AAOS Now

Published 6/24/2021
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George M. Sanders, JD

Heightened Targets of Acquisition: How Orthopaedic Groups Can Stay Afloat

Hospitals have faced challenges in remaining financially viable for decades. The financial strains of the COVID-19 pandemic have caused hospital systems to incur significant losses.

Throughout 2020, hospitals were hit with a double whammy. Many were forced to significantly limit or cancel outpatient procedures and elective surgeries—the heart of profitability—while they were bleeding money treating an overflow of COVID-19 patients. Many patients were covered by Medicaid and Medicare plans that do not fully compensate for the care provided. Hospitals also had to expand intensive care unit capability and increase spending on labor, personal protective equipment, and disinfecting services.

The full extent of these losses is still unknown, but the losses for 2020 and the first quarter of 2021 could reach $300 billion. The federal government has provided massive aid during the pandemic, but those payments may not cover all of the losses hospitals have experienced to date, nor will they cover future losses from consumers who remain hesitant to go to hospitals. To offset this financial loss, hospitals may try to increase revenues by growing their market share in profitable healthcare market segments, such as orthopaedic services.

Hospitals typically have negative views toward physician-owned ambulatory surgery centers (ASCs). Now they may view their acquisition as an easy way to increase market share, reduce competition, and increase profits. As these dynamics unfold, hospitals may resort to aggressive, and possibly illegal, tactics to force ASCs into acquisitions. In other cases, ASCs may be willing to enter joint ventures with hospitals to stave off acquisition. Orthopaedic groups need to understand the antitrust laws involved, how to structure joint venture deals that toe the line, and how to act when a hospital willing to violate antitrust laws to force an acquisition jeopardizes the ASC’s future.

Options for orthopaedic groups

If a local hospital starts pressuring an orthopaedic specialty practice into an acquisition, the practice can refuse to engage with the hospital and pursue its own marketing efforts. However, if the practice chooses to engage, it has three general options:

  • negotiate/form a joint venture with the hospital
  • request an antitrust investigation
  • litigation

Option 1: negotiation

Orthopaedic groups possess all the qualities hospitals want: They perform high-profit surgeries and administer high-cost therapeutic drugs that a hospital could transform into high-profit sales under the federal 340B Drug Pricing Program. These qualities provide the group with leverage in negotiations about a possible joint venture with a hospital.

A joint venture is typically an independent entity created by the hospital and the practice to pursue a specific business goal. This method is appealing for the practice because it retains significant independence but also receives access to capital and administrative resources otherwise unavailable to it. Even if both entities agree that a joint venture makes sense, they need to structure the agreement in a way that does not prompt an antitrust challenge. If the practice and hospital are competitors, they must pay special attention to any part of the arrangement that could unreasonably harm competition or consumers, such as agreements to fix prices, allocate markets and customers, or boycott rivals.

The best time for an orthopaedic practice to enter a joint venture with a hospital is before it hires orthopaedic surgeons. Agreements between noncompeting firms are likely to raise fewer antitrust issues and be subject to less scrutiny than those between preexisting competitors. However, many hospitals have already hired orthopaedic surgeons, which does not categorically prevent joint ventures with those hospitals. Joint ventures that allow for coordinated and integrated care, bring new services into the market, and/or lower medical costs may not run afoul of antitrust laws.

On the other hand, the orthopaedic practice needs to ensure the joint venture is not a step to being acquired by the hospital. Within a joint venture, the practice should remain a viable, independent entity. An independent practice association (IPA) is a type of joint venture that might provide a practice with some level of protection. An IPA is a joint venture between physician practices that typically contain a number of different medical specialties. IPAs can create efficiencies and have a stronger negotiating position than individual practices. Although IPAs typically try to negotiate contracts with health insurers, they also can provide physicians with additional options when facing a powerful hospital. Creating and operating an IPA can raise antitrust issues, making it vital to have antitrust counsel work with the IPA’s business attorneys and consultants to ensure it does not violate antitrust laws.

Option 2: requesting an antitrust investigation

In cases where a hospital engages in predatory actions designed to force an acquisition, orthopaedic practice can file a complaint with the U.S. Department of Justice’s Antitrust Division or the Federal Trade Commission. To pursue this option, the practice must carefully prepare a position paper that the agencies will use to evaluate whether any antitrust laws were violated. If the hospital is using market power to harm competition and consumers, retaining an economist is crucial. This person can provide the research and economic analysis to build a strong narrative of market power and consumer harm.

Preparation for the complaint must also include interviews with group members and related parties on certain topics, including:

  • group structure
  • practice’s size and role in the market
  • how competition works in the market
  • relationship between the practice and hospital
  • nature of the hospital’s misconduct

This approach is a relatively low-cost option, compared to litigation, and a hospital may be more amenable to reverse course if federal agencies get involved. There is no guarantee, however, that the government will launch an investigation or that the investigation will result in a lawsuit or agreement between the hospital and the government that benefits the affected practice.

Option 3: litigation

Anticompetitive conduct that violates antitrust laws includes:

  • controlling referrals
  • organizing a group boycott of targeted practices
  • entering exclusive contracts with health insurers
  • refusing to grant privileges
  • predatory hiring

To encourage antitrust lawsuits, antitrust laws allow a plaintiff to recover attorney fees, as well as three times its lost profits, if it wins. This sounds like a promising route, but pursuing an antitrust lawsuit is lengthy and expensive and may do more harm than good to the orthopaedic group.

The right choice for your practice

The well-being of our healthcare system depends on private practice groups, which create healthy competition that can result in better options, pricing, and care for patients. When hospitals use market power to obliterate these groups, consumers, patients, and independent physicians all suffer.

If an orthopaedic ASC sees its business dwindling due to a local hospital’s actions, it has options. The quality of our healthcare system depends on it.

George M. Sanders, JD, founder and partner of the Law Offices of George M. Sanders, PC, has been a litigator for more than 30 years and concentrates his practice on complex litigation, including healthcare antitrust and civil Racketeer Influenced and Corrupt Organizations action.

Reference

  1. American Hospital Association: CARE ACT Relief Funds Have Helped Hospitals and Health System, but Are Just a Fraction of Losses. Available at: https://www.aha.org/system/files/media/file/2020/06/aha-covid19-financial-impact-short-0620.pdf. Accessed June 2, 2021.
  2. American Hospital Association: How could COVID-19 affect the financial health of hospitals in 2021? Available at: https://www.aha.org/guidesreports/2021-02-23-covid-19-2021-potential-effect-hospital-revenues. Accessed June 2, 2021.
  3. Analysis Group: Financial Impacts for Hospitals from COVID-19. Available at: https://www.analysisgroup.com/Insights/ag-feature/analysis-group-forum/forum-2020/financial-impacts-for-hospitals-from-covid-19/. Accessed June 2, 2021.