Physician groups eye mergers but blindsided by legal fights

Courts are taking up lawsuits that are challenging such consolidations, and doctors need to be aware of their antitrust risks.

By — Posted Dec. 10, 2012

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Declining payments and increasing financial pressures have led more physicians to become employees of large medical groups and hospitals. At the same time, the Affordable Care Act is prompting smaller practices to consolidate as a way to more easily participate in new health system delivery models such as accountable care organizations.

But as physicians attempt to escape administrative burdens and financial stress, they are encountering another hurdle­ — legal disputes brought about by mergers.

Courts are considering cases or have ruled on lawsuits challenging medical group mergers, consolidations and acquisitions. The suits highlight the legal and antitrust risks doctors face when they are part of a merger:

The U.S. Supreme Court is weighing whether a publicly held Georgia hospital’s merger with a privately owned hospital should be protected from antitrust scrutiny because of the “state action doctrine.” The doctrine protects bodies from FTC scrutiny if the state has clearly articulated a policy to displace competition and actively supervise the transaction in some way. The Litigation Center of the American Medical Association and the State Medical Societies has not sided with either party in the case, but issued a friend-of-the-court brief on a related issue. The Litigation Center is concerned that a ruling for the FTC in the case could improperly expose professional licensure boards to antitrust scrutiny.

Being unaware of legal dangers that stem from mergers can lead to unnecessary expenses and practice disruption, said Dale Grimes, a Nashville, Tenn.-based attorney with Bass, Berry & Sims and chair of the firm’s Antitrust and Trade Practices Group.

“There’s no question that we’re seeing more physician group mergers,” Grimes said. “When you have mergers and growing consolidation, it’s something that is likely to get the FTC’s attention, and that is certainly what is happening. Many times people don’t think there might be antitrust issues and that has turned out to be not a good idea because a number of transactions have been challenged after the deal has closed.”

Money spent on medical practice mergers and acquisitions jumped significantly in the second quarter of 2012 compared with the same period in 2011, according to data released July 19 by Irving Levin Associates, a research firm based in Norwalk, Conn. Data show 21 physician practices reported mergers and acquisitions in the second quarter, with $4.2 billion changing hands.

Eight physician groups reported a merger or acquisition in the third quarter of 2012. That number is expected to rise, said Stephen M. Monroe, editor of Irving Levin Associates’ Health Care M&A Report.

“In general, physicians are tired of the liability issues and tired of the business [responsibilities] and the reimbursement cuts,” he said. “They are finding the life of a practicing physician is a lot easier being employed by a physician group or by a hospital.”

However, legal experts warn that this desire for ease and efficiency can land physicians in court if they fail to consider the details. Along with antitrust scrutiny, doctors can face legal challenges by partners or employees if transactions hit snags.

“Changes in ownership and composition of professional businesses can end up being very contentious if partners don’t agree,” said Mark A. Hall, a law and public health professor at Wake Forest University School of Law in Winston-Salem, N.C. “These disputes can end up being very expensive because of the value that is built into professional businesses.”

Ruling spotlights physicians’ rights

The Indiana ruling could provide important guidance for physician groups and shareholders who disagree with mergers, legal analysts said.

In the case, Dr. Hall was displeased with Indianapolis Neurosurgical Group’s plan to merge with an academic medical center. He tried to resign, but was terminated because the practice said he violated a contract agreement requiring him to give one-year notice, according to court documents.

After a financial dispute about how much money he was owed, Dr. Hall sued. The Marion Superior Court ruled the practice group did not inform Dr. Hall of his dissenters’ rights or provide him with the appropriate severance.

The judge ordered Indianapolis Neurosurgical Group to pay Dr. Hall the fair value of his shares, attorneys’ fees and interest. Under Indiana law, a shareholder is entitled to dissent from a merger and may obtain payment for the fair value of his or her shares. These rights empower shareholders who oppose a merger to exit without penalty, the court opinion said.

A jury will determine Dr. Hall’s damages. At this article’s deadline, an attorney for Indianapolis Neurosurgical Group had not returned messages seeking comment.

The case is a lesson for physicians who want to merge into group practices, said Mark Hall, who is not related to Dr. Hall.

“The gist is that disputes can arise, and when they do, it’s not necessarily majority rules,” he said. “It may be necessary to buy out members of the group that don’t agree with the decision — and that can be expensive.”

Many states have corporation laws similar to Indiana’s, and the ruling in Dr. Hall’s case could influence courts in other states, said Robert MacGill, Dr. Hall’s attorney.

“The case says that physician shareholders’ rights are protected and that physicians have the right to the fair value of [their] shares in the context of a merger,” he said. “This is important not only for physicians in Indiana, but for physicians and medical groups throughout the country.”

The ruling reminds doctors to evaluate their rights as shareholders and potentially retain independent counsel if they believe they are being mistreated by employers or partners, MacGill said.

“Before mergers go forward or are decided or executed, medical corporations must be aware of physician rights and their corresponding obligations,” he said.

What prompts antitrust attention

Although medical groups are required to notify the FTC only when planning mergers valued at $60 million or more, smaller practices should not be lulled into a false sense of security when consolidating. If the FTC finds antitrust violations, a court could order the company to disband the merger and potentially forfeit any profits made by the consolidation. The agency also can seek civil penalties of $16,000 per day if a company violates an agreement with the FTC.

“It’s important to note that whether the merger falls within those rules or not, the FTC has the jurisdiction to evaluate all mergers,” said Jeff Perry, assistant director of the Mergers IV Division of the FTC’s Bureau of Competition.

If physicians are concerned about antitrust scrutiny, they can reach out to the FTC or state attorney generals to explain their merger motivation and request feedback.

It also helps to obtain data about the number of physician competitors in the community and document credible reasons for the merger, said Monica Noether, executive vice president and chief operating officer at Charles River Associates in Boston. She is former vice chair of the American Health Lawyers Assn.’s Antitrust Practice Group.

“It’s often helpful for [health professionals] to think about the likelihood it’s going to be challenged and do a good job articulating why consumers are going to be better off because you’re merging,” she said.

American Medical Association Board Trustee Joseph P. Annis, MD, recommends that doctors review new principles on physician employment adopted by the AMA in November. The principles provide important guidance for doctors undergoing employment changes such as mergers, he said.

“Mergers and working for larger groups have their challenges, but in today’s environment, it’s probably a safe thing for physicians,” said Dr. Annis, an anesthesiologist in Austin, Texas. “I think most are going to work out just fine. We’ll rise to these challenges.”

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How doctors can avoid legal problems resulting from a merger

Physicians who are considering being part of a merger should weigh their risks and take steps to reduce potential legal hurdles, experts say.

Communicate with shareholders and employees. When a medical group is not transparent, negative rumors may persist. Physicians should be as open as possible about the details of a merger so employees feel comfortable. Incorrect assumptions can lead to distrust and inaccurate information.

Retain experienced advisers. Doctors should confer with attorneys, antitrust experts and other specialists early on. Such consultants can make sure potential problems are discussed before they arise.

Review the reasons for the merger. Medical groups should have pro-competitive reasons for merging such as improving quality of care or access to treatment. Health professionals should be sensitive to their market share and realize the larger the group becomes, the more likely it could attract suspicion of anti-competitive behavior.

Discuss how to integrate. Groups that merge sometimes want to maintain independent autonomy by keeping their names or staying in the same location. However, consolidated groups must be able to demonstrate they are working as one unit to prevent Federal Trade Commission scrutiny.

Obtain relevant data. Before a merger, health professionals should obtain data on the number of competitors in their community to better defend against an antitrust challenge. They should be able to present information about why their merger would not harm competition.

Request an opinion. If concerned about antitrust issues, doctors can ask the FTC to review their plan and issue an advisory opinion. The opinion is not binding, but can offer the group necessary guidance on whether it should move forward.

Sources: Hylan B. Fenster, a corporate and transactional law attorney at Epstein Becker Green in New York; Monica Noether, executive vice president and chief operating officer at Charles River Associates in Boston; and Dale Grimes, a Nashville, Tenn.-based attorney with Bass, Berry & Sims

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External links

Federal Trade Commission guide to antitrust laws (link)

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