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Exclusive Contracts in the Hospital Setting: A Two-Edged Sword
Exclusive Contracts in the Hospital Setting: A Two-Edged Sword Part 2: Pros and Cons, Avoidance Strategies, and Negotiating Tips Robert M. Portman, JD
Hospitals routinely enter into contracts with radiology groups for the right to be the exclusive providers of radiologic services at the facilities in exchange for the groups’ agreeing to provide and manage all aspects of those services within the hospitals. These exclusive contracts generally result in radiology departments and associated equipment being closed off to physicians who are not part of the contracting groups. Although exclusive contracts offer obvious benefits to the physicians who receive them and obvious disadvantages for those who are excluded, they also present pitfalls for physicians in the chosen group. Part 1 of this article discussed the legal issues raised by exclusive contracts. Part 2 weighs the practical advantages and disadvantages of exclusive contracts for physicians covered and not covered by such contracts and strategies for avoiding them, as well as provisions that can be included in medical staff bylaws to protect physicians from the automatic termination of privileges when a hospital enters into or terminates an exclusive contract. The remainder of the article provides tips on specific provisions of exclusive contracts that should be included or avoided. Key Words: Exclusive contracts, clean sweep, medical staff bylaws, termination, scope of services J Am Coll Radiol 2007;4:401-405. Copyright © 2007 American College of Radiology
Exclusive contracts between hospitals and hospital-based physicians have become a staple in hospital management and operations. These contracts give individuals or groups of physicians the right to be the exclusive providers of medical services at facilities in exchange for the physicians or groups agreeing to provide and manage all aspects of those services within the hospitals. Exclusive contracts typically result in the closing of one or more hospital departments or the restriction of access to certain equipment to the contracting physicians.1 Exclusive contracts are generally considered to be good for physicians who have them and bad for those excluded by them. In fact, exclusive contracts can be a two-edged sword. Although such contracts offer obvious benefits to Powers Pyles Sutter & Verville, PC, Washington, DC. Corresponding author and reprints: Robert M. Portman, JD, Powers, Pyles, Sutter & Verville, 1501 M Street, NW, Washington, DC 20005; e-mail: [email protected]. 1 Exclusive contracts are often characterized as a form of economic credentialing. This article does not address other forms of economic credentialing. The American Medical Association [1], which opposes the practice, defines economic credentialing as “the use of economic criteria unrelated to quality of care or professional competency in determining qualifications for initial or continuing medical staff memberships or privileges.” © 2007 American College of Radiology 0091-2182/07/$32.00 ● DOI 10.1016/j.jacr.2006.09.014
the physicians who receive them and obvious disadvantages for those who are excluded, they also present pitfalls for physicians in the chosen group. Part 1 of this article discussed the legal issues raised by exclusive contracts. This part weighs the advantages and disadvantages of exclusive contracts for physicians covered and not covered by such contracts and strategies for avoiding them, as well as provisions that can be included in medical staff bylaws to protect physicians from the automatic termination of privileges when a hospital enters into or ends an exclusive contract. The remainder of the article provides tips on specific provisions of exclusive contracts that should be included or avoided. EXCLUSIVE CONTRACTS: PROS AND CONS Although obtaining an exclusive contract generally seems to be a sensible goal for hospital-based radiologists and other types of physicians, such contracts have downsides for the contracting physicians, as well as the obvious disadvantages for excluded physicians. 401
402 Journal of the American College of Radiology/ Vol. 4 No. 6 June 2007
Advantages of Exclusive Contracts The most obvious benefit of an exclusive contract is that it gives the contracting group guaranteed access to all of the hospital’s patients in need of the services covered by the agreement. It also typically excludes physicians of the same specialty who are not part of the group from performing services in the relevant department and sometimes throughout the entire hospital, depending on the scope of services covered by the agreement. These are critical advantages in an era of decreasing reimbursement. Having an exclusive contract also provides job security, because obtaining an agreement allows the physicians in a group to plan on being in the same place for at least the duration of the agreement. In addition, the contracting physicians are able to maintain their referral relationships with other physicians and, where applicable, avoid disrupting long-term relationships with patients.
and the initial provider’s contract expressly stated that the physician’s privileges would be terminated upon termination of the contract. Other Disadvantages In addition to clean-sweep provisions, hospitals typically require contracting physicians to agree to other onerous terms, including but not limited to: ●
●
● ● ●
Disadvantages: The Clean Sweep Exclusive contracts are usually bad news for physicians who are not in the groups that receive contracts. As noted in the discussion of legal issues in part 1, hospitals typically will seek to summarily terminate their privileges or restrict their access to the relevant facilities as part of the process of the closing of the departments. In some cases, excluded physicians may be forced to move to other locations to find steady work. But being on the winning side is not always all it is cracked up to be. Entering into exclusive agreements necessarily requires contracting physicians to give up certain rights. Most significantly, virtually all hospitals now require contracting physicians to agree to clean-sweep provisions. Clean-sweep clauses require the physicians to agree that their clinical privileges (and sometimes medical staff memberships as well) will automatically terminate when contracts expire or are terminated. The clauses also require physicians to agree to waive any rights they would otherwise have under the medical staff bylaws, including the right not to have one’s privileges restricted for reasons other than competency or professional conduct and the right to due process before such restrictions may be imposed. As the case law demonstrates, the waiver of these rights can leave physicians in contracting groups in a more vulnerable position than their excluded colleagues. Claims for breach of contract or failure to provide a fair hearing are generally not available if a physician or the physician’s group has agreed to an exclusive contract with a clean-sweep provision. Indeed, as previously discussed, courts have routinely upheld the termination of privileges where one exclusive provider is replaced by another
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mandatory participation with all third-party payers and managed care plans with which the hospitals have agreements;2 covenants not to perform medical services within specified distances from the hospitals for 2 or more years after the termination or expiration of the contracts; terms of no more than 2 or 3 years3; broad termination rights for the hospitals, including, in some cases, the right to terminate without cause; one-sided indemnification provisions requiring physicians to reimburse and hold harmless hospitals for claims against hospitals arising out of acts or omissions of the group without reciprocal or mutual indemnification from the hospitals; required payments or contributions for services that used to or should be provided free by the hospitals (which could violate the federal antikickback statute); and gag clauses or broad confidentiality provisions regarding the terms of agreements and information shared thereunder.
Thus, physicians who enter into exclusive contracts often must sell their professional souls to gain what may be temporary and somewhat illusory benefits. In many cases, physicians would be better off if they never entered into exclusive contracts in the first place. Of course, physicians rarely have a choice in the matter. They either must accept the exclusive contracts or face the financially ruinous prospect of losing their privileges and access to the hospital. The groups best positioned to deal with this Hobson’s choice are those with the greatest bargaining power: those that have alternative sources of income to fall back on through ownership of or contracts with freestanding imaging centers independent of hospitals. Physicians
2
The adverse effects of such provisions are magnified as managed care rates are ratcheted down. Many managed care organizations are putting financial pressure on hospitals to force their hospital-based physicians to accept unreasonably low rates as a condition of securing or maintaining exclusive contracts with the hospitals. As noted below and in Part I of this article, such requirements could violate the federal antikickback statute. 3 Nonprofit hospitals that seek to issue tax-exempt bonds typically will take the position that that federal tax laws prevent them from entering into management contracts with private entities that exceed 2 or 3 years, depending on the specific circumstances [2].
Portman/Exclusive Contracts in the Hospital Setting 403
who do not have these fallback options must be more creative about devising strategies for heading off or maneuvering within closed departments. STRATEGIES FOR AVOIDING EXCLUSIVE CONTRACTS As discussed in part 1, from a legal perspective, hospitalbased physicians, such as radiologists, pathologists, and anesthesiologists, often would be better off with open departments. The same can be said with even greater confidence for physicians who are not hospital based and prefer to practice at multiple hospitals. For physicians who would favor that result, the medical staff bylaws are the key to avoiding exclusive contracts. Ideally, the bylaws would be amended to preclude hospitals from adversely affecting staff membership or clinical privileges, including access to facilities and technical personnel, of any member of the medical staff based solely on the awarding of a contract or on the basis of other economic criteria. The effect of such a provision would be to prevent hospitals from truly closing any of their departments, because “excluded” physicians would still be able to use the facilities. Another less direct and less effective strategy for discouraging exclusive contracts is to include language in the bylaws preventing the reduction of staff membership or clinical privileges without adequate notice and fair hearing. A bylaws provision that precludes any adverse action against staff or clinical privileges except on the basis of issues relating to competence, professional conduct, or other criteria related to patient care would make it even more difficult to terminate the privileges of physicians outside a contracting group. However, this strategy is less effective than an anti-clean-sweep provision because, as previously shown, some courts have denied fair hearings, even when the bylaws require them, on the grounds that such hearings are futile when the bylaws give hospitals the authority to enter into exclusive contracts. So ideally, the bylaws would not authorize hospitals to close departments and enter into exclusive contracts. At a minimum, the bylaws should include a provision that requires the hospital to consult with or, even better, obtain the approval of the medical staff before closing departments. Of course, physicians do not have complete control over the bylaws. Most medical staff bylaws require approval by hospitals’ boards of trustees for any amendments. If a board and its legal counsel are even half awake, they would refuse to agree to any changes in the medical staff bylaws that prevent the hospital from entering into a true exclusive arrangement. In fact, many hospitals have successfully engineered amendments to medical staff by-
laws that specifically authorize exclusive contractual relationships and provide for the automatic termination of clinical privileges of any physicians covered by exclusive contracts if those agreements expire or are terminated. Physicians should also be on the lookout for changes in hospitals’ bylaws that may allow the hospitals to take actions not permitted under the medical staff bylaws. Despite the obstacles, hospital-based physicians and others likely to be adversely affected by exclusive contracts should be active participants in the bylaw review and amendment process to protect their rights against the loss of privileges in the event hospitals try to close particular departments. Of course, any protections that are included in the bylaws may have a negative effect on physicians who desire to enter into exclusive contracts. To the extent the above protections make it harder to terminate the privileges of like specialists outside a group, they reduce the value and desirability of an exclusive contract. NEGOTIATING PRO-PHYSICIAN CONTRACTS If the closing of a particular department is inevitable, and a group of hospital-based physicians (or other physicians) is interested in being the exclusive provider of medical services for a particular department, it should try to avoid certain provisions, or at least seek language that will soften their adverse impact. On the flip side, physicians would be well advised to negotiate for certain favorable terms in any exclusive contract.4 A contracting group’s success in negotiating a favorable agreement will depend primarily on its relative bargaining power, its relationship with the hospital administration and board of trustees, and, most important, its relationship with the other members of the medical staff. The stronger these relationships are, the more likely it is that the hospital will be flexible in negotiating the contract. However, the contracting group’s greatest leverage will be its ability to walk away from the deal without suffering significant economic consequences. For hospital-based physicians, this means having relationships with other hospitals or interests in outpatient facilities. For other physicians, having a strong patient base that can be moved to another hospital would be critical. The terms that should be avoided or modified include the following: ●
4
Clean sweep: As noted above, clean-sweep provisions require physicians to give up their staff membership or clinical privileges, and any due process rights associated with their membership and privileges, if either
For additional discussion on exclusive hospital-physician contracts, see Blau [3].
404 Journal of the American College of Radiology/ Vol. 4 No. 6 June 2007
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side terminates the contract. At a minimum, contracting physicians should seek to tie such a provision to the awarding of a contract to another group rather than to the termination of the agreement. This means that the physicians’ privileges will not be automatically terminated if the contract expires and the hospital takes several months or even years to find another group with which to contract. Mandatory managed care participation: If a hospital requires a group to participate in all of its managed care contracts, the physicians should at least maintain the right to separately negotiate with all managed care plans with which the hospital contracts and should not be required to agree to unreasonable or unlawful terms. They also should fight for the right to balance bill under managed care agreements if rates fall below a specified threshold. The group should be permitted a reasonable time to conduct such negotiations (eg, at least 90 days). Noncompete clause: It is all too common for a contract to include a covenant not to perform certain medical services within a specified distance from a hospital for a duration of 2 or more years after the termination or expiration of the contract. This provision should grandfather any arrangements or investments that the physicians have at the time the contract is signed. It also must be reasonable as to the duration and geographic scope of the noncompete clause. Termination: Often, exclusive contracts include broad termination rights for hospitals, including, in some cases, the right to terminate without cause. A contracting group should seek to negotiate a provision for termination “for cause” only (ie, for a specified reason). Proper cause typically would be a breach of contract, material change in ownership of the group, or the imposition of Medicare or other sanctions against the group. If a “without cause” termination clause cannot be avoided, the group should negotiate for as long a notice period as possible (eg, 6 months to 1 year). Disciplinary actions taken against a single physician normally should not be grounds for termination of the contract for an entire group. However, it is common for hospitals to require individual physicians not to be permitted to provide services under the contract if they lose their licenses or are otherwise disciplined. Indemnification: Physicians should beware of onesided indemnification provisions requiring a group to reimburse and hold harmless a hospital for claims against the hospital arising out of acts or omissions of the group without providing a reciprocal or mutual indemnification from the hospital protecting the group against the hospital’s acts or omission. The contracting group must check with its insurance carrier to
●
determine whether it can provide a contractual indemnification. Kickbacks: A required payment or contribution for services that used to or should be provided for free by a hospital may be in violation of the federal antikickback statute and should be avoided.
Some of the terms for which physicians should actively negotiate include the following: ●
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●
●
●
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●
Exclusive provider: a clear statement that a contracting group is the exclusive provider of specified services throughout the hospital, not just in the closed department; otherwise, competing specialists will still be able to provide services covered by the agreement in other parts of the hospital. Scope of services: a broad but clear definition of services covered in the agreement and a narrow carve-out for services not covered. The definition of services will determine the scope of the contract. A narrow definition or a broad carve-out for excluded services can significantly reduce the value of the contract. To the extent feasible, the contract should cover future as well as current services and modalities. Right of first refusal: Where appropriate, the contracting physicians should have the right of first refusal on all new opportunities to provide services covered by the agreement at local facilities in which the hospital is owner or part owner. This is often presented by the contracting group as a quid pro quo for agreeing to a covenant not to compete. The group can also try to negotiate for a “right of first negotiation” on any renewal of the exclusive contract [3] but it is unlikely that most hospitals would agree to this. Term: The contracting group would prefer as long a term as possible. As previously noted, most nonprofit hospitals, however, will not agree to more than a 3-year term because of limitations imposed by the Internal Revenue Service on hospitals that issue tax exempt bonds. Alternatively, physicians should negotiate for long notice periods before termination (to allow them time to find other arrangements) and an “evergreen clause” providing for the automatic renewal of the agreement unless notice of nonrenewal is given 60 to 90 days before the expiration date of the contract. Stipend: The contracting physicians should ask for a fair market value payment or stipend from the hospital for administrative and teaching services. Income guarantees: When possible and appropriate, the physicians should seek income guarantees for managed care participation. Billing and other administrative services: The contract should describe how the parties’ respective services will be billed (eg, each will bill for its own services, or the hospital will bill globally and reimburse the group for
Portman/Exclusive Contracts in the Hospital Setting 405
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its professional services). The contract should also specify whether the hospital or the group will be responsible for transcription and other administrative services. Facilities and equipment: The hospital should provide the group with appropriate facilities and equipment. The group should negotiate for a say in what kind of equipment is purchased and the timing of such purchases. Typically, the hospital will provide hospitalbased physicians with the use of office space and equipment free of charge, but this may be a point of negotiation. Any payments required of the contracting group must not exceed fair market value. Anti-clean sweep: Ideally, the physicians would want the opposite of a clean sweep: a provision that gives them explicit protection for their privileges and access to equipment even if the hospital terminates the agreement and enters into an exclusive contract with another group. The chances of the hospital agreeing to such a provision in this day and age are somewhere between slim and none, but it can’t hurt to try. Alternative dispute resolution: For the most part, provisions requiring arbitration or mediation of disputes will lead to faster and less expensive resolutions than litigation. Health Insurance Portability and Accountability Act patient privacy: The parties may want to include a provision stating that they are part of an organized health care arrangement under the Health Insurance Portability and Accountability Act’s patient privacy regula-
tions. This is significant because it means that a radiology group would not need to issue its own patient privacy notice and adopt separate compliance procedures; rather, it could rely on the hospital’s notice of privacy practices and follow the hospital’s compliance procedures. This would be particularly beneficial for groups that practice only in hospitals. Those that have office-based practices may want to use their own notice-of-privacy practices and compliance procedures. Whether the hospital would agree to that could become a separate point of discussion. CONCLUSION These are some of the more important terms to be on the lookout for in reviewing and negotiating an exclusive contract. A contracting group’s success in negotiating a favorable agreement will depend primarily on its relative bargaining power, its relationship with the hospital administration and board of trustees, and, most important, its relationship with the other members of the medical staff. The same factors are of critical importance to physicians seeking to avoid the closing of a department. REFERENCES 1. American Medical Association. Economic credentialing. Available at: http://www.ama-assn.org/ama/pub/category/10919.html. Accessed May 6, 2007. 2. Internal Revenue Service. IRS revenue procedure 97-13, 1997-1 C.B. 632. 3. Blau ML. Exclusive hospital-based service agreements: what radiologists need to know. J Am Coll Radiol 2004;1:467-77.
Hospitals routinely enter into contracts with radiology groups for the right to be the exclusive providers of radiologic services at the facilities in exchange for the groups’ agreeing to provide and manage all aspects of those services within the hospitals. These exclusive contracts generally result in radiology departments and associated equipment being closed off to physicians who are not part of the contracting groups. Although exclusive contracts offer obvious benefits to the physicians who receive them and obvious disadvantages for those who are excluded, they also present pitfalls for physicians in the chosen group. Part 1 of this article discussed the legal issues raised by exclusive contracts. Part 2 weighs the practical advantages and disadvantages of exclusive contracts for physicians covered and not covered by such contracts and strategies for avoiding them, as well as provisions that can be included in medical staff bylaws to protect physicians from the automatic termination of privileges when a hospital enters into or terminates an exclusive contract. The remainder of the article provides tips on specific provisions of exclusive contracts that should be included or avoided. Key Words: Exclusive contracts, clean sweep, medical staff bylaws, termination, scope of services J Am Coll Radiol 2007;4:401-405. Copyright © 2007 American College of Radiology
Exclusive contracts between hospitals and hospital-based physicians have become a staple in hospital management and operations. These contracts give individuals or groups of physicians the right to be the exclusive providers of medical services at facilities in exchange for the physicians or groups agreeing to provide and manage all aspects of those services within the hospitals. Exclusive contracts typically result in the closing of one or more hospital departments or the restriction of access to certain equipment to the contracting physicians.1 Exclusive contracts are generally considered to be good for physicians who have them and bad for those excluded by them. In fact, exclusive contracts can be a two-edged sword. Although such contracts offer obvious benefits to Powers Pyles Sutter & Verville, PC, Washington, DC. Corresponding author and reprints: Robert M. Portman, JD, Powers, Pyles, Sutter & Verville, 1501 M Street, NW, Washington, DC 20005; e-mail: [email protected]. 1 Exclusive contracts are often characterized as a form of economic credentialing. This article does not address other forms of economic credentialing. The American Medical Association [1], which opposes the practice, defines economic credentialing as “the use of economic criteria unrelated to quality of care or professional competency in determining qualifications for initial or continuing medical staff memberships or privileges.” © 2007 American College of Radiology 0091-2182/07/$32.00 ● DOI 10.1016/j.jacr.2006.09.014
the physicians who receive them and obvious disadvantages for those who are excluded, they also present pitfalls for physicians in the chosen group. Part 1 of this article discussed the legal issues raised by exclusive contracts. This part weighs the advantages and disadvantages of exclusive contracts for physicians covered and not covered by such contracts and strategies for avoiding them, as well as provisions that can be included in medical staff bylaws to protect physicians from the automatic termination of privileges when a hospital enters into or ends an exclusive contract. The remainder of the article provides tips on specific provisions of exclusive contracts that should be included or avoided. EXCLUSIVE CONTRACTS: PROS AND CONS Although obtaining an exclusive contract generally seems to be a sensible goal for hospital-based radiologists and other types of physicians, such contracts have downsides for the contracting physicians, as well as the obvious disadvantages for excluded physicians. 401
402 Journal of the American College of Radiology/ Vol. 4 No. 6 June 2007
Advantages of Exclusive Contracts The most obvious benefit of an exclusive contract is that it gives the contracting group guaranteed access to all of the hospital’s patients in need of the services covered by the agreement. It also typically excludes physicians of the same specialty who are not part of the group from performing services in the relevant department and sometimes throughout the entire hospital, depending on the scope of services covered by the agreement. These are critical advantages in an era of decreasing reimbursement. Having an exclusive contract also provides job security, because obtaining an agreement allows the physicians in a group to plan on being in the same place for at least the duration of the agreement. In addition, the contracting physicians are able to maintain their referral relationships with other physicians and, where applicable, avoid disrupting long-term relationships with patients.
and the initial provider’s contract expressly stated that the physician’s privileges would be terminated upon termination of the contract. Other Disadvantages In addition to clean-sweep provisions, hospitals typically require contracting physicians to agree to other onerous terms, including but not limited to: ●
●
● ● ●
Disadvantages: The Clean Sweep Exclusive contracts are usually bad news for physicians who are not in the groups that receive contracts. As noted in the discussion of legal issues in part 1, hospitals typically will seek to summarily terminate their privileges or restrict their access to the relevant facilities as part of the process of the closing of the departments. In some cases, excluded physicians may be forced to move to other locations to find steady work. But being on the winning side is not always all it is cracked up to be. Entering into exclusive agreements necessarily requires contracting physicians to give up certain rights. Most significantly, virtually all hospitals now require contracting physicians to agree to clean-sweep provisions. Clean-sweep clauses require the physicians to agree that their clinical privileges (and sometimes medical staff memberships as well) will automatically terminate when contracts expire or are terminated. The clauses also require physicians to agree to waive any rights they would otherwise have under the medical staff bylaws, including the right not to have one’s privileges restricted for reasons other than competency or professional conduct and the right to due process before such restrictions may be imposed. As the case law demonstrates, the waiver of these rights can leave physicians in contracting groups in a more vulnerable position than their excluded colleagues. Claims for breach of contract or failure to provide a fair hearing are generally not available if a physician or the physician’s group has agreed to an exclusive contract with a clean-sweep provision. Indeed, as previously discussed, courts have routinely upheld the termination of privileges where one exclusive provider is replaced by another
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mandatory participation with all third-party payers and managed care plans with which the hospitals have agreements;2 covenants not to perform medical services within specified distances from the hospitals for 2 or more years after the termination or expiration of the contracts; terms of no more than 2 or 3 years3; broad termination rights for the hospitals, including, in some cases, the right to terminate without cause; one-sided indemnification provisions requiring physicians to reimburse and hold harmless hospitals for claims against hospitals arising out of acts or omissions of the group without reciprocal or mutual indemnification from the hospitals; required payments or contributions for services that used to or should be provided free by the hospitals (which could violate the federal antikickback statute); and gag clauses or broad confidentiality provisions regarding the terms of agreements and information shared thereunder.
Thus, physicians who enter into exclusive contracts often must sell their professional souls to gain what may be temporary and somewhat illusory benefits. In many cases, physicians would be better off if they never entered into exclusive contracts in the first place. Of course, physicians rarely have a choice in the matter. They either must accept the exclusive contracts or face the financially ruinous prospect of losing their privileges and access to the hospital. The groups best positioned to deal with this Hobson’s choice are those with the greatest bargaining power: those that have alternative sources of income to fall back on through ownership of or contracts with freestanding imaging centers independent of hospitals. Physicians
2
The adverse effects of such provisions are magnified as managed care rates are ratcheted down. Many managed care organizations are putting financial pressure on hospitals to force their hospital-based physicians to accept unreasonably low rates as a condition of securing or maintaining exclusive contracts with the hospitals. As noted below and in Part I of this article, such requirements could violate the federal antikickback statute. 3 Nonprofit hospitals that seek to issue tax-exempt bonds typically will take the position that that federal tax laws prevent them from entering into management contracts with private entities that exceed 2 or 3 years, depending on the specific circumstances [2].
Portman/Exclusive Contracts in the Hospital Setting 403
who do not have these fallback options must be more creative about devising strategies for heading off or maneuvering within closed departments. STRATEGIES FOR AVOIDING EXCLUSIVE CONTRACTS As discussed in part 1, from a legal perspective, hospitalbased physicians, such as radiologists, pathologists, and anesthesiologists, often would be better off with open departments. The same can be said with even greater confidence for physicians who are not hospital based and prefer to practice at multiple hospitals. For physicians who would favor that result, the medical staff bylaws are the key to avoiding exclusive contracts. Ideally, the bylaws would be amended to preclude hospitals from adversely affecting staff membership or clinical privileges, including access to facilities and technical personnel, of any member of the medical staff based solely on the awarding of a contract or on the basis of other economic criteria. The effect of such a provision would be to prevent hospitals from truly closing any of their departments, because “excluded” physicians would still be able to use the facilities. Another less direct and less effective strategy for discouraging exclusive contracts is to include language in the bylaws preventing the reduction of staff membership or clinical privileges without adequate notice and fair hearing. A bylaws provision that precludes any adverse action against staff or clinical privileges except on the basis of issues relating to competence, professional conduct, or other criteria related to patient care would make it even more difficult to terminate the privileges of physicians outside a contracting group. However, this strategy is less effective than an anti-clean-sweep provision because, as previously shown, some courts have denied fair hearings, even when the bylaws require them, on the grounds that such hearings are futile when the bylaws give hospitals the authority to enter into exclusive contracts. So ideally, the bylaws would not authorize hospitals to close departments and enter into exclusive contracts. At a minimum, the bylaws should include a provision that requires the hospital to consult with or, even better, obtain the approval of the medical staff before closing departments. Of course, physicians do not have complete control over the bylaws. Most medical staff bylaws require approval by hospitals’ boards of trustees for any amendments. If a board and its legal counsel are even half awake, they would refuse to agree to any changes in the medical staff bylaws that prevent the hospital from entering into a true exclusive arrangement. In fact, many hospitals have successfully engineered amendments to medical staff by-
laws that specifically authorize exclusive contractual relationships and provide for the automatic termination of clinical privileges of any physicians covered by exclusive contracts if those agreements expire or are terminated. Physicians should also be on the lookout for changes in hospitals’ bylaws that may allow the hospitals to take actions not permitted under the medical staff bylaws. Despite the obstacles, hospital-based physicians and others likely to be adversely affected by exclusive contracts should be active participants in the bylaw review and amendment process to protect their rights against the loss of privileges in the event hospitals try to close particular departments. Of course, any protections that are included in the bylaws may have a negative effect on physicians who desire to enter into exclusive contracts. To the extent the above protections make it harder to terminate the privileges of like specialists outside a group, they reduce the value and desirability of an exclusive contract. NEGOTIATING PRO-PHYSICIAN CONTRACTS If the closing of a particular department is inevitable, and a group of hospital-based physicians (or other physicians) is interested in being the exclusive provider of medical services for a particular department, it should try to avoid certain provisions, or at least seek language that will soften their adverse impact. On the flip side, physicians would be well advised to negotiate for certain favorable terms in any exclusive contract.4 A contracting group’s success in negotiating a favorable agreement will depend primarily on its relative bargaining power, its relationship with the hospital administration and board of trustees, and, most important, its relationship with the other members of the medical staff. The stronger these relationships are, the more likely it is that the hospital will be flexible in negotiating the contract. However, the contracting group’s greatest leverage will be its ability to walk away from the deal without suffering significant economic consequences. For hospital-based physicians, this means having relationships with other hospitals or interests in outpatient facilities. For other physicians, having a strong patient base that can be moved to another hospital would be critical. The terms that should be avoided or modified include the following: ●
4
Clean sweep: As noted above, clean-sweep provisions require physicians to give up their staff membership or clinical privileges, and any due process rights associated with their membership and privileges, if either
For additional discussion on exclusive hospital-physician contracts, see Blau [3].
404 Journal of the American College of Radiology/ Vol. 4 No. 6 June 2007
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side terminates the contract. At a minimum, contracting physicians should seek to tie such a provision to the awarding of a contract to another group rather than to the termination of the agreement. This means that the physicians’ privileges will not be automatically terminated if the contract expires and the hospital takes several months or even years to find another group with which to contract. Mandatory managed care participation: If a hospital requires a group to participate in all of its managed care contracts, the physicians should at least maintain the right to separately negotiate with all managed care plans with which the hospital contracts and should not be required to agree to unreasonable or unlawful terms. They also should fight for the right to balance bill under managed care agreements if rates fall below a specified threshold. The group should be permitted a reasonable time to conduct such negotiations (eg, at least 90 days). Noncompete clause: It is all too common for a contract to include a covenant not to perform certain medical services within a specified distance from a hospital for a duration of 2 or more years after the termination or expiration of the contract. This provision should grandfather any arrangements or investments that the physicians have at the time the contract is signed. It also must be reasonable as to the duration and geographic scope of the noncompete clause. Termination: Often, exclusive contracts include broad termination rights for hospitals, including, in some cases, the right to terminate without cause. A contracting group should seek to negotiate a provision for termination “for cause” only (ie, for a specified reason). Proper cause typically would be a breach of contract, material change in ownership of the group, or the imposition of Medicare or other sanctions against the group. If a “without cause” termination clause cannot be avoided, the group should negotiate for as long a notice period as possible (eg, 6 months to 1 year). Disciplinary actions taken against a single physician normally should not be grounds for termination of the contract for an entire group. However, it is common for hospitals to require individual physicians not to be permitted to provide services under the contract if they lose their licenses or are otherwise disciplined. Indemnification: Physicians should beware of onesided indemnification provisions requiring a group to reimburse and hold harmless a hospital for claims against the hospital arising out of acts or omissions of the group without providing a reciprocal or mutual indemnification from the hospital protecting the group against the hospital’s acts or omission. The contracting group must check with its insurance carrier to
●
determine whether it can provide a contractual indemnification. Kickbacks: A required payment or contribution for services that used to or should be provided for free by a hospital may be in violation of the federal antikickback statute and should be avoided.
Some of the terms for which physicians should actively negotiate include the following: ●
●
●
●
●
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Exclusive provider: a clear statement that a contracting group is the exclusive provider of specified services throughout the hospital, not just in the closed department; otherwise, competing specialists will still be able to provide services covered by the agreement in other parts of the hospital. Scope of services: a broad but clear definition of services covered in the agreement and a narrow carve-out for services not covered. The definition of services will determine the scope of the contract. A narrow definition or a broad carve-out for excluded services can significantly reduce the value of the contract. To the extent feasible, the contract should cover future as well as current services and modalities. Right of first refusal: Where appropriate, the contracting physicians should have the right of first refusal on all new opportunities to provide services covered by the agreement at local facilities in which the hospital is owner or part owner. This is often presented by the contracting group as a quid pro quo for agreeing to a covenant not to compete. The group can also try to negotiate for a “right of first negotiation” on any renewal of the exclusive contract [3] but it is unlikely that most hospitals would agree to this. Term: The contracting group would prefer as long a term as possible. As previously noted, most nonprofit hospitals, however, will not agree to more than a 3-year term because of limitations imposed by the Internal Revenue Service on hospitals that issue tax exempt bonds. Alternatively, physicians should negotiate for long notice periods before termination (to allow them time to find other arrangements) and an “evergreen clause” providing for the automatic renewal of the agreement unless notice of nonrenewal is given 60 to 90 days before the expiration date of the contract. Stipend: The contracting physicians should ask for a fair market value payment or stipend from the hospital for administrative and teaching services. Income guarantees: When possible and appropriate, the physicians should seek income guarantees for managed care participation. Billing and other administrative services: The contract should describe how the parties’ respective services will be billed (eg, each will bill for its own services, or the hospital will bill globally and reimburse the group for
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its professional services). The contract should also specify whether the hospital or the group will be responsible for transcription and other administrative services. Facilities and equipment: The hospital should provide the group with appropriate facilities and equipment. The group should negotiate for a say in what kind of equipment is purchased and the timing of such purchases. Typically, the hospital will provide hospitalbased physicians with the use of office space and equipment free of charge, but this may be a point of negotiation. Any payments required of the contracting group must not exceed fair market value. Anti-clean sweep: Ideally, the physicians would want the opposite of a clean sweep: a provision that gives them explicit protection for their privileges and access to equipment even if the hospital terminates the agreement and enters into an exclusive contract with another group. The chances of the hospital agreeing to such a provision in this day and age are somewhere between slim and none, but it can’t hurt to try. Alternative dispute resolution: For the most part, provisions requiring arbitration or mediation of disputes will lead to faster and less expensive resolutions than litigation. Health Insurance Portability and Accountability Act patient privacy: The parties may want to include a provision stating that they are part of an organized health care arrangement under the Health Insurance Portability and Accountability Act’s patient privacy regula-
tions. This is significant because it means that a radiology group would not need to issue its own patient privacy notice and adopt separate compliance procedures; rather, it could rely on the hospital’s notice of privacy practices and follow the hospital’s compliance procedures. This would be particularly beneficial for groups that practice only in hospitals. Those that have office-based practices may want to use their own notice-of-privacy practices and compliance procedures. Whether the hospital would agree to that could become a separate point of discussion. CONCLUSION These are some of the more important terms to be on the lookout for in reviewing and negotiating an exclusive contract. A contracting group’s success in negotiating a favorable agreement will depend primarily on its relative bargaining power, its relationship with the hospital administration and board of trustees, and, most important, its relationship with the other members of the medical staff. The same factors are of critical importance to physicians seeking to avoid the closing of a department. REFERENCES 1. American Medical Association. Economic credentialing. Available at: http://www.ama-assn.org/ama/pub/category/10919.html. Accessed May 6, 2007. 2. Internal Revenue Service. IRS revenue procedure 97-13, 1997-1 C.B. 632. 3. Blau ML. Exclusive hospital-based service agreements: what radiologists need to know. J Am Coll Radiol 2004;1:467-77.