One consequence of the lack of a profit motive is an industry with too few entrepreneurs and too little innovation, at least with respect to cutting costs and meeting patient needs. In those areas in which the profit motive is still the major driving force (for example, the manufacturer of medical equipment and pharmaceuticals) innovation and change are rampant. But in the area of solving patient problems, cost-reducing innovations have been few and far between. Consider, for example, patients with chronic ailments. An estimated 32 million people have arthritis, 16 million have bad backs, 9 million have migraine headaches, and 23 million have allergies.

According to Gallup polls, one-third of Americans report they have insomnia, and 70 million Americans claim they have severe headaches. How innovative has the health care system been in treating these problems? Harvard University professor Regina Herzlinger has reported the statement of a patient with a bad back: "I couldn’t find a multidisciplinary team that could treat my problem. So instead I went from one doctor to the next. They all offered different prescriptions. Neurologists wanted to medicate, radiologist to take pictures, orthopedic surgeons to operate, and sports-medicine types to exercise my abdominal muscles. My back still hurts!"

Indications are that things are beginning to change, however. Physician entrepreneurs were largely responsible for the 1980s boom in such cost-reducing innovations as emergency care clinics and outpatient surgery units. Some physicians and pharmacists are now using 900 numbers to give telephone advice for a fee. At least one for-profit company maintains a patient hotline to help people avoid purchasing more health care than they need and avoid seeing the wrong kind of physician. And some physicians are now advertising package prices (including the physician fee and facility charges) for routine types of surgery.

On the other hand, physician entrepreneurs are coming under attack by those who charge that the profit motive simply contributes to escalating health care costs. For example, a study conducted by the Florida Health Care Cost Containment Board found that 40 percent of Florida physicians involved in direct patient care had a financial interest in joint ventures to which they could refer patients. Patients treated at physician-owned therapy centers averaged 43 percent more visits. Although the prices per treatment or visit were lower, total costs to patients (or their third-party payers) were 31 percent higher. Clinical laboratories owned by referring physicians performed twice as many diagnostic tests per patient.

It is not obvious that more tests and more physician visits are bad. However, when physicians have a direct financial interest in the therapy they prescribe, their judgment may be influenced by that fact. What should be the role of the profit motive in medical practice?

Those who are hostile to the pursuit of self-interest in general, especially financial self-interest, see the search for profit as a source of problems, not a solution. Accordingly, the bureaucratic approach to medical care frequently favors laws barring physicians from having any financial interest in facilities to which they refer patients. Under this view, it is permissible for physicians to invest in the market for corn futures (about which they may know nothing), but impermissible for them to invest in a medical laboratory (about which they may know a great deal).

In an ideal system, by contrast, self-interest would be seen as a normal and natural characteristic of human behavior. The trick is to harness this drive, so that it is directed toward solving problems rather than creating them. Historically, physicians have been the primary innovators and entrepreneurs in the medical marketplace, and that is a tradition that should be encouraged. There are plenty of ways to prevent abuse—for example, by requiring physicians to disclose their financial interest to patients. But our concern over potential abuses should not lead us to prohibit entrepreneurship in the one market where it is most needed.