unfettered growth of hosptial-centric medicine, usually touted as bringing
“better care,” “enhanced safety,” and “more
efficiency,” often brings less caring care, hospital acquired infections,
and . . . control over the market with its “efficient” byproduct,
of hospital systems can be seen as a reaction to the fact that procedures are
moving out of the hospital at a quickening pace.
But why grow when the future requires that they shrink?
In a sense, it’s the same reason that a government bureaucracy grows like
a rhizome: self-protection. Stop the progress, stop the future, and stop the
following: Hospitals attempt to prevent competition by (1) turning to
regulators and legislators to ban or severely restrict competition (e.g.,
prohibitions on physician ownership of hospitals, certificates of need), (2)
acquiring physician groups in order to bind the providers to the hospital,
taking them “off the table” in a manner of speaking, and (3)
acquiring competing freestanding facilities (e.g., ASCs) and either converting
them into hospital outpatient department facilities receiving higher
reimbursement, or simply closing them down.
On August 31st, Washington State’s Attorney
General filed an antitrust suit in federal court against Franciscan Health
System d/b/a CHI Franciscan Health, Franciscan Medical Group (which I’ll
refer to collectively as “CHI Franciscan”), The Doctors Clinic
(“TDC”), and WestSound Orthopedics
The lawsuit seeks to unwind the deals in which CHI Franciscan
acquired WestSound, a seven physician orthopedic practice, and entered into an
affiliation via a professional services agreement, a management services
agreement, and other agreements (collectively, the “PSA”) with TDC,
a 45-physician multi-specialty group. It also seeks disgorgement of profits
plus civil penalties.
State alleges that the deals violate a number of pro-competitive laws,
including the Sherman and Clayton Acts (i.e., federal antitrust law), and
counterpart Washington State law. In fact, the State alleges that the deal is
so blatantly anti-competitive that it constitutes a per
se antitrust violation.
Prior to the deal, WestSound was a 7 physician orthopedic group in
July 2016, CHI Franciscan acquired WestSound and folded the physicians into its
September 2016, CHI Franciscan entered into a set of agreements with TDC, also
based in Silverdale. The deal with TDC was not structured as an acquisition of
the medical practice itself. TDC remains a separate legal
Instead, via the
PSA, TDC and CHI Franciscan agreed that TDC would provide services exclusively
for CHI Franciscan in exchange for CHI Franciscan’s negotiated
reimbursement rates with payers, and CHI Franciscan acquired TDC’s ASC,
imaging, and lab facilities. TDC agreed to provide management services back to
State argues that the acquisition of WestSound and the arrangement with TDC
weren’t simply deals entered into in order to improve care and provide
better access for patients, but were instead anticompetitive schemes in
connection with healthcare services on the Kitsap Peninsula, the area of the
state that lies west from Seattle across the Puget Sound.
As to the deal with TDC, the State alleges
that it’s simply a price-fixing conspiracy between competitors via the
Under the PSA, the CHI
Franciscan negotiates reimbursement rates both for itself and for TDC, but CHI
Franciscan doesn’t share any financial risk with TDC. As mentioned above,
TDC remains an independent entity with its own governance, provides most of its
own administrative functions, and has its own EHR system. CHI Franciscan and
TDC are neither clinically nor financially integrated.
After the deal was inked, CHI Franciscan
closed outpatient facilities that it acquired from TDC, allegedly shifting
cases to CHI Franciscan’s HOPDs in order to receive higher
the Complaint filed by the Washington State Attorney General, the impact of the
arrangement between CHI Franciscan and TDC is higher prices, lower quality, and
decreased patient choice.
The Attorney General’s attack on CHI Franciscan’s
acquisition of WestSound is based on traditional anticompetitive merger
grounds. The AG claims that the relevant market is the Kitsap Peninsula and
that following the TDC and WestSound deals, CHI Franciscan controls 55% of
orthopedic services and is monopolistic.
None of the defendants have yet filed a response to the
Attorney General’s Complaint.
The Takeaways For You
1. Hospitals have had a rather free hand in
acquiring physician groups, especially because many deals are too small to
attract US Department of Justice or Federal Trade Commission attention. But
there are other routes to challenge their metastasis, including, as in this
case, action by the state government.
2. Anti-competitive arrangements do not arise solely from true
mergers and acquisitions. Ongoing deals between separate legal entities, as in
the CHI Franciscan case, between a hospital system and a large medical group,
can trigger antitrust investigations and lawsuits.
3. The Complaint (let me know if you’d like a
copy) demonstrates the the AG has detailed knowledge of internal CHI
Franciscan communications. I’m not suggesting that anyone break the law
and hide it, and the allegations in the CHI Franciscan case are of a civil, not
criminal, nature. Rather, it’s self-immolating to document unlawful
intent. Emails don’t just go away. Loose lips sink
4. As the future
gets bleaker for hospitals, expect more to attempt to try to lock up physician
referrals through questionable deals. Be