American Journal of Law & Medicine

The physician self-referral dilemma: enforcing antitrust law as a solution.


"Disease" plagues the United States health care system. Health care costs continue to soar, revealing no sign of abatement.1 Although many believe the United States boasts the highest quality health care in the world, the amount of money it spends on health care fails to engender a corresponding increase in quality of care.2 For example, the United States devotes more than twice as much money per capita to health care than most other industrialized countries, yet it has nearly the lowest mortality rates.3 Moreover, an exorbitant number of citizens try to remain healthy while suffering from a most devastating illness, lack of health insurance.(4) Those fortunate enough to have insurance often do not have enough coverage.(5)

Many contend that the practice of physician self-referrals exacerbates the health care crisis.(6) Physicians "self refer"(7) when they send a patient for testing or treatment to a health care entity in which they have a financial interest.(8) The process begins when physicians in a position to refer patients invest in an ancillary health care facility.(9) The physician-investors then send their patients to that facility. On its face, this scenario appears mutually beneficial to patients and physicians. The ancillary facility offers patients the opportunity to receive treatment or testing outside of the traditional hospital setting.(10) In addition, such ancillary facilities sometimes give patients access to new technology.(11) At the same time, physicians benefit by earning a return on their investment.

However, recent evidence supports the conclusion that self-referrals cause over-utilization, overpricing, and lower quality of care.(12) In the now famous Florida Study,(13) data indicated that doctors who self-refer generally order more procedures for their patients than do non-self-referring physicians.(14) Financial incentives motivate self-referring physicians to recommend tests or treatment for patients even when patients do not need them.(15) For these doctors, more testing means greater profits.(16)

Other sources reveal that such physicians refer their patients only to the facilities in which they have invested, regardless of whether the facility provides the best quality care for the lowest price.(17) Self-referring physicians choose the secondary health care provider that the patient will use,(18) thus "dictat[ing] where patients will spend their money and receive their [health] care."(19)

Self-referrals distort competition in an already diseased health care market by inflating health care costs, both in terms of actual dollars and lower quality of care.(20) Although not all self-referrals lead to anticompetitive effects, those which do must be eliminated. To combat the problem engendered by self-referrals, some have suggested laws(21) or ethical guidelines(22) prohibiting the practice. However, these solutions severely restrict a physician's competition in the health care market. Then, it examines how enforcing antitrust laws can ameliorate the self-referral dilemma and aid in restoring competition to the health care market.


During the last two decades, changes in the health care system have induced changes in the physicians' role.(23) The physician no longer serves only in the traditional role as provider of medical care; she has adopted a second role, that of entrepreneur.(24) In response to competitive pressures, physicians developed new tactics to offer efficient medical services and earn increased profits.(25) Instead of relying on hospitals to provide most health care services, physicians invested in ancillary facilities, such as clinical and radiology laboratories, and physical therapy centers, which could provide the same services as hospitals.(26) These investments generally took the form of limited partnerships where doctors invest a nominal sum of money and limit their potential liability.(27) In return, physician-investors receive dividends, which increase directly as the number of investors and the number of referrals each investor makes increases.(28) Accordingly, by sending all of their patients to their own facilities, physician-investors ensure easy returns on their investments.

Initially, physician investment brought about positive results for everyone involved. First, competition flourished between physician-owned facilities and hospitals. Soon, doctors realized profits previously reserved to hospitals. Physicians could hardly make a bad investment because self-referrals guaranteed patient use of their facilities and thus, guaranteed profits.(29) Second, physician investment facilitated increased patient access to sophisticated health care technology. Outpatient surgery centers and diagnostic laboratories, among other secondary health care facilities, appeared in many areas.(30) Doctors set up facilities close to their patienst's homes; patients discovered purchased the newest technology, enabling patients to receive tests and test results more quickly.(31)

The initial favorable reaction to this investment has not lasted. It has quickly become apparent that physician-investors' practice of self-referral creates anticompetitive drawbacks which outweigh any positive results occasioned by physician investment. Self-referral has led to over-utilization of tests and higher medical care costs.(32) Inevitably, some doctors' desire for higher profits blind them at the price of quality of patient care.(33) Physicians, traditionally regarded as trustworthy caretakers, are now seen as self-interested profit-seekers.(34) Even when most doctors operated solo practices under the traditional fee-for-service system,(35) patients worried about whether physicians would order unnecessary tests or treatment merely to increase their income.(36) The recent proliferation of physician-owned businesses has intensified such concerns. With the practice of self-referral, a doctor earns money twice: first, by assessing patients' health during an office visit and second, by sending them for treatment at the physicians' ancillary facility.(37)

Furthermore, self-referral has posed difficulties for doctors who do not want to invest in ancillary facilities. Self-referring physicians pressure special- colleagues to invest in their businesses. These collegues really have no choice: those refusing to invest cannot survive even by providing the highest quality care for the lowest price because self-referring doctors control the patient referral flow.(38) Moreover, because self-referring doctors control the patient flow, even colleagues who escape pressure to invest cannot survive.

Finally, researchers discovered that physician-owned facilities have failed to bring new technology to needy patients.(39) Physician-investors actually shy away from establishing businesses in poor areas.(40) Instead, doctors continue to invest in laboratories and other facilities in urban areas that already have an oversupply of providers.

Physician-owned health care enterprises now saturate the United States health care market.(41) Nevertheless, lawmakers have set some limits on self-referral. Currently, Congress prohibits health care practitioners from referring Medicare and Medicaid patients to a clinical laboratory in which the provider or a family member has a financial interest.(42) Some states also ban or restrict self-referrals.(43) Moreover, the American Medical Association (AMA) favors prohibiting self-referrals unless physicians demonstrate "community need."(44) Nevertheless, the problem remains unsolved. Physician self-referrals continue to plague the health care market by distorting competitive forces.


Theoretically, competition forms the basis of the market economy in the United States.(45)

The essence of a competitive market is (1) ... [the existence of)

many well-informed buyers and sellers, no one of whom is large

enough to influence price; (2) ... buyers and sellers act[ing] independently

(that is, there is no collusion); and (3) ... free entry for

other buyers and sellers not currently in the market.(46) Under perfect or healthy competitive conditions, the market system should produce the most efficient allocation of resources.(47) Sellers' behavior, expressed as Supply,(48) interacts with buyers' behavior, expressed as demand,(49) at the point of equilibrium which determines market price.50 This price reflects the point at which the amount of good buyers want to purchase equals the amount of goods sellers wish to sell.(51) At any other price, buyers and sellers would have incentives "to change their behavior until the quantities supplied and demanded [become mutually consistent."(52)

Consumer knowledge about price and quality provides a key ingredient to achieving healthy competition.(53) Sellers advertise their products and services; consumers gather information about the products and services they want to purchase. If the market functions in accordance with the theoretical model, consumers scrutinize goods and services to find the highest quality for the lowest price.(54) However, consumers may spend more money when they want a higher quality product or spend less money and sacrifice quality if they have less money to spend, or choose to spend money in other areas. Suppliers alter inventories to meet demand: suppliers with low quality or high priced products may adjust their output in order to gain or keep market share.(55) As a result of this process, competition should flourish.(56)

While the United States economy fails in many respects to conform to the ideal competitive market described above, the health care market "depart[s] substantially from competitive conditions."(57) Due to the nature of the health care industry, market failures prevent competition from achieving its potential.(58) Such failures endemic to the health care market include payment by insurance companies for most of patients' health care expenses without regard to cost and appropriateness of care, thus increasing patients' incentives to demand all of the care the doctor recommends, and increasing physicians' incentives to render more care than patients may truly need.(59) Provider influence over the market through collusive behavior reflects another health care market failure.(60) This influence reduces the benefits of competition which occur when providers act independently.(61)

Moreover, the health care market contains barriers to information.(62) Through no fault of their own, patients often lack the necessary skills to evaluate what medical treatment they need.(63) Consequently, patients must trust physicians to assess their health and suggest treatment.(64) Although theoretically physicians should discuss all treatment alternatives with patients,(65) in practice patients usually almost blindly follow physicians' advice.(66) Once the doctor suggests tests or treatment, "[t]he patient, ill and uninformed, is in no position to do comparison shopping.(67) "Thus, without good information, the beneficial qualities of competition -- efficiency in production, minimum prices necessary to meet demand, responsiveness to consumers' desires and self-policing of competitors -- are lost."(68)


Study of the profits of physician-owned facilities to which physician-investors refer their patients further indicates that an ailment afflicts competition in the health care market. In healthy competition, profits from physician-owned facilities should be about the same as those from businesses not owned by physicians.(69) The Florida study(70) discovered substantially higher profits for physician-owned ventures.(71) According to researchers, excessive profits suggest that physician-owned businesses provide services more efficiently than their competition, charge more for those services than would be warranted by competition, or furnish services of lower quality at lower prices.(72) In the case of most physician-owned ventures, the latter characteristics, charging more for services and providing lower quality services, tend to be present.(73)


Higher profits of physician-owned facilities, and resulting adverse effects on competition, can in part be attributed to self-referrals.(74) Essentially, self-referrals enhance the already prevalent problem of supply-induced demand.(75) Supply-induced demand involves "the creation of medical |need' by those who then profit from it."(76) For example, "[a]ctuarial studies have shown that in areas with the greatest supply of physicians, people simply go to the doctor more often."(77) Physician self-referrals inflate this problem: instead of patients choosing to go to the doctor more often, doctors create demand for their services by ordering more tests or treatment at the business in which they invested. …

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