THE BLOG
12/05/2013 11:52 am ET Updated Feb 04, 2014

When Doctors Become Salesmen, Patients Pay the Price

"She'll need a wrist support for a while," the doctor said as he removed the cast. "We have them, I'll get her one."

Later, a nurse slipped a black sleeve onto my daughter's outstretched arm. She next handed me a clipboard. "Sign this, if you don't mind. It just says we're going to submit the cost of this equipment to your insurance company and whatever they don't pay, you will."

Equipment? I shifted uneasily. "What's the cost of that ... equipment?"

"Sixty-seven dollars," she replied. "But, let's hope the insurance company covers it."

Back in the car, I plugged the model number of our new purchase into my smartphone browser. Instantly, a dozen resellers popped up. I picked one and dug for a price: $11.82.

I felt violated, as if I'd found my car on cinderblocks. Only, it had taken place on a good street in a nice part of town where things like this weren't supposed to happen.

I ran the numbers. My 20 percent co-pay on their inflated price was more than I would have paid had I bought it online and left my insurance company out of it.

It gnawed at me.

This was happening tens of thousands of times a day at offices, clinics and hospitals across the country on equipment sales fetching far more than $67. My purchase was a mere appetizer: Main course orthotics -- like knee, back, foot and elbow braces -- were selling for $400, $500, even $600 a piece.

This was real money, and insurers weren't absorbing the costs. They were passing them back to me and other Americans as higher premiums.

With the weight of the insured premium-paying world on my shoulders, I called the physicians' office and asked for the billing manager.

I hadn't fully explained my beef before she made an unsettling revelation. "We don't actually sell these items -- that's done by a company out of California. But, we do have a sales rep who works here in our office if you'd like to speak with her?"

My antennas went up.

When the rep came on, I asked how a respectable business could justify billing me (albeit through my insurer) $67 for something that retailed elsewhere for $12.

"Oh, we don't actually set these prices," she said. "They're mandated by Medicare."

Medicare? We had private insurance. On the non-public side of the business, reimbursement rates might be negotiated between insurers and providers, but they weren't mandated.

"Can I help you with anything else?" the sales rep asked.

Indeed she could. As the paying customer, I figured that I had a right to know whom I was compensating. "I can only assume there's some kind of revenue sharing arrangement between your company and your physician-landlords. Am I right?"

"I'm sorry," she replied, "but I can't answer that."

Though she wouldn't admit it and the physician hadn't disclosed it, her company was indeed paying physicians who distributed their products. The California vendor readily admitted it in a 10-K filed with the SEC. Payments were being made in conjunction with what they called a "stock and bill" arrangement.

Under this type of agreement, the vendor company maintains an inventory of equipment in the physician's office. This enables the physician to prescribe and sell, then make delivery on the spot. Since title to inventory never passes to the physicians, sales are (legally) made between the patient and the equipment company. That part is clear enough. The money flows, however, are more ambiguous -- and for good reason.

Federal anti-kickback laws make it a crime for a doctor to receive (or equipment company to pay) any form of compensation for physician referrals. This law only applies, however, if the reimbursing entity is a federal health care program, like Medicare. But, since Medicare is big part of most practices, vendors and physicians take great care to characterize payments in permissible ways.

Our California-based vendor was making payments to physicians in return for "rental space and support services." At least that's the description given in the 10-K.

Interestingly enough, the DHHS Inspector General used nearly identical language in a February 2000 Special Fraud Alert in which it specifically addressed "the rental of space in physicians' offices by persons or entities that provide health care items or services (supplies) to patients that are referred either directly or indirectly by their physician-landlords."

The feds have been and remain skeptical of stock and bill arrangements. That being the case, physicians don't sign on and agree to distribute equipment for third-party vendors unless they're satisfied the upside (convenience, rental payments and service fees) outweighs the downside (potential fines, legal fees, bad prison food, etc.).

From the vendor's perspective, using physicians as salesmen is ideal, even if the added compensation costs drive up prices billed to patients. It's a match made in heaven (or possibly hell, if you're the patient).

Beneath the physician's umbrella of trust, patients don't feel a need to ask, "Hey Doc, what are you charging for that equipment, and what would it cost me elsewhere?" They assume the physician has their best interests at heart -- not just medically but economically as well.

When sellers compete, prices fall and consumers benefit. It's the same with medical equipment as it is with cars, oil changes and hotel rooms. But when these items are sold through prescribing physicians, there is no competition. Equipment vendors charge whatever they can get away with, which is a lot -- sometimes as much as five, six or even seven times more than competitive retail prices.

While Medicare doesn't mandate these prices (as the sale's rep initially declared), Medicare's reimbursement rates are nonetheless relevant -- they inform vendor estimates as to how much private insurers are likely to pay.

That's the picture and there's plenty wrong with it.

Physicians -- along with attorneys, priests and CPAs -- are fiduciaries. They occupy a special position of trust with extraordinary influence and sway. (Who else could ask a perfect stranger to turn his head and cough?) In short, that means they're obliged to put patient interests above their own and abstain from self-dealing (profiting from the relationship unless the client consents).

The first lesson in being a good fiduciary is to avoid even the appearance of impropriety. The second is that full disclosure solves most problems before they happen. For practicing physicians or hospitals that facilitate the sale of medical equipment on behalf of third-party vendors, that translates into three simple rules:

First, tell patients what they're being charged before making the sale. Don't wait for them to ask.

Second, if the price being charged is materially more than what patients would likely pay on the open market, give them a heads up. Allow them the opportunity to make an informed economic decision.

Third, if the physician is receiving any form of benefit from the equipment vendor, disclose it. It's a textbook conflict of interest.

Once given these disclosures, some patients will elect to purchase prescribed equipment from less expensive sources. Others, however, will pay up for the convenience. The amount by which physician-channel sales decline will offer a quantifiable measure of the powerful influence physicians often exert -- whether knowingly or unknowingly -- when they prescribe and sell third-party products.

Trust is central to the physician-patient relationship. Without it, we'd be reluctant to access health care. When we did, we'd think twice about divulging the kind of deeply personal information that's often critical to effective diagnosis and treatment. It also affects our satisfaction with the treatment we receive and our willingness to follow (and stick with) a prescribed course. In this sense, it can actually impact treatment outcomes.

Patient trust benefits the doctors as well. Practitioners readily admit that it's among the most satisfying aspects of being a physician.

Research indicates that many factors contribute to the creation of patient trust. Even so, experience confirms that a single self-serving act is all it takes to undermine it.

Trust is hard to earn, easy to lose and exceptionally difficult to regain.