My practice is being squeezed by our local hospital — now what?

Insight Article - September 11, 2020

Governance

Partnerships, Mergers & Acquisitions

Strategic Planning

George Sanders JD
Over the past 20 years, healthcare markets have changed considerably. One of the major shifts impacting private practice physician groups is that local hospitals have set their sights on them.

As hospitals hire their own specialty doctors, they become major competitors to specialty practices and independent physician associations (IPAs), often squeezing out specialty practices by using their vast resources, control over referrals and ability to leverage strength with payers. Specialty practices and IPAs, especially those with high-income-producing possibilities, are ripe targets, but the tactics used by hospitals may also violate federal antitrust laws.

The impact of COVID-19

The COVID-19 pandemic may accelerate some of these changes. As hospitals struggle to remain financially viable, they may view physician practice acquisitions as a way to protect their profitability. In many areas, the pandemic has significantly reduced the volume of more profitable outpatient services provided by hospitals. Hospitals may react by trying to grow market share in many different outpatient markets to recoup losses they already incurred or to act as a buffer to hedge against future potential disruptions.

What are my options?

Up against these forces, there are several options for physician group leaders to consider in the event the local hospital attempts a hostile takeover or other type of acquisition strategy. For some practices, allowing an acquisition makes sense. For practices that want to retain their independence, several options exist:
  1. Negotiating with the hospital system/forming a joint venture
  2. Requesting the government open an antitrust investigation
  3. Litigation.

Each has its pros and cons, and in some instances, it may be wise to implement them in successive order.

Option 1: Negotiating with the hospital system

Now that many hospitals are competing in physician markets, hospitals and IPAs share some common characteristics; however, they each have qualities the other needs and wants. Finding common ground can prove beneficial to independent physicians.

Entering a variety of medical specialty markets or expanding into specialties in which offerings are limited may not make economic sense for hospitals — unless they have their sights set on monopolizing physician markets. Recruiting and directly employing physicians represent significant upfront investments by hospitals. Further, motivating and retaining these employed physicians presents many difficulties for hospitals. A hospital may not be able to realize sufficient integrative efficiencies to offset these costs.

Of course, hospitals can hire physicians from nearby practices, which can lower recruitment costs. This strategy, however, can trigger lawsuits, create ill will and, in some cases, result in higher salaries than recruiting physicians from outside the community. At the same time, recruiting physicians outside the community can be riskier than hiring known and established local physicians.

Physicians in longstanding practices within a community have established referral networks and skills, as well as cultivated relationships with patients and the community. A hospital may have difficulty replicating these advantages due to costs or the available talent pool.

These are qualities a physician group can offer a hospital through a joint venture or similar collaboration. Joint ventures are versatile organizations in which hospitals and physician practices can balance integration of their business with independence in many different areas. A joint venture is typically an independent entity created by the hospital and physician group to pursue a specific business goal. Some involve the purchase and operation of complex equipment or an outpatient facility. Others might include a combination of a hospital specialty line with a physician practice in which the physician practice and hospital share control. There are a wide range of options to choose from and each has its benefits and drawbacks.

A joint venture is often appealing to physicians because they can retain significant independence but also have access to capital and administrative resources otherwise unavailable to smaller physician groups.

The makings of a strong joint venture

Even if a hospital and private practice can come to terms on a joint venture, they need to do so in a way that does not prompt a government investigation into potential antitrust violations.

Federal and state antitrust laws limit the types of arrangements into which hospitals and physicians can enter. If a physician group and a hospital are competitors, they must pay special attention to any part of the arrangement that could unreasonably harm competition and consumers. For example, agreements to fix prices, allocate markets and customers or boycott rivals can violate the antitrust laws. For example, an agreement between the hospital and a physician practice stating that they will not compete for services outside the joint venture’s scope could raise serious antitrust issues.

In some cases, the joint venture could give the hospital and physician group market power. One indicator of market power is a large market share; however, in certain cases, market power could exist even if it appears that the joint venture has only a modest market share. While a joint venture that has some degree of market power is not necessarily unlawful, it could trigger an antitrust investigation.

To minimize potential antitrust issues, the best time for a physician practice to enter into a joint venture with a hospital is before the hospital enters the physician’s area of specialty. While agreements between non-competing firms can raise antitrust issues, these types of agreements are subject to significantly less scrutiny than agreements between preexisting competitors.

This does not mean that physicians should avoid joint ventures with hospitals they compete against, as there are many ways to structure a joint venture that can minimize the risk of an antitrust issue. Joint ventures in which hospitals and physicians share risk can create significant efficiencies, benefit consumers, bring new services into a community and prevent redundant and wasteful capital expenditures. Further, certain joint ventures may bring a new medical service into the community, which benefits consumers in the long run.

An example of Congress, the antitrust enforcement agencies and CMS recognizing the benefits created by joint ventures are the rules concerning accountable care organizations (ACOs). An ACO is a certain type of joint venture that brings together multiple medical specialties and hospitals to more efficiently coordinate care, thereby potentially lowering medical costs. While the guidelines created for ACOs do not control the structure of more traditional and limited joint ventures, the concepts of coordinated care and risk sharing applicable to ACOs transfer easily to other types of joint ventures. The guidelines for ACOs also show the problems joint ventures can face if they don’t address possible antitrust issues early in the process.

The goals of a properly structured joint venture are increased efficiencies and cost reductions. Identifying these efficiencies and cost reductions during the negotiation process is important. If the government were to investigate the joint venture, the ability to clearly identify any efficiencies and cost savings can play a major role in allaying the government’s concerns.

Demands a physician group should consider

Before entering any joint venture discussion with a hospital, it is crucial that the practice or IPA understand what it wants to achieve through the joint venture, and to ensure those goals are consistent with antitrust laws. Trying to expand care and get access to needed capital while retaining a level of independence are legitimate goals.

Physician practices need to ensure that the joint venture is not a step to being acquired by the hospital. This means that the physician group should ensure that within the structure of the joint venture it remains a viable independent entity. 

Joint venture concerns

It is important to keep in mind that even a joint venture with legitimate objectives can raise antitrust issues. The Department of Justice (DOJ) Antitrust Division and the Federal Trade Commission (FTC) look for two key concerns:
  1. Will the joint venture have too much market power when the hospital and physician group pool resources?
  2. Are there anticompetitive agreements contained within the joint venture’s framework unconnected to any legitimate joint venture function?

Market power can make a joint venture untenable under the antitrust laws. Fortunately, market power issues can sometimes be remedied or mitigated by structuring the joint venture differently. Further, evidence that the joint venture will create significant efficiencies benefiting consumers may ameliorate any market power issue.

An ancillary anticompetitive provision in a joint venture agreement might have an alternative that does not raise antitrust issues. Spotting these issues early in the process is important. Taking steps to avoid anticompetitive outcomes goes a long way with government enforcement agencies.

Option 2: Requesting the government open an antitrust investigation

A different course of action against a predatory hospital is to file a complaint with the DOJ’s Antitrust Division or the FTC.

Filing a complaint with these agencies is not as easy as filling out a form. A physician group must carefully prepare a position paper containing the type of information the Antitrust Division and FTC would need to evaluate whether the identified improper conduct violates the antitrust laws. 
 
The Antitrust Division and FTC are concerned with how a hospital’s role in the local market may negatively impact patients. If the underlying theory is a particular hospital using market power to harm competition and consumers, hiring an economist is a crucial step in drafting the position paper. The economist will provide the necessary research and analysis to build a strong market power and a consumer-harm narrative. Market power and consumer harm are at the heart of practically all antitrust cases, and a government agency will want to see analysis on these points. An antitrust enforcement agency would need to show market power and consumer harm, if it were to prosecute the hospital. Further, an antitrust enforcement agency will not want to devote its limited resources to a case when neither of these elements is present.

In addition, preparation of the complaint must also include interviewing members of the physician practice and other related parties on topics including:
  • The structure of the physician practice
  • The practice’s size and role in the market
  • How competition works in the market
  • Relationship between the practice and hospital
  • Nature of the hospital’s misconduct.

The economist’s findings from the investigation and analysis are then integrated into the position paper sent to the FTC or DOJ.

Getting these government agencies’ attention is its own challenge, as these entities enforce antitrust laws in many industries, receive many complaints and must prioritize their limited resources when determining what to investigate. Developing a strong argument with a solid economic analysis increases the chance your case will be considered.

One of the primary benefits with this approach is its relatively low cost. Preparing a position paper and meeting with an antitrust enforcement agency is far less expensive than litigating an antitrust lawsuit. Further, a hospital may be much more reluctant to fight the DOJ or FTC in a lawsuit than a mid-sized physician practice and agree to stop its predatory conduct.

There are, however, some drawbacks. First, there is no guarantee the government will take any action. One offset in this situation is that the work underlying the position paper will also support a complaint in a court proceeding, should the practice pursue that option. Second, even if the government starts an investigation, there is no guarantee it will result in a lawsuit or agreement between the hospital and the government.

Finally, even if the government agency takes action against the hospital, the relief the government agency obtains may not solve the practice’s problem. Many government antitrust investigations are resolved by an agreement, which is turned into a judgment by a court. If the government and the hospital settle the dispute, the government agency may file a complaint and propose a judgment with a court. Once entered, the judgment will limit the hospital’s behavior according to the terms of the judgment. That judgment may or may not address all of the physician practice’s concerns. Even if the judgment did not resolve all of the practice’s concerns, the relief may do enough to make litigation by the practice against the hospital unnecessary.

Option 3: Litigation

Negotiating with a hospital or seeking help from an antitrust enforcement agency are initial options private practices should consider if their business is squeezed by a predatory hospital, but litigation can be another option if these pursuits fall short.

To specifically encourage individuals and firms harmed by anticompetitive conduct to bring antitrust lawsuits, antitrust laws allow a physician group to recover its attorneys’ fees as well as three times its lost profits, if it wins. These substantial awards are in place because the federal government does not have the resources to investigate and prosecute every alleged antitrust violation.

This may sound like a promising pursuit, but filing an antitrust lawsuit should be carefully considered, as it can be a lengthy and expensive process. Gathering the necessary facts in antitrust litigation oftentimes goes well beyond information held by the defendant. Getting information from third parties, such as health insurers and other market participants, is common in healthcare antitrust litigation. Once a plaintiff has the needed data, it will need an economist to assess the data. Expert witness costs can be significant in antitrust litigation.

The first step in filing an antitrust lawsuit is identifying a hospital’s anticompetitive conduct and providing a narrative on how it has harmed competition and consumers. Doing so often involves the following:
  • Interviewing members of the practice to learn about its history, growth, challenges, actions by the hospital and the practice’s place in the market 
  • Interviewing third parties about the market, actions by the hospital and how competition has developed or changed in the market 
  • Gathering public disclosures made by firms in the market, news articles and other publicly available information. 

A complaint must allege the necessary facts and lay out a compelling antitrust theory of liability. Typically, demonstrating that the hospital has market power is a key element, and developing a proper market power story requires the help of an economist who can collect and analyze the relevant data.

The court will use this complaint as a road map to determine what information the physician group can force the hospital and other third parties to produce. Complaints that are cryptic or too narrow can haunt the plaintiff when trying to force the hospital to provide important information, as the hospital will be reticent to release information that paints it in a negative light.

Some types of anticompetitive conduct a hospital might employ include:
  • Controlling referrals
  • Organizing a group boycott of targeted physician practices
  • Entering exclusive contracts with key health insurers
  • Refusing to grant privileges to physicians who have privileges with a competing hospital or own an outpatient center
  • Predatory hiring of a practice’s key physicians.
 
In these situations, the physician practice will have to show that the hospital has significant market power.

Making the right choice for your practice 

The well-being of our healthcare system is dependent upon private practice groups, which create the healthy competition that results in better pricing and care for patients. When hospitals use market power to crush these groups, consumers, patients and independent physicians all suffer.

If a private physician practice sees its business dwindling because of a local hospital’s actions, it is important to keep in mind they have options, be that striking a deal, approaching the government or litigation. The quality of our healthcare system depends on it.
 

About the Author

George Sanders
George Sanders JD
Healthcare Antitrust Attorney The Law Offices of George M. Sanders P.C.

George Sanders, JD, can be reached at gsanders@gmslaw.net.

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