Exclusionary Practices in Disputes
Involving Physician-Owned Facilities:
Foreclosure or Competition-Enhancing?
William E. Berlin, Esq.
Ober|Kaler
Washington, DC1
1
Bill Berlin is a principal in Ober|Kaler’s antitrust practice. Before joining Ober|Kaler, Bill was an
attorney with DOJ’s Litigation I section and the Health Care Task Force.
The conflict between traditional general acute-care inpatient hospitals (“general
hospitals” or “hospitals”) and competing facilities owned by physicians on the hospital’s
medical staff (“physician-owned facilities” or “POFs”) continues, although there are
indications that new development of physician-owned specialty hospitals may be
slowing.2 These POFs may be wholly or partially owned by physicians, and they include
single specialty or limited-specialty hospitals (“SSHs”), as well as other types of freestanding outpatient facilities, such as diagnostic imaging centers and ambulatory surgery
centers (“ASCs”).
General hospitals throughout the United States have responded to the perceived
threat from these facilities in a variety of ways that may be considered exclusionary
practices, most notably “conflict of interest” or “economic” credentialing to expel
competing physician-investors from general hospitals’ medical staffs and various
contracting practices with payors that limit or foreclose physician investors from joining
or participating in managed care provider networks, as well as other practices. These
actions by general hospitals, and frequently payors as well, have often formed the basis
for lawsuits alleging antitrust as well as other claims by physician-investors.
This article addresses recent developments in litigated cases (although there
remains a dearth of caselaw meaningfully analyzing these issues), government agency
views, more-recent empirical support for both sides of this debate, and legislative,
regulatory, and business pressures that may impact this issue. It then focuses on the
various types of hospital responses, and the specific factors that may assist in determining
which responses may be considered exclusionary practices and under what circumstances
those practices raise significant antitrust risk (although many of these factors are equally
applicable to exclusionary practices in other healthcare contexts). This article will not,
for the most part, repeat the basic antitrust analysis or the discussion of earlier cases and
studies from multiple previous papers by this author and others.3
Two Sides of the POF Dispute and Recent Empirical Studies
Generally, since the advent of POFs, their advocates have asserted benefits
including 1) increased competition by providing consumers and payors a lower-cost
alternative to general hospitals (i.e., more “choice”); 2) higher quality and better
outcomes due to focusing on limited specialties and performing a high volume of
procedures; 3) more convenient services with more amenities than general hospitals; 4)
more efficient services; 5) permitting the physicians rather than the hospital to control the
2
American Hospital Association, Physician Ownership and Self-Referral in Hospitals: Research on
Negative Effects Grows, in Trendwatch (Apr. 2008).
3
For additional background and discussion of earlier cases and studies, see William E. Berlin, Antitrust
Implications of Competition Between Physician-Owned Facilities and General Hospitals: Competition or
Exclusion?, ABA Health Law Section Health Lawyer, June, 2008.
2
delivery of service; and 6) permitting physicians to supplement their otherwise
decreasing revenues from both commercial payors and government programs.4
Single specialty hospitals, ASCs, diagnostic imaging centers, and other physicianowned facilities typically have tailored their services to the most profitable needs of the
general community, although there are indications this may be changing due, in part, to
revisions to Medicare reimbursement that will reduce the profitability of some of these
services, which include cardiac surgery, orthopaedic surgery, neurosurgery, ambulatory
or general surgery, cancer treatment and diagnostic imaging. Although some facilities
provide emergency care, most do not, and few provide care for those that cannot afford to
pay (many POFs do not even participate in Medicare or Medicaid).5 In contrast, general
hospitals with which the POFs compete are often non-profit community hospitals with a
charitable mission, and typically have charitable obligations under government laws and
regulations. General hospitals believe that these actions by POFs have left them with a
sicker and higher-cost patient population. The dual threat of increased competition for
the most profitable services and, where it occurs, the change in patient mix to a more
costly population, has, in the view of general hospitals, increased their burden of
subsidizing less profitable services and providing uncompensated care.
In addition, the conflict of interest created by physician ownership of a competing
facility has the potential to influence referrals. The physician controls referrals, and the
physician thus may have an incentive to refer to a facility in which he or she has an
economic interest. This, in turn, can have several additional effects: physicians steering
insured or high-reimbursement patients to their own facility and leaving less insured or
uninsured patients to the general acute care hospital (“cream skimming” or conversely
“patient dumping”) or, similarly, steering less acute cases to their own facility and
leaving more complex and expensive cases to the full service hospital.
Critics of POFs point to a number of additional detrimental effects on established
general acute care hospitals, and on competition itself, in a given market. The higher
reimbursement services that most specialty hospitals provide (e.g., cardiac, orthopedics,
etc.), are those services that the hospitals rely on to cross-subsidize unprofitable but
necessary services, such as the emergency room (“ER”). Other potential detrimental
effects include increased utilization; duplication of facilities resulting in overcapacity in
the market; create incentives (whether or not acted upon) for upcoding or overpricing
services; exacerbated staffing shortages; diminished ER call coverage; abused or ignored
peer review obligations by medical staff with a conflict of interest; and deterioration of
4
See Fed. Trade Comm’n & U.S. Dep’t of Justice, Improving Health Care: A Dose of Competition (July,
2004) (“Joint Report”), at Ch. 3 pp. 19-22, available at
http://www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf.
5
The GAO reported in October 2003 that specialty hospitals serve proportionately fewer uninsured
patients than general hospitals. See U.S. General Accounting Office (subsequently renamed the
Government Accountability Office), “Specialty Hospitals: Geographic Location, Services Provided, and
Financial Performance,” Report No. GAO-04-167 (Oct. 2003), available at
http://www.gao.gov/new.items/d04167.pdf (hereinafter Report No. GAO-04-167). Also, the majority of
these new facilities have opened in jurisdictions where a certificate of need (“CON”) is not required. Id.
3
hospital board-medical staff relationships.6 And, to the extent that SSHs are a lower-cost
alternative to general hospitals, this may simply confirm that those facilities do not
provide and, thus, depend on the general hospitals to provide necessary but unprofitable
services.
Ultimately, according to SSH critics, these effects, particularly overutilization and
overcapacity, may increase healthcare costs across all services provided by hospitals for
all consumers, and reduce access to care.7 In the short term, access can decrease due to
the limited charitable commitment of specialty hospitals and the reduced incentives of
physician-investors to provide ER call coverage and related services at the established
full service hospitals. In the longer term, if general acute care hospitals lose revenue
from those more-profitable services that are referred to a specialty hospital and, thus, are
no longer able to cross-subsidize other unprofitable services (such as ER, trauma centers,
and burn units) or medical care to the uninsured, hospitals claim they may no longer be
able to provide these particular services, or may exit the market altogether if they cannot
remain financially viable. As a result, general hospitals argue, consumer access to care
and consumer welfare in general will be diminished.
The pace of empirical studies of these POF issues appears to have considerably
slowed in the past two years.8 The Department of Health and Human Services Office of
Inspector General (“OIG”) issued a report in January, 2008, assessing physician-owned
SSHs’ ability to manage medical emergencies.9 Two deaths of SSH patients who
experienced complications following surgery raised concerns that caused a Senate
committee to request that the OIG conduct a study of patient care in SSHs that were
addressed in the report. The study was based on data from 109 SSHs. The OIG’s found:

“About half of all physician-owned specialty hospitals have emergency
departments, the majority of which have only one emergency bed.

Not all physician-owned specialty hospitals had nurses on duty and physicians on
call during the 8 sampled days.
6
See, e.g., GAO, “Specialty Hospitals: Information on National Market Share, Physician Ownership, and
Patients Served,” Report No. GAO-03-683R (Apr. 2003), available at
http://www.gao.gov/new.items/d03683r.pdf; Report No. GAO-04-167, supra note 5.
7
See, e.g., Jean Mitchell, Effects of Physician-Owned Limited Service Spine and Orthopedic Hospitals in
Oklahoma and Evidence from the Market for Cardiac Inpatient Care in Arizona, Georgetown Univ. Public
Policy Inst. (Oct. 24, 2006) (reporting new findings corroborating prior research showing that physician
self-referral arrangements result in increased utilization of medical procedures, cream-skimming of lowseverity/more generously insured patients, and ultimately significant adverse effects including higher costs
to payors).
8
For a discussion of previous empirical studies on this issue, see William E. Berlin, Antitrust Implications
of Competition Between Physician-Owned Facilities and General Hospitals: Competition or Exclusion?,
ABA Health Law Section Health Lawyer, June, 2008, at 6-7.
9
DEPARTMENT OF HEALTH & HUMAN SERVICES, OFFICER OF INSPECTOR GENERAL, Physician-Owned
Specialty Hospital’s Ability to Manage Medical Emergencies, REP. OEI-02-06-00310 (Jan. 2008).
4

Administrators reported that less than one-third of physician-owned specialty
hospitals have physicians onsite at all times.

Two-thirds of physician-owned specialty hospitals use 9-1-1 as part of their
emergency response procedures.
 Some physician-owned specialty hospitals lack basic information in their written
policies about managing medical emergencies.”
The OIG recommended that CMS develop a system to monitor physician-owned
SSHs, ensure that SSHs have a RN on duty 24-7 and a physician on call (if one is not
onsite), ensure SSHs are not relying on 9-1-1 as a substitute for their own ability to
provide emergency services (CMS found that 37 SSHs used 9-1-1 to obtain medical
assistance to stabilize patients, violating Medicare requirements), and require SSHs to
have written policies for managing emergencies. CMS concurred with all four of the
OIGs recommendations.
The American Hospital Association (“AHA”) prepared a report collecting various
studies supporting its negative view of physician-owned SSHs, and concluded that “the
growing body of research does not support the claims that [SSHs] deliver more efficient
or higher quality care” but instead shows that physician ownership creates financial
incentives for cream-skimming, thus “compromising community hospitals’ ability to
offer essential services such as emergency and trauma services and uncompensated
care.”10 The report notes a number of findings that show negative effects on not only
general hospitals, but also payors, including: physician-owned SSHs increase procedure
volumes,11 the opening of a SSH raises utilization more than an existing facility adding
the same amount of new capacity,12 fewer services are used when physicians “do not
have financial incentives to order more services via self-referral,” SSHs have higher
inpatient costs per discharge than community hospitals,13 and 57% of SSHs have profit
margins at or above ten percent in contrast to only 17% of other acute care hospitals
having equivalent margins, which let the AHA to conclude that “t]hese gains for
investors contribute to increasing system-wide health costs.
The AHA report also repeats the concerns about SSH quality and safety stated in
the OIG’s January 2008 study, discussed above, and also asserts that SSHs have the same
or worse (e.g., for patients with greater comorbidity) outcomes than less specialized
10
American Hospital Association, Physician Ownership and Self-Referral in Hospitals: Research on
Negative Effects Grows, in Trendwatch (Apr. 2008).
11
Id. (citing Jean Mitchell, Utilization Changes Following Market Entry by Physician-owned Specialty
Hospitals, Medical Care Research and Review, 64(4), 395-415 (2007)).
12
Id. (citing Brahmajee K. Nallamothu, et al., Opening of Specialty Cardiac Hospitals and Use of
Coronary Revascularization in Medicare Beneficiaries, 297 J. Am. Med. Ass’n 962 (2007) (reprinted)).
13
Id. (citing Medicare Payment Advisory Comm’n, Report on Physician Owned Specialty Hospitals
Revisited (Comm. Print 2006)).
5
hospitals.14 Finally, the report states that access to SSHs is limited for certain populations
– they treat a small share of Medicaid patients, virtually no uninsured patients, and fewer
racial and ethnic minorities than competing hospitals15 – and surmises this may be due to
SSH’s having no or very small ERs, where a higher proportion of these categories of
patients are treated.
Recent Litigation
There have been several recently-decided cases in this area, although as
mentioned above, none of them provide a meaningful discussion of foreclosure,
anticompetitive effects, or procompetitive justifications resulting from or justifying the
exclusionary practices at issue. Nonetheless, they illustrate various types of exclusionary
conduct, and some of the issues presented by claims based on these practices.
Most recently, in Franco, et al. v. Memorial Hermann Healthcare System, on
March 11, 2010, a jury reached a verdict rejecting plaintiffs’ antitrust claims in Texas
state court after a two-month trial.16 Memorial Hermann is an 11 hospital system, and is
the largest hospital system in Houston, with an approximately 20% market share in the
Houston MSA (according to the Texas Attorney General). Plaintiffs were a group of
physicians who invested in Houston Town & Country Hospital, a competing multispecialty hospital located only a few blocks from Memorial Hermann’s Memorial City
Hospital in west Houston. Two groups of physician investors filed separate complaints
against the hospital in June, 2007, alleging that the hospital pressured payors not to
conduct business with Town & Country, ultimately causing it to fail and exit the market
(Memorial Hermann itself purchased and then closed Town &. Country). The insurers
were not named as defendants.
Specifically, plaintiffs alleged a hub and spoke conspiracy consisting of a
horizontal conspiracy among insurers orchestrated and motivated by Memorial Hermann.
According to plaintiffs, Memorial Hermann coerced the payors with which it contracted
to boycott Town & Country by threatening to terminate or impose rate increases with
respect to Memorial Hermann’s entire system on any insurer which contracted with the
physician-owned hospital. The jury found that there was insufficient evidence to
establish that the insurers joined the conspiracy plaintiffs alleged. Plaintiffs apparently
did not allege any claim that Memorial Hermann unilaterally acted to exclude the
physician-owned hospital (perhaps because Memorial Hermann had an insufficient
market share even in the very narrow “west Houston” geographic market alleged by
plaintiffs). Defendant argued, in part, that the cause of Town & Country’s failure was its
own poor business decisions rather than Memorial Hermann’s conduct. Defendant also
14
Id. (citing C.W. Hwang, Comorbidity and Outcomes of Coronary Artery Bypass Graft Surgery at
Cardiac Specialty Hospitals Versus General Hospitals, Medical Care, 45(8), 720-728 (2007)).
15
Id. (citing Medicare Payment Advisory Comm’n, Medicare Admissions by Type of Hospital and Race
(May, 2005)).
16
Franco v. Mem’l Hermann Healthcare Sys., No. 2006-79945 (Tex. Dist. Ct., March 11, 2010);
also see Amy Lynn Sorrel, Texas Hospital Settles Charges of Boycotting Physician-Owned Hospital,
AM. MED. NEWS, Mar. 16, 2009, http://www.ama-assn.org/amednews/2009/03/16/gvsc0316.htm.
6
argued that its practices were justified in order to protect its position and ability to
provide charity care, as well as to obtain volume for discounts.
In yet another chapter in this saga, Stealth, one of the two original groups of
owners of Town & Country that filed suit against the hospital, settled with Memorial
Herman for an undisclosed amount on the eve of trial but has since filed another suit
immediately after the jury verdict, this time against the insurers it alleges conspired with
Memorial Hermann.
Earlier, in January 2009, the Texas Attorney General’s office entered into a
consent decree with the hospital system, in which Memorial Hermann agreed to a fiveyear injunction prohibiting the types of contracting practices at issue in these cases
without admitting to engaging in them. The attorney general alleged these practices
induced area health plans not to contract with the physician-owned hospital, resulting in
the hospital’s failure. 17 The decree stated that when Memorial Hermann learned of
CIGNA's contract with Town & Country (the only major insurer to do so), Memorial
Hermann notified CIGNA of its intent to terminate and subsequently renegotiated its
contract, "resulting in substantial rate concessions from CIGNA." The decree similarly
stated that Memorial Hermann also informed Aetna that it would impose a 25% rate
increase if it added Town & Country to its network.
In an even earlier lawsuit arising out of this same dispute, Memorial Hermann
filed an action in federal court seeking declaratory judgment that its exclusive contracting
is lawful under the Sherman Act and Texas antitrust laws.18 Specifically, the hospital
sought declaratory judgment that it is free to enter into exclusive or semi-exclusive
dealing arrangements even if they exclude the SSH, and that its contracts with payers
have not resulted in a horizontal group boycott or concerted refusal to deal or resulted in
“a direct or indirect agreement between or among two or more health insurers that none
of them would deal with” the SSH. Interestingly, the complaint’s allegations contain the
typical general hospital criticisms of SSHs – physicians’ conflict of interest in referring
patients to their own facility; overutilization concerns, and cherry-picking the most
lucrative patients. The complaint goes on to expressly allege that these practices drive up
the cost of healthcare by inflating demand for expensive elective surgery. On September
4, 2007, the parties jointly agreed to dismiss the federal action with an agreement that
plaintiffs would not take action in federal court regarding this dispute.
In Heartland Surgical Specialty Hospital v. Midwest Division, Inc.,19 on October
1, 2007, a federal district court denied defendants’ motion for summary judgment on the
plaintiff SSH’s horizontal conspiracy claims under Section 1 of the Sherman Act, after
which the remaining defendants settled (defendants apparently did not move for summary
17
Agreed Judgment, Texas v. Mem’l Hermann Healthcare Sys., No. 2009-04609 (Tex. Dist. Ct., Jan.
26, 2009), available at
http://www.oag.state.tx.us/newspubs/releases/2009/012609hermann_judgment.pdf .
18
Memorial Hermann Healthcare System v. Stealth, L.P. D/B/A Houston Town & Country Hospital, No.
07-1914 (S.D. Tex., dismissed Sept. 4, 2007).
19
527 F. Supp. 2d 1257 (D. Kan. 2007).
7
judgment on the vertical conspiracy claims). Although plaintiff claimed the hospital
defendants’ combined market share was 74%, and the major health plans’ share (of
managed care enrollment) was 90% in the Kansas City metropolitan area, it did not allege
any unilateral conduct claim under Section 2 of the Sherman Act. The SSH alleged
several types of conspiracies as both per se and rule of reason violations of Section 1
(along with several tortious interference claims). In Count I, the plaintiff asserted
horizontal conspiracies among five competing hospitals to pressure six major health plans
to exclude the SSH from contracting to participate in the plans’ provider networks. In
Count II, plaintiff alleged vertical conspiracies between the hospitals and payors to
exclude the SSH from the payors’ networks, including specific “network configuration”
clauses in the hospitals’ payor contracts. Although it is not clear there is a horizontal
conspiracy among payors alleged in Count II, the complaint contains factual allegations
of communications between the managed care defendants and, in its October, 17, 2007
opinion denying defendants’ summary judgment motions, the court found sufficient
evidence of such horizontal agreements between payors, as well as between hospitals, to
permit the case to proceed to trial. Interestingly, the court considered the evidence of
separate but similar vertical agreements (e.g., the network configuration clauses) between
individual hospitals and health plans to be circumstantial evidence of the hospital and
payor horizontal conspiracies.20
Heartland alleged that the hospitals agreed with each other to use their dominant
position to pressure the health plans to deny the SSH managed care contracts, and that no
health plan could build a competitively attractive provider network without these “must
have” hospitals. The court also found that the health plans participated in the conspiracy
to exclude the SSH, including signing the network configuration agreements, in exchange
for the hospitals agreeing to lower reimbursement rates. As to the health plan conspiracy,
plaintiff argued that the payors agreed with each other to exclude Heartland in order to
police and enforce the boycott so health plans would not be disadvantaged by one or
more of them defecting from the boycott. The court found this to be a “plausible
economic theory.”21
The court also found the network configuration clauses, which excluded new
hospitals from health plan networks but permitted the addition of new facilities that were
owned by general hospitals, created an exception to typical selective contracting
discounts for volume, which the court recognized elsewhere was common. This
discrepancy permitted an inference of conspiracy here because the hospitals could not
justify why they agreed to include new facilities owned by their hospital competitors but
not physician-owned facilities.22 Finally, the court found that the health plan defendants’
failure to conduct a network-need analysis before making their contracting decisions to
exclude Heartland, despite evidence of market need for some of the SSHs services, was
not rational and constituted circumstantial evidence of a conspiracy.23
20
527 F. Supp. 2d at 1301-02.
527 F. Supp. 2d at 1266, 1302-03.
22
527 F. Supp. 2d at 1265, 1308.
23
527 F. Supp. 2d at 1304.
21
8
In another recently decided case, a plaintiff clinic and cardiologists, who had
invested in and developed a cardiac hospital, challenged more than one type of alleged
exclusionary conduct and alleged multiple types of antitrust claims. In Little Rock
Cardiology Clinic v. Baptist Health, the plaintiff-physicians alleged violations of both
Sections 1 and 2 of the Sherman Act, and challenged both the hospital’s conflict of
interest credentialing policy and its preferred contracting arrangements with Arkansas
Blue Cross Blue Shield. 24 And plaintiffs sued both the general hospital and, later,
Arkansas Blue Cross Blue Shield, based on allegations that they conspired both to
terminate plaintiffs’ participation in Blue Cross’ provider networks and to adopt a
credentialing policy that ultimately resulted in the termination of the plaintiff physicians’
privileges and ability to practice at the defendant hospital. The Eighth Circuit, affirming
the district court’s dismissal for failure to state a claim, held that the plaintiffs failed to
allege a plausible relevant product or geographic market. 25 Plaintiffs petitioned the
Supreme Court of the United States for a writ of certiorari on March 29, 2010.
Plaintiffs alleged that both the general hospital (67% of a narrowly-defined
geographic market) and Blue Cross (78-89% market share) were dominant in their
respective markets. Plaintiffs also alleged that Baptist Health was a “must-have”
hospital. In their various amended complaints filed over one and half years, plaintiffs
added Blue Cross as a defendant, changed their relevant market definitions, and added
several counts to their prior pleadings. In a product market plaintiffs defined as “hospital
services for cardiology patients covered by private insurance,” plaintiffs alleged four
counts: a conspiracy between Baptist Health and Blue Cross, that both defendants
conspired to monopolize and attempted to monopolize the same market apparently based
on the same conduct as the conspiracy, and that Baptist monopolized this market.
Plaintiffs alleged three additional counts involving the private (i.e., commercial) health
insurance market: a conspiracy to monopolize and attempt to monopolize this market
involving both defendants, and that Blue Cross alone monopolized this market.
Plaintiffs alleged that the hospital and payer conspired under Sections 1 and 2 not
only to exclude them from managed care contracts, but also to implement the conflict of
interest policy, which generally can be imposed unilaterally by a hospital (although the
third amended appears to treat both practices as part of a single reciprocal conspiracy to
protect each defendants’ alleged monopoly in their respective markets). In addition,
these two alleged conspiracies, rather than any unilateral conduct by the hospital or health
plan, apparently comprise the predatory conduct supporting plaintiffs’ attempted
monopolization and monopolization claims in two different relevant product markets; in
fact, the third amended complaint affirmatively states that the hospital and health plans
reciprocal refusals to deal with each other’s competitors “was not unilateral.” Also,
plaintiffs alleged that an HMO joint venture between the defendants was a third
participant in the conspiracy, but expressly stated that they “did not allege an actionable
restraint of trade arising from [the HMO JV’s] creation.”
24
25
The author represents defendant Baptist Health in this lawsuit.
591 F.3d 591 (8th Cir. 2009), aff’g, 573 F. Supp. 2d 1125 (E.D. Ark. 2008).
9
The district court dismissed all claims, holding that the plaintiffs’ alleged relevant
product market was incoherent and implausible, and regardless of whether plaintiffs were
alleging a physician or hospital services market, it could not be defined in a foreclosedprovider case such as this by how customers pay for services. The court also determined
that plaintiffs failed to apply a reliable methodology in defining their relevant geographic
market. Finally, the court dismissed all counts involving the health insurance market
under the statute of limitations. Plaintiffs appealed, and the Eighth Circuit affirmed,
holding first “as a matter of law” that in claims brought by sellers a relevant product
market “cannot be limited to a single method of payment when there are other methods
that are acceptable to the seller.”26 The appellate court also determined that plaintiffs
failed to allege a coherent relevant geographic market because they did not allege that a
low percentage of patients enter the alleged market (i.e., the hospital’s service area),
allowing plaintiffs to “gerrymander the relevant market to an artificially narrow
location.”27
The federal court case is the second suit initiated by the physician plaintiffs
against the hospital. In Murphy v. Baptist Health, the same plaintiffs previously sued the
hospital, but not the health plan, also in state court alleging state law tortious interference
and deceptive trade practices claims.28 The American Medical Association (“AMA”) and
Arkansas Medical Society intervened in the suit shortly before it was tried. The case was
tried in March 2008, and a decision issued on February 27, 2009. Plaintiffs challenged
only the conflict of interest credentialing policy. The court held that the policy interfered
with the physicians’ relationships with patients.29 The court found that public policy
disfavors economic credentialing, relying in part on the AMA’s Code of Ethics, based
again on its finding that the policy disrupts physician-patient relationships. The court
also found that public policy favors the establishment of SSHs, relying on expert
testimony summarizing other, secondary economic research. The court held that the
evidence did not support the hospital’s justifications for the policy because it relied on
empirical studies and literature showing that SSHs endanger general hospitals’ economic
viability, rather than conducting a study to generate data showing whether these effects
actually occurred in the market.
Federal and State Enforcement of POF Exclusionary Arrangements
Consistent with several previous competition advocacy statements opposing
conduct by general acute-care hospitals to exclude or limit competition by POFs,30 the
26
591 F.3d at 598.
Id. at 599.
28
Murphy v. Baptist Health, No. CV 2004-2002 (Ark. Cir. Ct., Feb. 27, 2009). For a discussion of the decision,
see Amy Lynn Sorrel, Organized Medicine-Backed Lawsuit Knocks Down Hospital’s Attempt at Economic
Credentialing, AM. MED. NEWS, Mar. 16, 2009, http://www.ama-assn.org/amanews/2009/03/16/prl10316.htm
29
Conversely, in Heartland, the court held that under Kansas law the SSH did not have a relationship with
the health plans’ insureds, precluding a tortious interference claim based on the health plans’ alleged group
boycott of the SSH.
30
Competition in Healthcare and Certificates of Need: Before a J. Sess. of the Health and Human Servs.
Comm. of the State S. and the CON Spec. Comm. of the State H.R. of the Gen. Assemb. of the State of Ga.
27
10
federal agencies have more recently indicated they will take a more aggressive position
and formally investigate, or even challenge, specific instances of such exclusionary
conduct by general hospitals under Section 2, Section 1, or both. FTC Commissioner
Rosch stated that the FTC may look more closely at this issue as an enforcement
priority.31 He stated that “the issues involved are complex, with no easy answers” and
added that that POFs “raise a host of ethical and fiduciary duty concerns that complicate
the competition issues.” He explained that “the only firm conclusion I’ve reached is that
full service hospitals should not be saddled with the full burden of charity care costs.
This is simply not fair. There should be some mechanism to ensure that specialty
hospitals carry their share of the burden.” Commissioner Rosch concluded that general
hospitals’ responses that reduce the competitiveness of the physician-owned facilities
may, where implemented through collective action, amount to illegal group boycotts or
per se illegal price fixing. He raised the possibility of the FTC using Section 5 of the
FTC Act to challenge such conduct and “identify what is acceptable behavior and what is
not.”32
The Section of Antitrust Law of the American Bar Association echoed
Commissioner Rosch, recommending that the agencies under the new administration
scrutinize the POF issue, noting that this is a complex area where “both sides hav[e]
credible arguments” and guidance from the agencies would help “shape the application of
the antitrust laws to this complex fact pattern.”33
In addition, one of Department of Justice Assistant Attorney General Christine
Varney’s first actions was to withdraw the Section 2 Report, which should facilitate
prosecuting cases involving unilateral exclusionary conduct.34 Ms. Varney made clear
that “vigorous antitrust enforcement action under Section 2 of the Sherman Act” will be
part of the DOJ’s response to current market conditions, and, in her view, “the greatest
weakness of the Section 2 Report is that it raises many hurdles to Government antitrust
enforcement.” Ms. Varney concluded that the DOJ will “go back to the basics” and
evaluate single-firm conduct against “tried and true standards” from leading Section 2
(2007) (statement of Mark J. Botti, Chief, Litigation I Section, U.S. Dep’t of Justice, Antitrust Div.); Letter
from Mark J. Botti to South Carolina State Health Planning Comm., Dec. 8, 2006.
31
J. Thomas Rosch, Commissioner, FTC, Enforcement Strategies in the Health Care Industry, Prepared Remarks
Before the ABA Health Law Section Sixth Annual Washington Healthcare Summit (Nov. 17, 2008), available at
http://www.ftc.gov/speeches/rosch/081117abahealthcaresummit.pdf.
32
Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45 (enacted 1914), prohibits “unfair
methods of competition” – i.e., the same conduct as other antitrust laws, plus conduct that the Federal
Trade Commission determines violates the “spirit” of the antitrust laws. Section 5 is enforced only by the
Federal Trade Commission; there is no private right of action, and it provides only for civil injunctive
relief.
33
American Bar Association Antitrust Law Section Transition Report 56 (2008), available at
http://www.abanet.org/antitrust/at-comments/2008/11-08/comments-obamabiden.pdf.
34
See Varney, Vigorous Antitrust Enforcement In This Challenging Era (May 11, 2009), available at
http://www.usdoj.gov/atr/public/speeches/245711.htm.
11
cases and successful DOJ challenges “that set forth clear limitations on how monopoly
firms are permitted to behave.”35
Reinvigorated enforcement and scrutiny of single-firm conduct under Section 2
by the FTC and DOJ means that hospitals and health plans with substantial market power
or monopoly power (i.e., a market share approaching or exceeding 65%) will need to
exercise caution even in unilateral responses to POFs, such as conflict of interest
credentialing. Since there are many hospitals and health plans that arguably have
monopoly power in defined geographic markets, increased federal agency enforcement
activity in this area under Section 2 will be a realistic possibility.
And as noted above, at least some state attorneys general also are scrutinizing
exclusionary practices by general hospitals in response to the entry of POFs. In
Memorial Hermann, the Texas Attorney General’s office investigated the general
hospital’s contracting practices at the same time state-court litigation between the
physician-investors and the general hospital was pending, and obtained a consent decree
in which Memorial Hermann agreed to a five-year injunction prohibiting the types of
contracting practices at issue in both the in the investigation and litigation.36
Types of Exclusionary Practices
Many general hospitals have taken various actions to respond to the perceived
threats from competing POFs to their ability to continue providing total care for the
community and, in some cases, to their viability. A general hospital’s response, often in
combination with a health plan or physicians, generally falls into one or more of the
following categories:

Establishing its own SSH, ASC or other POF to compete with the physicianowned facility;

Joint venturing with medical staff physicians or selling participating bonds to
physicians in order to align their interests with the hospital (possibly implemented
in conjunction with non-compete agreements);

Implementing a public relations campaign to engage the community and increase
awareness of the specialty hospital’s potential detrimental effects on the overall
provision of healthcare;
35
Id. (citing Lorain Journal v. United States, 342 U.S. 143 (1951); Aspen Skiing Co. v. Aspen Highland
Skiing Corp, 472 U.S. 585 (1985); United States v. Dentsply International, Inc., 399 F.3d 181 (3d Cir.
2005); United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001) (en banc); Conwood Co. v. United States
Tobacco Co., 290 F.3d 768 (6th Cir. 2002)).
36
Agreed Judgment, Texas v. Mem’l Hermann Healthcare Sys., No. 2009-04609 (Tex. Dist. Ct., Jan.
26, 2009), available at
http://www.oag.state.tx.us/newspubs/releases/2009/012609hermann_judgment.pdf .
12

Seeking political remedies, such as lobbying for state laws prohibiting or limiting
physician ownership in specialty hospitals, requiring disclosure of such ownership
interest to patients, etc., or at the local level, opposing zoning approval for such
facilities;

Opposing Certificate of Need (“CON”) applications for new specialty hospitals;

Refusing to assist or cooperate with specialty hospitals (e.g., refusing to enter into
transfer agreements with a specialty hospital for emergency cases, or requiring
indemnification for the cost of care for any transferred patients who are
uninsured);

Pressuring other members of the medical staff and/or community physicians not
to refer to or otherwise use the specialty hospital;

Terminating or refusing to enter into financial relationships with physicianinvestors, such as recruitment contracts, medical directorships, or even
arrangements where the physician interprets tests for the hospital;

Enforcing any non-compete covenants in medical office building leases with
physician-investors;

Terminating or limiting other relationships with physician-investors, such as
removing them from on-call rotation, restricting their ability to schedule surgeries,
and limiting access to operating rooms;

Terminating or prohibiting physician-investors’ membership, if any, on hospital
boards;

Terminating or prohibiting physician-investors’ medical staff leadership positions
or medical directorships;

Terminating physician-investors’ participatory rights, such as voting or active
staff membership;

Limiting or terminating physician-investors’ privileges and medical staff
membership (“conflict of interest credentialing”),37 including:
37
Note that the “conflict of interest” credentialing actions discussed here are a subset of a practice known
as “economic credentialing” – which refers to the broader practice of terminating privileges based on
economic or financial factors, rather than on a physician’s clinical competence, disciplinary criteria, or
quality of care (i.e., the hospital takes into account the financial impact that physicians’ actions have or
may have on the hospital). Economic credentialing can encompass privileging decisions based on criteria
in addition to the conflict of interest scenario presented here, such as over-utilization, conditioning
privileges on predetermined levels of referrals to the hospital, and limiting staff size to ensure sufficient
volume for credentialed physicians. The Joint Commission on Accreditation of Healthcare Organizations’
(“JCAHO”) standards do not prohibit economic credentialing. Not surprisingly, the American Medical
13
o Terminating or limiting physician-investors’ clinical privileges and
medical staff membership but not courtesy privileges;
o Terminating only privileges for prospective conflicts of interest (i.e.,
“grandfather” medical staff who currently invest in specialty hospitals);
o Enacting prospective or retrospective policy refusing to reappoint (at the
time of reapplication) or denying applications for privileges for physician
investors;
o Denying or terminating privileges based on demonstrated pattern of
referring or steering profitable cases to POF (i.e., cream-skimming)
o Denying or terminating privileges for physician-investors’ partners;
o Denying or terminating privileges to physicians who have only an indirect
financial interest in a POF, including where a family member of the
physician holds the financial interest;

Terminating all relationships with physician-investors; and

Seeking exclusive or preferred contracts with health plans that preclude or
disincentivize the plan from contracting with the POF, including:
o Offering discounts/increasing rates on all hospital services;
o Offering discounts/increasing rates only on the services with which the
POF competes (but regardless of which of the hospital’s competitors are
excluded);
o Offering discounts/increasing rates to exclude only the POF from the
plan’s provider network;
o Offering bundled discounts whereby the plan receives a discount on all
services only if the plan refuses to contract with the SSH/contracts
exclusively with the hospital for the POF s' specific services;
o Refusing to contract with the plan for any hospital services if it contracts
with the POF; and
o Refusing to contract with the plan for specific or any services at all system
hospitals if the plan contracts with the POF (“full-system forcing”).38
When do these general hospital responses become exclusionary conduct, and
which ones raise the most antitrust risk? Competing POFs and/or their physician
Association (“AMA”) and other physician organizations oppose it, and more narrowly, oppose the “conflict
of interest” credentialing discussed in this article.
38
See FTC & DOJ Joint Report, Ch. 3 at 22-23,
http://www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf (listing various hospital responses identified
by panelists during the joint DOJ-FTC healthcare hearings).
14
investors have alleged with varying degrees of success in litigated cases that a number of
these practices by hospitals are types of exclusionary conduct to exclude them or at least
impede their efforts to establish or operate viable competing facilities. Challenged
practices include: hospital policies to exclude physician-owners from the hospitals’
medical staffs through “conflict-of-interest” credentialing policies; 39 alleged vertical
conspiracies with health plans including exclusive or preferred contracts to exclude the
physicians from participating in health plans;40 exclusive or other types of exclusionary
contracts between the hospital and one or more health plans only for the specific services
provided by the physician-owned facilities;41 alleged horizontal conspiracies among
competing hospitals or competing health plans to exclude physician-owned facilities,42
use of bundled discounts with payors,43 refusals to enter into transfer agreements with
physician-owned facilities;44 and attempts to persuade other physicians not to refer to the
physicians’ facility.45 Other of the hospital practices listed above may constitute
exclusionary conduct claims but have not yet been the subject of reported litigation.
As these cases demonstrate, generally speaking, the practices that raise the most
antitrust risk (or at least engender the most antitrust litigation) are general hospitals’
39
See Little Rock Cardiology Clinic v. Baptist Health, 573 F. Supp. 2d 1125 (E.D. Ark. 2008), aff’d, 591
F.3d 591 (8th Cir. 2009); Murphy v. Baptist Health, No. CV 2004-2002 (Ark. Cir. Ct., Feb. 27, 2009); Gordon
v. Lewiston Hosp., 423 F.3d 184 (3rd Cir. 2005)(plaintiff claimed termination of privileges, in part, in
retaliation for his plans to open a competing outpatient surgery center); Williamson v. Sacred Heart Hosp.
of Pensacola, 1993 WL 543002 (N.D. Fla. 1993) (denying staff privileges for opening a free standing
diagnostic imaging center), aff’d per curium without published opinion, 41 F.3d 667 (11th Cir. 1995);
Biddulph v. HCA, Inc., No. CV-2004 (Idaho Dist. Ct. Mar. 2, 2004) (attacking a medical staff development
plan that provided for the revocation of privileges if steerage of profitable care was “lopsided”); Mahan v.
Avera St. Luke’s, 621 N.W.2d 150 (S.D. 2000) (closing medical staff to orthopods and neurosurgeons
except for those recruited by the hospital); Miller v. Indiana Hosp., 843 F.2d 139 (3d Cir. 1988) (revoking
staff privileges of a doctor who intended to build a lab and radiology facility); Berasi v. Ohio Health Corp.,
No. 04CVA-03-2406 (Franklin County, Ohio C.P. Ct., Mar. 8, 2004) (suit dismissed by plaintiffs on March
8, 2004 after court denied their motion for a temporary restraining order) (hospital revoked physicians’
privileges under “conflict of interest’ provision in medical staff bylaws that prohibited investing in a
competing inpatient orthopedic facility). .
40
See Little Rock Cardiology Clinic, 591 F.3d 591; Franco v. Mem’l Hermann Healthcare Sys., No.
2006-79945 (Tex. Dist. Ct., March 11, 2010); Rome Ambulatory Surgery Ctr. v. Rome Mem’l Hosp., 339
F. Supp. 2d 389 (N.D.N.Y. 2004) (exclusive contracting with the two largest commercial payors in the
area; also alleged conflict of interest credentialing and conspiring with or intimidating affiliated and other
physicians to not refer to or use the SSH).
41
See, e.g., First Amended Complaint, Rome Ambulatory Surgery Ctr. v. Rome Mem’l Hosp., No. 01-CV0023 (DNH-GJB) (N.D.N.Y. Aug. 22, 2002).
42
See Heartland Surgical Specialty Hosp. v. Midwest Div., Inc., 527 F. Supp. 2d 1257 (D. Kan. 2007);
Franco v. Mem’l Hermann Healthcare Sys., No. 2006-79945 (Tex. Dist. Ct., March 11, 2010).
43
See Surgical Care Ctr. of Hammond v. Hosp. Serv. Dist. No. 1, 2001-1 Trade Cas. (CCH) ¶ 73,215,
2001 U.S. Dist. LEXIS 138, at *1 (E.D. La. 2001), aff’d, 309 F.3d 836 (5th Cir. 2002) (offering enhanced
discounts in an effort to “tie” the sale of inpatient to outpatient services); see also Cascade Health Solutions
v. Peace Health, 515 F.3d 883 (9th Cir. 2008) (plaintiff was not a POF or physician-investor but claims
involving bundled discounts are applicable to POF antitrust litigation)..
44
See Surgical Care Ctr. of Hammond v. Hosp. Serv. Dist. No. 1, 2001-1 Trade Cas. (CCH) ¶ 73,215,
2001 U.S. Dist. LEXIS 138, at *1 (E.D. La. 2001), aff’d, 309 F.3d 836 (5th Cir. 2002).
45
See, e.g., First Amended Complaint, Rome Ambulatory Surgery Ctr. v. Rome Mem’l Hosp., No. 01-CV0023 (DNH-GJB) (N.D.N.Y. Aug. 22, 2002).
15
various exclusive or exclusionary contracting practices with payors and, to a lesser extent
(because it can be and generally is imposed unilaterally), conflict of interest
credentialing. Other conduct by hospitals, such as pressuring other members of the
medical staff or the medical community not to use the competing POF, as alleged in
Rome, and, under certain circumstances, joint venturing another specialty facility with
medical staff members can also raise significant antitrust risk. On the other end of the
spectrum, a general hospital’s establishing its own SSH, engaging in public relations
campaigns, opposing CON applications, and even refusing to permit physician investors
to serve on the hospital board or in medical staff leadership positions raise little risk
because these actions are unilateral, exempt from antitrust liability, or not exclusionary in
the first place. The other types of hospital responses identified above fall somewhere in
between.
Analysis of Exclusionary Practices
What factors determine which of these practices are exclusionary, under what
circumstances they are exclusionary, and/or which ones raise the most risk? POFs often
allege anticompetitive effects, and general hospitals claim justifications, relying on
empirical studies of the purported benefits and harm resulting from the entry of POFs into
the market. These studies, however, yield inconclusive or mixed results and provide little
specific guidance. The cynical view is that determining whether or not these
exclusionary practices are anticompetitive or procompetitive depends on which set of the
empirical studies and literature one accepts – those showing that POF’s are high-quality,
efficient providers of medical services or others demonstrating POFs are creamskimming profit centers that drain-away resources that general hospitals use to subsidize
less profitable but necessary services. As the court in Heartland stated, although both
sides “insist they solely possess the moral high ground . . . [n]either side can make a
colorable argument that the parties’ profits is not a central factor in their dispute.”46
There are a number of other tried and true antitrust factors, however, that are not
unique to the POF context that can be considered to determine the risk and/or viability of
POF claims challenging exclusionary conduct. Foreclosure of the POF, and/or the
physician-investors depending on the parties and relevant product market alleged, is the
primary focus of the antitrust analysis of each of these practices. But it is not the only
relevant factor considered.

Who are the entities involved in the dispute and named in the suit?
The answer to this initial question makes a difference, both to the relevant product
market definition and the type of claim(s) alleged. In POF disputes, the plaintiffs can be
the POF, the physician-investors or both. The defendants can be a single general
hospital, multiple allegedly conspiring hospitals, one or more health plans that contract
with the hospital(s) or otherwise allegedly conspire with the hospital(s) or each other, and
staff or other physicians who allegedly conspired to exclude the plaintiff(s).
46
527 F. Supp. 2d at 1264
16
As to the plaintiffs, if only the physician-investors but not the POF itself are
named, this can create a standing problem for any claims of exclusionary conduct in the
hospital services market (or other market for the services provided by the POF), which is
likely to be where the “real action” – the foreclosure and anticompetitive effects, if any -has occurred. This dilemma can arise where the POF is owned by multiple parties and
not all of the parties want to join in the litigation. In most circumstances, the physicians
themselves are not competitors or customers of the hospital so they have no standing to
allege claims in hospital services market.
Conversely, the physician-investor plaintiffs cannot allege the general hospital
monopolized or attempted to monopolize the physician services market. The hospital
cannot, as a matter of law, monopolize or attempt to monopolize a market in which it is
not a participant and does not compete, and thus has no market power.47 As a result, a
plaintiff physician generally cannot maintain a Section 2 claim against a hospital based
on purported exclusionary conduct in the physician services market. Of course, a
hospital may compete in that market to the extent it employs physicians, but plaintiffs
must then prove exclusionary conduct, market power, foreclosure and effects in that (i.e.,
the physician services) market.
In Little Rock Cardiology Clinic, plaintiffs tried to have it both ways by alleging
some sort of conjoined physician and hospital services market (although the district court
acknowledged it could not determine precisely what product market plaintiffs alleged),
but this resulted in the court holding that their alleged relevant product market was
incoherent and implausible. In Heartland, the plaintiff was the POF only and not the
physician-investors which allowed it to allege claims in the hospital services market. In
an interesting twist, the court held that under Kansas law the SSH did not have a
relationship with the health plans’ insureds, precluding a tortious interference claim based
on the health plans’ alleged group boycott of the SSH. Perhaps the plaintiff could have
maintained a tortious interference claim if the physician-investors had been included as
plaintiffs too, as the court held in Murphy based on its finding of a physician-patient
relationship.
As to the defendants, which parties are involved in the exclusionary conduct has a
determinative impact on what type of claim can be alleged. If only a single hospital is
alleged to be involved, then plaintiffs’ claims are limited to those challenging unilateral
exclusionary – in this context, “predatory” -- conduct under Section 2 of the Sherman
Act. In cases where both a hospital and payor are involved, such as those involving
exclusive contracts, then plaintiffs may allege vertical conspiracies under both Sections 1
and 2. Although a plaintiff may only name a single entity, such as a hospital, it may still
allege a conspiracy where the facts support such a claim, such as in Memorial Hermann
where the health plan coconspirators were not named as parties in the initial suit. But in
47
See Little Rock Cardiology Clinic, 573 F. Supp. 2d at 1140-41 (E.D. Ark. 2008)(citing Gordon v.
Lewiston Hosp., 423 F.3d 184, 421 n. 24 (3rd Cir. 2005)); Spanish Broadcasting Sys. v. Clear Channel
Commc’ns, 376 F.3d 1065, 1075 (11th Cir. 2004); White v. Rockingham Radiologists, Ltd., 820 F.2d 98,
104 (4th Cir. 1987).
17
that case, one plaintiff group later sued the health plan co-conspirators after settling with
hospital, apparently to get a second bite of the apple. Similarly, plaintiffs in Little Rock
Cardiology Clinic alleged a conspiracy between the hospital and health plan but initially
sued only the hospital. A year later they amended the complaint to add Blue Cross, with
fatal consequences as this opened the door to a motion to dismiss that ultimately resulted
in the case being dismissed.
And where multiple hospitals and/or multiple payors are involved in the
challenged conduct, then plaintiffs can assert horizontal conspiracies, hub and spoke
conspiracies or even group boycotts that are per se violations of Section 1. Heartland is
unique in that multiple hospitals as well as multiple health plans were named as
defendants, allowing horizontal conspiracies to be alleged at both levels. Similarly, in
claims involving a conspiracy among those members of a hospital’s medical staff who
are competitors to boycott the POF by, for example, refusing to refer patients to that
facility, there is the risk of a per se claim.

Is the exclusionary practice unilateral conduct or a conspiracy?
As the preceding discussion makes clear, the distinction between concerted and
unilateral conduct is significant to assigning the degree of antitrust risk between these
responses or practices. Generally, exclusionary conduct that is the product of concerted
action or a conspiracy is viewed more strictly than unilateral conduct, requires a lesser
showing of market power, and may even constitute a per se violation of Section 1. Most
of the recent and older POF cases cited above allege only Section 1 claims, and to the
extent they also allege monopolization or attempted monopolization claims under Section
2, often the only predatory conduct alleged are the same conspiracies with payors or
physicians that provide the basis for the Section 1 count.48 As noted above, conflict of
interest credentialing typically is unilateral conduct rather than the product of a
conspiracy. In order to allege any Section 1 conspiracy, as well as certain Section 2
claims, such as a conspiracy to monopolize the market for those overlapping hospital
services offered by both the general hospital and SSH, a plaintiff must show that the
hospital participated in an agreement or conspiracy with health plans, members of its
medical staff, community physicians or others to exclude the physician-investors or the
POF from the market.
Plaintiffs’ ability to establish such an unlawful agreement will depend, first, on
who is involved in taking that action, as discussed above. A hospital or hospital system,
its board of directors, officers, employees and any combinations of these entities and
individuals – the parties who typically implement a conflict of interest policy – are
usually incapable of conspiring with one another as a matter of law because they are parts
of the same single entity.49 The circuits are split, however, on whether a hospital and its
medical staff (or the medical staff board, committees, or other entities) are capable of
48
See Little Rock Cardiology Clinic, 573 F. Supp. 2d 1125.
See, e.g., Surgical Care Ctr. of Hammond, 309 F.3d 836; see also Potters Med. Ctr. v. City Hosp. Ass’n,
800 F.2d 568 (6th Cir. 1986).
49
18
conspiring in the context of peer review credentialing decisions.50 And it is not clear that
the same rationale for holding that a hospital and its medical staff are incapable of
conspiring will apply in the conflict of interest credentialing context where the
privileging decision is based on economic or competitive issues rather than quality
concerns.51 Moreover, an exception exits where one or more physicians has an
independent personal stake even in those circuits where the hospital and medical staff are
incapable of conspiring.52
Where a conspiracy is legally possible, a plaintiff must show direct or
circumstantial evidence that the privileging decision, in fact, resulted from a conspiracy
rather than permissible unilateral action. Most general hospitals take care to avoid
implementing a conflict of interest policy through medical staff bylaws or other
agreement between the medical staff and the hospital that could give rise to a Section 1
claim. For example, in Williamson v. Sacred Heart Hospital,53 the court held there was
no circumstantial evidence of a conspiracy. The court stated that the hospital’s board of
directors had “the final authority to grant privileges or waive bylaws requirements,” and
noted that none of the medical staff physicians who competed with the excluded
physician sat on the Board, on any committee that reviewed that physician’s application
for privileges, or played a role in drafting the credentialing criteria for the hospital. As a
result, the court concluded that the credentialing decisions constituted unilateral actions
taken by the hospital board and did not establish an antitrust conspiracy. A novel way
around this for plaintiffs is to allege that the credentialing policy itself – particularly one
that conditions future privileges on not investing in a competing facility - creates an
actionable agreement between the hospital and the physician-investor as a coerced
coconspirator.54
And even in cases alleging exclusionary practices jointly between hospitals and
health plans, or among competing hospitals or competing health plans, proving a
conspiracy is no easy matter for plaintiffs, as the physician investors in Memorial
50
The Ninth and Eleventh Circuits have held or suggested that a hospital can conspire with its medical
staff, or at least with individual members of its medical staff, for purposes of the antitrust laws; and the
Third, Fourth, Sixth, and Seventh Circuits have held they are incapable of conspiring when engaged in
peer-review credentialing. Compare Oltz v. St. Peter’s Community Hosp., 861 F.2d 1440 (9th Cir. 1988);
Crosby v. Hosp. Auth. of Valdosta, 93 F.3d 1515 (11th Cir. 1996), with Nanavati v. Burdette Tomlin Mem.
Hosp., 857 F.2d 96 (3d Cir. 1988); Patel v. Scotland Mem’l Hosp., 91 F.3d 132 (4th Cir. 1996); Alba v.
Marietta Mem’l Hosp., 202 F.3d 267 (6th Cir. 2000); Pudlo v. Adamski, 2 F.3d 1153 (7th Cir. 1993). The
remaining Circuits either have suggested that a hospital cannot conspire with its medical staff or have not
decided the issue.
51
But see Biddulph v. HCA, Inc., No. CV-04-1219 (Idaho Dist. Ct. Aug. 6, 2004) (holding hospital
incapable of conspiring with its trustees in adopting conflict of interest policy).
52
See, e.g., Oksanen v. Page Mem. Hosp., 45 F.2d 696, 705 (4th Cir. 1991).
53
1993 WL 543002 (N.D. Fla. 1993).
54
See Mark L. Mattioli, Economic Credentialing, Conflict-of-Interest Policies, and Hospital-Physician
Competition, American Health Lawyers Association Antitrust Practice Group Member Briefing (Mar.
2009), available at
http://www.healthlawyers.org/members/practicegroups/antitrust/memberbriefings/documents/layout_mattio
li.pdf.
19
Hermann learned at trial when their case foundered on their failure to prove a conspiracy
between the health plans to exclude the SSH (curiously, the plaintiffs appear not to have
pursued a claim that the hospital and each health plan were part of a vertical conspiracy,
even though their theory, apparently, was that the hospital was the “hub” of the
conspiracy and plaintiffs – initially – sued only Memorial Hermann.)

What is the proper relevant market?
Exclusionary conduct cases in the POF context can turn on what relevant product
and/or geographic market the plaintiffs allege. As discussed above, plaintiffs cannot
allege that a general hospital monopolized or attempted to monopolize the physician
services market in which it does not compete (unless the hospital employs physicians),
and plaintiff physicians may not have standing to assert claims in the hospital services
market.
And even where the plaintiff is a competing SSH, it often alleges that the relevant
product market includes the entire cluster of hospital services, even though the SSH at
issue competes only in a subset of specialty services offered by the competing general
hospital. This was the case in Heartland, although the plaintiff there also alleged an
alternative market of those specific services that the SSH provided. Where plaintiffs
allege a narrower hospital services market consisting of the overlapping services offered
by both the SSH and general hospital, in certain circumstances this may result in a lower
market share for the defendant hospital (because of the competition it faces from the
SSH) than the general hospital’s share of the overall hospital services market. No case
has yet addressed this issue.
In the healthcare context, including POF suits, almost all exclusionary conduct
cases involve the exclusion, or foreclosure, of providers from access to patients – whether
because of exclusive/selective/bundled discount contracting between hospitals and health
plans (the most common type of conduct in its many forms), privileging, or other conduct
and regardless of whether the conduct is unilateral or concerted action. In all of these
situations, the antitrust concern is that the providers have been foreclosed from providing
services to the health plan’s subscribers or hospital’s patients, and, in turn, that this
foreclosure has caused them to exit the market or lose their competitive viability. This
depends on their degree of foreclosure from all sources of patients and revenue, however,
not just the patients and revenue from a particular hospital or health plan. Arguably,
then, the relevant product market cannot be limited to only commercially insured patients
(versus government or self-pay). Instead, in these market foreclosure cases, the relevant
product market is all the products and geographic sales for which the plaintiff competes –
i.e., the available market for the supplier/provider, as both the district and appellate court
held in Little Rock Cardiology Clinic.55 In Rome, however, in denying the hospital’s
motion for summary judgment, the court appeared to accept plaintiff’s argument,
although without discussion, that the relevant product market was limited to
55
See Little Rock Cardiology Clinic, 573 F. Supp. 2d 1125, 1147, aff’d, 591 F.3d 591, 597-98 (citing Stop
& Shop Supermarket Co. v. Blue Cross & Blue Shield, 73 F.3d 57, 67 (1st Cir. 2004).
20
commercially insured patients and that the contracts between the defendant and the two
health plans foreclosed plaintiff from about 65 percent of that market. 56

Do the defendants have market power or monopoly power?
If the general hospital has substantial market power, or monopoly power (i.e., a
market share approaching or exceeding 65%), in the market for the specific services
provided by the POF, this increases its antitrust exposure, and increases the types of
claims that can be alleged, because plaintiffs can then challenge the hospital’s unilateral
conduct as monopolization or attempted monopolization of that market under Section 2
of the Sherman Act. Because much of the exclusionary conduct alleged in the POF
context is unilateral, the lack of monopoly power will limit a plaintiff’s options and a
hospital will have much more leeway in implementing some of these practices. For
example, in Surgical Care Center of Hammond, the court rejected a claim under Section
2 by a physician-owned ambulatory surgery center, primarily because it found that the
plaintiff failed to prove the hospital’s market power in the relevant market for outpatient
surgery,57 and in Memorial Hermann, plaintiffs did not, apparently, even allege a
unilateral conduct claim.
Market power is also an important indicator of antitrust risk in Section 1 cases
involving conspiracies among multiple parties. For example, in cases challenging
exclusive and other types of contracts between health plans and hospital that exclude
POFs from the health plan’s network, there will be little or no foreclosure unless the
health plan has market power. Also, in cases where plaintiffs assert that the general
hospital “coerced” or pressured a health plan or multiple plans to refuse to deal with the
plaintiff POF, such as Heartland, Memorial Hermann, and Little Rock Cardiology Clinic,
and many other cases, such a claim is implausible unless the hospital has sufficient
market power to be a “must have” hospital. This type of conduct can also establish a
Section 2 claim where the hospital’s market share is sufficient to establish monopoly
power. Plaintiff’s claims in Heartland are curious in this respect. Although plaintiff
claimed the hospital defendants’ combined market share was 74%, and the major health
plans’ share (of managed care enrollment) was 90% in the Kansas City metropolitan area,
and then alleged the hospitals pressured the payors to boycott the SSH, plaintiff did not
allege a claim under Section 2 of the Sherman Act (perhaps because no single hospital or
health plan had sufficient market share to show monopoly power).
If the hospital has market power in the cluster market for inpatient hospital
services, and conditions its sales of those services on a health plan’s purchasing from it
the specific types of services offered by the POF, a tying arrangement might result.
Again, market power in the cluster services is necessary to show the hospital coerced the
health plan to effectuate the tie. Coercion is the “touchstone issue in assessing a tying
claim.58 Similarly, full system forcing (i.e., requiring a health plan to contract with all of
56
349 F. Supp. 2d 389 (N.D.N.Y. 2004).
2001 U.S. Dist. LEXIS 138 (E.D. La. 2001), aff’d, 309 F.3d 836 (5th Cir. 2002).
58
Cascade Health Solutions v. Peace Health, 515 F.3d 883, 913-914 (9th Cir. 2008)
57
21
a multi-facility system’s hospitals or, in the POF context, threatening to terminate a
contract with an entire system if the insurer contracts with the POF, as in Memorial
Hermann) likely would be analyzed as a tying claim. Finally, in some markets both the
hospital and the health plan have market power in their respective markets, which would
increase the antitrust exposure for both and permit a plaintiff to allege that they conspired
to exclude each other’s competitors, including SSHs who compete with hospital, and to
maintain or increase their respective market power. This was the plaintiffs’ theory in
Little Rock Cardiology Clinic.

Are the plaintiffs foreclosed from the market?
As noted above, foreclosure is the most important factor in analyzing an
exclusionary conduct case, and the analysis in this context typically focuses on the extent
to which the POF is foreclosed from patients by the hospital’s conduct, and the effect of
that foreclosure on the general hospital’s market power in the market for the services
offered by the POF, or in some circumstances, on the physician-investors’ foreclosure in
the physician services market.
At the outset, in the POF context, the very fact that the physicians practice at their
POF generally will at least reduce the degree of their foreclosure, for instance, resulting
from conflict of interest credentialing, because their own facility provides an additional
outlet for the physicians to provide services. As to foreclosure of the POF itself from the
hospital services or specialty services market, however, the availability of patients and
the resulting success of the POF, or lack thereof, is critical. Typically, as noted above,
the plaintiff POF will allege it has been foreclosed from the health plan’s subscribers as a
result of exclusive or selective contracting between the hospital and one or more health
plans or, less often, from the general hospital’s patients as a result of a credentialing
policy (although this is a much more difficult case for plaintiffs). This alone is not
sufficient, however, for plaintiffs to demonstrate a viable claim. Plaintiffs also must
show their alleged exclusion will force them to exit the market or at least prevent them
from continuing as a viable competitor.59 This will be difficult to prove unless the health
plan has market power – i.e., controls a large percentage of the available patients in the
market that, as a result of the exclusionary conduct, are unavailable to the POF.
In addition, it is difficult for plaintiff POFs to show foreclosure (and resulting
anticompetitive effects) when the POF is financially successful. The POF’s success will
be tangible evidence that it has access to sufficient patients and is not significantly
foreclosed from the market, and thus is a viable competitor, even though it is not an innetwork provider with one or more health plans. This is not infrequently the case, such
as in Little Rock Cardiology Clinic. On the other hand, plaintiffs seemingly have a very
strong foreclosure argument where they have been forced out of business, as in the Rome
and Memorial Hermann matters. The question then becomes one of causation. In fact, in
Memorial Hermann, defendant argued that the POF failure was caused by its own poor
business decisions rather than the hospital or health plans’ conduct.
59
See, e.g., Doctor’s Hosp. v. Se. Med. Alliance, Inc., 123 F.3d 310, 311 (5th Cir. 1997).
22
Finally, as discussed above, if the relevant product market is not limited to only
commercial patients, then Medicare, Medicaid, and self-pay patients also are available to
the POF and must be considered, which will often very significantly reduce the degree of
foreclosure and any resulting harm to the POF.

Are there any effects on competition?
As a threshold matter, if there is no significant foreclosure of the POF or
physician investors, it is highly unlikely that a plaintiff will be able to demonstrate
anticompetitive effects. And very often, even assuming the plaintiff POF or physician
investors have been foreclosed and injured, there is no apparent effect on competition.
Unfortunately, no cases meaningfully address anticompetitive effects analysis in the POF
context.
First, there usually is no anticompetitive effect in the hospital or specialty services
markets resulting simply from conflict of interest credentialing. In fact, the policy may
benefit the POF by increasing its referrals because the physician investors can no longer
refer to the general hospital after having their privileges terminated. In a physician
services market, although a unilateral credentialing policy may injure the investing
physicians and possibly competition, the hospital (unless it employs competing
physicians) is not a competitor and thus has no market power in that market, as discussed
above.
On the other hand, anticompetitive effects are more likely to result from exclusive
arrangements between the general hospital and health plans, although they still will be
difficult to prove. Plaintiffs must show that their exclusion from either the hospital or
physician services market will result in too few remaining competitors for a competitive
market.60 So where there are additional physician groups in the same specialty that
patients and payors can choose from, there will be no harm to competition generally even
if the plaintiff physicians themselves have been foreclosed and injured as a result of the
exclusionary arrangement (or credentialing policy). There is a much greater likelihood of
anticompetitive effects where the excluded physicians are the only providers in their
specialty. A conflict of interest credentialing policy may actually increase competition in
the physician services market if the general hospital recruits new physicians to the area to
replace those that lost their privileges because of the policy. Similarly, in the hospital
services market, plaintiffs must show the credentialing policy or, more likely, the
exclusionary arrangement has the effect of preventing the development of competing
facilities that would constrain the general hospital’s ability to exercise market power.
This is less likely where there are existing hospital competitors in the market.
Plaintiffs typically allege direct anticompetitive effects, such as higher prices, lower
quality and reduced choice, in POF cases. Proving these direct effects is a much more
difficult proposition, but no case yet has turned on this issue. In Little Rock Cardiology
Clinic, the district court found that plaintiffs did not even allege direct anticompetitive
60
Todd v. Exxon Corp., 275 F.3d 191, 213, (2d Cir. 2001).
23
effects of any kind in the physician services market. As a result, the court held that if
plaintiffs intended to allege a physician services market, then the Section 1 conspiracy
must be dismissed, in part, because there were no allegations of increased prices for
physician services, or a decline in the quality or quantity of physician services. 61 Instead,
plaintiffs made the usual allegations articulated by POF proponents of quality effects in
the hospital market resulting from the exclusion of their SSH: better outcomes, harmed
patient health, reduced patient choice, and disrupted physician-patient relationships. In
Murphy v. Baptist Health, the state court relied on empirical studies and literature to find
that public policy favors the establishment of SSHs and disfavors economic credentialing.
Because it is not clear from the body of empirical studies and literature on this issue that
there are quality and other efficiency benefits from SSHs and other POFs, however, it
does not automatically follow that there will be anticompetitive price, quality, and choice
effects from the exclusion of these facilities, or that courts will rely on these studies to
find such effects in antitrust cases. Instead, plaintiffs must present evidence that these
effects have actually occurred in the market in order to establish that the conduct is
anticompetitive.

Does the general hospital have a legitimate justification for its actions?
The final step in determining the antitrust risk from exclusionary practices under
Section 1 is determining whether there are legitimate business justifications for the
general hospitals’ conduct in response to the POF, and whether those procompetitive
benefits outweigh any anticompetitive effects.62 Some courts hold that once a defendant
establishes a legitimate business justification, the burden then shifts back to the plaintiff
to show that these benefits could have been achieved through a less restrictive alternative
means or that the restraint is not reasonably necessary to achieve the stated objective.63
Similarly, under Section 2, conduct generally is not predatory if the defendant has a
legitimate (non-pretextual) business justification or “valid business reasons” for engaging
in it.64
Various business justifications have been articulated for general hospitals’
responses to POFs. Much has been written previously about the empirical and legal
support for these justifications, and will not be repeated here.65 As noted above, one of
the most prominent justifications is that such responses are necessary in order to protect
the general hospital’s ability to cross-subsidize its unprofitable patients or services. On
one hand, this justification fundamentally amounts to an argument that terminating
privileges or taking some other action against the specialty hospital or its physician
investors is necessary simply because they are competing and taking business away from
61
Little Rock Cardiology Clinic, 572 F. Supp. 2d at 1141-42.
See, e.g., Geneva Pharmac. Tech. Corp. v. Barr Labs., Inc., 386 F.3d 485 (2d Cir. 2004).
63
See, e.g., United States v. Brown Univ., 5 F.3d 658 (3d Cir. 1993).
64
See, e.g., Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992).
65
For additional discussion of earlier cases and studies addressing the justifications offered in the POF
context, see William E. Berlin, Antitrust Implications of Competition Between Physician-Owned Facilities
and General Hospitals: Competition or Exclusion?, ABA Health Law Section Health Lawyer, June, 2008,
at 8-10.
62
24
the hospital. This, of course, is just the type of conduct that the antitrust laws are
intended to promote, not prohibit. On the other hand, several courts have specifically
stated that competition for patients and protecting a hospital’s ability to provide
community services is a legitimate procompetitive justification.66
A second justification articulated by general hospitals for their responses to SSHs
is to prevent “cream-skimming” or “patient dumping.” The underlying concern for this
justification is the same as for the cross-subsidization rationale: physician-investors who
also have admitting privileges at the hospital have the incentive and ability to steer more
profitable patients to their own facility and costlier patients to the hospital. The
physician-investors thus “free ride” on the general hospital’s inability to turn away
patients and its investments in the services needed to treat those patients -- ER services,
charitable care to the uninsured and other services that SSHs and other POFs do not
provide but require in order to operate. Numerous courts have recognized that conduct
undertaken to prevent free-riding can be a legitimate business justification in a variety of
contexts.67 In addition, in the SSH context, commentators have stated that preventing
free riding can economically justify conflict of interest credentialing and exclusive or
preferred contracting with payors.68 And recently, FTC Commissioner Rosch stated that
it is “not fair” that general hospitals are “saddled with the full burden of charity care
costs” and SSHs should “carry their share of the burden.”
While preventing free-riding appears to be more widely-accepted than protecting
cross-subsidization, both justifications require proof that physician investors actually are
steering more profitable patients to their own facility and vice-versa. It will likely not be
sufficient for a general hospital merely to offer empirical studies and literature
demonstrating the incentive for and possibility of steering. The justification for a
hospital’s exclusionary practice will be stronger if it is supported by actual market data
showing that cream skimming or patient dumping has occurred (and even more
compelling if also supported by evidence the hospital is likely to invest less in services as
a result of the free-riding). For example, although not an antitrust case, in Murphy the
court held that the evidence did not support the hospital’s justifications for its conflict of
interest credentialing policy because it relied on empirical studies and literature showing
that SSHs endanger general hospitals’ economic viability, rather than conducting a study
66
E.g., Williamson v. Sacred Heart Hospital of Pensacola, 1993 WL 543002 (N.D. Fla. 1993), aff'd per
curiam without published opinion, 41 F.3d 667 (11th Cir. 1995) (opinion reprinted in 1995-1 Trade Cas.
(CCH) ¶ 70,905)(plaintiff's status as a competitor directly competing with the hospital for patients
constitutes a “rational economic reason” and procompetitive business justification under Section 1 for
terminating privileges).
67
See, e.g., Continental T.V., Inc. v. G.T.E. Sylvania, Inc., 433 U.S. 36 (1977) (a procompetitive effect of
vertical restraints is that they prevent free-riding); Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792
F.2d 210 (D.C. Cir. 1986) (one aspect of justification was to prevent free-riding on defendant’s national
image which attracted customers); Morris Commc’ns Corp. v. PGA Tour, Inc., 235 F. Supp. 2d 1269 (M.D.
Fla. 2002) (preventing free-riding is a valid business justification even for a monopolist under Section 2).
68
See, e.g., David A. Argue, An Economic Model of Competition Between General Hospitals and
Physician-owned Specialty Facilities, Antitrust Health Care Chronicle 1 (July 2006).
25
to generate data showing that these effects actually occurred in the market.69 Similarly,
the court in Heartland found that the coconspirator health plans’ failure to conduct an
analysis before making their contracting decision to exclude the SSH was not rational.70
But general hospitals argue that these studies demonstrate potential harm to competition,
which should be sufficient to justify their proactive response to forestall such harm before
it actually occurs.
Where a general hospital’s exclusive arrangements with health plans were
implemented prior to the POF’s entry, or even if implemented later, the standard discount
for volume rationale for managed care contracting can be a legitimate rationale for those
arrangements even where they exclude the POF. In Heartland, the court recognized this
contracting practice is common and can be procompetitive; however, the court also found
that the specific contract provisions at issue, which excluded new POFs but permitted
new facilities owned by existing general hospitals, undercut this justification.
A final consideration in the justifications analysis is evaluating whether the
hospital’s response is overly broad, or the least restrictive alternative, for addressing the
alleged problem. Some commentators and courts have stated that exclusive or bundled
discount contracts may be an overbroad response to free-riding and cream skimming.71
Conclusion
General hospitals have responded to the perceived threat from POFs in a variety
of ways that may be considered exclusionary practices. The factors described above can
be considered to determine which hospital responses may be considered exclusionary
practices and under what circumstances those practices raise significant antitrust risk for
the implementing hospital and health plan. Most of these factors are equally applicable
to exclusionary practices in other healthcare contexts.
69
The court, however, inconsistently did not hold the plaintiff physicians to this same standard and found
that the credentialing practice was contrary to public policy based only on secondary sources rather than an
actual market study.
70
527 F. Supp. 2d at 1304; See also United States v. Dentsply International, Inc., 399 F.3d 181 (3d Cir.
2005)(rejecting unsupported justification as pretextual)
71
See, e.g., Rome, 339 F. Supp. 2d at 411.
26