Selective Hearing: Physician‐Ownership and Physicians’ Response to New Evidence

• Date: 01 February 2017
• DOI: http://doi.org/10.1111/jems.12178
• Author: Jason Hockenberry,David H. Howard,Guy David
• Published date: 01 February 2017

Selective Hearing: Physician-Ownership

and Physicians’ Response to New Evidence

DAVID H. HOWARD

Department of Health Policy and Management

Department of Economics

Emory University

Atlanta, GA

david.howard@emory.edu

GUY DAVID

The Wharton School

University of Pennyslvania

Philadelphia, PA

gdavid2@wharton.upenn.edu

JASON HOCKENBERRY

Department of Health Policy and Management

Department of Economics

Emory University

Atlanta, GA

jason.hockenberry@emory.edu

Physicians, acting in their role as experts, are often faced with situations where they must

trade off personal and patient welfare. Physicians’ incentives vary based on the organizational

environment in which they practice. We use the publication of a major clinical trial, which found

that a common knee operation does not improve outcomes for patients with osteoarthritis, as

an “informational shock” to gauge the impact of physicians’ agency relationships on treatment

decisions. Using a 100% sample of procedures in Florida from 1998 to 2010, we find that

publication of the trial reduced procedure volume, but the magnitude of the decline was smaller

in physician-owned surgery centers. Incentives affected physicians’ reactions to evidence.

1. Introduction

Vertical integration between physicians and others types of health care providers can

facilitate care coordination but, under the prevailing fee-for-service reimbursement

regime, may present physicians with incentives to referpatients for costly care. Physician

ownership arrangements are of special concern. Historically, physicians owned the of-

fices in which they provided primary care and basic exams but maintained arms-length

relationships with hospitals, imaging centers, surgery centers, and other facilities. Be-

ginning in the 1990s and continuing throughout the 2000s, many physicians assumed

ownership stakes in nonoffice facilities. Based on concerns that ownership encourages

physicians to recommend high-cost, low-value services, the U.S. Department of Health

and Human Services restricts physician ownership of health care facilities. Some types

of physician ownership arrangements are prohibited outright. Others are permitted as

long as they adhere to a number of regulatory “safe harbors.”

C2016 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume26, Number 1, Spring 2017, 152–168

Selective Hearing 153

Research on physician ownership of surgery centers (Hollenbeck et al., 2010;

Hollingsworth et al., 2010a, b 2011; Mitchell, 2010), cardiac hospitals (Barro et al., 2006;

Mitchell, 2005, 2008; Nallamothu et al., 2007), imaging centers (Baker 2010; Shreibati and

Baker, 2011), and pharmacy services (Iizuka, 2007, 2012) has generally confirmed the

hypothesis that ownership is associated with increased use of health care services. A

limitation of most of these studies is that in the absence of a benchmark for the optimal

level of use, it is impossible to assess the impact of alternative practice arrangements on

consumer welfare. Physicians in physician-owned facilities provide more care, but we

do not know if they provide too much.

In 2002, the New England Journal of Medicine published the results of a trial (hereafter,

the “Moseley trial”) showing that arthroscopic surgery for patients with osteoarthritis

of the knee, a widely used procedure at the time, does not improve patient outcomes

(Moseley et al., 2002). Physicians perform arthroscopic surgery in hospital-based surgery

centers or freestanding centers, most of which are physician-owned. We use the trial as

an “informational shock” to compare physicians’ treatment decisions in hospital-based

and physician-owned ambulatory surgery centers. Wefind that the Moseley trial affected

practice patterns, but the magnitude of the effect was smaller in freestanding centers. The

Moseley trial identified a clinical scenario where physicians’ financial interests and the

interests of their patients diverge. Faced with the same set of scientific facts, physicians

in hospital-based and freestanding surgery centers responded differently.

2. Physician Ownership and Treatment Incentives

For every surgery, insurers pay a professional services fee to the surgeon for their labor

and a facility fee (or “technical” fee) to the hospital or surgery center to cover the cost of

supplies, nonphysician labor, and capital. Physician-owners split the profits generated

from facility fees based on their ownership shares, providing an extra incentive to

induce demand.1(It would be illegal under federal anti-kickback laws for a facility to

pay a physician based on the profits generated from directly from his own surgeries.)

Physician-owned facilities can also incentivize physicians by tying ownership shares

to productivity. Reallocating ownership shares on a predetermined schedule based on

each owner’s procedure volume is illegal. However, reallocating shares during times of

transition—when owners bring in a new partner or when an existing partner retires—is

legal as long as shares are exchanged at fair market value.

Managers in physician-owned facilities may be better than managers in other

types of facilities at eliciting high levels of physician effort (and inducement). Hospitals

are large, bureaucratic, multiproduct firms. The residual claimants (e.g., shareholders,

nonclinical administrators) are far-removedfrom the delivery of care. By contrast, groups

of surgeon-owners face stronger incentives to monitor each other’s case volumes, face

lower monitoring costs, and have greater ability to reward high-volume surgeons and

punish shirkers.

3. Clinical Background

Arthroscopic surgery is a minimally invasive procedure to treat damage to the soft

tissue of the knee. A patient undergoing arthroscopic surgery receives several small

1. Income effectsmay offset the direct incentives presented by ownership. If ownership increases physi-

cians’ income, they may reduce labor supply and/or efforts to induce demand (McGuire, 2000).