FTC Staff Comment to the Hon. Chuck Hardwick Concerning NJ A.B. 2647 to Prevent a Physician From Referring Patients to a Physical Therapy Service Entity in Which the Physician’s Family Has Any Financial Interest

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May 	21, 	1987
The 	Honorable 	Chuck Hardwick
Speaker 	of 	the Assembly
of 	the 	state 	of 	New 	Jersey
state 	House 	Annex, 	CN098
Trenton, 	New 	Jersey 	08625
Attention: 	John 	Kohler
: 	•• 	Assembly Republ iean 	Staff
Re: 	Assembly 	Bill 	2647
Dear Mr. 	Speaker:
We 	are 	pleased 	to 	provide 	these 	comments 	in 	response 	to 	your
request 	for 	our views 	on 	Assembly 	Bill 	2647 	("A-2647").1 	This
bill 	would 	prevent 	a 	physician 	from 	having 	a 	financial 	interest
in 	any 	entity 	that 	provides 	physical 	therapy 	services, 	and 	from
referring 	patients 	for 	physical 	therapy 	to 	an 	entity 	in 	which 	the
physician's 	family 	has 	any 	financial 	interest. 	We 	believe 	that
this 	bill 	is 	likely 	to 	injure 	consumers 	by 	reducing 	competition
among 	physical 	therapy 	providers, 	thereby 	decreasing 	the 	choices
available 	to 	consumers. 	Consequently, 	we 	respectfully 	recommend
that 	the 	New Jersey 	legislature 	not 	approve 	A-2647. 	Should 	you
nonetheless 	conclude 	that 	some 	corrective 	measures 	are 	necessary,
we 	believe 	that 	a 	simple 	disclosure 	of 	the 	physician's 	financial
interests 	would 	be 	a 	less 	restrictive 	alternative 	to 	the 	proposed
legisla~ion.
'.
1 	These 	comments 	represent 	the 	views 	of 	the 	Bureaus 	of
Competition, 	Consumer 	Protection, 	and 	Economics, 	and 	the 	San
Francisco 	Regional 	Office 	of 	the 	Federal 	Trade 	Commission, 	and 	do
not 	necessarily 	represent 	the 	views 	of 	the 	Commission 	itself.
The 	Commission 	has, 	however, 	voted 	to 	authorize 	their 	SUbmission.
The 	San 	Francisco Regional 	Office 	has 	participated 	in 	the
preparation 	of 	these 	comments 	because 	of 	its 	experience 	in 	this
subject 	area. 	~ 	Letter 	to 	Lin 	Ng, 	Deputy Attorney General,
state 	of 	Nevada, 	regarding 	Nevada 	Board of 	Physical 	Therapy
(Q~tober 23, 	1986).

Chuck Hardwick, 	Speaker
Assembly 	of 	the 	state 	of New Jersey Page 2
Interest 	and 	Experience 	of 	the 	Federal 	Trade 	commission
For more 	than 	a 	decade, 	the 	Commission 	has 	investigated 	the
competitive 	effects 	of 	restrictions 	on 	the 	business 	practices 	of
state-licensed 	professionals, 	inclUding 	dentists, 	lawyers,
physicians, 	non-physician 	health 	care 	providers, 	and 	others.
The 	goal 	of 	the 	Commission has 	been 	to 	identify 	and 	recommend 	the
removal 	of 	those 	restrictions 	on 	practice 	that 	impede 	competition
or 	increase 	costs 	without 	providing 	adequate 	countervailing
benefits 	to 	consumers. 	We 	believe 	that 	A-2647, 	as 	proposed, 	may
result 	in 	these 	adverse 	effects.
potential 	Harm 	to 	Competition 	and 	Limitation 	of 	Consumer 	Choic~
- A-2647 	would 	restrict 	competition 	among 	physicians 	and
physical 	therapists 	in 	several 	ways. 	First, 	by 	forbidding
physicians 	from 	inclUding 	physical 	therapy 	in 	their 	practice
unless 	they 	provide 	the 	treatment 	personally, 	it 	would 	prevent
physicians 	from 	employing 	physical 	therapists. 	Second, 	by
prohibiting 	a 	physician 	from 	having 	"any 	financial 	interest" 	in
any 	entity 	that 	provides 	physical 	therapy 	services, 	the 	bill
would 	prevent 	a 	physician 	and 	a 	physical 	therapist 	from 	forming 	a
joint 	practice 	through 	which 	they 	may 	compete 	with 	other 	types 	of
physical 	therapy 	practices, 	and 	would 	prevent 	physical 	therapists
Who wish 	to 	affiliate 	with 	physicians 	from 	doing 	80. 2 	Finally,
the 	bill 	would 	prevent 	physicians 	from 	referring 	patients 	to
physical 	therapy 	services 	in 	Which 	a 	member 	of 	the 	physician's
family 	has 	a 	financial 	interest. 	This 	limitation 	prevents
referral 	to 	a 	therapist 	that 	the 	physician 	and 	patient 	may 	find
best 	suited 	to 	the 	patient's 	needs. 	In 	essence, 	A-2647 	would
limit 	competition 	between 	independently 	practicing 	physical
therapists 	and 	other health 	care 	provider 	arrangements 	merely
b~cause.~hese arrangements 	are 	owned, 	at 	least 	in 	part, 	by
physicians 	or 	their 	families.
Tho 	primary 	adverse 	effect 	or 	A-2647 	is 	that 	the 	legislation
would 	deny 	consumers 	the 	benefits 	of 	the 	fUll 	range 	of 	service,
price, 	and 	quality 	options 	that 	a 	competitive 	market 	would 	offer.
A-2647 	may 	hinder 	the 	development 	of 	more 	efficient 	practices
2 	A physician would 	also 	be 	prohibited 	from 	having 	any
ovnership 	interest 	in 	a 	sports 	medicine 	Clinic, 	occupational
therapy 	clinic, 	or 	other 	specialty 	clinic 	at 	which 	physical
therapy 	services 	were 	provided 	in 	conjunction with medical
services. 	The 	prohibitions 	contained 	in 	the 	proposed 	legislation
are, 	in 	fact, 	so 	broad 	that 	they 	Appear 	to 	forbid 	physicians 	from
even 	owninq 	pUblicly-traded securities 	in health 	care
corporations 	that 	provide 	physical 	therapy 	services.
~	
~

Chuck Hardwick, 	Speaker
Assembly of 	the 	State 	of 	New Jersey Page 	3
that 	reduce 	costs 	through 	economies 	of 	scale 	or 	scope. 	For
example, 	an 	orthopedist 	and 	a 	therapist 	would 	be 	unable 	to 	open 	a
joint 	practice 	that 	could 	reduce 	the 	administrative 	costs
associated 	with 	consultation. 	Providers 	would 	also 	be 	limited 	in
oftering, 	and 	consumers 	prevented 	from 	purchasing, 	allied
s~rvices at 	a 	single 	location. 	This 	form 	of 	allied 	practice
might 	provide 	greater 	convenience 	and 	lower 	costs 	to 	consumers
who would 	otherwise 	have 	to 	go 	to 	different 	locations 	to 	obtain
these 	services. 	For 	example, 	a 	patient 	may 	wish 	to 	obtain 	care
at 	a 	clinic 	where 	both 	diagnosis 	and 	therapy 	are 	offered 	(~, 	a
sports 	medicine 	or 	occupational 	health 	clinic). 	similarly, 	a
patient may 	wish 	to 	obtain 	physical 	therapy 	at 	a 	facility 	owned
by, 	and 	associated 	with, 	his 	physician 	so 	that 	the 	therapy
provided 	will 	be 	closely 	coordinated 	with 	the 	prescribed
~riatment plan. 	If 	A-2647 	is 	enacted, 	however, 	consumers 	would
be 	unable 	to 	select 	either 	of 	these 	options.
A-2647 	could 	also 	limit 	a 	physician's 	ability 	to 	oversee 	the
care 	provided 	to 	patients. 	A physician who 	employs 	a 	physical
therapist 	in 	his 	practice 	is 	able 	to 	monitor 	the 	prescribed
treatment 	directly. 	The 	physician 	is 	also 	readily 	available 	tor
consultation with 	either 	the 	patient 	or 	the 	therapist. 	These
benefits 	could 	be 	lost 	if 	physicians 	and 	physical 	therapists 	were
prevented 	from 	entering 	into 	employment 	relationships. 	Moreover,
a 	physician 	who 	invests 	in 	a 	physical 	therapy 	service, 	like 	any
long-term 	investor, 	will 	have 	a 	direct 	economic 	interest 	in
ensuring 	that 	the 	practice 	provides 	quality 	services.
Restrictions 	on 	financial 	arrangements 	a~ong providers 	of
health 	care 	may 	have 	adverse 	effects 	on 	consumers. 	The
Commission 	has 	taken 	legal 	action 	against 	private 	restrictions 	on
such 	arrangements.) 	One 	such 	case 	involved 	various 	ethical
provisions 	enforced 	by 	the 	American 	Medical 	Association. 	The
~OmmiB~!on found 	that 	the 	AHA's 	restrictions 	on 	physician
Qmploym~nt relationships 	and 	salaried 	practice 	inhibited
3 	The 	Commission 	staff 	has 	also, 	on 	several 	occasions,
urged 	state 	regulatory 	boards 	to 	avoid 	enactment 	or
interpretation 	of 	regulations 	that 	prevent 	providers 	from
adopting 	more 	efficient 	forms 	of 	practice. 	~,~, 	Letter 	to
Lin 	Ng, 	Deputy 	Attorney 	General, 	state 	of 	Nevada 	(October 	23,
1986) (opposing 	a 	regulation 	proposed 	by 	the 	Nevada 	Board 	of
Physical 	Therapy 	that 	would 	prohibit 	physical 	therapists 	from
accepting 	employment 	with 	physicians); 	and 	Letter 	to 	H. 	Fred
Varn, 	Executive 	Director, 	Florida 	Board 	of 	Dentistry 	(November 	6,
1985) (opposing 	an 	interpretation 	ot 	Florida 	law 	that 	would
prohibit 	dentists 	from 	reterring 	patients 	to 	other 	dental
practices 	in 	which 	they 	had 	an 	interest) •
.~ r'

. '. ' .
•
Chuck Hardwick} 	Speaker
Assembly 	of 	the 	state 	of 	New Jersey
development 	of 	innovative 	forms 	of 	health 	care 	delivery 	that
could 	be 	cost-efficient, 	and 	hence 	beneficial 	to 	consumers. 4 	In
addition, 	the 	Commission 	found 	that 	the 	AHA·s 	restrictions 	on
joint 	business 	arrangements 	between 	physicians 	and 	non-physicians
inevitably 	had 	an 	adverse 	effect 	on 	competition 	because 	they
prevented 	physicians 	from 	adopting 	more 	efficient 	business
formats. 5
Less 	Restrictive 	Alternatives
Th~ apparent 	purpose 	of 	A-2647 	is 	to 	ensure 	that 	medical
care 	is 	based 	on 	the 	needs 	of 	patients 	rather 	than 	on 	the
ftnancial 	interests 	of 	the 	practitioner. 	If 	a 	physician 	has 	a
financial 	relationship with 	a 	physical 	therapist, 	then 	arguably
the 	physician 	has 	an 	incentive 	to 	order 	treatment 	even 	if 	the
treatment 	is 	not 	appropriate. 	In 	those 	instances 	in 	which
patients 	are 	unaware 	that 	a 	physician's 	referral 	could 	be
motivated 	by 	financial 	considerations, 	they 	arguably 	may 	be
misled 	about 	the 	necessity 	and 	cost 	of 	the 	recommended 	treatment.
We 	believe, 	however, 	that 	these 	concerns 	can 	be 	alleviated
without 	the 	prohibition 	against 	financial 	relationships.
The 	possibility 	that 	a 	physician 	may 	order 	unnecessary
treatment 	is 	a 	problem 	associated 	with 	many 	aspects 	of 	medical
service 	delivery, 	not 	just 	physical 	therapy. 	Whenever 	a
physician 	prescribes 	x-rays, 	injections, 	surgical 	procedures, 	or
other 	forms 	of 	treatment 	(including 	follow-up 	visits) 	to 	be
provided 	in 	the 	doctor's 	office, 	financial 	considerations 	could,
in 	theory, 	affect 	the 	recommendation. 	states, 	however, 	generally
do 	not 	ban 	doctors 	from 	ordering 	those 	other 	services.
There 	are 	less 	restrictive 	means 	of 	preventing 	abuse 	or
d~ceptiGn than 	prohibiting 	physicians 	from 	having 	any 	economic
interest 	in 	entities 	providing 	physical 	therapy 	services. 	For
example, 	an 	ownership 	disclosure 	requirement 	could 	be 	adopted.
Physicians 	could 	be 	required 	to 	provide 	a 	written 	disclosure 	or
post 	a 	notice 	informing 	patients 	of 	their 	financial 	interest 	in
4 	American 	Medical 	Asstn, 	94 	F.T.C. 	701, 	1016-18, 	afftd 	as
modified, 	638 	F.2d 	443 	(2d 	Cir. 	1980), 	aff'd 	memo 	by 	an 	equally
divided 	court, 	455 	u.s. 	676 	(1982).
5 	American Medical 	Ass'n, 	supra, 	94 	F.T.C. 	at 	1018 ...

Chuck Hardwick, 	Speaker
Assembly 	ot 	the 	State 	of 	New Jersey
Page 	5
:
entities 	to 	which 	they 	refer 	patients. 6 	Disclosure 	could 	provide
the 	patient with 	information 	that 	may 	aid 	in 	the 	decision 	whether
to 	use 	the 	recommended 	provider, 	although 	care 	should 	be 	taken 	to
avoid 	disclosure 	requirements 	that 	impose 	unnecessary 	costs 	on
providers.
Conclu5ion
In 	sum, 	we 	believe 	that 	A-2647 	may 	unnecessarily 	inhibit
beneficial 	competition 	and 	limit 	consumer 	choice. 	It 	seems
broader 	than 	necessary 	to 	protect 	consumers 	trom 	physicians'
poteptial 	conflicts 	of 	interest. 	Consumers 	should 	not 	be
deprived 	unnecessarily 	of 	the 	benefits 	of 	competition, 	inclUding
the 	ability 	to 	choose 	the 	provider 	and 	practice 	arrangements 	most
suited 	to 	their 	needs. 	For 	these 	reasons, 	the 	statt 	ot 	the
Federal 	Trade 	Commission 	recommends 	against 	enactment 	of 	A-2647
in 	its 	current 	form.
Very 	truly 	yours,
. 	.-•
6 	Similar disclosure 	requirements 	already 	exist 	in 	other
states. 	~,~, California 	Business 	& Professions 	Code
§654.2, 	which 	requires 	that 	physicians 	disclose 	in 	writing 	to
patients 	any 	financial 	interest 	they 	have 	in 	facilities 	to 	which
pa~ients are 	referred, 	and 	inform 	patients 	that 	they 	do 	not 	have
to~~e the 	provider 	the 	physician has 	selected.