Doctors, Hospitals Duke it out

Doctor-owned facilities sue hospitals on alleged antitrust violations.

Sheri Qualters / Staff reporter

November 26, 2007

Legal battles between physician-owned hospitals, clinics and surgical centers and traditional full-service hospitals are heating up as more doctor-owned entities accuse their rivals of violating antitrust laws to keep them out of the markets.

Since the federal government lifted a moratorium on Medicare payments to doctor-owned specialty hospitals a couple of years ago, those businesses have been bringing cases against their mostly nonprofit competitors running community hospitals.

Cases also frequently name insurance companies, hospital executives and board members as defendants.

Doctor-owned hospitals typically allege that community hospitals are teaming up with insurance companies to prevent them from obtaining insurance contracts.

Cases are pending in federal courts in Arkansas, Georgia, Illinois, Kansas and Oklahoma. A Texas state court case is also pending that alleges violations of state antitrust and insurance laws and tortious interference with prospective business relationships. Franco v. West Houston GP, No. 2006-79945 (Harris Co., Texas, Dist. Ct.).

A Racketeer Influenced and Corrupt Organizations Act (RICO) case in Ohio relies on federal anti-racketeering law to accuse an insurance company of delaying or denying claims to three doctor-owned facilities while making timely payments to other area hospitals. Riverview Health Institute LLC v. Medical Mutual of Ohio, No. 07-354 (D. Ohio).

Cherry picking?

Community hospitals believe that many doctor-owned medical centers for such lucrative practices as cardiology and orthopedics take the best-insured, healthiest and most profitable patients, leaving community hospitals with few resources to treat other patients, said Professor Tim Greaney, the co-director of the Center for Health Law Studies at the Saint Louis University School of Law.

"Community hospitals, those that see [themselves] as the victim of specialty hospitals, have acted in ways that may run afoul of antitrust laws," he said.

David Beck of Houston-based Beck Redden & Secrest, who is defending the nonprofit community hospital in the Texas state court case, said such hospitals have a "huge charity care mission" that can be jeopardized by competition with physician-owned hospitals, particularly when doctors are on the staff of both facilities.

"Whenever you have a competitor like a physician-owned hospital that competes with that, there's a very serious risk that well-insured patients with the lowest risk of complications are going to be siphoned off by doctors because they have an economic incentive to do so," Beck said.

Big Kansas case

In a closely watched case in a Kansas federal court that heartened plaintiffs' lawyers, an October ruling denied the defendants — including community hospitals and insurance companies — summary judgment motions on antitrust and conspiracy claims. Heartland Surgical Specialty Hospital v. Midwest Division, No. 05-2164 (D. Kan.).

Heartland Surgical Specialty Hospital, a physician-owned cardiac specialty care facility, initially accused five other community hospitals or hospital networks of conspiring with six insurance companies to deny managed care contracts to Heartland.

Heartland has since settled with six parties, but the case continues against five of the original defendants.

Claims in the case include Sherman Act antitrust theories, tortious interference with prospective business relationship and civil conspiracy claims against both hospital and insurance defendants.

Heartland attorney Patrick Stueve of Stueve Siegel Hanson in Kansas City, Mo., said physician-owned facilities didn't become a competitive threat to traditional hospital systems until about 2000. The physician-owned Heartland Surgical opened in September 2003.

"This case is plowing new ground," Stueve said. "Physician-owned hospitals are new competitive threats to traditional hospitals."

Community hospitals concerned about competition from doctor-owned hospitals and the survival of their own hospitals lobbied for government restrictions on doctor-owned hospitals.

The resulting moratorium from Dec. 8, 2003, to June 8, 2005 — which prohibited physician-owned specialty hospitals from billing Medicare for services to patients referred by one of the doctor-owners — curbed the opening of some new facilities.

After the moratorium expired, the Centers for Medicare & Medicaid Services suspended processing of specialty hospital enrollment applications and ordered regional offices not to make agreements with such hospitals until Feb. 15, 2006. Congress extended the ban to Aug. 8, 2006.

The firms that represent community hospitals and insurance companies in the Kansas case declined to comment. They are Honigman Miller Schwartz and Cohn in Detroit; Latham & Watkins; Kansas City, Mo.-based Blackwell Sanders and Stinson Morrison Hecker; and St. Louis-based Husch & Eppenberger and Lewis, Rice & Fingersh.

But a spokesman from hospital defendant HCA Midwest Health System said the company is "disappointed" with the court's ruling.

"We intend to vigorously defend ourselves against the lawsuit," said Rob Dyer.

Similar cases involving antitrust claims started appearing several years ago, and most have settled or were thrown out, said Jeff Miles, a Washington lawyer with Baltimore's Ober, Kaler, Grimes & Shriver.

Miles is on the defense team of an Arkansas antitrust case brought by a cardiology clinic and its doctors against a hospital and health insurance company. Little Rock Cardiology Clinic v. Baptist Health, No. 06-1594 (E.D. Ark.).

$100M in damages

The Texas state court case, Franco, which accuses a nonprofit charity hospital of orchestrating an insurance company boycott that allegedly drove the doctor-owned hospital out of business last year, estimates that damages could exceed $100 million.

According to the suit, the charity hospital "set out to destroy Town & Country Hospital in a methodical and orchestrated manner as part of an illegal, monopolistic business strategy to crush physician-owned hospitals."

Rusty Hardin of Rusty Hardin & Associates in Houston, who represents the doctor-owned Town & Country, said the charity hospital threatened to charge insurance companies higher rates for patient services and to impose contract cancellations to get them to go along with the boycott of the doctor-owned hospital.

"You can't compete by essentially eliminating your competitors by getting other people to refuse to do business with them," Hardin said.

Defense attorney William R. Pakalka, a lawyer in the Houston office of Fulbright & Jaworski, said that forcing insurers to deal with physician-owned hospitals means they can't offer exclusives to community-owned hospitals in return for discounts.

"That drives up the cost of medicine; it's anti-competitive," Pakalka said

The Ohio RICO case, Riverview Health, contains language that "suggests there might be an antitrust remedy" for physician-owned clinics and hospitals squeezed by insurance companies and community hospitals, but bringing antitrust claims against hospitals is difficult, said plaintiffs' lawyer Kenneth A. Lazarus of Washington's Lazarus & Associates.

The case is brought by three physician-owned hospitals against an insurance company and several individual officers and employees for violations of RICO and the federal Employee Retirement Income Security Act, and state breach of contract, fraud and tortious interference with business relationship claims.

The plaintiffs are equating insurance company Medical Mutual of Ohio's "slow-pay, no-pay, low-pay pattern," with mail fraud.

Since courts have typically defined hospital markets as covering a large geographic area, it's hard for opposing parties to claim that one competitor is controlling that market, Lazarus said. "It makes it hard for the plaintiff to prove that one hospital or a couple of hospitals have the requisite power to do something anti-competitive," Lazarus said.

Medical Mutual's attorneys at Squire, Sanders & Dempsey declined to comment on the case.

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