Texas hospital settles charges of boycotting physician-owned hospital

The case may signal increased scrutiny from state officials and give physician-owned hospitals an alternate antitrust avenue.

By — Posted March 16, 2009

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Community hospitals may think twice before attempting to stifle competition from physician-owned hospitals, experts say, after a recent antitrust action by a state government official that is believed to be among the first of its kind.

Memorial Hermann Healthcare System on Jan. 26 settled allegations by Texas Attorney General Greg Abbott that the hospital systematically discouraged health insurers from doing business with a competing physician-owned hospital. Memorial Hermann, Houston's largest hospital system, allegedly used its leverage to punish -- with threats of contract terminations or rate increases -- insurers that signed on with what used to be Town & Country Hospital. The physician-owned facility went out of business in 2007.

Memorial Hermann denied any wrongdoing but agreed to pay the state $700,000 to reimburse the cost of the two-year investigation. The hospital also agreed to a five-year injunction prohibiting certain contracting practices, though the hospital said they are "practices Memorial Hermann has never employed."

"This is an instance where you have the government actually getting on board for the argument that physician-owned facilities cannot be frozen out of the managed care market," said Lorin E. Patterson, a health care regulatory expert and partner with law firm Reed Smith in Falls Church, Va. "The outcome is that it really should be a level playing field for all facilities."

The case also may offer physicians an alternate course of action against anticompetitive behavior other than pursuing what often are expensive private antitrust claims, he said.

The settlement is one of several legal battles across the country, sparked by doctors who allege that dominant hospitals are trying to protect themselves from competition at the expense of patient care. A separate lawsuit brought by the physician owners of Town & Country Hospital is pending in Harris County District Court and is set for trial in September. The doctors claim that Memorial Hermann's conduct drove their facility to close.

On the other hand, general hospitals argue that physician-owned facilities often choose more profitable treatments and patients, leaving the community facilities with the cost of emergency and uninsured care.

A trend at play?

Unlike more limited specialty hospitals, Town & Country was a general acute-care facility, noted Texas Assistant Attorney General Mark Tobey. "That was a fairly important distinction for us," he said, noting that Town & Country had an emergency department and had plans to offer a full range of patient services.

Competition is key to ensuring patient choice, and physician-owned hospitals have shown reduced costs and improved quality over community facilities, Tobey said.

The case also signals that stronger state scrutiny is to come, he said. "The injunction in place should make it clear to Memorial Hermann and to the health care community at large that the attorney general is going to be watching this situation."

The attorney general's office also launched an early-stage inquiry into the possibility of similar antitrust violations in the Amarillo area. As part of the probe, state officials in November 2008 requested what they considered relevant information from Baptist St. Anthony's Health System. That included documents related to the hospital network's managed care contracts and communications, as well as a list of any competing physician-run facilities, legal records show.

Baptist was the subject of an earlier antitrust lawsuit brought by a group of Texas orthopedic surgeons who owned a competing surgical hospital. The Texas Medical Assn. and the Litigation Center of the American Medical Association and State Medical Societies contributed financially to the doctors in that case, Higgins v. Baptist, which ultimately settled.

Baptist spokeswoman Mary Barlow said the hospital complied with the request, but she had no further comment.

Tobey also declined to comment on the matter, but he said the attorney general's office was aware of the previous physician actions. Texas law requires parties to notify the attorney general's office upon filing any antitrust claim.

Policy questions

While antitrust laws generally favor competition, government officials and payers have kept a close eye out for overutilization and excessive costs when doctors refer patients to their own facilities, said John J. Miles, a former Justice Dept. attorney and partner at Ober Kaler in Washington, D.C. "The policy questions are very important in antitrust litigation" and are likely to be taken into account by courts, he said.

In addition, hospitals are able to contract exclusively with insurers without necessarily running afoul of antitrust laws. "There is no antitrust problem if a big hospital goes to a third-party payer to express concern [about a competing entity] and says, 'You decide,' " said Miles, who represents Baptist Health, a separate facility in Arkansas in a similar dispute brought by a physician-owned heart hospital. Little Rock Cardiology Clinic v. Baptist is headed to the 8th U.S. Circuit Court of Appeals after a trial court initially dismissed the case.

Memorial Hermann President and CEO Dan Wolterman said in a statement that his hospital had complied with the law, noting that nothing in the settlement prevents it from entering into exclusive contracts or negotiating appropriate rates and terms.

But Tobey said the hospital crossed the line when it imposed a significant rate increase on an insurer that included Town & Country in its network and when it pressured other payers. He said Memorial Hermann is permitted to seek rate increases under certain circumstances, but it first would need to show that it lost business because of any proposed changes by a managed care plan.

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Case at a glance

Did a community hospital block competition from a physician-owned hospital by interfering with insurance contracts?

The case, brought by the Texas Attorney General, was settled.

Impact: Experts believe the action to be among the first of its kind to involve state officials and say it could offer physicians an alternative recourse against anticompetitive actions by larger traditional hospitals.

State of Texas v. Memorial Hermann Healthcare System, Harris County District Court

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