Competition among providers both for exclusive contracts and for exceptions to exclusivity has grown increasingly commonplace. Although exclusive contracts continue to survive legal attacks, courts also continue to scrutinize such contracts in light of new legal theories. Two recent federal appeals court opinions evidence the continuing trend of courts upholding exclusive contracts between hospitals and hospital-based physicians, such as radiologists, anesthesiologists and emergency room physicians. Although a growing line of case law in various jurisdictions grants wide deference to hospitals to administer their departments and deny or terminate medical staff privileges to practice in closed departments, physicians continue to challenge exclusive contracts under novel legal theories, most often under antitrust laws, breach of implied contract or due process rights. The facts, reasoning and considerations may vary by case, but courts generally recognize a hospital’s ability to exclude hospitalbased physicians from exercising privileges when a hospital enters into an exclusive contract with another hospitalbased physician group.
The U.S. Court of Appeals for the Tenth Circuit denied a radiologist, Robert Stears, M.D., the right to pursue due process and breach of contract claims against a Wyoming hospital that denied the radiologist the right to exercise privileges after it entered into an exclusive contract with another radiology group. See Stears v. Sheridan County Memorial Hospital Board of Trustees, 491 F.3d 1160 (10th Cir. 2007). Dr. Stears had previously been the exclusive provider of radiology services at the hospital, but terminated his contract with the hospital after failed attempts to renegotiate the non-competition provision of the agreement. Dr. Stears continued to provide radiology services at the hospital for a few months after the contract terminated. The hospital then entered into an exclusive agreement with another radiology group and notified Dr. Stears that the radiology department would be closed to radiologists who were not affiliated with the new exclusive provider. Although Dr. Stears technically retained active medical staff membership, including the right to vote, hold office and serve on medical staff committees, he was excluded from exercising his privileges at the hospital without any rights to a hearing under the medical staff bylaws. He argued that he was being denied due process rights under federal law, as well as rights under a Wyoming anti-discrimination law and the hospital’s bylaws.
The court held that Dr. Stears could not pursue due process claims because, since his clinical privileges were never terminated, he was not deprived of a property interest. In fact, if Dr. Stears joined the radiology group with exclusive rights to provide radiology services, he could exercise his privileges to provide radiology services at the hospital. A number of other courts recognize the distinction between having medical staff privileges and being able to exercise those privileges. The Tenth Circuit reasoned that even if the property interest was not in the privileges themselves, but in the right to exercise them, Dr. Stears did not have a legitimate claim of entitlement to this interest. It also emphasized that the grant of privileges did not constitute any contractual rights. The court found that since Dr. Stears’ privileges were restricted only as a result of the exclusive contract with another group, and not as a measure related to professional performance, he was not entitled to procedural rights. The appeals court ruling affirmed a trial court decision that Dr. Stears could not demonstrate the deprivation of a vested liberty or property interest, and could not show that his contract rights were violated by the hospital’s business decisions.
Similarly, the Sixth Circuit Court of Appeals found no violation of antitrust laws by a two-hospital health system in Ohio entering into an exclusive radiology services contract. See Nilavar v. Mercy Health System-Western Ohio, No. 06-3819, unpublished (6th Cir. 2007). Dr. Nilavar’s antitrust theory was that the hospital system excluded other radiology providers by granting an exclusive contract for radiology services to a group that complied with the hospital’s cost reduction goals by using more temporary and part-time physicians, and also by using less expensive agents in radiology procedures, which resulted in higher prices and lower quality radiology services at the system’s two hospitals. There was no evidence of patient harm. At the trial court level, plaintiff Sundar Nilavar, M.D.’s other claims were dismissed, including an argument that the hospital deprived him of due process and breached medical staff bylaws when he was denied a hearing prior to the termination of his privileges after the hospital signed the new contract with another provider. No notice or hearing was required, according to the trial court, because the hospital’s decision to enter into an exclusive contract for medical services related solely to the hospital management and administrative matters, and was unrelated to Dr. Nilavar’s professional competence.
Although the court ultimately found no antitrust violation, several factors considered by the court are notable. One factor was that the hospital solicited several competing radiology groups, of which seven responded to a request for proposal for an exclusive contract. According to the court, the exclusive contract was a result of competition and not a limitation. The court also found that the loss of staff privileges of several former radiologists after the new exclusive contract did not result in a decrease in radiology services. The short two-year term of the exclusive contract was also addressed. The court characterized this case as essentially involving a hospital’s staffing decision and choice of provider of services. Relying on extensive court precedent upholding exclusive contracts under antitrust laws, the court found that the hospital system’s decision regarding staffing and privileges was not anticompetitive.
Many courts continue to recognize the validity of exclusive hospital-based contracts and to allow deference to hospitals to administer their bylaws and deny, limit or terminate medical staff privileges. In the landmark case, Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2 (1984), the United States Supreme Court upheld an exclusive contract between a hospital-based group and a hospital, and held that other individual physicians may be denied staff privileges. Since that decision in the mid-1980s, many hospitals and hospital-based physicians groups have chosen to enter into exclusive contracts. Also since that time, many courts have dismissed legal challenges to exclusive contracts as violating due process or antitrust laws. Justifications for exclusive contracts include enhancing the quality of care and increasing the efficiency of the hospital and the department. As a result, despite advancing new and creative arguments, physicians such as Dr. Stears and Dr. Nilavar have generally been unsuccessful in obtaining relief from termination or limitations of privileges as a result of exclusive contracts.
As exclusive contracts become more nuanced, different factual issues may emerge, and scrutiny will increase. These future challenges may prove more successful. For example, a hospital may have difficulty defending an exclusive radiology contract when numerous nonradiologist physicians have been granted privileges to perform imaging services despite the exclusive contract. Until then, however, it appears that the courts remain supportive of hospitals’ exclusive contracting and privileging actions.