Physician Conflict of Interest  3/94

There has been extensive debate over physician conflict of interest in both the lay and medical press. The general consensus is that physicians are guilty of a conflict whenever they refer a patient to a laboratory, x-ray, surgical, or any diagnostic or treatment center in which they have a financial interest. It has been variously estimated from 7-27% of such centers are partially owned by physicians. This has caused criticism that physicians are profit motivated, using patients as a captive group to increase their wealth, and having minimal concern for their welfare. Criticism about health care in the media, whether about physicians, hospitals, ancillary health facilities, or pharmaceutical companies creates a poor image first for the physician. After all, the public holds us responsible for all aspects of medical care, even though we control very little of its operation and are not directly responsible for the cost of that 80% of health care costs that occur outside of the physician's office.


"Physician Conflict Of Interest" may be defined as any possible compromising of a physician's professional judgment in making a diagnosis, outlining a diagnostic plan, instituting a treatment program, or even in the initial "acquisition" of the patient, for the purpose of financial reward.

It is presumed conflict, if ownership is present, even if the judgment is not compromised; the diagnosis is accurate and medically astute; the therapy appropriate, with no increase in cost or decrease in quality; and there has been no financial gain in the process.

Office Practice

In a busy office practice, a large variety of patients come in with a multiplicity of problems that need immediate evaluation, diagnosis, and treatment. The family doctor of yesteryear was expected to have the appropriate laboratory capabilities to make the required urgent diagnosis, and have the appropriate therapeutic modalities in his office for the initiation of prompt treatment. This may be changing to the detriment of patient care.

Conflict in Source

If a patient is referred from a source over which the physician has some control, or the source has control over the physician, this may alter his professional judgment. He may minimize the severity of his diagnosis, the completeness of his diagnostic plan or the extent of his treatment in order to benefit his referral source. The source can include an insurance carrier, a managed care intermediary, or a hospital which provides him more patients with the same beneficial expectation.

Conflict in Diagnostic Tests

It is stated in the lay and medical press that if a physician has a financial interest in a laboratory, an x-ray facility and its extension to CT's and MRI's, an EEG, EMG, PFT, sleep laboratory, or any other diagnostic facility, he will order more diagnostic studies than he would normally order or which would be required by usual standards of care.

If he does these tests in his office as a service to his patients, as long as they are appropriate to his field of practice, they are currently allowed. The Clinical Laboratories Improvement Act (CLIA), however, may make such studies more expensive or otherwise not feasible due to personnel or other regulatory requirements which can not be met due to the limited volume performed.

Conflict in Treatment Regimens

It is generally expected that if a physician has a financial interest in a drug company, respiratory care service, an oxygen supply company, a rehabilitation or other treatment facility, he will order the drugs manufactured by that company, order more respiratory treatments, home oxygen, or have patients go through a more extensive rehabilitation program than would normally be considered appropriate.

Physician Ownership of Hospitals

Although physician ownership of hospitals is increasingly rare, proprietary hospitals are not. My medical school preceptor, along with his brother, both GP's, owned their hospital. My preceptor told me that the community was not interested in building a hospital, and so the two doctors had to do it. They charged $6 for a ward bed, $8 for a semiprivate bed and $10 for a private room (which I occupied during the month I was there). He told me the charges for their private hospital were between 20 and 50% less than the community hospitals in adjacent towns. Every year they discussed whether or not they should raise their rates to meet the level of other communities. They always decided the hospital was making adequate profit, and, therefore, they kept the charges low. Raising the fees would have put the cost of care out of the reach of the poorer members of the community.

Cost of Commercial Laboratories

The cost of laboratory tests by commercial laboratories, owned and operated by clinical pathologists, has been very responsive to the savings of technology. As autoanalyzers were developed, the cost of a dozen chemistry tests was about the same as the prior cost for a single test by hand. As coulter counters were developed for blood counts, we not only got hemoglobin, hematocrit, white blood count and differential, but also platelet counts and red blood cell indices, all for a reduced charge.


Cost Savings and Patient Convenience of Office Testing

Hospital laboratories are frequently about twice as expensive as commercial laboratories. In one community where outpatient CBC's are $14, the hospital CBC's are $28. As commercial laboratories become owned by non physician investors, their charges are also increasing disproportionately.

What is frequently overlooked is that the physician's office CBC is even cheaper. Some GP's are still charging $8-10 for a basic CBC in the office. Of course it doesn't have the indices and platelets, but it is satisfactory for the vast majority of decisions required in the care of office patients.

Modern technology has also reduced the costs of single chemistries. The primary care practitioner can do potassium, glucose, and other chemistries, as well as digoxin, theophylline, and other drug levels in a matter of minutes and for considerable less cost than the commercial laboratories, and for a small fraction of the cost of hospital laboratories. The greater convenience in medical management has markedly improved patient compliance, office efficiency, and level of care.

Chest X-Ray Comparison

When I went into the practice of Pulmonary Medicine in 1970, I used the chest x-ray facilities in the adjacent medical office building. I soon found that many patients were often so short of breath after going to and from the car to my office that they could not walk to the adjacent office building to get the CXR that I felt necessary for immediate diagnosis. They said they would have to go home and catch their breath for a day or so and then get the CXR. This would then require empirical therapy at the time of the initial office visit with the expense of a follow up evaluation sooner than normal. Sometimes neither the x-ray nor the return visit occurred, thereby requiring a follow up phone call, and the instituting of treatment by phone. Office CXR charges continue to be about half of the hospital rate.

Pulmonary Function Testing

Pulmonary function tests in offices are essential to a pulmonary consultation. PFT's are generally approximately two-thirds to one-half the cost of hospital PFT testing. Blood gas analysis, which are critical in the month to month management of respiratory failure patients, are also approximately half to one-third as expensive as hospital ABG's.

The Problem

With the current cost debate about health care reform, there is a basic distrust and hostility toward physician entrepreneurs. But as the above examples show, there may be little basis for the accusations that physicians are increasing costs without regard for our patients. In fact, there is ample evidence that we are working hard to save the patient considerable money and are the only effective counter balance to the excessive charges by the hospitals.

Many physicians have told me that they order fewer tests than they feel are necessary if the hospital does them because of the exorbitant charges for CT's, MRI's, PFT's, ABG's, EEG's, (to name a few). When less costly outpatient facilities are available, physicians will order more tests at a savings of 20% to 60% for each patient. This might explain the data in the literature which indicates that physicians refer 20-60% more often to their less expensive free standing labs than to the more expensive hospital laboratories. This probably doesn't increase overall health care costs. It does afford a higher level of care to more patients.


Physician offices and private outpatient facilities provide a service which is the hospitals' only competition. Radiologists put their names on their requisitions and reports and clinical pathologists put their names as directors of their laboratories on their requisitions and reports. It appears that as long as any physician who owns more than 5% of any outpatient diagnostic or treatment facility, has his name on the requisition, so that there is full disclosure to his patient, AND the patient is given an alternate place to have the test done (if such is available), there will be minimal abuse. The advantages to our patients would seem to far outweigh any possible disadvantages.

In an ideal world it may be preferable for physicians to steer clear of medically related investments. However, the current status of health care competition suggests other alternatives.

E. Haavi Morreim, Ph.D. from the Department of Human Values and Ethics at University of Tennessee, Memphis, College of Medicine, states that we should not be asking the question whether physicians should refer their patients to their own facilities. Clearly the answer is no. The real question is whether patients should be permitted to spend their own money on the provider they choose, including the ancillary facility in which their physician has a financial interest. Physician self-referral dictates where patients will spend their money and receive their care whereas a legal prohibition dictates just as rigidly where patients will not spend their money and can not receive their care. Either way, the patients are the losers. Their choice is preempted either by their physician or their government. Why not return the choice to the patient?

Dr. Morreim also reviews the FTC position on physician ownership which the FTC feels can improve quality of care, enhance efficiency, and lower the price, and thus remedy the problem of hospital pricing while improving service.

It would be important that physicians be allowed and perhaps even encouraged to fully participate in any outpatient free standing diagnostic and treatment facility to preserve competition in the medical marketplace.