Washington Watch

Sole Source Physician Contracts - Can We Do Them?

by James L. Thorne, Esq.

Introduction
The AAEM has reviewed from time-to-time the propriety of utilizing sole source physician contracts related to its efforts to promote the creation of emergency physician-owned practice groups.

The purpose of this article is to review a United States Court of Appeals decision, issued this year that upheld the use of sole source physician contracts. This particular case involved physician anesthesiologists and nurse anesthetists (Minnesota Association of Nurse Anesthetists, et al. v. Unity Hospital, et. al., U.S. Court of Appeals 8th Circuit, No. 98-2677, 4/3/00).

The court decision appears to alleviate certain anti-trust law fears and to support the AAEM's desired approach.

Case Facts
In this case, the involved physician anesthesiologists and nurse anesthetists are licensed in the State of Minnesota to administer anesthesia during surgeries. Though they typically worked as a team during an individual surgery, anesthesiologists and nurse anesthetists do compete for the contractual right to provide anesthesia services at hospitals and other surgical facilities.

Historically in Minnesota, many hospitals employed nurse anesthetists and included the charges for their services in hospital bills, whereas anesthesiologists like other physicians, billed patients directly. Yet, the rise of managed health care plans and the accompanying focus on health-care cost containment have put financial and competitive pressures on this dual marketplace, in Minnesota (as in other locales).

Some Minnesota hospitals responded to these and other market changes by deciding to "sole-source" their anesthesia services. Here, the involved hospitals (Unity Hospital and Mercy Hospital, among others), terminated their nurse anesthetist employees and entered into exclusive contracts with groups of physician anesthesiologists (Midwest Anesthesia, P.A.) for the provision of all anesthesia services. Many of the terminated nurse anesthetists then formed Nurse Anesthesia Services, P.A. and, in turn, contracted with Midwest Anesthesia to provide nurse anesthetist services at Unity and Mercy hospitals.

Trial Court Decision and Basis for Appeal
In the initial district court action, the plaintiff nurse anesthetists attacked the exclusive contracts between the hospitals and the physician anesthesiologists on antitrust grounds. The district court granted summary judgment for the defendant hospitals, et al., concluding that the sole-source contracts were not analyzed correctly as boycotts, and that the plaintiff nurse anesthetists totally failed to demonstrate either prohibited market power or "actual, sustained adverse effects on competition." In this case, twelve nurse anesthetists and the Minnesota Association of Nurse Anesthetists appealed the district court's grant of summary judgment.

In the appeal, the plaintiff nurse anesthetists assert the sole-source contracts were part of a "grand conspiracy" by Minnesota anesthesiologists to eliminate nurse anesthetists as a class of lower-cost, equally competent competitors. The hospital defendants claim they independently decided to enter into these sole-source contracts to eliminate billing confusion and uncertainty, to significantly reduce costs, and to provide anesthesia services more efficiently. The defendant anesthesiologists denied conspiring to boycott the nurse anesthetists or to eliminate them from a marketplace in which they continue to provide the same services as before.

The Court's Reasoning for Its Decision
In the appeal, the plaintiff raises five issues. The 8th Circuit decision addresses each of the five issues as follows:

1. The sole-source contracts are per se unlawful group boycotts (because they prevent nurse anesthetists from performing anesthesia services at the defendant hospitals).

The 8th Circuit concluded that plaintiffs' theory was without merit, both legally and factually. Citing existing case law, the court stated that legally, "group boycott" is a narrow category of per se violation, "limited to cases in which firms with market power boycott suppliers or customers in order to discourage them from doing business with a competitor. Quoting from a U.S. Supreme Court decision, the 8th Circuit stated, "no boycott-related per se rule applies" to the decision "by a buyer (the hospital defendants) to purchase goods or services from one supplier (the physician anesthesiologists) rather than another." As a factual matter, the court determined that neither party to the involved exclusive dealing contracts stopped dealing with nurse anesthetists. Here, the hospitals and the anesthesiologists continued to seek out and use nurse anesthetist services, albeit on different contractual terms.

2. The joint efforts by anesthesiologists to obtain sole-source contracts from hospitals were an unlawful boycott of nurse anesthetists.

In addressing this issue, the court again stated that the plaintiffs' theory was without merit. Citing a prior Supreme Court decision (Indiana Dentists, among others), the 8th Circuit concluded that a society of professionals (for example, AAEM) will run afoul of the antitrust laws when its rules or policies result in a horizontal agreement among members that achieves an anticompetitive objective. Here, the court concluded "we see nothing wrong with a society of medical professionals counseling its members as to what form of contractual relationships with hospitals might be in their self-interest, absent evidence that the society's members then collectively and coercively used market power to accomplish their objectives."

3. The defendant hospitals "conspired" with each other to boycott nurse anesthetists.

The plaintiffs' raised this issue based on its assertion that after one of the defendant hospitals publicly announced its decision to sole-source its anesthesia services, the administrators of another defendant hospital discussed that decision with the announcing hospital. However, the court pointed out that, based on the plaintiffs' own market analysis, the two defendant hospitals are in different geographic markets. Further, non-competing hospitals have no logical motive to "conspire" with each other concerning the way each organizes the anesthesia component of its surgery services. Thus, agreeing with the trial court, the 8th Circuit concluded that the plaintiffs' failed to present sufficient evidence of conspiracy, that is, evidence that "tends to exclude the possibility that the alleged conspirators acted independently."

4. The sole-source contracts between the hospital defendants and the anesthesiologist defendants violate Section 1 of the Sherman Act.

In addressing this issue, the 8th Circuit relied heavily on a prior U.S. Supreme Court decision, Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2 (1984). The Jefferson Parish case involved an exclusive contract between a New Orleans hospital and a group of anesthesiologists to provide anesthesia services at the hospital. In Jefferson Parish, an excluded anesthesiologist challenged the agreement. The Supreme Court reversed the court of appeals decision, concluding, "this exclusive-dealing arrangement must be sustained under the (applicable) rule of reason (analysis)."

Applying the rule of reason analysis from the Jefferson Parish case, here the 8th Circuit concluded that the "plaintiffs have proved neither that the defendants possess market power, nor that their acts have caused actual detrimental effects on competition in a relevant market." Specifically, Midwest Anesthesia's membership includes less than eight percent of the areas' anesthesiologists. Further, the nurse anesthetists continue to provide anesthesia services at the defendant hospitals. Last, according to the court, "plaintiffs (nurse anesthetists) claim a right under the antitrust laws to access all hospital surgeries as independent, direct-billing professionals. That claim is without merit."

5. Patients (and their third-party insurers) have been deprived of a lower-cost alternative provider of anesthesia services.

With regard to this issue, the 8th Circuit stated that the plaintiffs failed to prove actual adverse effects on competition in the (relevant) market, such as increased prices for anesthesia services, or a decline in either the quality or quantity of such services available to surgery patients. According to the court, "absent concrete evidence of this nature, plaintiffs must prove market power in a relevant geographic market. Here, "they utterly failed to do so."

After addressing the specific issues raised, the 8th Circuit affirmed the judgment of the lower trial court and summarily mentioned the case Balaklaw v. Lovell, 14 F.3d 793, 802 (2d Cir. 1994). In its' brief mention of the Balaklaw case, the 8th Circuit concluded that "the defendants' exclusive sole-source contracts for providing anesthesia services.are entitled to the frequently expressed judicial approval of exclusive contracts for medical services."

Comment
Again, the case appears to lessen if not alleviate certain antitrust concerns that some have expressed about sole-source contracts. The AAEM has been reviewing whether or not sole-source contracts can be used in conjunction with creating emergency physician owned groups. Antitrust issues may and probably will be raised. However, this case- subject to careful review by AAEM members' respective legal counsel-may provide the legal basis for going forward with desired emergency physician owned groups.

James L. Thorne is Washington government relations counsel for AAEM. He is Vice President of the Washington, DC governmental relations firm R. Duffy Wall & Associates, Inc. He can be reached at (202) 737-0100 or thornej@RDWA.com.