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Consequences of Physicians' Ownership of Health Care Facilities — Joint Ventures in Radiation Therapy

Jean M. Mitchell, Ph.D., and Jonathan H. Sunshine, Ph.D.

N Engl J Med 1992; 327:1497-1501November 19, 1992

Abstract
Abstract

Background.

Physicians are increasingly the owners of health care facilities to which they refer patients for services but at which they do not practice. We studied such ownership arrangements, known as "joint ventures," in the field of radiation therapy, examining their effects on access, use of services, costs, and quality.

Methods.

Because 44 percent of free-standing facilities providing radiation therapy in Florida in 1989 were joint ventures, as compared with 7 percent elsewhere (95 percent confidence interval, 3 to 10 percent), we compared data for Florida with comparable data for the remainder of the United States. We also compared radiation-therapy facilities in Florida that were established as joint ventures with those that were not. Since most data were derived from entire populations rather than from samples, any differences found were of necessity statistically significant.

Results.

No joint-venture facilities providing radiation therapy were located in inner-city neighborhoods or rural areas, but 11 percent of other free-standing facilities and hospital-based facilities were located in such areas. Among free-standing facilities, joint ventures received 39 percent of their revenues from patients with well-paying insurance coverage, as compared with 31 percent for facilities that were not joint ventures (P<0.01). The frequency and costs of radiation-therapy treatments at free-standing centers were 40 to 60 percent higher in Florida than in the rest of the United States; there was no below-average use of radiation therapy at hospitals or higher cancer rates that explained the higher rates of use or higher costs in Florida. Radiation physicists at joint-venture facilities (the principal personnel involved in quality control other than physicians) spent 18 percent less time with each patient over the course of treatment than did their counterparts at free-standing facilities that were not joint ventures (P<0.05). Mortality among patients with cancer in Florida was not lower than the U.S. average, even though joint ventures are much more common in that state.

Conclusions.

Joint ventures in radiation therapy appear to have adverse effects on patients' access to care. They also appear to increase the use of services and costs substantially. Some indicators show that joint ventures cause either no improvement in quality or a decline. Our results add to the evidence indicating that physicians' self-referral generally has negative consequences. We recommend legislation to ban ownership of joint ventures by referring physicians. Such legislation needs to be carefully designed in order to achieve its objectives and forestall new, financially abusive arrangements. (N Engl J Med 1992;327:1497–501.)

Media in This Article

Table 1Cost and Frequency of Radiation-Therapy Services Provided in 1989 at Free-Standing Centers, per 1000 Medicare Enrollees.
Table 2Frequency of Radiation-Therapy Services Provided in 1989 at Hospitals, per 1000 Medicare Enrollees.
Article

UNDER federal law, it is illegal for physicians to receive kickbacks for referrals of Medicare and Medicaid patients. Thirty-six states also have anti-kickback laws of various types that apply to both publicly and privately insured patients. General prohibitions of referrals to facilities in which physicians have a financial interest are uncommon, however.1 , 2 Nonetheless, in recent years physicians have come to own nearly every type of health care business to which they make referrals, but at which they do not directly provide services.3 Some critics argue that such arrangements, known as "joint ventures," have proliferated because they are lucrative investments from which the referring physicians are able to earn disguised kickbacks.4

Critics contend that the financial incentives for referring physicians that are created by joint ventures lead to overuse of services, increased costs to consumers, reduced access for the poor, and service of diminished quality.5 6 7 8 Proponents claim that joint ventures may increase access to care for persons in medically underserved areas, may provide needed financing, and may allow physicians to improve the quality of the services provided to their patients.9 , 10 Despite intense debate, there is little empirical evidence of the effects of joint ventures involving physicians.

This study uses recent data, principally from Florida, to examine the effects of joint ventures in radiation therapy. Previous research on the effects of physicians' financial interests has concentrated on use of services and costs.11 12 13 14 15 We examine a broader range of effects, including those on access and (to a more limited extent) quality, in accordance with a recent study conducted by one of us.16 The examination of data from Florida is particularly appropriate, because a large proportion of the free-standing radiation-therapy centers there are owned by referring physicians. In contrast, joint-venture centers providing radiation therapy were rare elsewhere before 1991. Thus, comparing the situation in Florida with that in other states constitutes something of a natural experiment.

Methods

All free-standing facilities providing radiation therapy and all acute care general hospitals in Florida were sent questionnaires as part of a comprehensive study of health care facilities commissioned by the Florida legislature.16 Twenty-three of the 32 free-standing facilities (72 percent) provided information on ownership, staffing, and revenue according to category of payer; facilities that did not respond were contacted by telephone for information about their ownership. Over 95 percent of the 238 acute care licensed hospitals returned the surveys, from which we identified 39 hospital-based departments providing radiation therapy.

The free-standing facilities were classified according to ownership status as either joint ventures or non-joint ventures. The term "joint venture" was defined to indicate any ownership or investment interest between a referring physician (or other health care professional making referrals) and a business providing radiation-therapy services. Because radiation oncologists are consultative physicians who receive and treat patients referred by other physicians, radiation-therapy centers owned solely by such specialists are not joint ventures. Joint ventures located outside Florida that provided radiation therapy were identified by tabulating data from the 1989 Group Practice Survey of the American College of Radiology.17

Access

We compared joint ventures with other facilities providing radiation-therapy services in Florida in order to evaluate geographic access — that is, whether any facilities were located in inner-city neighborhoods or outside urban areas. In accordance with the practice of Florida's Department of Health and Rehabilitative Services, we defined urban areas to include metropolitan statistical areas (as designated by the U.S. Census Bureau) and counties with a population in excess of 100,000 persons.

We also evaluated economic access by comparing the percentage of revenues derived from well-paying sources with that derived from poorly paying sources. Managed care payers, Blue Cross, and commercial insurers were classified as well-paying sources, because during 1989 these payers reimbursed, on average, about 90 percent of the submitted charges. In contrast, during 1989 Medicaid reimbursements for radiation-therapy services averaged between 5 and 10 percent of the full charges, Medicare reimbursements averaged approximately 70 percent, and patients nominally paying their own bills were typically recipients of charity care. These were classified as poorly paying revenue sources.

Use of Services

Radiation therapy for cancer has become somewhat standardized as a result of the Patterns of Care study.18 19 20 Hence, any variations in use associated with joint ventures are likely to result more from different numbers of patients receiving treatment than from changes in the number of services per patient treated. Radiation therapy thus offers an interesting contrast to clinical laboratory services, in which investors who are referring physicians can easily increase the use of services not only by ordering tests for more of their patients, but also by ordering more tests per patient.

We evaluated the effects of joint ventures on the use of services by taking a market-area approach.21 , 22 Specifically, we measured the use of radiation-therapy services per Medicare beneficiary in Florida and compared these figures with corresponding data for the rest of the United States. Such ratios of use to population take into account differences both in the percentage of patients receiving treatment and in the number of services provided to each such patient.

An analysis of Medicare data is particularly appropriate in the case of radiation-therapy services because cancer, the disease that is treated by radiation therapy, is very much a disease of the elderly (persons 65 years of age or older). The source of data used to study use of services and costs was the procedure file of Part B Medicare Annual Data for 1989. This file contains data on all physicians' services provided under Medicare, including the number of services, the charges submitted, and the amounts paid according to procedure, locality and state, and place of service (i.e., hospital or nonhospital), and other variables.

Two measures of use were employed: the number of radiation-therapy services per 1000 Medicare enrollees and the number of relative-value units for radiation therapy per 1000 Medicare enrollees. To standardize the count of services, each "weekly treatment management" service (codes 77420 to 77430 of Current Procedural Terminology, fourth revision [CPT-4]) was counted as five services, in accordance with Medicare's definition of weekly treatment management.23 The Medicare relative-value scale for radiation-therapy services was developed by radiation oncologists. A relative-value scale recognizes the amount of work involved in providing each individual service and thus represents a more refined measure of use than a simple count of services.24 The use of hospital-based facilities, which may serve as a substitute for the use of free-standing centers, was measured in the same two ways.

We also compared both the incidence of cancer and mortality from cancer in the Florida elderly population in 1989 with the corresponding statistics for the entire United States, since these factors could underlie differences in service use. Data on cancer in Florida were obtained from the Florida Department of Health and Rehabilitative Services. National data were obtained from the Surveillance, Epidemiology and End Results (SEER) program of the National Cancer Institute, with the incidence data for 1984 through 1988 extrapolated to 1989,25 and from the National Center for Health Statistics (for 1989 death rates). With respect to age and sex, the composition of the Florida elderly population was almost identical to that of the overall U.S. elderly population, so no adjustments for age or sex were made to the data on use of services or cancer rates.

Costs

We compared the Medicare Part B data on submitted charges and amounts reimbursed by Medicare (the so-called "allowed charges") for all radiation-therapy procedures rendered in free-standing facilities in Florida with the corresponding figures for the rest of the United States. Free-standing facilities charge a global fee that includes both the physician's "professional component" and the technical or facility component. Submitted charges and payments for radiation-therapy procedures performed in hospitals were not analyzed, because the Medicare Part B file contains only the physician's professional component.

Quality

We evaluated the use of time by radiation physicists, the nonphysician personnel most responsible for quality control. Specifically, we compared joint ventures and non-joint ventures with respect to physicists' hours of work per patient treated in free-standing facilities. We also compared outcomes of cancer in Florida with those in the United States as a whole. The outcome measure was an approximation of the cancer lethality rate, calculated as the number of cancer deaths in 1989 divided by the 1989 incidence rate for cancer. Since outcomes of cancer differ according to age and sex, and this measure may be sensitive to very small differences, we adjusted the U.S. nationwide data to the age- and sex-related mix of Florida's elderly population before computing the U.S. lethality rate. The statistic we used was not a strict case fatality rate. For example, some of the 1989 cancer deaths involved patients who were first given their diagnoses in earlier years. However, since incidence and death rates change slowly, a comparison of our statistic across geographic areas provides a reasonable measure of relative outcomes.

Statistical Analysis

Percentages of revenue derived from high-paying sources and physicists' time spent per patient were compared by two-tailed t-tests. Since the sample of radiation-therapy facilities represented a large percentage of the total number, we applied the usual finite-population correction factor to adjust the standard errors of these variables. The Medicare data represented the entire population, rather than a sample. In such cases, the usual view of statisticians is that tests of significance are not required, because all differences found are real.26

Results

During 1989, 14 of the 32 free-standing radiation-therapy facilities in Florida (44 percent) were joint ventures. Tabulations from the 1989 Group Practice Survey of the American College of Radiology show that elsewhere in the United States, 7 percent of such centers (95 percent confidence interval, 3 to 10 percent) were joint ventures.

Access

None of the joint ventures among the free-standing radiation-therapy centers in Florida were located in a rural county or an inner-city neighborhood. In contrast, 1 of the 18 free-standing centers that were not joint ventures (6 percent) was located in a rural county, and 5 of the 39 hospital-based facilities (13 percent) were situated in inner-city neighborhoods.

With respect to economic access, we found that among free-standing facilities in Florida, the joint ventures generated 39 percent of their revenues from high-paying sources. In comparison, free-standing centers that were not joint ventures derived 31 percent of their revenues from such sources (P<0.01).

Use of Services

At free-standing centers, the number of radiation-therapy procedures per 1000 Medicare enrollees was 58 percent higher, and the number of relative-value units for radiation therapy 53 percent higher, in Florida than the average in the rest of the United States (Table 1Table 1Cost and Frequency of Radiation-Therapy Services Provided in 1989 at Free-Standing Centers, per 1000 Medicare Enrollees.).

The frequency with which radiation therapy was administered in hospital-based facilities, measured by a count both of procedures and of relative-value units, was slightly higher in Florida than in the rest of the United States (Table 2Table 2Frequency of Radiation-Therapy Services Provided in 1989 at Hospitals, per 1000 Medicare Enrollees.). The higher volume of services performed in hospitals as compared with free-standing centers, both in Florida and nationally, does not imply that hospitals use more resources to treat patients. Instead, it probably indicates that there are more hospital-based facilities than free-standing centers. The incidence of cancer among the elderly in Florida and the mortality rate from cancer were, respectively, 8 and 6 percent below the national average (Table 3Table 3Cancer Rates among the Elderly in 1989.).

Costs

For every 1000 Medicare enrollees, the submitted charges for radiation therapy performed in free-standing centers in Florida exceeded the submitted charges for the rest of the United States by 42 percent ($13,290 vs. $9,572) (Table 1). A similar comparison of the amount actually paid by Medicare (the "allowed charges") shows that in Florida, Medicare payments for radiation therapy provided in free-standing centers exceeded the average payments elsewhere by almost 46 percent ($9,572 per 1000 enrollees in Florida vs. $6,556 nationally).

Quality

Among free-standing facilities, the joint ventures used radiation physicists 18 percent less than facilities that were not joint ventures. They averaged 4.78 hours of physicist time per patient treated, as compared with 5.82 hours for free-standing facilities that were not joint ventures (P<0.05). Approximately 54 percent of patients with cancer died of their disease in Florida, as compared with 53 percent nationally (Table 3). Adjustments for age and sex made a difference of approximately 0.1 percent in this measure of lethality.

Discussion

Findings in Florida

Our analysis of Florida shows that free-standing radiation-therapy facilities owned by referring physicians provide less access to poorly served populations than other types of radiation-therapy facilities. Geographically, hospitals provide the most ready access for such populations, because a considerable percentage of hospitals are located in inner-city neighborhoods. Economically, joint ventures "skim the cream," because they generate substantially more of their revenues from patients with good insurance than do free-standing centers that are not joint ventures. The disparity we measured would probably have been even greater if we had data on sources of revenue for hospital-based facilities, many of which are located in inner cities. "Cream skimming" tends to undermine the financial base of facilities that are more willing to treat poorly insured patients.

Since 44 percent of the free-standing facilities in Florida were joint ventures, as compared with 7 percent elsewhere, joint ventures must be regarded as a likely explanation for the high levels of use and costs characteristic of Florida. Moreover, we investigated the two most obvious alternative explanations: that free-standing centers substitute for hospital-based facilities and that cancer is more common in Florida than elsewhere. Our analyses show that neither of these explanations is valid. Indeed, since the use of hospital-based radiation-therapy services was slightly higher in Florida than elsewhere in the United States and the burden of cancer lower, these factors should lead to lower use and costs at free-standing centers in Florida.

A replication of the analysis of use of services with 1988 data showed that rates of use in Florida were at least as far above the U.S. average in 1988 as in 1989. Therefore, the 1989 findings were not a onetime occurrence. Since use of services and costs at free-standing facilities are about equally elevated in Florida, the increase in use is probably the principal cause of the higher costs.

Other evidence supports the contention that joint ventures are responsible for the increase in service use and costs. Several recent studies have found that when physicians gain financially from the provision of services, as is the case with joint ventures, service use and costs are substantially higher.1 , 11 12 13 14 , 16 In one case in Florida, a radiation oncologist in an academic center reported that in an area where approximately 80 patients per day had received radiation therapy, the number increased to approximately 110 after the opening of a free-standing facility owned by some 175 referring physicians.27 Additional case studies of this sort would help resolve the issue of causality more definitively. Currently, Florida's high rate of use of services and costs could possibly be explained by factors other than joint ventures. For example, physicians in the state may provide more services for all kinds of illnesses, with radiation therapy being only an example of this pattern. Nonetheless, joint ventures are extremely common in Florida in many types of health care services,3 and this might well account for a generally higher use of services.

Our evidence with regard to quality is quite limited. Traditionally, quality has been conceptualized as consisting of a number of factors related to structure, process, and outcome. We measured only one structure variable (staffing with physicists) and one outcome variable (the percentage of patients with cancer who die of their disease). The structural measure suggests that quality is lower in joint ventures. Our outcome measure was probably not particularly sensitive, because many patients with cancer receive no radiation therapy, whereas others receive it only for palliative treatment, with no expected effect on mortality. Still, it is clear that mortality from cancer in Florida has not declined substantially, despite the many joint ventures in the state.

Policy Considerations

At its annual meeting in December 1991, the American Medical Association (AMA) adopted new guidelines on joint ventures, specifying that "physicians should not refer patients to a health care facility outside their office practice at which they do not directly provide care or services when they have an investment interest in the facility."28 An exception was made for facilities established both because there is a demonstrated need in the community and because alternative financing is not available. The AMA emphasized that a physician's professional obligation is to the wellbeing of the patient and that the financial interest created by joint ventures results in at least the appearance of a conflict of interest.

Our findings documenting the generally negative consequences of joint ventures in radiation therapy, the similar findings of others on the effect of physicians' financial interests,1 , 11 12 13 14 , 16 and the conflict of interest inherent in self-referral by physicians all lead us to conclude that joint ventures involving referring physicians should be made illegal. The AMA's repudiation of its strong stance in June 1992 shows that professional guidelines are a weak reed. The existing federal anti-kickback law is in itself not an adequate remedy, if only because most patients are not covered by Medicare or Medicaid, and therefore the federal law does not apply to them. Banning joint ventures should substantially mitigate the continued escalation of health care costs. Such prohibitions have been recommended by President George Bush as part of his comprehensive program of health care reform.29 Bans on physicians' joint ventures, covering various types of services, were enacted this year in Illinois, Florida, and New York.

For such laws to be effective, they must include a requirement for the reasonably prompt divestiture or dissolution of existing joint ventures. For example, the federal ban on joint ventures involving clinical laboratories allowed two years for divestiture or dissolution.8 Provisions that allow "grandfathering" over the long or moderately long term only perpetuate deleterious effects. Also, the laws must effectively prevent new forms of abuse. If joint ventures are clearly outlawed and actively prosecuted, we expect to see attempts to achieve the same inappropriate financial gains through legal stratagems intended to make a facility to which a physician refers patients appear to be part of the physician's own practice.

Source Information

From the Graduate Public Policy Program, Georgetown University, Washington, D.C., and the Department of Economics, Florida State University, Tallahassee (J.M.M.), and the Research Department, American College of Radiology, Reston, Va. (J.H.S.). Address reprint requests to Dr. Mitchell at the Graduate Public Policy Program, Georgetown University, 3600 N St., NW, Suite 200, Washington, DC 20007.

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