Despite hospitals’ and physicians’ commonality of interest in caring for patients, hospital-physician relationships have been strained as hospitals and physicians struggle to provide services in an environment of soaring costs, decreased reimbursement and regulatory overload. Recent developments highlight how hospital reactions to competitive market factors can seriously disrupt longstanding relationships and result in the displacement of well-qualified physicians.

Economic credentialing: The hospital industry’s concern with declining surgery and occupancy rates has deepened with the proliferation of competing sites of service, including ambulatory surgical centers, specialty hospitals and physicians’ offices. As opportunities for physician investment in competing facilities have expanded, hospitals have responded with economic credentialing policies to create disincentives for physicians to practice at or invest in competing facilities. Typically economic credentialing policies require physicians to admit a specified percentage of their patients to the hospital in order to be eligible for privileges. Some policies have taken the form of loyalty oaths that make physicians who own or hold financial interests in competing facilities ineligible for privileges at the hospital. Whatever the specific provisions, economic credentialing policies focus on economic factors, rather than clinical competence, in reaching decisions to award or deny clinical privileges.

Hospitals contend that physician ownership of competing facilities can lead to unfair competition with the hospital as physician owners refer paying patients to their private facilities and send indigent and government-payer patients to the hospital. Further, hospitals argue that this trend imposes additional costs on them, thereby hampering their ability to compete with the physician-owned facilities. They also point to the potential conflict of interest when physicians with outside financial interests participate in peer review of fellow physician investors.

California litigation: A pending lawsuit that centers on the medical staff’s right to self-governance vividly illustrates how quickly hospital-physician relationships can deteriorate and the lengths to which hospitals will go to protect patient volume and retaliate against physicians who own investments in competing facilities.

In early 2003, the governing board of Community Memorial Hospital in Ventura, California unilaterally imposed a code of conduct and conflict-of-interest policy on medical staff members that forbade any physician with a competing financial interest from serving as a medical staff officer or committee member or voting on any medical staff matter. The hospital administration refused to recognize the medical staff officers, including the chief of staff who had been elected by the medical staff, claiming that they had financial conflicts of interest with the hospital. In addition the hospital took control of a $250,000 medical staff dues fund and transferred the funds to another financial institution.

Tension between the hospital and the medical staff reportedly began with the hospital’s decision to force out the radiology group that had a strong record of clinical service to patients at the hospital for 50 years. The hospital contended that it was seeking solutions to problems with timeliness of results and availability of staff while the radiologists claimed they were forced out by the hospital’s move to recruit an outside chief and by onerous contract conditions.

The medical staff sued the hospital, alleging that hospital officials were usurping the physicians’ authority to make medical decisions and engaging in unfair business practices. A key issue in the litigation was whether the medical staff, as an unincorporated association, had legal standing to sue the governing body of the hospital. On two occasions, in August and again in October 2003, a California court ruled that the medical staff did have the ability to maintain the action against the hospital and rejected a New Hampshire decision to the contrary. The court allowed the medical staff to proceed on its claims for declaratory relief and conversion by the hospital of the medical staff dues fund. Although these decisions are preliminary, they represent an important victory for the medical staff. Information about the litigation is available at <www.concernedventuraphysicians.org>.

Threats to displace anesthesiologists: As the dispute continued, case volume at Community Memorial Hospital dropped. In early August, following ongoing dialogue about strategies to address underutilization of operating rooms, the anesthesiologists proposed to reduce the number of operating rooms staffed on a daily basis by one room, from seven to six rooms. The department of surgery unanimously supported this proposal. The hospital administrator viewed the proposal as an ultimatum and responded by threatening to replace the anesthesiologists.

After protests by numerous surgeons that replacing the anesthesiologists would result in a deterioration in the quality of patient care even worse than the situation created the year before by the exodus of the radiologists, the administrator relented and agreed to release operating room utilization data and to meet with the anesthesiologists and surgeons on a regular basis. Thereafter the hospital announced that the long-time administrator would step down.

Anesthesiologists are likely to be involved in these disputes for several reasons. As investors in surgical centers and pain clinics, they may be subject to conflict-of-interest policies that hospitals try to implement. Anesthesiologists’ efforts to provide office-based anesthesia also may anger hospital administrators. On an operational level, because anesthesiologists staff the primary revenue-generating center of any hospital, its operating rooms, anesthesiologists are likely to become enmeshed in dispute as they respond to decreased utilization while the hospital seeks to maintain expanded coverage. The potential for conflict points to the importance of generating strong support among medical staff members, as in the Ventura case. For groups with contracts with hospitals, the lesson is to negotiate for language that provides a fair process before the hospital can terminate the anesthesiology practice.

Contract provisions: In hospital-anesthesiologist contracts, provisions akin to economic credentialing policies often take the form of noncompetition provisions that bar the anesthesiology practice from providing services at any location within the hospital’s “service area” and that prohibit the practice from investing in any competing facility. The enforceability of these provisions will vary from one state to another, and their potential impact on a practice will depend upon many factors.

OIG solicitation of public comments: At the urging of the American Medical Association, in December 2002, the Health and Human Services Office of Inspector General (OIG) solicited comments on economic credentialing practices by hospitals <http://oig.hhs.gov/authorities/docs/solicitationannsafeharbor.pdf>. In particular the OIG asked for information regarding economic credentialing policies and their impact on physicians. As an agency responsible for interpretation and enforcement of the federal antikickback statute, the OIG is considering whether exercise of a hospital’s economic credentialing policy violates that statute. When a hospital exercises its discretion to deny privileges to a physician on the basis that the physician will not provide a sufficient flow of referrals to the hospital, a strong argument can be made that a classic prohibited kickback occurs.

Predictably, hospital interests filed comments arguing that these credentialing practices are lawful. They claimed that nonprofit community hospitals are vulnerable to competition from physician-owned facilities and that denying clinical privileges to physicians who compete with a hospital is a legitimate exercise of a hospital board’s discretion. To date the OIG has not issued any further notices on this issue.

JCAHO proposed changes: The Joint Commission on Accreditation of Healthcare Organizations (JCAHO) accreditation manual for health care facilities addresses organization and governance of the medical staff. JCAHO standards currently provide for medical staff adoption of bylaws and rules to establish a framework for self-governance of medical staff activities. They bar unilateral amendment of bylaws.

In the past year, hospital advocates have lobbied JCAHO to change its stance on medical staff self-governance, arguing that since the governing board of a hospital controls the hospital, it should have absolute control over medical staff composition and function. In addition these groups contend that JCAHO accreditation standards should allow a hospital governing board to make unilateral amendments to medical staff bylaws.

Instead JCAHO proposed a rule that would enhance the existing prohibition on unilateral amendment of medical staff bylaws by authorizing a citation of noncompliance if either the medical staff or governing body bylaws permit unilateral changes. If adopted, the rule would be effective in 2004.

State statutes: A number of states and the District of Columbia have statutes establishing requirements for hospital credentialing of physicians, but their content and potential protection vary. Some statutes restrict hospitals from using economic factors in credentialing decisions while others permit their use. Legislation can bolster efforts to resist inappropriate restrictions on physicians, but such statutes would be unlikely to regulate contracts in which physicians may agree to abide by noncompetition provisions.

Lessons: So what can anesthesiologists do to protect their positions as medical staff members? A basic lesson is to pay attention to what is going on in the hospital. In the Ventura case, although the surgeons long had concerns about the administration’s actions, the turning point came when the well-qualified radiologists left and radiology services suddenly deteriorated. The medical staff had no part in the hospital’s decision to recruit an outside radiologist to a leadership role in the hospital.

Part of the strategy of staying aware is to become involved in medical staff activities, to have ongoing discussions with the hospital administration about the anesthesiology department and developments of interest and to become acquainted with members of the hospital’s governing body. Knowing nonphysician members of the governing board can be critical in times of discord.

The California case underscores the desirability of a medical staff having its own funds subject to the control of the medical staff, not the hospital. Similarly the case points to the desirability of having separate counsel for the medical staff when disputes arise.

Finally the lesson is that all physicians need to pay attention to the medical staff bylaws and the hospital policies at their institutions. Provisions in the medical staff bylaws can make or break a relationship with a hospital. They also can provide important protection against unilateral action by the hospital administration by requiring medical staff involvement in critical staffing decisions.

Judith Jurin Semo, Esq., is with the law firm of Squire, Sanders & Dempsey L.L.P., Washington, D.C. which serves as ASA’s legal counsel.