The Executive Suite: Negotiating with a major competing hospital

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

Hospitals are now their major competitors
Referrals may dry up as hospitals that employ large numbers of primary care physicians steer referrals in-house
Access to hospitals and other key facilities essential to running their practice may be cut off as retaliation for competing effectively

But this does not mean hospitals and physicians are locked in mortal combat from which only one will emerge. In many instances, it can be beneficial for independent physician groups and hospitals to work together; however there are a number of key considerations to creating a successful–and legal–partnership.

The Hospital Perspective

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

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

Finding Common Ground

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

The Makings of a Strong Joint Venture

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

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

It is important to keep in mind that even a joint venture with a legitimate objective can raise antitrust issues. The Antitrust Division of the Department of Justice and the Federal Trade Commission will look for two key concerns:

Will the joint venture have market power–or too high of a market share–when the hospital and physician group pool resources?
Are there anticompetitive agreements contained within the joint venture’s framework that are unconnected to any legitimate joint venture function?

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