Stark Contrasts: The Impact of Prohibiting Physician Self-Referrals on the Prevalence of Overtreatment in Health Care

Do physicians invest in medical service facilities to profit from the overtreatment of patients? Current literature only shows that physicians with a financial interest in an entity to which they refer patients order more services than physicians without such a financial interest. These studies, however, do not prove that the additional services constitute “overtreatment.” Using medical claims data from Taiwan, I examine the impact of a policy designed to remove physicians’ financial incentives to overprescribe drugs by prohibiting clinic-pharmacy integration, and make three principal findings: (1) Physicians in clinics that are vertically integrated with a pharmacy overtreat patients with prescription drugs. (2) Removing the incentives to overprescribe drugs causes physicians to overprescribe diagnostic and laboratory tests instead (3) This overtreatment occurs even when physicians refer patients to an employee-pharmacist in the clinic rather than to an outside entity in which physicians have a financial interest. These findings have important implications for federal Stark Legislation (42 U.S.C.S. §1395nn), which prohibits physicians’ referral of Medicare/Medicaid patients to an entity in which they have a “financial relationship” for certain designated health services. In particular, the third finding calls into question Stark Law’s implicit assumption that vertically integrated medical providers are unlikely to overtreat patients, as exemplified by the “bona fide employee” safe harbor exception.