Hospital-Centric Healthcare | Impending Death of Hospitals

Why You Must Know About A University’s Captive Medical Group Filing Bankruptcy

Last week, on November 7, 2018, the medical group affiliated with Michigan’s Wayne State University Medical School, University Physician Group, which does business as Wayne State University Physician Group (“WSUPG”), filed Chapter 11 bankruptcy.

How is that even possible, you ask? After all, you were told that there’s safety in what is essentially hospital employment.

Well, it’s not only possible, it’s likely the tip of the iceberg, not only for “stand alone” captive physician groups like WSUPG with its 873 employees, but for entire hospital hospital systems made more fragile, not stronger, by their size.

Hospital systems across the country suffer from bloated fixed costs, huge payrolls, layers and layers of bureaucracy, and management by managers, not by entrepreneurial thinkers.

Instead of bringing what the proponents of hospital-centricity promised would be stability, the actual result is becoming much different: The larger the hospital-centric system is, the more sensitive it is to declining payments from private payors, and the movement of procedures out of their facilities to freestanding, and often independent facilities, from clinical laboratories, to imaging facilities, to ASCs. And now, the federal government is getting increasingly into the act: It has cut reimbursement to hospital outpatient clinics, and has signaled its decreasing support for outpatient surgery performed in hospital outpatient departments (“HOPDs”)as opposed to in freestanding ambulatory surgery centers.

Hospital employment was hardly ever a good deal for any physician. The difficulty in holding a hospital together is tough enough. The difficulty in holding a hospital system together is even greater.

But both pale in comparison to the challenges of holding a hospital system plus its directly or indirectly employed physicians together. A shock that could have been absorbed by the pure hospital-side of the business can be fatal to the enormously expense-ridden hospital-plus-physician structure.

Why You Need to Know

1. Employment, directly or indirectly, with hospitals is far from “safe.” In fact, it may be far riskier for physicians.

2. In the event that a tightly aligned physician group fails, the employed physicians have no offices, no patient records, no staff, no “nothing” readily available to them to re-start independent medical practice.

3. For outside groups, the failure of a hospital-controlled medical group presents the ability to cherry pick physicians who may be desperate for quick reemployment. That is, unless those physicians are barred from accepting employment in the area due to ill negotiated covenants not to compete, assuming that they are enforceable.

4. The failure of a hospital-affiliated medical group will disrupt referral patterns, presenting opportunities on both the services-side and the facility-side for independent physician practices and their affiliated facilities.

Comment or contact me if you’d like to discuss this post.

Mark F. Weiss

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Hospital-Centric Healthcare

Washington State Takes Antitrust Aim at Aggressive Health System Competition

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 prices.

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 (“Westsound”).

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.

The Deal

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 Franciscan.

The Allegations

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 Puget Sound.

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 reimbursement.

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 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 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.

Comment or contact me if you’d like to discuss this post.

Mark F. Weiss

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