Community hospitals seeking the legal ammunition to fight surgery centers may have found it in New Orleans, where a federal appeals court ruled that a public hospital did not violate antitrust laws when it demanded managed care contracts that excluded the competing surgery center across the street.

"The decision affirms that hospitals are allowed to lawfully compete with any privately-owned, for-profit facility that attempts to siphon off desirable services from the full-service, community-oriented hospital," says Michele Kidd Sutton, community resources officer at North Oaks Medical Center, a 215-bed public hospital in Hammond, La.

?A competitive response'
St. Luke's SurgiCenter, located a quarter mile from the hospital that many of its 17 physician-investors, nurses and patients used to call home, opened in 1996 and filed suit against North Oaks in 1997, alleging that the hospital tried to monopolize outpatient surgery services and engaged in unfair trade practices. In a case that slogged through the legal system for five years, a three-judge panel affirmed a January 2001 ruling that North Oaks did not violate antitrust laws when it pressured managed care companies to use it exclusively for both inpatient and outpatient care.

The "exclusive" contracts entitled HMOs or Preferred Provider organizations to up to a 25% discount of billed charges if the provider designated North Oaks as the sole provider of certain medical services, including outpatient surgery, within a designated geographic area, according to court documents. The court concluded that the managed care contracts at issue were "reasonable and pro-competitive." The judge's opinion states, "It would be reasonable for North Oaks to seek exclusive managed care contracts as a competitive response to the fact that the physician-owners of St. Luke's have a financial incentive to refer patients to St. Luke's."

The trial judge ruled that North Oaks' 42% to 44% share of the outpatient surgery market was not dominant and did not pose barriers to new competitors because St. Luke's earned a 25% market share in its first year in business.

What's good for the goose
The decision that monopolistic leveraging tactics are permissible and not predatory could ball the fists of community hospitals in their fight with competing surgical facilities. "At the beginning, we were losing money," says Claire Manuel, BS, RN, administrator of St. Luke's, which has benefited from the national managed care contracts of Universal Surgery Centers, its managing partner since September 2001. "But we're digging out and the impact is not as significant. The number of contracts that are exclusive with the hospital has decreased dramatically."

It's easy to argue in favor of community hospitals like North Oaks, which have few profitable services that let it offset the losses sustained in providing the charity and inadequately reimbursed care that is the hallmark of a community hospital. To continue its public service mission, the thinking goes, community hospitals must compete for services like outpatient surgery that for-profit entities seek to cherry pick from the hospital. "Physicians or others certainly have the right to open an ambulatory surgery center like St. Luke's, and community hospitals like North Oaks must and will compete," says North Oaks legal counsel John Derenbecker.