entrepreneurship. As a profession, medicine has always been distanced from, yet dependent on, the marketplace and the profit motive. The ways in which this duality has been handled in the past are instructive because they illustrate the inherent tension between profession and business and the uneasy balances that have been struck. The ethical

codes that professional organizations have formulated are one guide to the boundaries of ethical conduct. Such self-regulation is an inherent

and necessary characteristic of any true profession. Provisions addressing the general problem of conflict of interest are a prominent feature of many such codes. The AMA has adopted several Principles of Medical Ethics, including

the proposition that "a physician shall deal honestly with patients and colleagues." This provision has been interpreted by the Council on Ethical and Judicial Affairs, through periodic "Opinions," to flatly condemn the practice of fee splitting (Opinion 6.04) [22]. Fee splitting has been

prohibited by the Opinions since 1912 as "detrimental to the public good and degrading to the profession." Initially the emphasis was on the hidden character of such payments, but since the 1950s, fee splitting itself has been condemned [9]. The present Opinion notes that "the payment violates the requirement to deal honestly with patients and colleagues. The patient relies upon the advice of the physician on matters of referral. All referrals and prescriptions must be based on the skill and quality of the physician to whom the patient has been referred

or the quality and efficacy of the drug or product prescribed" (Opinion

6.04) [22]. Financial incentives that skew such disinterested judgment

are, then, presumably inappropriate. Similar prohibitions apply to clinic and laboratory referrals and the receipt of drug prescription rebates. Efforts at circumventing these proscriptions were originally given short shrift—in 1947, the AMA Judicial Council became so aggravated by the efforts of ophthalmologists to evade the prohibition on rebates they issued an Opinion stating, "no matter how prevalent these practices may have become, they are still unethical. It should be well known by

Perspectives in Biology and Medicine, 35, 3 · Spring 1992 | 321

this time that the traditional interpretation has been that the doctor may receive no profit from his patient other than payment for medical services" [24]. More recently, the AMA has become much more accom-

modating to entrepreneurial interests. In 1955, an Opinion that sought to limit the sale of appliances (e.g., eyeglasses) by prescribing physicians was removed after an organized protest by ophthalmologists. Two years

later, the AMA concluded that physicians could legitimately dispense drugs, remedies, or appliances, so long as the best interests of the patient were served.

The extent to which the AMA has retreated from its 1947 Opinion is clear in the present standards. The AMA now sanctions physician ownership of facilities to which they refer patients. The relevant Opin-

ion does caution, "[u]nder no circumstances may the physician place his own financial interest above the welfare of his patients ... If a conflict develops between the physician's financial interest and the physician's responsibility to the patient, the conflict must be resolved to the patient's benefit" (Opinion 4.05). Physicians also have an ethical obligation to disclose their financial interests to their patients. Another section of the Opinions deals with the general problem of

conflict of interest. This section opens with the flat assertion: "physician

ownership interst in a commercial venture with the potential for abuse is not in itself unethical" (Opinion 8.03). It then recapitulates the obligation to disclose, notes that the patient should be given free choice, and adds an injunction against exploitation. The only type of secondary income flatly condemned by the AMA is DRG incentive payments, offered by hospitals to physicians to reward economical treatment. The AMA's present position is thus a marked loosening of its earlier

formulations, allowing physicians to accommodate themselves to the demands and benefits of the marketplace. The AMA insists that "medicine is a profession, a calling, and not a business," but these guidelines provide little evidence of the AMA's ability or desire to stand in opposition to physician entrepreneurship. In an attempt to maintain professional standing and also maximize business receipts, these guidelines provide little guidance. The flat prohibition of fee splitting is inconsistent with the minimal limitations on physician ownership interests. DRG incentive payments don't appear different enough from these profit-sharing entrepreneurial interests to justify a per se determination of unethical behavior for only one of them. Limiting the focus to abusive relationships is also puzzling—the problem of the appearance of impropriety is discounted entirely, and few people need to be told that it is unethical to engage in overutilization.1 'While this article was in press, the AMA's Council on Ethical and Judicial Affairs issued new guidelines that significantly tighten the standards for physician investment in facilities

to which they refer patients.

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Other professional organizations have enacted more stringent restrictions on physician entrepreneurship. The American College of Physicians (ACP), after condemning fee sharing, notes, "the physician must avoid any personal commercial conflict of interest that might compromise his loyalty and treatment of the patient .... The safest course

would be to avoid any such potentially compromising situations" [25]. The American College of Surgeons (ACS) first condemned fee splitting shortly after its formation. In fact, the ACS expelled members who split fees and originally required a signed declaration from all candidates for fellowship that they would not participate in such practices [26]. Hospitals that sought accreditation by the ACS had to promulgate policies that would prohibit fee splitting. The American College of Radiology (ACR) recently enacted a policy statement on referral arrangements. It states, "[t]he position of the ACR is that the practice of self-referral of

patients for a diagnostic or therapeutic medical procedure may not be in the best interest of the patient. Accordingly, referring physicians should not have a direct or indirect financial interest in diagnostic or

therapeutic facilities to which they refer patients" [27]. Finally, the Institute of Medicine's Committee on For Profit Enterprise in Health Care

concluded after several years of study that "it should be regarded as unethical and unacceptable for physicians to have ownership interests in health care facilities to which they make referrals or to receive payments for making such referrals" [19]. These four strong statements of policy stand in stark contrast to the AMA's more conciliatory approach.

Although it is widely recognized within the medical profession that there should be some ethical limitations on physician entrepreneurship, there is relatively little consensus on how sweeping the limitations should be. How, then, is one to balance the competing claims of business and profession posed by physician entrepreneurship? One might begin resolving the issue by looking again at the problem of fee splitting. In an age of skepticism about professionalism, physicians, medical societies, and state law are virtually uniform in their opposition to such practices [6]. Although a strictly economic issue, fee splitting is the most illustrative conflict of interest because it cuts to the ethical heart of the profes-

sion in its claim to be a moral enterprise. If physicians send their referrals to the highest bidder, they are decidedly not acting as trustees for the patients' best interests. As far back as the 1920s, the ACS described three evils that resulted from surgeons splitting their fees: [F]irst, ... it makes for incompetent surgery. The surgeon who is party to the practice gets his cases usually not upon the basis of merit but upon the basis of the percentage of fees collected that he will give to the practitioner. The more

incompetent he is, as a rule, the larger a percentage of the fees he gives to his

co-fee-splitters. Second, fee splitting makes for unnecessary surgical operations. Under the Perspectives in Biology and Medicine, 35, 3 ¦ Spring 1992

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fee splitting system, surgery becomes a commercial enterprise and not a professional service. Both the physician and the surgeon tend to make surgical diagnoses without adequate study, and the result is unnecessary surgery. . . .

Third, fee splitting, by introducing dishonesty into medical practice, lowers the entire medical profession in the estimate of the public. The fee-splitter, for

example, says to his patient that he refers him to a most competent surgeon, when he knows well enough that if he, the physician, were to be operated upon,

he would select another surgeon. Further, the fee-splitter usually poses before

his patient has having received little or no fee for his services when, as a matter of fact, he has received a large fee indirectly from the patient. He holds such a fee really as a theft. [28]

By distorting the decision-making process, fee splitting corrupts the entire enterprise of medical care and elevates physician self-interest

above the patient's needs. Physician entrepreneurship has the potential to do the same. Here is the same hidden payment, the same incentive to steer the patient to one's own facility over others, the same potential

for marked overutilization, the same pretense of trustworthiness, and the same posturing that one receives no secondary income. Are these really the actions of a trustworthy agent? To embrace physician entrepreneurship is to abandon the moral center of the profession in its claim

to be primarily a fiduciary for the patient's interests.

What then differentiates ethical conduct from unethical? Why is phy-

sician entrepreneurship like fee splitting and unlike gatekeeper arrangements or fee-for-service medicine? The latter two can surely distort the physician's decision-making process as well. In fact, much of the criti-

cism of HMOs and for-profit hospitals seems connected to the potential conflicts of interest and incentives that might be brought to bear on the physician.

The incentives created by such arrangements are open and obvious. Patients may readily ascertain the physician's economic interest and ac-

count for it in their decisions. In fact, the ethical acceptability of gate-

keeper arrangements in HMOs has been explicitly conditioned on ad-

vance knowledge by patients of the general incentives to which their physicians would be subjected [19]. Some commentators have suggested

that HMOs should be required to fully disclose to patients at the time of enrollment the actual incentives and constraints their physician will

operate under [29], Knowing acquiescience should limit concerns about the impropriety of such institutional arrangements. Physician entrepreneuership, however, is almost never revealed to

patients. Unlike the other practice arrangements discussed, where the conflict is apparent to all, the patient is unable to weigh the physician's financial interest in assessing treatment recommendations. Proponents usually suggest this problem can be cured by disclosure of the adverse

interest. Unfortunately, there are good reasons to be skeptical about the effectiveness of mandated disclosure, even on the rare occasions that it 324

David A. Hyman ¦ Professional Profiteering

occurs [12, 30]. Indeed, disclosure may well undermine the very values it attempts to safeguard [6]. Yet, the most obvious objection to these entrepreneurial arrangements is financial. A physician is more likely to refer patients for a non-costworthy or unnecessary test if there is an economic return for the referral. Many of the entrepreneurial arrangements involve sophisticated diagnostic equipment. One would predict that an ownership interest would lead to a marked increase in extremely thorough—and extremely expensive—work-ups. Similar patterns will prevail whenever physicians are rewarded financially for making certain patient care decisions. The empirical evidence that is available tends to support this commonsense conclusion [19, 31]. One observer recently commented that entrepreneurial arrangements of this sort have " 'dramatically increased testing,' driving up many physicians' bills as much as 60 percent" [14]. A sales pitch for physician investment in MRI diagnostic centers was even more explicit: extremely high utilization results because "the clinicians are feeding the machine" [32]. A recent report from the Inspector General of HHS suggested that increased testing by physicians with investment interests in clinical laboratories cost the Medicare program $28 million in 1987 [33]. Increased utilization does not necessarily imply fraudulent conduct, but it certainly foreshadows unpleasant consequences for the total cost of health care, an increased level of iatrogenic injury, and a rise in misdiagnosis from false-positive results. The response of physician entrepreneurs on this issue has been

muted. Most commonly, the claim is that physicians will not respond at all to such incentives, in keeping with their professional obligations. Ironically, the attackers of professionalism now rely on professionalism to curb both criticism and overutilization. Even limited to the financial

arrangements discussed, this claim is suspect. Physicians, like everyone else, respond to economic incentives. Their professional obligations may place broad limits on their responsiveness, but a reward for a particular clinical decision will affect many cases. The

explosive growth in the Medicare budget prior to the introduction of DRGs certainly indicates that physicians do not routinely violate the

predictions of economists. It is unlikely that physicians will abdicate their responsibility entirely, but the art of medicine is likely to be a more expensive and risky proposition if physicians can profit from increased utilization: "It is asking more than human perfection to assume that a surgeon's judgment may not be influenced unconsciously by pressing financial need" [34]. Whether consciously chosen or not, the effect is likely to be pronounced. Perhaps George Bernard Shaw said it best: What other men dare pretend to be impartial where they have a strong pecuniary interest on one side? Nobody supposes that doctors are less virtuous than judges; but a judge whose salary and reputation depended on whether the Perspectives in Biology and Medicine, 35, 3 ¦ Spring 1992

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verdict was for plaintiff or defendant, prosecutor or prisoner, would be as little trusted as a general in the pay of the enemy. To offer me a doctor as my judge and then weight the decision with a bribe of a large sum of money and a virtual

guarantee that if he makes a mistake it can never be proved against him, is to go wildly beyond the ascertained strain which human nature will bear [35].

It is foolish to maintain that physicians will be able to resist some of the lucrative opportunities of entrepreneurialism. Even without specific economic incentives, physicians' lack of diagnostic restraint is already well established [36]. When sufficient financial incentives are added,

even the definition of "treatable disease" may expand [37]. The costly consequences are clear. Even if no physicians respond to these incentives—as unlikely as that outcome seems—the mere appearance of impropriety is likely to damage the reputation of the profession [8]. Patients generally believe that

their physicians will strive to advise them appropriately. At bottom, the relationship is founded on mutual trust and identification of interest.

The medical profession has already seen a substantial decline in its public image. Some of this decline is probably due to the growing commercialization of health care, as medicine moves away from its traditional

emphasis on altruism [38]. Patients' trust in their own physicians remains high. However, widespread recognition of the potentially adversarial interest can only result in a further decline in the reputation of the profession and in patients' trust in their own physicians. The profession will lose its foundation of trust as patients begin to routinely question whose interest the physician is serving.

Claims about professionalism have been sharply scrutinized in recent years. Sociologists and economists have attacked the idea of professionalism as "a myth created and perpetuated by professionals to enhance their status" and used to "silence the critics of monopoly, privilege, and power to which professionals are attempting to cling." Yet, this "myth" is of great practical importance if one looks to its effect on the practice of medicine. Theories of professional responsibility have recently been used to support the physician's obligation to provide care to AIDS patients and to oppose euthanasia [39-41]. That these arguments are at all persuasive testifies that such matters are a force in the way most doctors think about their work. Would practitioners of the medical art speak and act in such fashion without sharing some ideal of the healing profession? Policymakers have also relied on professionalism—physicians were intended to be the conscience of the DRG system and to ensure that patients' needs were not ignored in the rush to cost-containment.

Of course, one can rightly complain that few physicians act so scrupulously. In part, this dereliction is due to changes in the medical environment and in American society, rather than to any latent defect in physi326

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cians' moral character [18]. Still, ethics that quit when the going gets tough are really little more than window dressing. Are physicians cyni-

cally exploiting the nation's pocketbooks and its trust? Is medicine "just another interest group scrambling for a place at the public trough"? Should we embrace entrepreneurship and expose the sham of professionalism?

New mistakes will not remedy old ones, but they may well distract us from the fundamental problem of professional compensation. It is obvious that fee-for-service practice creates a conflict of interest, but that observation, without more, does not justify the creation of new conflicts of interest. In fact, our uneasiness about the incentives created by the

fully visible practice of fee-for-service medicine should discourage us from casually creating more conflicts of interest. The ambivalent relationship between medicine as profession and as business may never allow for a completely satisfactory solution, especially since the conflict

is so deeply rooted that it has been called the "central paradox of medicine" [20].

Physician entrepreneurship poses this paradox in an especially poignant form. Here is both the appearance and, at least, the potential for impropriety. Payments are generally hidden, worsening the potential

conflict of interest. Self-interested behavior, hidden beind a mask of

professionalism, seems inevitable. Of course, one may never escape selfinterest entirely, but neither is one obligated to give it free reign. Ulti-

mately, most physician entrepreneurship is an oxymoron—one cannot be both disinterested trustee and hustling promoter. The former is at worst only partially in the commercial world, while the latter at best never leaves it behind.

What then is to be done? Several states have attempted to ban or otherwise regulate physician entrepreneurial activities [5, 6]. The De-

partment of Health and Human Services has recently issued new regulations, and Congress has tinkered with the issue as well [5, 16, 42]. If it is shown that these arrangements actually increase Medicare expenditures, there are good indications that new federal laws will be passed. Yet all this derives from a commendable concern with the budget, and not with the ethical integrity of the medical profession.

If the medical profession intends to take its obligations seriously, it should act first and set an example. Physicians should reexamine their economic interests. Professional organizations such as the AMA could issue stronger statements opposing entrepreneurial activities and the

creation of unnecessary conflicts of interest. Ironically, however, ethical codes will only restrain the most ethically minded practitioners—those

who are least likely to exploit their patients and abuse the public trust. Faced with this paradox, a professional society might attempt to discipline those who, despite ethical bars, choose to engage in entrepreneur-

Perspectives in Biology and Medicine, 35, 3 ¦ Spring 1992 | 327

ial conduct. Unfortunately, such actions are probably not compatible with the antitrust laws, which do not contain an exception for the

learned professions to undertake anti-competitive conduct, even for worthy ends [43]. An effective prohibition can come only from the legislature. As the final irony, the safeguarding of the ethical integrity of the medical profession is no longer a matter for doctors. REFERENCES

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