Dealing with Medical Staff Applicants and Members Employed by Competitors: “Economic Credentialing” or Financial Conflict of Interest?

August 21, 2012

I. Introduction

Hospitals, health care systems, and their affiliates are employing more physicians. Today, most Medical Staffs are comprised of a combination of independent and employed practitioners, including physicians who are employed by the hospital or a competing entity.

So what can or should you do, if anything, if your incoming Chief of Staff just signed an employment contract with a competing health system? Do financial ties affect a physician’s referral patterns or the physician’s willingness to fulfill medical staff responsibilities including emergency call and peer review? Does it create a conflict of interest, automatically? It’s helpful to keep in mind that your hospital is likely to find itself on both sides of this issue!

II. Legal Framework

A. Case Law – Eligibility of Physicians Who Compete against Hospitals for Medical Staff Appointment

Mahan v. Avera St. Luke’s. A nonprofit hospital in Aberdeen, South Dakota adopted a medical staff development plan that had the effect of preventing physicians affiliated with a competing surgicenter from applying for medical staff appointment. The Supreme Court of South Dakota upheld the hospital’s policy and the Board’s authority to adopt it. The court specifically noted that the policy was based on the Board’s fiduciary obligation to do what is in the best interest of the community.

Walborn v. UHHS/CSAHS Cuyahoga, Inc. A governing board of a hospital adopted a “Conflict of Interest Credentialing Policy” that prohibited physicians from applying or reapplying for medical staff appointment if they had a financial relationship with a competing entity or held an administrative or leadership position with a competing entity. In finding that adoption of the Credentialing Policy was a legitimate exercise of the governing board’s authority, the court first noted that “ensuring the continued viability of a hospital is a legitimate basis upon which to implement a policy or program.”

Williamson v. Sacred Heart Hosp. of Pensacola. A radiologist who was denied medical staff appointment at two Florida hospitals and membership in an IPA sued claiming that, among other things, the denials violated the antitrust laws because she was the owner of a competing freestanding diagnostic imaging center. Although the court found no evidence to support her claim that this was the reason for the actions, the court concluded that denying appointment to a competitor would be justified.

Rosenblum v. Tallahassee Mem’l Reg’l Med. Ctr., Inc. A Florida trial court upheld the decision of a hospital that a heart surgeon who had a contractual commitment to a competing hospital, which caused his interests and allegiance to lie elsewhere, was ineligible for staff appointment.

Berasi v. Ohio Health Corp. A health system Board of Trustees drafted a resolution that terminated the privileges of any physician who had an investment interest in a for-profit hospital that was in competition with the hospital. The policy allowed for “fair hearing” procedures for such terminations, but these were limited to evidence showing the policy had been “incorrectly applied to the Practitioner based upon inaccurate facts.” The system’s hospital subsidiary subsequently revoked the privileges of 17 staff physicians who had invested in a new surgical hospital. The physicians sued, alleging violation of the bylaws that provided that clinical privileges could not be terminated except for reasons related to patient care and that the resolution passed by the board was not a valid modification of the bylaws. The court denied the physicians’ motion for a TRO and the physicians ultimately withdrew their action.

Biddulph v. Eastern Idaho Reg’l Med. Ctr. The hospital board adopted a policy giving it the power to remove a physician from the hospital’s medical staff if the physician held a financial interest in a competing facility or diverted patients to another facility for their own financial gain. Pursuant to this policy, the hospital revoked the privileges of five physicians who violated the hospital policy by referring patients to a physician-owned facility in which they were investors. The policy was not referenced in the bylaws, and the physicians argued it operated as an unauthorized unilateral amendment. The physicians filed an eight-count complaint, but the hospital rendered the injunctive issue unripe by voluntarily deferring the effective date of the termination of the physician’s medical staff appointment. The court deferred on four of the eight counts, dismissed two of the counts, and denied the motion to dismiss as to the two remaining counts. It was subsequently reported that the parties issued a joint press release on June 30, 2005, indicating that the case had settled, without payment of financial consideration.

Murphy v. Baptist Health. Six physicians who held an indirect interest in a heart hospital sought an injunction against the enforcement of a hospital’s Conflict of Interest Policy that prohibited physicians with an ownership or investment interest in a competing hospital from being eligible for medical staff appointment or reappointment. The Arkansas Supreme Court ruled that the hospital improperly interfered with the doctor-patient relationship by possibly depriving patients of their choice of physician. The court affirmed the lower court’s findings that the physicians would likely succeed on the merits of their claim of tortious interference and that the physicians would suffer irreparable harm.

On balance, the weight of the case law leads to the conclusion that it is lawful for a hospital to adopt a policy deeming physicians who have a financial relationship with a competing facility or service to be ineligible for medical staff appointment and clinical privileges. Such a policy would mean that, if the physician is going to have access to the hospital’s facilities, equipment and personnel, the physician must make a choice to forego a substantial financial relationship with the hospital’s competitors that would induce the physician to direct business to the competitor’s facility. Such policies should not be designed to exclude physicians, but should be designed to help the hospital in support of its mission and commitment to the community.

B. State Statutes

C. Related Legal Issues – Court Decisions Upholding Exclusive Contracts Can Provide Guidance

1. Antitrust issues.

2. What evidence does a Board need to document the proper hospital purposes of exclusivity or limitations in applications?

3. Can a department be operated through several parallel exclusive contracts with groups that sign a covenant not to compete?

III. Medical Staff Strategic Planning – “Mission-related Eligibility Criteria”

A. Steps for a Board to Take to Study the Issues and Options

1. Statement of Charitable Principles.

2. Board resolution. The resolution can authorize research and analysis, and establish a task force composed of Board members, management representatives, and physicians. It is important that the physicians selected for any such task force not be those who might be economically advantaged by its recommendations.

3. Communication. It is critical that physicians, especially those in leadership positions, know and understand how and why this issue is being considered. Physicians should be kept apprised of the progress and input from physicians should be sought and considered.

4. Community needs assessment (required by ACA). This issue can be considered as part of the process, involving collection of data regarding individuals currently practicing in the hospital. Typically, a community needs assessment will include the following: (i) information about the physicians’ practices and referral patterns, including what care is referred outside of the community and why; (ii)demographic information regarding the population served by the hospital and that population’s health care needs; (iii) areas underserved, either from a geographic, medical specialty, or income level standpoint; (iv) visits to the emergency department; (v) waiting lists for care in physician office practices or inability to obtain an appointment.

5. Financial Relationships. The task force should review information about competing entities in the market and how that type of competition affects the hospital, both financially and programmatically. For example, a competing surgicenter might not only divert revenue from the hospital, but it might make it more difficult for the hospital to recruit or retain professionals who are in short supply, such as OR nurses, CRNAs, and anesthesiologists. The task force may also wish to solicit input from board members, management, physicians and community members about the potential effects of competition.

B. Possible Outcomes

1. Comprehensive Medical Staff Strategic Plan

The adoption of a Medical Staff Strategic Plan presents an opportunity to design medical staff growth by requiring that practitioners who join the medical staff must share the hospital’s commitment to its mission and community. This approach may allow a hospital or system to provide better or more comprehensive services, while at the same time maximizing efficient utilization of facilities. It will also enhance the organization’s financial viability, and thus its ability to serve the community. Such a plan could include:

(a) specialty-by-specialty analysis;

(b) recruitment priorities;

(c) mission-related criteria for appointment and clinical privileges;

(d) identification of services to be provided through contract(s) or employment;

(e) enhanced qualifications which will foster an open staff for all practitioners who meet the standards; and/or

(f) “By Invitation Only” staff.

2. Financial Conflicts of Interest Policy

(a) Request for Application Questionnaire. Inquire about financial relationships between medical staff applicants and competing entities. Do the same at reappointment or grandfather existing members. Inquiries could include:

·  Are you employed by, or do you have any contract for professional services or medical director services with, any other hospital or its affiliate?

·  Do you have any ownership or investment interests in, or compensation arrangement with, any health care provider?

If the answer is yes, full information is to be provided so eligibility may be determined.

(b) Such relationships may disqualify physicians from being considered for a variety of positions and/or benefits, including: service on the Board; service as medical staff leader; ability to contract as medical director; participation on on-call panels; appointment to PHO panel; or receipt of recruitment assistance.

(c) There are many questions to be addressed by such a policy, including what constitutes a financial COI? (Use Stark definition) and who decides whether there is a financial conflict of interest. A decision may also be made that only conflicts of interest that actually affect the organization’s ability to fulfill its mission will trigger the most serious consequences.

(d) Such relationships may disqualify physicians (and their employed mid-levels) from being appointed to the medical staff.

IV. Other Issues and Questions

·  Is it ever too late to adopt such criteria? Can you start the process after you learn of an event?

·  How often should the Board revisit the issues?

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