When Hospitals Attack: AG, Physicians Battle Memorial Hermann

Texas Medicine Magazine Logo

Law Feature - April 2009


Tex Med . 2009;105(4):43-47.

By  Crystal Conde
Associate Editor

For Houston family physician Robert Vanzant, MD, the closing of Houston Town & Country Hospital two years ago was doubly sad. He suffered financially, and his patients lost an excellent source of medical care.

"What happened to Town & Country was a devastating blow," said Dr. Vanzant, the former president of the Harris County Medical Society who had invested $25,000 to buy one share of the hospital. "I was heavily involved in getting doctors on board. Town & Country Hospital had an excellent emergency room staff and was the first to set up a digital mammogram system in the area. We had nurses who knew our patients; it was an ideal situation."

Dr. Vanzant says patients miss Town & Country's presence in Houston.

"Everybody from the doctors to the nurses to the ancillary staff at Town & Country was happy to be there, and the patients could sense that. It was a family atmosphere where the patients felt important," he said.

All that went away, he says, when Town & Country closed.

Dr. Vanzant is one of the physician investors in Town & Country suing Memorial Hermann for its actions involving their hospital. Earlier this year, Texas Attorney General (AG) Greg Abbott sent a clear message to Texas hospital systems that attempt to drive physician-owned facilities out of business, when he filed an agreed five-year injunction against Memorial Hermann. The order bars Memorial Hermann from certain contracting practices and orders it to pay $700,000 in partial reimbursement to the attorney general's office for its two-year investigation.

The attorney general's office began investigating Memorial Hermann in 2007 after receiving antitrust complaints that it allegedly attempted to prevent other hospitals from opening competitive health care institutions in the Houston area. Town & Country, a physician-owned 99-bed hospital, was one of the hospitals allegedly harmed. It opened near Memorial Hermann's 319-bed Memorial City Hospital in 2005 but closed after failing to secure contracts with more than one major health care payment plan. Memorial Hermann Healthcare System subsequently purchased the facilities from the hospital's creditors.

The attorney general settled with Memorial Hermann Healthcare System in late January "to avoid the time, uncertainty, and expense of protracted litigation," according to the final judgment filed in Harris County District Court.

Among its lengthy terms, the injunction bars Memorial Hermann from signing any agreement with a health care payment plan that results in a boycott of competing hospitals. The hospital system also can't require or request that health care payment plans supply information on the rates they pay competing hospitals.

To read the  full terms of the injunction  [ PDF ], visit the attorney general's  Web site .

In a news release, Dan Wolterman, Memorial Hermann's president and chief executive officer, denied that the hospital unreasonably restrained Town & Country's ability to compete in the Houston market and said the attorney general didn't find that Memorial Hermann violated any law.

"Under the terms of the settlement reached, we agreed to a five-year injunction prohibiting certain contracting practices - practices Memorial Hermann has never employed," he said.

Alejandra Rodriguez, Memorial Hermann's senior media relations representative, adds that the hospital system's existing contracting practices are consistent with those outlined in the attorney general's injunction.

Attorney General Abbott said the injunction against Memorial Hermann "will preserve healthy competition and will help ensure that Houston-area patients have more hospital choices." He credits open competition among physicians in a free-market system with improving care and lowering health care prices.

The injunction is the second time this year that a state government has acted to preserve competition in markets where physicians have economic interests. The Pennsylvania Insurance Department opposed the potential merger of two health care payment plans due to concern the union could have formed a monopoly and limited patients' access to care.



AG Takes Action

Memorial Hermann is an 11-hospital system and the largest in the Houston area. Complaints filed with the attorney general contend it deterred health plans from adding Town & Country to their insurance coverage networks.

Town & Country succeeded in securing a contract only with CIGNA.

According to the attorney general's lawsuit against Memorial Hermann, the hospital system threatened to terminate its contract with CIGNA upon learning the insurer had contracted with Town & Country. Subsequently, the suit charges, Memorial Hermann renegotiated its CIGNA contract, "resulting in substantial rate concessions from CIGNA, far in excess of any reasonable foreseeable economic impact on Memorial Hermann from CIGNA's inclusion of Town & Country within its network."

The lawsuit also says Memorial Hermann threatened Aetna with a 25-percent increase in service rates if Aetna contracted with Town & Country.

At the time of the attorney general's investigation, according to the lawsuit, Memorial Hermann possessed a 20-percent market share.

Henry Allen, senior attorney for the American Medical Association's Private Sector Advocacy unit, says that unless an antitrust defendant engages in particularly anticompetitive conduct, such as price fixing, it's unusual for an attorney general to go after entities with a market share of less than 30 percent.

"This case is encouraging to the physician community because it points out there may be a state policy concern to protect the new specialty hospital entrant," Mr. Allen said. "I'm reading into this that the attorney general found the conduct to be particularly anticompetitive."

Through research on physician ownership and trends in insurer contracts, TMA's Office of the General Counsel has identified part of a consistent pattern of conduct by community hospitals against physician-owned competitors. General community hospitals engage in exclusionary conduct to thwart potential or current competition. They do so to protect their market share and to shut out from the market a competitor institution owned by physicians.

One tactic a hospital system will use is exclusive contracting, an agreement between a hospital and a health plan that the hospital will be the exclusive provider of health care services in the local area. Exclusive contracting occurs in the following forms:

  • Exclusive services arrangements in which the hospital and health plan agree that the hospital will be the exclusive provider of certain hospital services (such as orthopedics or cardiology) for a certain portion of the health plan's service area;
  • Fee penalties that increase the hospital's rates for services based on the number of physician-owned facilities a health care payment plan adds to its network; and
  • Consent arrangements that stipulate that an insurer must first obtain the hospital's permission before expanding its network to include specialty hospitals and freestanding ambulatory surgery centers that are not majority-owned by participating hospitals.

A 2004 report by the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice identified similar community-hospital anticompetitive conduct to gain a competitive edge over physician-owned specialty hospitals. Improving Health Care: A Dose of Competition explores how competition can be enhanced to increase consumer welfare and addresses how antitrust enforcement should work to protect existing and potential health care competition.

The full report is available on the  FTC Web site  [ PDF ].



Doctors File Civil Lawsuit

Like the attorney general, Dr. Vanzant and the other physicians suing Memorial Hermann allege it pressured insurance companies to avoid contracting with Town & Country.

In a private antitrust suit of this sort, Mr. Allen says the physicians must first show that the defendant hospital engaged in either monopolization or concerted conduct to unreasonably restrain trade.

"In the absence of market power that could be inferred from a large market share, the physician-owned hospital would have to show that consumers were harmed; that as a result of Town & Country's exclusion from the marketplace, patients had to pay higher prices or received a lower quality of health care," he said.

According to Ms. Rodriguez, Memorial Hermann's current market share is about 25 percent.

Houston attorney Richard Zook, JD, who represents a group of 10 Town & County physician investors, is confident in his case against Memorial Hermann, largely due to what he describes as "very incriminating" documents that illustrate the hospital system's alleged anticompetitive behavior.

One of them, he says, is the e-mail from Memorial Hermann to Aetna. In it, Memorial Hermann's chief executive officer, Mr. Wolterman, and Jeff Brownawell, the hospital's vice president of Managed Care and Governing Reporting, say the hospital system would raise its rates 25 percent on all services at all facilities if Aetna contracted with Town & Country.

According to Mr. Zook, the e-mail also is important because it indicates that Memorial Hermann told Aetna that Blue Cross and UnitedHealthcare had agreed not to contract with Town & Country.

The strategies large hospital systems undertake to reduce or even eliminate competition from physician-owned hospitals can take an emotional and financial toll on the physician investors. Mr. Zook says Town & Country physician investors are out more than $8 million and have had to pay back $4 million in personal guarantees.

Dr. Vanzant says he hopes to recoup some of the money he lost on his investment from the lawsuit and would like to see Memorial Hermann change its attitude toward physicians.

"I told Mr. Wolterman in 2003 that if he'd make a fair partnership with the doctors, Town & Country would never break ground. The response was that Memorial Hermann shut our hospital down. That doesn't sound like a partner in caring to me," he said.

A decision for the physician investors in the lawsuit may have a greater impact on antitrust law than the attorney general's order, Mr. Allen adds. A court finding of antitrust liability would set a precedent, demonstrating the plausible harm to patients that results when community hospital systems drive physician-owned hospitals out of a community.

However, Mr. Zook says the attorney general's injunction against Memorial Hermann helps validate his clients' allegations in the civil suit.

"The Texas attorney general has filed a lawsuit claiming they [Memorial Hermann] violated the antitrust laws in the same way we've alleged they violated the antitrust laws. This is the state of Texas making the same allegations we're making," he said.

Mr. Zook says his clients want to ensure Memorial Hermann and other hospital systems throughout the state cannot run physician-owned facilities out of business via anticompetitive means. The outcome of the civil suit, he says, has implications for future physician-owned hospitals.

The Texas Hospital Association reports that as of February, Texas was home to 69 physician-owned hospitals with approximately 15 pending or proposed. In 2006, the state had 58 physician-owned hospitals.

Trial in the case is set to begin in September.

Ms. Rodriguez says the hospital system looks "forward to proving in court, this fall, that Houston Town & Country Hospital failed because it was a high-risk venture that was under-capitalized and poorly executed."



Exclusive Tactics Not New

Carlos J. Cárdenas, MD, a member of the TMA Board of Trustees and an Edinburg gastroenterologist, chairs the board of Doctors Hospital at Renaissance, a physician-owned acute care hospital with 180 beds. Opened in 2003, the hospital has grown to include four freestanding imaging centers located throughout the Rio Grande Valley.

During the first three years it was open for business, Doctors Hospital encountered resistance from health care payment plans.

"When we opened as a hospital in 2003, we weren't allowed into any insurance networks at all. What happened at Town & Country was identical to what insurers tried to do to us here. Blue Cross partnered with a for-profit hospital chain in the area and tried to work out exclusive contracts that prevented Doctors Hospital from entering into the plan's network," Dr. Cárdenas said.

He says the hospital survived because the market was such that patients were willing to come to Doctors Hospital on an out-of-network basis. Blue Cross began contracting with the hospital in 2006.

At Doctors Hospital, Dr. Cárdenas says, 70 percent to 80 percent of the patients participate in Medicare or Medicaid. He adds that the hospital's unique payer mix may have contributed to its ability to thrive.

"The private insurance part of our pie is much smaller than it would be in other markets," he said. "Once we got into the Blue Cross network, other major insurers began working with us."

He says Memorial Hermann's alleged anticompetitive tactics against Town & Country were wrong, and he hopes the attorney general's injunction sends a strong message that "all hospitals need to operate on a level playing field, irrespective of ownership."

What Dr. Cárdenas and the physician investors in Town & Country experienced is nothing new.

TMA promotes responsible ownership of all health care facilities, whether owned by a physician, hospital, or other provider. The association believes physicians should fully disclose any interest in a facility to which they refer patients. TMA's policy states that physician-owned entities should adhere to all state and federal regulations; provide appropriate credentialing of physicians and clinical and support staff; perform systematic, ongoing monitoring of utilization and quality; and adhere to relevant TMA and AMA ethical guidelines including adhering to responsible ownership policy.

According to Arlo Weltge, MD, an emergency medicine physician in Houston and chair of TMA's Ad Hoc Committee on Physician/Hospital Relations, all hospitals, regardless of ownership, have a responsibility to provide quality care in an effective manner.

"Hospitals have a duty to meet community needs, address emergency patients in a fair and equitable manner, as well as act in the patient's interest and in the community's interest," he said.

Crystal Conde can be reached by telephone at (800) 880-1300, ext. 1385, or (512) 370-1385; by fax at (512) 370-1629; or by e-mail at  Crystal Conde .



April 2009 Texas Medicine Contents
Texas Medicine Main Page