physician ownership of hospitals health facilities: antitrust ...

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

7. 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

8. 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

10. The Policy Battle (cont�d) 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

11. 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

12. 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

13. 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

14. 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

15. 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 MCO�s and Hospital Defendants Alleged broad conspiracy to boycott plaintiff from contracting with MCO�s in violation of �1 of the Sherman Act District Court framed the issues: �[T]his 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�.

16. 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

17. Regional Cases-Heartland Heartland�s Conspiracy Evidence Direct Unwritten but understood agreement among MCO�s not to extend managed care contracts to SSHs �Gentlemen�s agreement� among MCO�s 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 MCO�s on common network configuration agreement terms Statements to plaintiff by MCO�s that their contracts prevented them from granting plan access to physician-owned facilities

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

19. 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

20. 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

21. 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 Missouri�s 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 Delta�s patients actually go to for services

22. 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 FTC�s 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

23. 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

24. 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

25. 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

26. 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 MCO�s 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

27. 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) aff�d 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) Woman�s Clinic, Inc. v. St. John�s 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. Luke�s, 621 N.W. 2d 150 (S.D. 2000)

28. 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, 3M�s Bundled Rebates: An Economic Perspective, 72 U. Chi. L. Rev. 243 (2005)