July 2004 Volume 68	Number 7

Exclusive Contracts Not Always Lawful After All?

Karin Bierstein, J.D.
Assistant Director of Governmental Affairs (Regulatory)


Hospitals may award exclusive contracts to anesthesiology groups — many state courts have espoused this principle over the years. Acknowledging that it was in the minority, the West Virginia Supreme Court recently decided that quasi-public hospitals cannot enter into exclusive contracts “that have the effect of completely excluding other physicians who have staff privileges at the hospital from the use of the hospital’s facilities.”

This split in opinions means that anesthesiologists displaced by the award of exclusives to new groups may face more sympathetic judges in their own court actions. The landscape of precedent has changed. Potential litigants should recall, however, that the ruling by the highest court in West Virginia is not binding on the lowest court in another state.

In its February 2004 decision in Kessel v. Monongalia County General Hospital Company, the West Virginia Supreme Court addressed a number of arguments that attorneys representing anesthesiology groups in exclusive contract disputes will want to consider.

Are the medical staff bylaws a contract? First, the three anesthesiologists who were no longer permitted to perform anesthesia at Monongalia General because the hospital had signed an exclusive with a new group claimed that their privileges had been reduced for reasons unrelated to clinical competency, in violation of the medical staff bylaws. The court rejected the view that medical staff bylaws constitute a contract between hospitals and physicians without express language to the contrary. Since state statutes already required the medical staff to adopt, and the hospital to approve, the bylaws, the requisite new basis (“consideration”) for a contract was lacking.

Do the due process provisions in the medical staff bylaws apply if there is no question as to clinical competence? Following the majority of courts, the Kessel court ruled that fair hearing and due process provisions in a hospital’s medical staff bylaws are not implicated unless the physician’s professional competency is at issue. There is no right to a hearing when physicians lose privileges (or simply lose access to the operating room schedule) if the reason is that the hospital sought to improve quality or efficiency by entering into a contract with another group.

Are privileges a property right? The Kessel court reviewed case law on whether membership on the hospital medical staff was a property right under the United States Constitution. In earlier decisions, the court had held that there was no such right protected by due process.

Extending its analysis, the court discussed an important distinction between private and public hospitals. Physicians who lose privileges at privately owned hospitals are not able to obtain judicial redress unless there are allegations of professional incompetence or misconduct. Even in that event, courts will only decide whether the peer-review process was conducted properly, not its outcome.

On the other hand, physicians are generally considered entitled to practice in the public or quasi-public hospitals of the state as long as they respect the law and the “reasonable” rules and regulations of those hospitals. Hospitals cannot deny or terminate privileges if to do so would be “unreasonable, arbitrary, capricious or discriminatory.”

Is it “reasonable” for public hospitals to exclude some physicians by contracting with others? Balancing the interest of trained physicians in being able to practice medicine, the discretion of hospital authorities to govern as they see fit as long as they do not act arbitrarily, and the interest of patients in choosing their own physicians, the court held that:

A public or quasi-public hospital may not enter into exclusive contracts with medical service providers that have the effect of completely excluding other physicians who have staff privileges at the hospital from the use of the hospital’s medical facilities.

“Preferential” or exclusive contracts? One of the factors in determining the reasonableness of Monongalia General’s action was the existence of “less extreme measures to solve management problems such as scheduling conflicts and repeated delays in surgery.” The court offered up the novel concept of a “preferential contract” that would differ from an exclusive contract in that other physicians with privileges could provide anesthesia (or other services) if specifically requested by a patient.

The Kessel court acknowledged “that the weight of authority appears to support the right of hospitals to execute exclusive contracts.” One important case to that effect is Mateo-Woodburn v. Fresno Community Hospital and Medical Center, which was decided by an intermediate-level California state court in 1990. Faithful readers of Michael Scott’s writings over the years will recognize the name of this decision, in which ASA filed an amicus brief. In Mateo-Woodburn, the court used a “not irrational, arbitrary, contrary to public policy or procedurally unfair” test and upheld the exclusive contract. While Kessel considered the closing of the anesthesiology department unreasonable because scheduling problems and delays could be controlled through “preferential” contracts, Mateo-Woodburn saw the scheduling issue as one of the day-to-day problems that made an exclusive arrangement “not irrational.”

Organized medicine considers limits on excluding members of the medical staff. ASA, together with the American College of Radiology, the American College of Emergency Physicians and the College of American Pathologists, introduced a resolution at the June 2004 Annual Meeting of the American Medical Association (AMA) calling upon AMA to work with the groups in protecting physicians when hospitals decide to close a department through the award of an exclusive contract. The effort would be three-pronged, supporting legislation to establish medical staff bylaws as a contract, supporting legislation to require due process protections for termination of privileges in all medical staff bylaws, and urging the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) to require due process protections in medical staff bylaws as part of the JCAHO accreditation process.

The resolution was referred to the AMA Board of Trustees for a report at the December Interim Meeting.

Source Material:

• Kessel v. Monongalia County General Hospital Company, <www.state.wv.us/wvsca/docs/spring04/31547.htm>. (Thanks to Robert E. Johnstone, M.D., for bringing this case to our attention.)

• Mateo-Woodburn v. Fresno Community Hospital and Medical Center, 221 Cal.App.3d 1169, 270 Cal.Rptr. 894 (Ct. App. 1990).

• CMS Change Request 3138, Transmittal 71, April 16, 2004, <www.cms.hhs.gov/manuals/pm_trans/R71OTN.pdf>.

Medicare Changes ‘Pain Management’ to ‘Pain Medicine’

In an April notice to local Medicare carriers, the Centers for Medicare & Medicaid Services (CMS) instructed them to obtain the latest changes to the list of Provider Taxonomy Codes. The codes to be used by pain medicine specialists have not changed, and there are no payment implications here, but it is worth noting the semantic change and the definition of “pain medicine” newly incorporated in the Provider Taxonomy Code list:

Pain Medicine is a primary medical specialty based on a distinct body of knowledge and a well-defined scope of clinical practice that is founded on science, research and education. It is concerned with the study of pain, the prevention of pain and the evaluation, treatment and rehabilitation of persons in pain. A comprehensive evaluation incorporates the physical, psychological, cognitive and socio-cultural contributions to pain. The treatment protocol may include pharmacological, invasive, behavioral, cognitive, rehabilitative and complementary strategies provided in a concurrent focused and patient specific manner.

The Pain Medicine physician often serves the patient as a frontline physician regarding their pain, but also may serve as a consultant to other physicians, direct an interdisciplinary/multidisciplinary treatment team, conduct research or advocate for the patient’s pain care with public and private agencies. The Pain Medicine physician may work in variety of settings including office, clinic, hospital, university, or governmental/public agencies.

The American Board of Pain Medicine provides Board Certification.

Source: American Academy of Pain Medicine.

We have asked CMS to note that the certification in Pain Medicine offered through the American Board of Anesthesiology is recognized by the American Board of Medical Specialties, unlike the certification noted in the description above.