June 4, 2020

QUESTION:        What’s the difference between closing a department and an exclusive contract?  Are they both still legally valid?


ANSWER:          They may have a similar impact but differ in important respects. Both approaches have been generally accepted by the courts, so long as the process by which they are adopted by a hospital board is carried out carefully.  They have in common the concept that a candidate seeking an application for privileges would be advised up front that no applications will be processed except as consistent with the contract(s) or Board-adopted Medical Staff Strategic Plan (MSSP).   (It’s a good idea to develop a form letter to use in communications with those who inquire.)

Many hospitals have exclusive contracts pursuant to which one group is accountable for the quality of professional services and the smooth operation of hospital-based services.  Traditionally these contracts have involved anesthesia, emergency medicine, imaging and pathology/laboratory.  The contracts typically incorporate performance standards.  Increasingly such contracts (which may be semi-exclusive, with several groups as opposed to a single group) encompass other services such as neonatology, interventional cardiology, hospital medicine and others.

Sometimes referred to as a Plan to “close” department as a shorthand, a MSSP has typically not involved contracts but rather a board resolution and policy. A board committee reviews the community needs assessment and other data to determine how to manage medical staff growth, to promote hospital goals.  Numbers of specialists needed, based on formulas, were often identified and reviewed periodically.  That approach has morphed in more recent years to encompass considerations such as financial conflicts of interest such as investments in competing facilities.  One variation more common today is a board decision to operate a service solely through its employed physicians, or through physicians employed by an affiliated group.

Courts have generally upheld both exclusivity in contracts and MSSPs where it is clear that the process was undertaken by the Board, based on proper, documented hospital objectives, with no appearance of undue influence by any physicians who would stand to gain from reduced competition.  Indeed, there has been relatively little litigation in recent years.  MSSPs were historically adopted in an era where very few physicians were employed.  Perhaps the fact that so many physicians are now employed has led to the decline in challenges to both MSSPs and exclusive contracts.  That said, it is important for the Board to assess options and make reasonable determinations based on the hospital’s mission.  Physician input can be obtained, but avoid votes by departments or committees that could be characterized as collective action to restrain trade.  Such allegations are rare now but it remains important to follow a process to demonstrate reasonableness.  Court approval should not simply be assumed!