In a perfect market, the buyers and consumers are constantly working together to find an optimal outcome whereby both parties are at least marginally better off than they were before engaging in the trade. But the healthcare market is not a perfect market. Failures such as Moral Hazard and Imperfect Agency create bad incentives for providers to engage in fraud and abuse of the system. In an attempt to address these concerns, congress has passed a series of laws, collectively known as the Stark laws, which limit providers’ ability to take advantage of these market failures. But like any market transaction, these laws come at a price, and in this case, it may be that we have traded competition for a perceived reduction in waste.
The implementation of Medicare as an entitlement program in the United States, followed by Medicaid, has created moral hazard for its beneficiaries. Moral hazard exists when the interference of insurance or a third-party payer eliminates any incentive to be frugal in how money is spent. Medicare is the largest purchaser of health services in the country, and is responsible for approximately one-third of our nation’s spending on health care. Medicaid, a joint state-federal program, covers another several million Americans. This creates a myriad of issues, but in this context, the consequence of greatest importance is that moral hazard eliminates the consumers’ interest in how much money is being spent an whether it is appropriate. This, predictably, contributes greatly to the rapidly escalating cost of health care in America.
Health services is a unique industry because it is one of the only industries where the consumer and the purchaser are not the same entity. Because the provider rationally wants to produce as much as possible, and because the patients will consume those services, regardless of price, the only actor in this market who does not want there to be high spending, the payer, has no say in the decision because Medicare and Medicaid are entitlements that must be provided for “all reasonable and necessary” treatment. This situation creates the perfect storm for rapid increases in healthcare spending.
Despite the absurd incentives created by the separation of the functions of payer and consumer, as well as the separation of producer and consumer, there are ethical and societal obligations to encourage physicians to prioritize the interests of their patients above their own. However, it is a complex world and a lot of gray area exists where the interests of the patient do not directly conflict with those of the provider, but only with those of the payer. Ethical obligations, such as the Hippocratic Oath, do not, and perhaps should not, prevent providers from trying to make a profit. It is therefore reasonable to believe that there may be circumstances, such as self-referrals, where providers advance both their own self interests and those of the patient simultaneously.
In 1989 the first Stark law was passed in an Omnibus bill. Its champion, Rep. Stark, introduced the rather meek bill, which limited the ability of physicians to refer patients to other medical facilities if the physician has a financial interest in the facility, thereby attempting to limit fraud and abuse in Medicare. The laws have since evolved and become increasingly complex, even to the point where the American Bar Association wrote an article lamenting it difficult in wading through the vague yet extensive list of exceptions to Stark laws. In 1998 the Health Care Financing Administration (now CMS) issued revised Rules for Stark, which addressed the now huge amount of modifications and exceptions to Stark, and the breadth and scope of the reporting requirements.
As a practical matter, what the stark laws have become so little resembles what they were intended to do that even Rep. Stark has lamented the burden they impose on the healthcare system. Today’s Stark laws are an entirely different entity from which nearly every relationship between health service providers requires an exemption. Without one, Hospitals and physicians may be liable for financial penalties of $15,000 a patient, and exclusion from Medicare reimbursement. These harsh penalties create a strong incentive to be overcautious in establishing any kind of relationship (financial or otherwise!) with any other health service provider or entity.While caution is generally a good thing, especially when it comes to health, in the context of the healthcare marketplace, too much of an incentive to be cautious can have negative effects that are just as harmful as the behaviors they are trying to prevent.
Stark laws were created with the primary purpose of eliminating fraud and abuse in the healthcare system in order to help rein in the skyrocketing cost of American healthcare. However, the consequences of these laws can be worse than the original abuses.
Most physicians are genuinely concerned about the health and safety of their patients, and want to be able to provide the highest quality of care possible, but Stark laws create a barrier to entry that may prevent health services providers from being able to provide all the reasonable related care that a patient might need during a single visit. Referring patients to an off-site location creates a barrier between the patients and a necessary health service. When physicians are unable to provide certain types of diagnosis and treatment in their own office, patients are forced to make additional time, travel and financial commitments in order to obtain those tests. Social science and economic theory tells us, however, that as these opportunity costs increase, the likelihood of a patient complying with a doctors orders to get those diagnoses or treatments decreases. As a result of Stark, patients may be less likely to receive the care they need, despite the marginally reduced cost of care that results from Stark’s mitigation of fraud and abuse in the healthcare system.
Another consequence of Stark laws is that providers are stripped of incentives to innovate and create new payment systems that may help to decrease costs of care without necessitating government intervention. Because Stark laws are so difficult to navigate, there are hefty administrative fees associated with compliance efforts. These costs, in combination with the ever-looming threat of liability and Medicare exclusion as penalties for even inadvertent Stark violations, may discourage physicians from attempting innovative payment structures or relationships in attempt to control costs.
Physicians with independent practices will feel this administrative burden more acutely, as the majority of the exceptions to stark laws apply exclusively to physician groups and hospitals. Because of the exceptions available tot group practices, physicians running their own practice are at a disadvantage in attracting patients because they are unable to provide the same range of services, much less the convenience and continuity that groups and hospitals can provide because of those exemptions. This presents individual physicians with the dilemma of having to choose between the autonomy of having an independent practice, or the competitive advantage of joining a large practice group or hospital.
As far as cost savings are concerned with Stark, the exceptions have nearly swallowed the rule. Stark creates protections from certain forms of abuse that are so complicated that the cost of compliance is extremely burdensome. What is worse is that despite cost savings being jeopardized by the additional administrative fees that are necessary to comply, physicians have no incentive to work to create more efficient or patient-friendly relationships with other providers for fear of violating Stark and losing an entire practice.
One thing Stark laws have succeeded in doing is limiting the competitive nature of the health services market. This is just another example of Congress legislatively picking winners and losers and taking the decision out of the hands of the consumers.