Organized medicine-backed lawsuit knocks down hospital's attempt at economic credentialing

A trial judge in Arkansas found that a hospital system denying privileges to some physicians was motivated by unfounded financial concerns.

By Amy Lynn Sorrel — Posted March 16, 2009

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An Arkansas hospital system's economic credentialing rule intrudes on the patient-physician relationship and violates public policy, a state trial court ruled on Feb. 27.

Baptist Health's credentialing policy precluded staff doctors with interests in competing hospitals from having privileges. The judge found that Baptist's policy was intended to suppress competition from physician-owned specialty hospitals, rather than further patient care.

"The heart of this case is the patient-physician relationship. The relationship is entitled to exceptional protection," Judge Collins Kilgore wrote. "Arkansas protects the patient's right to the physician of their choice. An act such as Baptist Health's economic credentialing policy that interferes with that choice, and that by extension interferes with the patient-physician relationship, is contrary to public policy."

Little Rock-based Baptist Health, Arkansas' largest hospital system, instituted what it calls an economic conflict-of-interest policy in 2003. Twelve staff cardiologists who owned a specialty facility, Arkansas Heart Hospital, lost their privileges and sued. The Arkansas Supreme Court in 2006 stopped Baptist from ending the doctors' privileges while the case headed to trial.

The Pulaski County trial court ruling permanently bars Baptist from enforcing its policy. Baptist did not indicate whether it plans to appeal but said it would study the opinion.

Physicians said the decision in the closely watched case demonstrates that economic credentialing policies do nothing to protect patient care and serve only to restrict it.


Dr. Patchin

"What's important is the court's recognition of the sanctity of the patient-physician relationship, the importance of continuity of care in that relationship and patients' ability to have a choice in where they receive their care," said Rebecca J. Patchin, MD, chair-elect of the American Medical Association Board of Trustees.

The AMA, along with the Arkansas Medical Society, joined the case as plaintiffs. The Litigation Center of the American Medical Association and State Medical Societies also contributed to the physician plaintiffs' legal expenses.

The awarding of clinical privileges should be based on physicians' skills and expertise, not financial considerations, Dr. Patchin said.

"If you don't have that patient and doctor working together, the patient is not going to get the best care," said AMS President David C. Jacks, MD. "It doesn't matter where they go. A hospital is just a building."

The decision is among a few that directly address economic credentialing and could have a nationwide effect as other hospitals and courts turn to the opinion for guidance, said Emily Sneddon, an attorney for the AMA and AMS. At least 13 states have laws that restrict or prohibit economic credentialing, according to AMA research. Arkansas is not one of them.

Because the court found Baptist's credentialing rule a violation of public policy, the hospital system likely cannot enforce it against any physician in the state, including the plaintiffs involved, Sneddon said.

Baptist said in a statement that its policy was aimed at protecting "the community's long-term access to a broad range of services" and protecting patients from "an inherent conflict of interest" when physicians refer to their own facilities. Such referrals hurt the hospital's financial health by steering away higher-paying patients and leaving it with unprofitable charity care, Baptist maintained in court documents.

No evidence Baptist was harmed

The trial court recognized that hospitals have an interest in protecting their economic viability and ensuring access. But Kilgore found no evidence that Baptist had been harmed by competition from Arkansas Heart Hospital.

Baptist adopted the credentialing policy six years after the heart hospital opened in 1997, without analyzing its effect on Baptist's profitability, the court noted. Nor was there any evidence that the heart hospital's physician owners had acted unethically.

Instead, Kilgore found that Baptist had instituted the policy despite a shortage of cardiac beds in the region and "acted in a way directly adverse to its goal of providing services to the community."

The court dismissed the policy as "overbroad" in that it applied to non-referring doctors, such as radiologists; physician family members with indirect outside interests; and geographic regions outside Baptist's treatment area.

Kilgore said Baptist's policy was meant to discourage competition, ruling it an unconscionable trade practice that "affronts the sense of justice, decency, and reasonableness because it impinges on fundamentally important public policies without adequate countervailing justification."

Lawyers who represent hospitals said the decision, while significant, evolved from unique circumstances and does not prevent hospitals' ability from using economic credentialing.

"Clearly, there are a lot of lessons learned from this decision, and hospitals need to be mindful and do their homework when pursuing such a policy," said Michael R. Callahan, a hospital attorney and partner with Chicago-based Katten Muchin Rosenman LLP. "But it will play differently in different circumstances."

For example, Baptist is the only dominant hospital system in a largely rural region, he noted. But in larger markets, physicians likely would have privileges at multiple hospitals. There they could continue to treat patients without disruption, despite losing privileges at one facility.

The Arkansas court emphasized that Baptist applied its policy retroactively to existing medical staff without any hearing rights, Callahan said. Some states also permit hospitals to consider economic factors in the initial credentialing process.

Callahan said the ruling still "preserves certain fundamental principles" that hospitals have a right to protect their financial well-being. "But a court is not going to accept [such principles] carte blanche without looking at the evidence."

Bruce E. Murphy, MD, lead plaintiff in the case and medical director of Arkansas Heart Hospital, said he hoped the decision would embolden other physicians who feel pressured by large hospital and insurance entities.

The doctors, partners at Little Rock Cardiology Clinic PA, sued Baptist in a separate antitrust case alleging that the hospital system had conspired with a dominant health insurer to keep the doctors and their heart hospital out of the network. A federal judge dismissed those claims in August 2008. An appeal by the doctors is pending in the 8th U.S. Circuit Court of Appeals.

For now, the state trial court ruling allows the physicians to return their attention to improving patient care -- their initial motivation for investing in the specialty hospital, said Dr. Murphy, an interventional cardiologist.

"Our patients are no longer at the mercy of hospitals and insurance companies telling them where to go," he said. "I would hope this [decision] would signal to hospitals that the foundation of medicine should not be tampered with."

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A different view

In a decision striking down an Arkansas hospital system's credentialing rule as being contrary to public policy, Pulaski County Circuit Court Judge Collins Kilgore distinguished his opinion in Murphy v. Baptist from some prior rulings on the matter.

  • In Walborn v. UHHS/CSAHS-Cuyahoga Inc., an Ohio trial court in 2003 held that a hospital demonstrated that its economic credentialing policy was "a reasonable means" of protecting the hospital's viability. But Kilgore said the "facts in [the Murphy] case do not support such a finding." He also noted that self-referral issues played a significant part in the Ohio dispute, whereas in the Arkansas case, "there is no evidence that the [physician-owned hospital] requires or encourages the plaintiff physicians to steer their patients" to their hospital.
  • In Mahan v. Avera St. Luke's, the South Dakota Supreme Court in 2001 upheld a hospital's decision to close its medical staff to new orthopedic surgeons after a group of doctors built a competing surgery center. No doctors in the group lost privileges, and the court agreed that the hospital's move was in patients' best interests. Kilgore differentiated that the South Dakota case stemmed from a breach of contract claim because the medical staff had not approved the hospital policy.
  • A 1993 decision in Williamson v. Sacred Heart Hospital of Pensacola in the U.S. District Court for the Northern District of Florida was based on antitrust claims that Kilgore said were not at issue in Murphy v. Baptist. The court sided with the hospital.
  • A 1992 Florida trial court ruling validated a hospital's decision to deny staff privileges to a heart surgeon who had interests in a competing hospital. The ruling in Rosenblum v. Tallahassee Memorial Regional Medical Center hinged on a Florida statute authorizing the use of economic criteria in hospital credentialing, as long as such factors are not "arbitrary." Kilgore said the case "did not aid the court" in the Murphy decision because Arkansas has no such law.

Source: Murphy v. Baptist, Pulaski County Circuit Court, Arkansas, Feb. 27 ruling

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