economic credentialing: here we go again?...review articles2 and case law.3 the term “economic...

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NNEWSLETTEREWSLETTER Volume Six - Number Ten October 2010

Economic Credentialing: Here We Go Again?

Physicians have long seen economic credentialing as a contentious practice. Instead of focusing on quality of care and professional competency, economic credentialing is viewed by the American Medical Association1 as a process that relies upon criteria that are incongruent with meeting the clinical needs of patients. Economic incentives have been used by both managed care organizations and hospitals to control physicians ordering expensive tests or procedures and to curb lengthy hospitalizations. Business decisions have been made by hospitals to control those who are permitted to participate on the medical staff. Maintaining the financial viability of the healthcare organization through the use of economic incentives or credentialing practices has been for many years the subject of law review articles2 and case law.3 The term “economic credentialing” covers many types of activities. Of particular relevance now is the use of economic credentialing to deter physicians with split allegiances between a public hospital and another in which the physicians are owners or investors in doctor owned facilities. A recent Arkansas Supreme Court ruling4 highlights this type of economic credentialing issue. More than that, the Arkansas decision may provide a context for credentialing issues and Accountable Care Organizations (ACOs), an important issue in light of the Affordable Care Act (ACA) and the Medicare Shared Savings Program.5

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The Arkansas Case The Supreme Court of Arkansas ruling on September 30, 2010 marked yet another ruling in a contentious legal battle over the issue of economic credentialing. The ruling was one of several court decisions going back to 2004. Litigation was pursued in both federal6 and state courts.7 Litigation took place after a May 2003 decision of the B.H. Board of Trustees. During that meeting, the hospital board adopted an “Economic Conflict of Interest Policy that denied both initial and renewal of professional staff appointments or clinical privileges at any of the systems hospitals

“to any practitioner who, directly or indirectly, acquires or holds an ownership interest in a competing hospital. The Policy defines a "competing hospital" as follows: "a hospital licensed in Arkansas or any subsidiary, component, division or other part of any such hospital" and "any entity that, directly or indirectly, holds an ownership interest or investment interest in a competing hospital and any entity that, directly or indirectly, has a management agreement with a competing hospital."8

The policy defined “ownership or investment interest” to include:

“…an equity, debt or other interest, including but not limited to, stock, partnership interests, limited liability company memberships, as well as loans, bonds, or other financial instruments that are secured with the competing hospital's property or revenue or a portion of that property or revenue. Excluded from the foregoing definition of "ownership or investment interest" is any interest that was initially acquired on terms and conditions that were available to the general public. Ownership or investment interest" also means any interest, directly or indirectly, in real or personal property used by a competing hospital.”9

Two of the appellees, Dr. M. and Dr. B had medical appointments on the hospital staff that were set to terminate toward the end of February 2004. They both had ownership interests in AHH, an Arkansas-based cardiac hospital. Based on the B.H. policy, they were considered ineligible for reappointment. The other appellees also had an interest in AHH and would have faced a similar result at the end of their current staff appointments.10





The doctors filed an action in the U.S. District Court for the Eastern District of Arkansas claiming that the policy violated federal and state statutes and that it represented tortious interference with the physician-patient relationship. The case was dismissed by the federal court for lack of jurisdiction.11 The same day that the federal court dismissed the case, an action was filed in Arkansas state court asserting a variety of claims based on federal and state statutes12 and also tortious interference.13 The appellees also requested a declaratory judgment that B.H.ʼs policy was against both federal and state law and should be enjoined from enforcement.14 The case then followed a protracted path between the Arkansas Circuit Court and the stateʼs highest court. Ultimately, a state circuit court judge issued a permanent injunction against enforcement of the economic conflict of interest policy and the latest appeal followed to the state supreme court. Rejecting some preliminary legal arguments raised by B.H.,15 the court proceeded to the critical points of the case. As a threshold consideration, the Arkansas Supreme Court rejected the public policy argument that the economic conflict policy was beyond review by the courts. Suggesting that a private hospital cannot “insulate itself from suit” when the appellees allege violations of state law, the court focused on the allegations of tortious interference and violation of the state deceptive trade practices law. The court spent considerable time on the issue of tortious interference. In the decision the court articulated the elements of such as claim:

“(1) the existence of a valid contractual relationship or a business expectancy; (2) knowledge of the relationship or expectancy on the part of the interfering party; (3) intentional interference inducing or causing a breach or termination of the relationship or expectancy; and (4) resultant damage to the party whose relationship or expectancy has been disrupted.”16

Additionally, the court noted that Arkansas law required that the defendant must manifest “improper conduct.”17 To make such a determination several factors should be considered including:

“(a) the nature of the actor's conduct, (b) the actor's motive,





(c) the interests of the other with which the actor's conduct interferes, (d) the interests sought to be advanced by the actor, (e) the social interests in protecting the freedom of action of the actor and the contractual interests of the other, (f) the proximity or remoteness of the actor's conduct to the interference and the relations between the parties.”18

The Arkansas Supreme Court affirmed the findings of the circuit court on the first element of tortious interference:

“(1) the appellees and their patients have contractual relationships wherein the physicians agree to provide care, the patients agree to accept the care, and the physicians are compensated; (2) the patient-physician relationship carries a reasonable business expectancy; (3) the physicians' relationship with referring physicians also carries a reasonable business expectancy. In support of these findings, the judge cited the testimony of appellee [Dr. M.] and other witnesses that "the patient-physician relationship is important and often physicians and patients will have relationships that span for years and even decades."19

It went further highlighting the point that in undisputed testimony it was made clear that “continuity of care aids patient outcomes.”20 Here the business expectancies were between the appellees and their patients.21 The high court also noted that there was ample evidence of “actual knowledge” of the appelleesʼ longstanding relationships with their patients and that B.H. knew the economic conflict of interest policy would prove disruptive in this regard. Both the CEO of B.H. and the two board members had testified before the circuit court that “they knew the Policy would disrupt patientsʼ relationships with the physician of their choice.”22 On the issue of intentional interference the Arkansas Supreme Court affirmed the findings of the lower court. Relying on the testimony of the CEO of B.H., there was ample evidence to support the allegation that the health system knew and intended that the policy would force patients to choose between B.H. and their relationships with the appellees.23 The court agreed with the circuit court judge that there was evidence of damage in this case. Indeed, due to the policy, one of the appellees was precluded from treating his patients at B.H. and as a result lost professional fees related to such





care. Additionally, the circuit court recognized that the appellees would be harmed by a reduction in referrals as a result of the economic conflict of interest policy.24 On the issue of improper conduct, the Arkansas Supreme Court affirmed the determination of the circuit court judge. Referring to the specific findings of the circuit judge that the actions of B.H. were against public policy the high court noted that the:

“motive was to discourage competition by physicians who considered investing in specialty hospitals, and [B.H.] wanted to force patients to choose between it and the physician appellees. The appellees' interest was in patient-physician relationships and the continuity of care, which outweighed [B.H.ʼs] interest in protecting its economic viability because no evidence supported [B.H.ʼs] purported need for the Policy. While society has a strong interest in [B.H.ʼs] continued viability, the evidence showed that its finances were never at risk.”25

The one point on which B.H. was successful was the claim dealing with the Arkansas Deceptive Trade Practices Act (ADTPA). Here the Arkansas Supreme Court ruled that the law did not create a private cause of action to seek injunctive relief.26 In conclusion, the Arkansas Supreme Court determined that the circuit court grant of declaratory judgment should be affirmed. As such, B.H. was enjoined from denying the appellees both their professional staff appointments and clinical privileges based on the economic conflict of interest policy.27 Observations on the Arkansas Case. The issues raised in the case are not unique to Arkansas. As suggested earlier, economic credentialing claims can take many forms. Enforcement of an economic conflict of interest policy is one variety. Critical to these cases is the matter of public policy as well as applicable state law. Equally important are the facts of a specific economic credentialing case. Economic credentialing cases can be protracted, expensive, and the subject of much public interest. The experts in “spinning” media news accounts may well enjoy a “field day” casting differing perspectives for each side of such a claim.





Greed, self-interest, disenfranchising patients, and the public all come to mind as part of the media spin. The Arkansas case started long before the Accountable Care Act was enacted into law. However, one sentence in the court ruling is telling in terms of the ACA:

“…the ʻundisputed testimonyʼ that continuity of care aids patient outcomes.”28

As stated in a “Preliminary Questions & Answers” document published by the Centers for Medicare and Medicaid Services (CMS), on Accountable Care Organizations,

“The Affordable Care Act (ACA) improves the health care delivery system through incentives to enhance quality, improve beneficiary outcomes, and increase value of care….ACOs facilitate coordination and cooperation about providers to improve the quality of care for Medicare beneficiaries and reduce unnecessary costs.” [Emphasis added]29

So why is the Arkansas passage important in the context of ACOs? The Affordable Care Act is about improving patient outcomes, a telling point for the Arkansas court in a decision that disapproved of a policy that could deter longstanding patients from achieving quality outcomes of care. The ACO is anything but an economic conflict of interest policy that puts up barriers to coordinated and cooperative care. Should ACOs become commonplace, healthcare leaders will have to think twice about imposing policy-driven roadblocks that impede quality outcomes along the continuum of care. There is one other point that merits discussion from the Arkansas case. The testimony of those on the board and CEO is troubling. Certainly, it may have been taken out of context in a case that spanned also six years. Nonetheless, the rationale for imposing a conflict of interest policy should not be about forcing cardiac or other patients to make a choice between their caregivers and acute care hospitals. The healthcare field is beset by many critics in Congress and in the public. Policy decisions must be set at the highest levels based on patient-focused principles. One can anticipate rebuke for anything that smacks of greed, or what is best for the healthcare organization at the expense of patients and the community. Hence, the Arkansas ruling may have more useful lessons than the





issue of economic conflict of interest policies. It is a good case study for teaching the fundamentals of governance in a healthcare organization. Risk Management Strategies for Economic Credentialing. To avoid litigation involving economic credentialing, there are a number of strategies to consider, including the following:

1. Look for Less Litigation-Prone Solutions. From a practical standpoint think about using systems ad processes that do not involve economic credentialing such as joint ventures and other acceptable models such as ACOs.

2. Determine What is Permissible Under State and Federal Law. If a decision is made to consider economic credentialing, recognize that there are different types of economic credentialing and that some forms may or may not be appropriate in a specific jurisdiction. Obtain legal advice on what is and what is not permissible under applicable state and federal law with regard to economic credentialing. Make certain that the model selected comports with legal guidance on the subject of economic credentialing.

3. Follow an Enterprise Risk Management Approach for Economic Credentialing. Utilize an enterprise risk management model that includes: a. Identifying risk factors for economic credentialing sometimes referred

to as an “inventory of risks;” b. Analyzing identified risk factors using good, practical tools; and, c. Evaluating the organizationʼs “appetite for risk” in terms of economic

credentialing. Once the board makes a choice, develop, implement and monitor a plan of action.

4. Educate Those Involved in Selecting and Using Innovative

Credentialing Models. Offer those in leadership practical education programs on economic credentialing and other options such as various models for accountable care organizations. Emphasize the pros and cons of each model and the risks associated with economic credentialing completed in a manner that





is considered contrary to applicable state and federal law. 5. Effectively Document Challenging Economic Credentialing

Decisions. Stress the importance of documenting decisions involving economic credentialing. Emphasize the use of data-driven decision-making, impact analysis for patient care, community access to qualified healthcare specialists, and the financial integrity of the healthcare organization. Avoid the use of “all or nothing” approaches for patients who must decide between a specialist or a health system or acute care facility.

6. When in Doubt, Get Assistance First from Knowledgeable

Individuals. Avoid precipitous decisions. If there is any question about the propriety of using economic credentialing or other options such as ACOs, get knowledgeable assistance. Consider input from experts on tax law, financial accounting, and law. Think about input from insurance brokers, agents, and consultants on directors and officersʼ liability coverage. Keep in mind that it is best to check before making a decision that could have legal, regulatory, and adverse publicity implications for the healthcare organization.

Conclusion. Although the term “economic credentialing” may have a negative connotation in medical staff circles, there may be situations in which healthcare organizations can use the concept to draw a “line in the sand” to safeguard assets and to promote patient care. Achieving such a balance may prove much more arduous going forward in the aftermath of the Accountable Care Act and the development of ACOs. A more prudent approach is to develop rationale systems and processes to avoid litigation based on economic credentialing. The principles of enterprise risk management should bode well in this regard. Education is essential for those in leadership positions as well as healthcare professionals. Going forward, some of the tools and systems that evolve from ACOs may offer approaches that avoid protracted litigation over strident economic credentialing policies.





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1 See e,g, “AMA, Economic Credentialing, Report to the Hospital Medical Staff Section Governing Council Report,”” (1993). See also, correspondence directed to K.G. McAnaney, at HHS, Office Of Counsel to the OIG, September 30, 2002 from the American Medical Association. It includes a legal memorandum prepared on September 25, 2002 on the topic of “exclusive credentialing.” 2 See for example, J.D. Blum, “Economic Credentialing Moves from the Hospital to Managed Care.“ 22 J. HEALTH CARE FINANCE 65 (1995); J. E. Orie, “Economic Credentialing: Bottom-Line Medical Care.“ 36 DUQUESNE LAW REVIEW 437 (Winger, 1998), J.W. Marks and J. R. Matchinski, “Recent Developments In Health Care Law: Conflicts Credentialing: Hospitals And The Use Of Financial Considerations To Make Medical Staffing Decisions.” 31 WM. MITCHELL L. REV. 1009 (2005) and B. Cohen, “An Examination Of The Right Of Hospitals To Engage In Economic Credentialing.” 77 TEMP. L. REV. 705 (Fall 2004). 3 There has been a good amount of case law on a variety of aspects of exclusivity and closing of

the medical staff by hospitals. Many of the articles in Reference 2 discuss the case law. A good example of a case can be found in Mahan v. Avera St. Luke's, 621 N.W.2d 150 (S.D. 2001), in which the court ruled that in closing the medical staff, the hospital made what the court considered as a good faith, reasonable administrative decision for the continued viability of the hospital. Furthermore, it was permissible under the hospitalʼs bylaws. As such, the court found that there was no breach of contract between the hospital and its staff.

4 B.H. v. M., 2010 Ark. LEXIS 45 (September 30, 2010). 5 Title XVIII of the Social Security Act (42 U.S.C. 1395 et seq added by Section 3022 of the

Patient Protection and Affordable Care Act, Pub Law.111-1148 (March 23, 2010). 6 M. v. B.H., No. 4:04CV00112, 2004 U.S. Dist. LEXIS, 12080 (E.D. Ark. Feb. 24, 2004)

(unpublished decision), referenced in B.H. v. M., 2010 Ark. LEXIS 45 (September 30, 2010) supra note 4.

7 The Supreme Court of Arkansas referred to the judicial rulings at the state level as B.I. [209 S.W.3d 360 (Ark. 2005)] and B. II., [226 S.W. 3d 800 (2008)], referenced in B.H. v. M., 2010 Ark. LEXIS 45 (September 30, 2010) supra note 4.

8 B.H. v. M., 2010 Ark. LEXIS 45 (September 30, 2010) supra note 4. 9 Id. 10 Id. 11 Id., referencing M. v. B.H., No. 4:04CV00112, 2004 U.S. Dist. LEXIS, 12080 (E.D. Ark. Feb. 24,

2004) (unpublished decision). 12 The Federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b(b); the Arkansas Medicaid Fraud Act,

Ark. Code Ann. § 5-55-111 (Repl. 2005); the Arkansas Medicaid Fraud False Claims Act, Ark. Code Ann.§ 20 77-902 (Repl. 2001); and the Arkansas Deceptive Trade Practices Act (ADTPA), Ark. Code Ann. §§ 4-88 -101 to -115 (Repl. 2001), (ADTPA) referenced in B.H. v. M., 2010 Ark. LEXIS 45 (September 30, 2010).

13 B.H. v. M., 2010 Ark. LEXIS 45 (September 30, 2010), supra note 4. 14 Id. Although compensatory and punitive damages were part of the complaint, based on a court order issued in March, 2008, the request for damages was dismissed. 15 The court denied the application of the legal doctrine of res judicata. It did not accept B.H.ʼs argument that the federal district court case barred the state law claims of the appellees. Here B.H. made no effort to combine the federal and state claims snd did not raise the legal doctrine until after the federal ruling. 16 B.H. v. M., 2010 Ark. LEXIS 45 (September 30, 2010), supra note 4. 17 Id.





18 Id., drawn from the Restatement (Second) of Torts §767. 19 B.H. v. M., 2010 Ark. LEXIS 45 (September 30, 2010), supra note 4. 20 Id. 21 Id. 22 Id. 23 Id. 24 Id. 25 Id. 26 Id. 27 Id. The court declared moot a cross-appeal for attorneyʼs fees but granted an award of costs to the appellees. 28 Id. 29 Medicare Accountable Care Organizations,” Shared Savings Program – New Section 1899 of Title XVIII, Preliminary Questions & Answers, CMS/Office of Legislation.

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