Changing Market The Business of Healthcare

Is Hospital System-Wide Contracting a Better Strategy?


It’s been reported that Tenet Healthcare Corp, which operates 11 hospitals in California, is considering ending contracts with local medical groups providing anesthesiology, emergency department and hospitalist care, in favor of contracting with a single national company to provide those services at a lower rate to the facilities.

Perhaps that’s what Tenet is doing, perhaps not.

But, it certainly raises the issue of whether a single system-wide contract is better than multiple agreements with a number of unrelated facilities.

Although the devil’s in the details of any contract, consider the impact of the term and termination provisions in a system-wide exclusive contract.

Consider a large group providing the menu of services at 11 chain-owned hospitals under a single exclusive contract. What happens at the end of the term – not simply measured by a two or three year facial term, but also, even more importantly, by any early termination provisions, whether with or without cause? For example, the existence of a 180 day without cause termination provision gives the deal a rolling 180 day future. Not so encouraging.

Perhaps, though, there’s more strength in holding a hospital system type contract if one believes it provides leverage over the hospital system: “Replace us at all 11 hospitals or not at all!”

Or, perhaps there’s less strength if the system realizes that it runs both ways: “Carve out for XYZ at hospital #1 or we’ll terminate the system contract and engage the providers you already have in place.”

If indeed, access to patients depends on hospitals, locking up system agreements will be seen as an advantage.

However, there are multiple reasons why that future is becoming less clear, including a developing trend in bundled billing between payors and physicians alone — that is, deals excluding the hospital. Who, then, will have the leverage?

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