Competing for Patients

Of all the indicators of a troubled health care industry in this country—and there are lots, from the rising cost of health insurance and prescription medication to trying to reach an actual person when you call your doctor—the controversy surrounding physician-owned hospitals brews somewhat under the general public’s radar, even though the outcomes of litigation on this matter have the power to affect where the public goes to receive medical treatment.

On October 25, 2007, the Center for Health Law Studies hosted a conference on “Physician Ownership of Hospitals and Other Health Facilities: Antitrust and Policy Issues.” The event was co-sponsored by the American Bar Association Section of Antitrust Law and the Saint Louis Area Health Lawyers Association. The purpose of the conference was to provide a forum for conference panelists, faculty, students and alumni to discuss the debate and to offer students a glimpse into how law is applied in the real world by the professionals who are involved in all facets of this issue.

What is the nature of this controversy? Physician-owned hospitals (also called specialty hospitals), where doctors invest capital to build their own health care facility, compete directly with nonprofit community hospitals. Specialty hospitals are more prevalent in states with either weak Certificate of Need (CON) laws or none at all. A CON is just what the name implies: In order to enter a health care market and establish a new facility, an applicant must prove to the state that there is a need for its services. A CON also is required if a facility wants to acquire a piece of equipment that costs more than $1 million.

The nonprofit hospitals claim that physicians who own specialty hospitals steer their patients to the their own facility and that this competition is unfair, especially because these physicians often still retain staff privileges at the competing nonprofit hospital. Specialty hospitals, on the other hand, have alleged that nonprofit hospitals engage in activity that violates such antitrust laws as the Sherman Act and the Clayton Act.

Both specialty hospitals and nonprofit hospitals ardently believe in the rightness of their positions and have proved themselves willing to take their cases to court. Glenn Davis, chair of the litigation group at Armstrong Teasdale LLP in St. Louis and one of the antitrust panelists at the conference, says that this area of health law is “fertile ground for antitrust and related forms of litigation.”

Physician, Heal—And Pay—Thyself

As it turns out, medical school was the easy part. Working as a physician in today’s health care environment is much more complicated and challenging than Hippocrates ever could have imagined, and with big, modern medicine comes big, modern bureaucracy.

According to Wes Cleveland, legal counsel to the American Medical Association’s Advocacy Group and one of the panelists at the recent conference, physicians are experiencing an “unprecedented level of frustration” with the current realities of practicing medicine, and “they feel disenfranchised by hospitals.” Their frustration stems from several sources: a lack of control over hospital governance and decision-making; an increase in the amount of time devoted to unpaid administrative duties; having to compete with the other hospital departments for their share of the budget, which is especially problematic when physicians ask for new equipment; and, perhaps most important, the administrative burdens leave less time for a physician’s primary function—seeing and treating patients.

For those physicians who feel stymied by what they consider to be unresponsive hospital administrations, investing in a specialty hospital seems like an attractive alternative. It all boils down to control. Doctors say that practicing in a specialty hospital empowers them to make the important decisions the way they see fit, and not as a result of hospital administration mandates. Physicians retain the ability to hire and fire their own staff and specify what qualifications the staff should have, they can make decisions about facilities and purchase the most advanced equipment, and they can determine their own schedules. In addition, because the specialty hospitals concentrate on treating only one medical condition, physicians maintain that their facilities run more efficiently without the interference from the bloated administration of a general hospital, thereby increasing time spent with patients and improving the quality of care patients receive.

And like anyone else who invests in a business, physicians who own specialty hospitals want to maximize their profits. When doctors own the facility in which they practice medicine, they collect not only their doctors’ fees, but also the facility fees; in a nonprofit hospital, those facility fees would be paid to the hospital.

Lawyers for specialty hospitals also cite studies that show the quality of care at such facilities is equal to or exceeds that of nonprofit hospitals, and that specialty hospitals create tax revenue for the community; moreover, the competitive presence of a specialty hospital spurs the other nonprofit hospitals in the area to innovate and improve their own services.

As to the charge that physician ownership fosters a somewhat ghoulish and predatory doctor-patient relationship based on greed rather than care, doctors who own these facilities respond that the percentage of ownership is so small as to be negligible in regard to individual patients, and that such a charge against them is absurd.

Improved care for patients, more efficient and happier doctors, no more pointless administrative functions—what’s wrong with this picture? If you ask any nonprofit hospital embroiled in this debate, there’s plenty wrong.

The Other Side

Daniel Landon, conference panelist and the senior vice president of governmental relations for the Missouri Hospital Association (MHA), manages that organization’s state and federal advocacy activities. In presenting the nonprofit hospital side of the issue, Landon stated that physicians who own specialty hospitals have a tendency to “cherry-pick” only the most lucrative revenue centers (typically cardiac or orthopedic care) and patients (i.e., those with good insurance and without complicating, chronic medical conditions), and refer these patients to their own facility rather than to a nonprofit hospital. Without these moneymaking departments, a nonprofit hospital has less money to subsidize its other, less profitable centers, such as emergency rooms and burn units.

Another charge against specialty hospitals is that they do not treat uninsured and underinsured patients, who then wind up in the emergency rooms of nonprofit hospitals, yet another drain on their resources. Unlike the specialty hospitals, nonprofit hospitals that operate an emergency room have a legal obligation to treat any patient who comes through their doors.

To nonprofit hospitals, these activities amount to unfair competition—the health care equivalent of taking the money and running. When explaining the economic side of the debate, conference panelist David Argue, Ph.D., of Economists, Inc. stated that “physician ownership provides unambiguous economic incentive” to refer patients to their own facility.

A more serious allegation aimed at specialty hospitals and one that has helped to galvanize other opponents of this health care trend—not least of whom are senators and officials at the Centers for Medicare and Medicaid Services (CMS)—is that they are unprepared for patient emergencies. At some of these specialty hospitals, there is no physician on staff 24 hours per day. In a few cases scattered around the country, patients died because the specialty hospital was unable to handle their emergencies and was forced to call 911 for help.

Policy, Antitrust and The Public Trust

Indeed, since 2003 Congress has placed—and extended, then lifted, then placed again—moratoriums on specialty hospitals, specifically enrolling them in Medicare and Medicaid, in response to criticisms about and investigations into their quality of care. CMS does not want to give money to hospitals that can’t provide even the most basic emergency care to patients. In addition, at least one of those aforementioned patient deaths occurred at a specialty hospital that opened during one of the federal moratoriums, prompting Senators Chuck Grassley of Iowa and Max Baucus of Montana to ask the Secretary of Health and Human Services to investigate whether the government had performed due diligence in evaluating and licensing specialty hospitals.

For conference panelist Barry Joyce, ’03, this conference was a homecoming of sorts. Joyce, who is an attorney with the Antitrust Division of the Department of Justice (DOJ), focusing on antitrust enforcement in health care and health insurance, was a research assistant to Professor Tim Greaney. Professor Greaney, coincidentally, was the supervisor in the same DOJ office where Joyce currently works. At the conference, Joyce addressed how the DOJ might view the antitrust issues in this corner of the health care arena.

It should be noted that antitrust issues don’t automatically arise concerning competition between specialty and nonprofit hospitals. Physicians interested in starting their own facility can demonstrate through certificates of need that the local marketplace can accommodate another facility, and hospital associations can lobby for stronger certificate of need laws; moreover, normal competitive activity is perfectly legal, though there are complicating factors particular to the health care market, such as third-party payers (e.g., insurance companies and the state and federal government). And cherry-picking patients is not exactly an antitrust issue, according to Joyce. “Companies are under no obligation to help their competition,” he says.

That said, specialty hospitals have claimed that their nonprofit counterparts have engaged in decidedly anticompetitive practices. Hospital associations can use their considerable bargaining power with managed care organizations to force them to exclude physician-owned facilities from their contracts. During his presentation at the conference, Glenn Davis cited a Kansas case, Heartland Surgical Specialty Hospital, LLC vs. Midwest Division, Inc., in which the plaintiff claimed, among other things, that there was an “unwritten but understood agreement among MCO’s not to extend managed care contracts” to specialty hospitals. 

Another tactic that nonprofit hospitals have employed is economic credentialing, which is the practice of basing a physician’s performance review and continued hospital privileges on the percentage of referrals the physician makes to the hospital. The American Medical Association (AMA) states on its web site that some hospitals have “refused to grant staff privileges to physicians who own, have financial interests in or have leadership positions with health care facilities or who refer patients to competing facilities.” The AMA objects to economic credentialing in general, but especially in certain cases when it’s done in retaliation or to punish a staff member who has interest in a specialty hospital.

Nonprofit hospitals, for their part, have argued that physicians have an unfair advantage when it comes to where they choose to refer their patients—phrases like “conflict of interest” are frequently used. Could a doctor really have patients’ best interests in mind when referring them to his or her own facility? 

It is up to the courts to decide what is unlawful, unfair competition, and so far the courts’ decisions have favored both sides. With regard to federal policy, Greaney says that political favor currently lies with nonprofit hospitals. Earlier this year, CMS proposed new rules and regulations that would require all hospitals that participate in Medicare to inform patients when physicians have ownership in a facility and whether a facility has a physician on staff at all times to handle emergencies; though these new guidelines would apply to all hospitals, the underlying message is clear that they’re directed at physician-owned facilities. “This is an intensely political issue, with lots of lobbying at the federal level by physicians and community hospitals,” says Greaney. And unlike a lot of the political issues that have pundit tongues wagging all over television, this one is not necessarily tied to the upcoming election. The battle between specialty and nonprofit hospitals will outlast next November.

Right now, there are few issues that combine the political and personal more than the debate about health care. It encompasses what is both deeply public and deeply private. There are possibilities for the reconciliation between the two sides of this debate: Physicians can start their own general hospitals; physicians can enter into joint ventures with nonprofit hospitals; and nonprofit hospitals can create specialized centers within their facilities to combine the best of the resources and skills of the hospital staff. While it would be naïve to think that those proposed solutions could easily solve this complex, ongoing debate, one hopes the legal community can guide physicians and hospitals toward workable solutions that benefit patients and not just the financial interest of one particular side.