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Trouble For Exclusive Contracts Between Hospitals and Doctors

Excluded doctors usually fail when they challenge exclusive contractual arrangements between hospitals and other doctors. However, two recent cases are clear exceptions to this rule.
A. Kessel v. Monongalia County General Hospital
In Kessel v. Monongalia County General Hospital Co., the West Virginia Supreme Court recently held that public and "quasi-public" hospitals may not enter into exclusive contracts with medical service providers that have the effect of completely excluding other physicians who have staff privileges at the hospital from the use of the hospital's medical facilities.
Monongalia General entered into exclusive contracts with three medical service providers that covered all of the hospital's cardiac, orthopedic and operative anesthesia at the hospital. Three anesthesiologists who had staff privileges at the hospital then sued the hospital and the three service providers on a variety of legal theories, including breach of contract, tortuous interference of a business relationship, due process violations, and restraint of trade.
The excluded doctors' breach of contract, tortuous interference and due process claims were based on the theory that the medical staff bylaws created a contractual right for the doctors to work at the hospital. However, the West Virginia court, following the majority of other jurisdictions, rejected this notion. The court also held that there was no due process violation, because the bylaw provisions calling for a fair hearing only apply when privileges are restricted for incompetence or misconduct - not when they are restricted merely for business reasons.
However, the court allowed the excluded doctors' restraint of trade claim to go forward. The court held that, while a private hospital has the right to exclude physicians from the use of its facilities, a public hospital does not have the same freedom, because a licensed physician should have the right to practice in the public hospitals of West Virginia, so long as the doctor "stays within the law and conforms to all reasonable rules and regulations of the hospital."
Curiously, although Monongalia Hospital is a private, not-for-profit corporation that receives no direct funding from West Virginia, the court, nevertheless, looked at several factors and determined that the hospital was a "quasi-public" organization, and, therefore, subject to this new no-exclusive contracts rule.
These factors include: provisions in the hospital's articles of incorporation that require all assets of the hospital to go to the county commission upon dissolution of the hospital; the fact that the hospital is housed in facilities that are owned by a public body and leased to the hospital; a public body's right to exercise "real and substantial power" over the selection of the members of the hospital's board of trustees; and the fact that public funds financed nearly all of the construction of the physical plant of the hospital.
Instead of exclusive provider contracts, the court noted that the hospital could have entered into "preferential contracts" to solve scheduling conflicts and coverage concerns. Such preferential contracts grant to a single provider the primary right to practice in a specific department, but provides exceptions in instances where another staff physician is specifically requested by a patient.
B. Sisters of Providence in Washington v. A.A. Pain Clinic
In another recent exclusive contracts case, the Alaska Supreme Court, in Sisters of Providence in Washington v. A.A. Pain Clinic, Inc., upheld a verdict for an excluded doctor's restraint of trade claims against a hospital and the anesthesiologist group with which the hospital contracted on an exclusive basis.
Generally, a restraint of trade claim requires the excluded doctor to show an injury to competition, and not just an injury to the excluded doctor. Therefore, of note in this case was the court's conclusion that injury to competition could be shown by harm to consumer welfare. The excluded doctor demonstrated such harm through evidence that: the group that had the exclusive contract was subject to frequent staff shortages; the chosen group members were not up-to-date on the most current medical procedures; and the chosen group dropped its unprofitable patients.
C. Conclusion
While these decisions need not be followed by courts in Maryland, these cases, nevertheless, show that in certain narrow circumstances courts may, in fact, provide some recourse to doctors who are excluded from practicing at a hospital because of an exclusive contract with other doctors.


March 22, 2005




Rosen, Barry F.


Health Care