In a twist on the David-and-Goliath story of powerful community hospitals being outmaneuvered and outsmarted by physician-owned facilities, hospitals are fighting back. They've become adept at courting physicians, influencing insurance companies and playing politics to compete with physician-owned facilities, which have responded with their own counter-strategies.

In this article, we'll report on the following top five ways that hospitals are fighting for patients, payors and physicians. They are:

• forming exclusive contracts with insurers
• fighting attempts by physician-driven facilities to obtain Certificates of Need (see "Hospital, Doctors Call Truce" on page 41)
• obliging physicians to sign exclusive privileging agreements
• attempting to direct and control referrals
• and recruiting competing providers.

Let's examine each of these strategies, and physicians' counter-strategies, in detail.

Exclusive contracts are even tougher. In these cases, the hospital serves as the only provider of all surgical services, which means that insurers will not pay for procedures in any other facility, even if the patient is willing to pay more.

Hospitals have been able to form preferred and exclusive contracts for many reasons. In some cases, hospitals own all or part of an insurance plan, allowing them to exert substantial influence. In other situations, hospitals will only provide inpatient services at reasonable prices if they have an exclusive contract for outpatient surgical services (see "Battle in the Big Easy," February, page 32). In this case, it doesn't matter that an independent ASC may be able to perform outpatient surgery more cost effectively. The savings that the payor realizes on inpatient services far outweigh any savings an independent facility could provide on outpatient services.

There are three different ways that physician-owned facilities are fighting to retain a share of the payor pie.

• By offering a level of service above and beyond what the hospital offers, some facilities do get a substantial number of out-of-network patients who are willing to pay higher co-payments and deductibles (as long as the contract is preferred and not exclusive). Facilities that are out-of-network often receive higher rates that may help offset a lower case volume. Often, subject to state and federal legal concerns, there are means by which the patient co-payment can be reduced based on an approximation of the fees that the payor will provide.
• In many situations, a facility can make a strong case that it can provide certain services better than an exclusive or preferred provider and then use intense lobbying efforts to be admitted into the payor network. We've seen situations where facilities published position papers describing their benefits and distributed the paper to the press, medical community leaders, business leaders and politicians. Over time, payors were obliged to admit them into their networks.
• In some cases, facilities can argue that payors and hospitals acting on a collaborative joint basis are violating antitrust laws. This is usually a last resort, as many of these claims have failed in court and the cost of bringing an antitrust action is usually extremely high. Nevertheless, if the facility can prove that the market for surgical services is large enough, and the hospital's actions are truly anticompetitive, an antitrust action could be successful.

The state agencies and the boards that control the CON process are often quite political in nature. When determining whether to issue a CON, the state agency will usually hold hearings and provide opportunities for parties that oppose the project to state their concerns, and the local hospitals are usually the first to show up. They are often successful in stalling the process or derailing it altogether.

The physician groups that do obtain CONs do their homework and dazzle state agencies with applications that highlight the strengths of the project and provide numerous examples of how the community will benefit. But they play political games as well, because they realize that, in some cases, the connections of the lawyers and lobbyists rather than the strength of the application is the key to success.

Consequently, physicians are hiring law firms that have years of experience in successfully shepherding CONs and wooing politicians and the public to help champion their cause. Other physician groups are adopting an "if-you-can't-beat-them-join-them" tactic by offering to joint venture with the competing hospital. If the hospital accepts, they become an ally in the CON process. Even if the hospital declines, however, groups that can prove that they made the attempt to joint venture usually reduce the hospital's leverage with the planning board.

Second, hospitals may allow physicians who build new surgical facilities to keep their privileges, but try to contain the growth of these facilities by denying privileges to new physicians if they join an independent facility first.

In the worst cases, hospitals have decredentialed physicians altogether - even if the physicians had been practicing at the hospital for years - if they build (or even obtain privileges at) another facility.

This is one strategy that may be on the decline. Hospitals have found it increasingly expensive to own and operate primary care physician practices, so their ability to control broad referral networks has decreased in the last few years.

When physicians are faced with opposition such as this, they often overestimate the impact that the hospital can have on their practice, so many physician-owned facilities will go out of their way to provide information regarding referral patterns to their physicians and provide data on how many patients a physician actually receives from hospital-related referral sources compared with other sources. This data often shows that physicians rely much less on hospital resources than they had perceived.

This is one strategy that physicians don't have to fight very often because it's usually too expensive for hospitals to implement. Hiring away physicians from competing facilities is often prohibitively costly, as is hiring first-rate specialists from out of town to compete with local physician leaders. Also, in most situations, hospitals have a very difficult time hiring just "one" of a type of specialist. They often need to hire two or three in a specialty to provide for call coverage, which doubles or triples the cost.

In many cases, hospital perks simply hold no allure because physicians prefer the work environment and efficiency of the ASC. Some facilities quickly get to the point where they can provide physicians with monthly payment distributions, which serves as a powerful incentive.

Two formidable foes
The increase in the number of physician-owned surgery centers and hospitals has naturally given rise to this increase in competition between the two types of facilities.

As you can see, both groups have significant strengths that they have used to gain or retain a foothold in the ultra-competitive medical environment, and now that the playing field has become more level, they will have to draw on these strengths more than ever to ensure their survival.