Rights and limitations in "exclusive provider" contracts

A column examining the ins and outs of contract issues

By Steven M. Harrisis a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column. Posted June 7, 2004.

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Physicians enter into so-called "exclusive provider" contracts with hospitals when a particular physician or, more typically, a physician practice group, has the exclusive right to exercise certain medical staff privileges in exchange for guaranteeing the hospital 24-hours-a-day, seven-days-a-week coverage for such services.

But exclusive provider contracts have been the source of litigation regarding the issue of economic credentialing. Economic credentialing occurs when hospital and medical staff privileging decisions are based on economic considerations such as the terms offered to a group practice by a hospital, rather than on traditional credentialing criteria.

While courts have ruled that hospital bylaws permit economic credentialing -- and there is no public policy that prohibits economic criteria -- exclusive provider contracts have nevertheless come under scrutiny. Still, these contracts are not going away.

The focus on economic credentialing has increased due to the impact of privileging on credentialing decisions in relation to the delivery of service, cost-control measures and other reimbursement mechanisms.

The hospital must notify the physician who no longer will practice in the designated department. Sometimes the physician is given the chance to enter into a relationship with the provider to whom the exclusive contract was given. You might decide to challenge the hospital's decision to close a department and limit your privileges if you are not offered or are unable to obtain an opportunity to provide such service under the exclusive provider contract.

Exclusive contracts should not be used to circumvent peer review procedures or medical staff bylaws by denying a member of the medical staff full due process rights. A medical staff member providing services to a hospital should not have privileges terminated without the right of a hearing, appeal and due process available to all other medical staff members.

Physicians challenging the hospital's decision to enter into an exclusive provider contract usually focus on the anticompetitive impact of the exclusive arrangement and the denial of due process for the hospital's failure to provide a hearing before terminating the physician's privileges.

While anticompetitive challenges to exclusive contracts have been unsuccessful, physicians can challenge exclusive contracts by alleging that the exclusive arrangement constitutes an unlawful restraint of trade.

To eliminate challenges to exclusive contracts based on due process, many hospitals include provisions in medical staff bylaws that specifically address the relationship among appointment, privilege and review rights in the existence or continuation of an exclusive agreement between the hospital and a specific group of physicians.

Courts have recognized that hospital bylaws create a contractual relationship between the physician and the hospital. Courts also have held that contractual rights afforded in hospital bylaws do not prevent a hospital from entering into an exclusive provider contract, nor does it guarantee that the scope of a physician's privileges will remain intact when the hospital enters into such a contract.

The relationship between physicians and hospitals in this context generates attention between the hospital's duties to its patients and its right to exercise administrative decisions that seek to carry out the hospital's responsibility to the physicians who care for the patients.

Courts have deferred to the hospital's right to conduct its business and have reasoned that, while the exclusive provider contract might have the effect of eliminating the physician's services in the area covered by the exclusive provider contract, it does not reduce or alter the physician's staff privileges as a whole. The rationale is that the physician still can work in the hospital in other capacities and work under the provider with the exclusive contract or attempt to obtain an exclusive contract later.

Some states have limited the use of exclusive provider contracts with physician groups specifically in the areas of anesthesiology, radiology and cardiology. A serious consequence to group practices is that practitioners of pain medicine are being excluded from privileges at these hospitals unless they convert to hospital-based practices and join the contracted physician group.

In Illinois, the hospital licensing regulations were amended to provide that no exclusive contract is permissible for pain management services performed by a physician licensed to practice medicine in the state.

Many hospitals have specific articles in their hospital bylaws that address exclusive provider contracts. For example, the hospital might state that it can enter into exclusive provider contracts for the performance of medical services in accordance with the procedures established in its policy manual.

The purpose of such policy is to involve medical staff leadership in the hospital's decision regarding its current exclusive provider contracts; termination of exclusive provider contracts; new exclusive provider contracts for services previously under exclusive arrangement; and exclusive contracts for services that were not previously subject to an exclusive provider contract.

Hospitals often list specific services for which they maintain exclusive provider contracts with doctor groups or an individual. For example, anesthesiology, pathology, emergency medicine, radiology, neonatology, immediate care/occupational health and radiation therapy have been consistently identified by hospitals as exclusive service providers.

A hospital will indicate in its bylaws that it annually reviews the performance of all exclusive contract holders and determines whether to continue the provision of such services on an exclusive basis.

Steven M. Harris is a partner at McDonald Hopkins in Chicago concentrating on health care law and co-author of Medical Practice Divorce. He writes the "Contract Language" column.

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