Physician Ownership of Hospitals

1
Physician Ownership of Hospitals Health
Facilities Antitrust Policy Issues

• When Doctors and Hospitals Fight The Antitrust
  Litigation Landscape
• Glenn E. Davis
• Johanna S. Larsson
• Armstrong Teasdale LLP
• October 25, 2007

2
Context of the Contest

• Members of acute care hospital medical staffs
  invest in, build, and refer patients to a niche
  facility that competes directly with the hospital
• Hospitals react with allegedly anticompetitive
  conduct to interfere with development of the
  facility and choke off physician referrals
• Common scenarios involve development of
• single-specialty hospitals (SSHs), i.e.
  inpatient cardiac or orthopedic services or
• ambulatory surgery centers (ASCs), i.e.
  outpatient surgical procedures or endoscopy
  services
• Free standing imaging and laboratory facilities
• Controversial matters of increasing antitrust and
  health policy concern and fertile ground for
  antitrust and related forms of litigation

3
You Know an Antitrust Issue is Hot When its in
the Newspaper
4
Policymakers Viewpoints Vary
5
Imperfections in Healthcare Markets

• Text book market conditions do not exist
• Hospitals have legal and practical obligations to
  provide care
• Regardless of ability to pay
• Reliance on cost shifting
• Cross subsidization of services
• Impact of federal and state reimbursement
  regulations
• Managed Care
• Entry and expansion barriers

6
Healthcare Markets

• Free-riding problems
• Physicians expect support, use of facilities
  equipment for free
• Back up support for exigent circumstances
• Financial survival without access even with
  competing facility
• Yet, physicians bring patients to hospitals
  without remuneration

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Healthcare Markets

• Agency problems in the physician-hospital
  relationship
• Information aysmmetry between physicians and
  patients
• Selection bias and incentives
• Professional service fees
• Profit sharing from facility usage
• Conflict of interest

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Healthcare Markets

• Potential for physician actions adverse to
  hospital financial interests
• Referral of patients requiring higher treatment
  costs to hospitals
• Referral of less acutely ill patients, less cost
  intensive procedures to physician facility
• Physicians supplier induced demand
• Incentives for over-utilization

9
The Policy Battle between Physicians and
Hospitals

• Physician/Investors
• Enhanced consumer choice for lower cost
  alternative to hospitals
• Higher quality, better convenience and amenities
• More efficient delivery of services
• Permit physicians to control delivery of services
• Permit physicians to supplement diminished
  revenue streams from government and commercial
  payors

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The Policy Battle (contd)

• Hospitals
• Physician cherry picking takes highest margin
  business from hospitals
• Physicians have unfair advantage in incentive and
  ability to control referrals
• Proliferation of facilities results in excess
  capacity, over-utilization, and higher health
  care costs
• Physicians can free ride on hospital capital
  investment while competing
• Revenue siphoning threatens ability of hospitals
  to care for uninsured, underinsured, and provide
  unprofitable services

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Common Hospital Responses

• Joint Ventures with physicians
• Lobbying and CON opposition
• Economic Credentialing
• Referral requirements
• Conflict of Interest policies/ triggered reviews
• Exclusive or selective contracting practices
• Closure of departments
• Exclusionary contracts with third-party payers
• Network configuration clauses
• Bundled service discounts
• Hospital and Medical Staff boycotts

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Core Antitrust Theories

• 1 of the Sherman Act
• Contracts, combinations and conspiracies in
  restraint of trade
• 2 of the Sherman Act
• Monopolization, attempts to monopolize, and
  conspiracies to monopolize
• 3 of the Clayton Act
• Exclusive dealing and tying arrangements
• 5 of the FTC Act
• Unfair trade practices

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Key Issues

• Unilateral conduct versus collusive conduct in
  response to market developments
• Product and geographic market definition
• Assessment of market power (monopoly and
  monopsony) facing healthcare professionals,
  hospitals and health insurers
• Injury to competition versus competitors and
  consumer welfare
• Impact of recent Supreme Court cases on pleading
  and proving conspiracies and the scope of
  antitrust immunities and exemptions

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State Law Theories

• State antitrust actions
• State unfair competition statutes
• Tortious interference with contracts and/or
  prospective relationships
• Civil conspiracy
• Non-Compete Agreements
• Breach of contract

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Regional Antitrust Cases

• Heartland Surgical Specialty Hospital, LLC v.
  Midwest Division, Inc. d/b/a HCA Midwest
  Division, et al., No. 05-2164-MLB (D. Kan.
  10/1/07)(summary judgment)
• Plaintiff sued eighteen defendants consisting of
  MCOs and Hospital Defendants
• Alleged broad conspiracy to boycott plaintiff
  from contracting with MCOs in violation of 1 of
  the Sherman Act
• District Court framed the issues This case
  ultimately involves the proper place of
  physician-owned healthcare ventures in the broad
  landscape of United States healthcare Both sides
  insist they solely possess the moral high
  ground.Neither side can make a colorable
  argument that the parties profits is not a
  central factor in their dispute.

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Regional Cases- Heartland

• The MCO defendants account for 90 of managed
  care enrollment in the Kansas City Metro Area
• The Hospital Defendants net patient revenue share
  is 74
• Heartland directly competes for hospital based
  inpatient and outpatient acute care services in
  the KC metro area
• Owned by orthopedic, neurological, plastic, pain
  management, and general surgery specialists
• 48 licensed inpatient beds
• Advertised higher standard of care, lower costs,
  lower infection rates, and higher patient
  satisfaction rates

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Regional Cases-Heartland

• Heartlands Conspiracy Evidence
• Direct
• Unwritten but understood agreement among MCOs
  not to extend managed care contracts to SSHs
• Gentlemens agreement among MCOs to include
  facilities majority owned by Hospital Defendants
  in managed care plans
• Network configuration agreements excluding SSHs
  but allowing competing hospitals to include new
  facilities
• Cooperation among hospitals and MCOs on common
  network configuration agreement terms
• Statements to plaintiff by MCOs that their
  contracts prevented them from granting plan
  access to physician-owned facilities

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Regional Cases-Heartland

• Heartlands conspiracy evidence
• Circumstantial or indirect
• Initial positive feedback from MCOs
• Hospitals shared concerns with threat of
  freestanding facilities with each other and MCOs
  communicated with each other on strategies
• Hospitals recognition of Heartland as a
  competitor and discussions about threats from
  specialty hospitals
• Hospital statements to MCOs in public forums
  that way to protect profit margins was for MCOs
  to deny contracts with freestanding facilities
• Individual complaints by hospitals to MCOs to
  keep freestanding facilities out of MCO networks
• MCOs denied Heartland access without need
  analysis
• MCOs permitted access to new hospital facilities
• Hospitals agreed to lower reimbursement rates in
  exchange for exclusionary provider agreements
  with network clauses

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Regional Cases Heartland

• Court denied summary judgment motions of all but
  one defendant
• Direct evidence weak, but sufficient to avoid
  need to produce evidence to exclude the
  possibility of independent action
• Circumstantial evidence given more weight due to
  economic plausibility of claims
• Parallel business behavior insufficient to
  support claims absent demonstration of plus
  factors
• Interplay of Matsushita and Twombly evident

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Regional Antitrust Cases

• Ferguson Medical Group, L.P. v. Missouri Delta
  Medical Center, 2006 WL 2225454 (E.D.Mo.
  2006)(motion to dismiss)
• FMG was a long standing physician group located
  adjacent to Mo Delta, a regional acute care
  hospital in Sikeston, MO
• FMG expanded into ancillary medical and
  outpatient diagnostic and surgical services
• FMG maintained non-compete agreements with
  employed physicians
• Mo Delta responded with recruitment of FMG
  physicians, elimination of coverage, limitations
  on access, and aggressive peer review and
  credentialing actions alleged to be an attack on
  FMG

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Regional Cases- FMG

• FMG filed a state court action for interference
  with physician contracts and raiding
• FMG filed a separate federal action for attempted
  monopolization and conspiracy to monopolize
  against Mo Delta and members of its medical staff
  committees and administration under 2 of the
  Sherman Act and Missouris antitrust statute
• Complaint alleged defendants attempting to
  monopolize the market for ancillary medical,
  outpatient diagnostic, and surgical services
• Complaint alleged geographic market based on
  patient migration data under the Elzinga-Hogarty
  test, consisting of the areas surrounding
  Sikeston from which 80-90 of Mo Deltas patients
  actually go to for services

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Regional Cases- FMG

• Mo Delta moved to dismiss, principally attacking
  the market definition as gerrymandered
• The District Court agreed and dismissed the
  complaint
• Emphasized critical issue is not where consumers
  of relevant services actually go, but rather
  where they could practically turn for alternative
  care
• FMG failed to adequately plead a viable relevant
  geographic market
• Court influenced by prior experience with
  defining a relevant market in the region in FTC
  v. Tenet Health Care Corp., 186 F.3d 1045 (8th
  Cir. 1999)(FTC market too narrow in merger
  enforcement action)
• Note this result may or may not be consistent
  with the FTCs new rejection of patient origin
  data as a useful tool in defining geographic
  markets, and focus on services sold to payors
  versus patients in defining product markets in
  hospital merger cases. In the Matter of Evanston
  Northwestern Healthcare Corporation (FTC
  Opinion).
• FMG, however, vigorously pressed the State Court
  claims and the parties entered into a
  confidential settlement

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Regional Antitrust Cases

• Branson Heart Center, P.C. v. The Skaggs
  Community Hospital Association, et. al., Circuit
  Court, Stone County, Missouri
• Physicians who formed a center for cardiology and
  interventional cardiology services sued an acute
  care hospital in Branson, MO, alleging attempt to
  monopolize under Missouri law and various state
  tort and breach of contract claims
• Allegations of a campaign to destroy plaintiffs
  financial viability included
• Unreasonable, arbitrary and capricious
  credentialing and peer review actions
• Verbal threats
• Creation of adversarial work environment
• Disseminating false information to hospital
  employees, other physicians and the public
• Selective application of hospital policies to
  interfere with plaintiffs activities
• Discriminatory and unreasonable false allegations
  of violations of hospital policies and abuse of
  disciplinary and review processes
• Establishing onerous requirements for
  interventional procedures to prevent plaintiffs
  physicians from obtaining privileges
• After extensive and contentious discovery and
  denials of motions to dismiss, parties entered
  into a confidential settlement

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Potential Litigation Game Changers

• Bell Atlantic v. Twombly, __ U.S.__, 127 S. Ct.
  1955 (2007)
• Class plaintiffs allegations of exclusively
  parallel conduct by major telecommunications
  providers failed to state a conspiracy claim
  under 1 of the Sherman Act
• Complaint failed to plead sufficient facts to
  support inference of conspiracy rather than
  identical but independent action
• Not a hard core price fixing case
• What will be required to sustain complaints for
  alleged conspiracies in healthcare antitrust
  cases?
• Clear direction to move beyond notice pleading
  under Fed.R.Civ.P. 8 for conspiracy allegations

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Game Changers

• Billing v. Credit Suisse First Boston
• Underwriters immune from antitrust liability for
  actions in connection with underwriting public
  offerings
• IPO activities squarely within the heartland of
  securities regulation SEC regulatory authority
  and antitrust principles incompatible
• What about implied immunity for hospitals in the
  healthcare arena?
• CON requirements
• HCQIA
• Accreditation

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The Future

• Litigated cases are fact intensive and cases will
  continue to be filed
• Twombly may make it harder to sustain a
  conspiracy complaint
• Characterization and proof of conduct in response
  to freestanding facilities as exclusionary and
  meeting the injury to competition requirement
• Rural hospitals with more alleged market power
  may be more vulnerable
• Increase in state court cases to avoid federal
  treatment
• Hospital systems will continue to expand with
  their own free-standing facilities
• Hospitals should carefully maintain appearance of
  unilateral action in dealing with competitive
  threats and avoid intertwining conduct with
  physicians or specialty groups or MCOs
• Hospitals should carefully consider medical staff
  development plans, credentialing criteria, and
  medical staff and board policies to avoid
  language that could be misinterpreted as
  anticompetitive
• Structure medical staff peer review and
  credentialing criteria to take full advantage of
  immunity provided in the HCQIA
• Both hospital systems and physician groups should
  consider the public interest and their mutual
  dependence in fashioning relationships with one
  another and dealing with perceived threats
• Overcoming the moral high ground
• Board leadership and physician character in
  litigation matters

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Helpful Sources

• Caselaw
• Cascade Health Solutions v. PeaceHealth, ___ F.
  3d ___, 2007 WL 2473229 (9th Cir. 2007)
• Flegel v. Christian Hospital Northeast-Northwest,
  4 F.3d 682 (8th Cir. 1993)
• Miller v. Indiana Hospital, 843 F.2d (3d Cir.
  1988)
• Gordon v. Lewistown Hosp., 272 F.Supp.2d 393
  (M.D. Pa. 2003)
• Williamson v. Sacred Heart Hospital of Pensacola,
  1993 WL 543002 (N.D. Fla. 1993)
• Surgical Care Center of Hammond. L.C. v. Hospital
  Service Dist. No. 1 of Tangipahoa Parish, 2001-1
  Trade Cas. (CCH) 73,215 (E.D. La. 2001) affd
  309 F.3d 836 (5th Cir. 2002)
• Rome Ambulatory Surgery Center, LLC v. Rome
  Memorial Hospital, 339 F. Supp. 2d 389 (N.D.N.Y.
  2004)
• Womans Clinic, Inc. v. St. Johns Health System,
  252 F. Supp. 2d 857 (E.D. Mo. 2002)
• Little Rock Cardiology Clinic, P.A. v. Baptist
  Health, 4-06-cv-1594-JLH (E.D.Ark. Nov. 2006)
• Mahan v. Ahera St. Lukes, 621 N.W. 2d 150 (S.D.
  2000)

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Helpful Sources

• Secondary Materials
• Robert W. McCann, Another Dose of Competition,
  Health Law Handbook (A. Gosfield ed. 2005)
• David A. Argue, An Economic Model of Competition
  Between General Hospitals and Physician-Owned
  Specialty Hospitals, ABA Antitrust Law Section
  Health Care Chronicle, Jul. 2006
• John K. Iglehart, The Emergence of
  Physician-Owned Specialty Hospitals, N. Engl. J.
  Med., Jan. 6, 2005
• Elizabeth A. Weeks, The New Economic
  Credentialing Protecting Hospitals from
  Competition by Medical Staff Members, 36 J.
  Health L. (2003)
• FTC and U.S. Department of Justice, Improving
  Health Care A Dose of Competition, Exec. Summ.
  Chs. 1 3 (2003)(Joint Report)
• Daniel Rubenfeld, 3Ms Bundled Rebates An
  Economic Perspective, 72 U. Chi. L. Rev. 243
  (2005)