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How practices can negotiate with a competing hospital

Medical Economics JournalMedical Economics September 2020
Volume 97
Issue 13

Not all hospitals and physicians are locked in mortal combat from which only one will emerge. In many instances, it can be beneficial for independent physician groups and hospitals to work together.

Over the past 20 years, hospitals have entered many markets previously serviced exclusively by private practice physician groups, either by hiring individual physicians or acquiring entire practices. These developments have changed many health care markets, often to the detriment of physicians. For independent physician groups, this means three things:

1 Hospitals are now their major competitors.

2 Referrals may dry up as hospitals that employ large numbers of primary care physicians steer referrals in-house.

3 Access to hospitals and other key facilities essential to running their practice may be cut off as retaliation for competing effectively.

This does not mean that hospitals and physicians are locked in mortal combat from which only one will emerge. In many instances, it can be beneficial for independent physician groups and hospitals to work together.

The hospital perspective

Unless a hospital has its sights set on monopolizing physician markets, it may not make economic sense for it to enter a variety of medical specialty markets or even expand its position in specialties in which it has only limited offerings. Expansion requires a hospital to directly employ physicians, which increases costs, and the hospital may not be able to realize sufficient integrative efficiencies to offset these costs. Hospitals can hire physicians from existing practices, but that can trigger lawsuits, create ill will and result in higher salaries than recruiting physicians from outside the community. At the same time, recruiting from outside the community can be riskier than hiring known and established local physicians.

Physicians with established practices typically have long-standing relationships with their patients and the community, and they have established referral networks and skills that a hospital may have significant difficulty replicating. This is exactly what the hospital hopes to build.

Find common ground

Overall, hospitals and physicians each have qualities the other wants, which is the bedrock of any potential joint venture or collaboration. Federal and state antitrust laws, however, limit the types of arrangements hospitals and physicians can draft. The antitrust laws, for example, make agreements between competitors that unreasonably harm competition and consumers unlawful. Although agreements between firms that do not compete against one another can raise antitrust issues, these types of agreements are subject to less scrutiny than those between preexisting competitors. This means that the best time for a practice to enter into a joint venture with a hospital is before the hospital enters the physician’s area of specialty.

Making a joint venture

Even if the hospital and private practice can come to terms on a joint venture, they need to do so in a way that does not prompt government intervention. Agreements between existing competitors are subject to certain limitations. For example, agreements to fix prices, allocate markets and customers, or boycott rivals can violate antitrust laws.

However, competing hospitals and physicians can embark on a broad range of collaborative endeavors. Joint ventures in which hospitals and physicians share risk can create significant efficiencies, benefit consumers, bring new services into a community, and prevent redundant and wasteful capital expenditures. Further, certain joint ventures may bring a new medical service into the community, which benefits consumers.

Even a joint venture with a legitimate objective can raise antitrust issues. The government will look for two key concerns:

Will the joint venture have market power?

Does the framework contain anticompetitive agreements?

A significant market power problem can make a joint venture untenable under antitrust laws, but this might be easily remedied by structuring the agreement differently. An ancillary anticompetitive provision might have an alternative that does not raise antitrust problems. Taking steps to avoid anticompetitive outcomes goes a long way with the government.

George M. Sanders, J.D., is an antitrust attorney who has represented physician practices in antitrust matters across the country. Send your legal questions to medec@mjhlifesciences.com.

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