Specialty hospital claims conspiracy to drive it to close

A lawsuit illuminates tensions between such facilities and community hospitals as they compete for patients.

By Katherine Vogt — Posted May 23, 2005

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A physician-owned orthopedic hospital in Kansas has alleged in a lawsuit that many of the leading acute-care hospitals and insurers in its market conspired in an attempt to drive it out of business, underscoring the rising tensions between specialty facilities and their competitors.

Heartland Surgical Specialty Hospital LLC of Overland Park, Kan., has filed a lawsuit in U.S. District Court in Kansas City, Kan., claiming that local general acute-care hospitals pressured insurance carriers to deny managed care network contracts to Heartland.

"The hospitals have been unabashed in their scheme, publicly describing the emergence of specialty hospitals like Heartland as 'the biggest threat we face,' and publicly applauding the insurance companies for keeping Heartland out of their networks," the lawsuit said.

As a result, the lawsuit said, Heartland has been cut off from health care "lifeblood," leaving much of its state-of-the-art facilities unused and causing severe financial damage to the 2-year-old, 49-bed hospital.

The lawsuit, which seeks to stop the "boycott" and seeks unspecified damages, names several defendants, including hospital giant HCA's Midwest Division. The HCA subsidiary, which operates 12 acute-care hospitals in the Kansas City area that compete with Heartland, dismissed the lawsuit as baseless.

"It's a desperate and frivolous lawsuit. At HCA, we believe that specialty hospitals, which use physician self-referral as the business model for their financial success, are endangering the future of quality health care across the country," the company said in a prepared statement.

Rob Dyer, a spokesman for HCA Midwest, went on to say that specialty hospitals cherry-pick the healthiest patients, offer high-margin product lines and then leave the costlier procedures and sicker patients for community hospitals.

An 18-month moratorium on physician referrals to new specialty hospitals was imposed to allow for a study of those criticisms. The ban, which has effectively shut down construction of new facilities, is set to expire in June, though lawmakers are considering an extension. The AMA has called for an end to the moratorium, saying that competition among hospitals can create better and less expensive care. The Association is not involved in the Heartland lawsuit.

While the debate over specialty hospitals is nothing new, observers say the lawsuit is unique because battles with claims like this rarely end up in court. "It's rare that you get a market where there is the level of clarity of collaboration, conspiracy and/or evidence is at a level that one can really support a lawsuit like this," said Jacque J. Sokolov, MD, chair of Sokolov, Sokolov, Burgess, a health care management, project development and investment firm based in Scottsdale, Ariz.

Heartland attorney Norman Siegel said the reason the complaint landed in court is that the defendants crossed the line between fair competitive behavior and violating the law.

He said they engaged in "conspiratorial conduct" and singled out Heartland as a threat. "If they take action on that in a concerted way, it's a violation of the antitrust laws," said Siegel, an attorney with Stueve, Siegel, Hanson, Woody LLP in Kansas City, Mo.

BlueCross BlueShield of Kansas City, another defendant in the suit, denied that it had conspired with others to keep Heartland out of the market. "We make all network decisions independently to best meet the needs of our customers," said spokeswoman Sue Johnson.

While not filing lawsuits or making similar conspiracy claims as Heartland, other operations of physician-owned specialty hospitals have said they have suffered taking on existing health systems.

For example, late last year The Heart Hospital of Milwaukee, a joint venture between 18 local physicians and for-profit developer MedCath of Charlotte, N.C., shut down after only one year in operation. David K. Hoover, president and chief executive of The Heart Hospital of Milwaukee, at the time said the problem was that the hospital couldn't generate enough referrals from primary care physicians because many of them had alliances with large hospital systems.

MedCath and investors sold the facility to the Columbia-St. Mary's system in Milwaukee for $42.5 million.

In many cases, doctors have partnered with local hospital systems to open surgery centers, believing they could get the benefits of a new facility without the risk of competing against entrenched competition. In fact, MedCath has stated it's expanding its strategy of developing cardiac hospitals with physicians to also include developing them with community hospitals.

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