The 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, higher
The growth 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 competition.
Consider 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.
The 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 Silverdale, Washington.
In July 2016, CHI Franciscan acquired
WestSound and folded the physicians into its captive group.
Then, in 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 entity.
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 CHI
The 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
As to the deal with TDC, the State
alleges that it’s simply a price-fixing conspiracy between competitors
via the PSA.
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
According to 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
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 ships.
4. As the future gets bleaker for
hospitals, expect more to attempt to try to lock up physician referrals through
questionable deals. Be ready.