Tad Sooter

Kitsap

TACOMA — The state attorney general's office filed a lawsuit Thursday against CHI Franciscan Health and two Kitsap County physicians groups, claiming arrangements between the organizations violate antitrust laws.

The suit seeks to unwind agreements between CHI Franciscan (parent company of Harrison Medical Center), The Doctors Clinic and WestSound Orthopaedics, which attorneys for the state say quashed competition in the Kitsap health care market while raising prices for insurers and patients in an arrangement that amounted to price fixing.

Attorney General Bob Ferguson said his office launched an investigation into the deals last year after receiving complaints from patients and hearing concerns from state legislators.

“It became pretty clear in a hurry that there was significant harm being done to consumers," Ferguson said in an interview with the Kitsap Sun.

The state filed its lawsuit under seal in U.S. District Court for the Western District of Washington in Tacoma. A redacted copy was provided to the Kitsap Sun (attached below).

In a statement to the Kitsap Sun, CHI Franciscan vice president for communications Cary Evans called the attorney general's lawsuit an "extreme" action that could "cause instability in the Kitsap health care market for some time to come."

Evans said WestSound Orthopaedics and The Doctors Clinic individually sought out partnerships with CHI Franciscan because they were in financial distress and needed the help of the larger health system to continue serving patients. He said the attorney general's office rejected CHI Franciscan's attempts to negotiate.

"CHI Franciscan plans to vigorously defend this case, and believes that the AG’s allegations are misguided and unfounded," Evans said.

In separate statements, The Doctors Clinic CEO Jay Burghart and WestSound Orthopaedics physician Dawson Brown emphasized the financial pressure their practices were under before entering into agreements with CHI Franciscan.

"In the current healthcare economy, small practices like ours are increasingly squeezed and unsustainable," Brown said. "To remain open and keep expert specialist doctors on the Peninsula, we joined CHI FH so we could continue to provide world-class care to our patients."

CHI Franciscan acquired WestSound Orthopaedics' assets in July of 2016 and shortly after announced a professional services agreement with The Doctors Clinic, a Silverdale-based multi-speciality group. CHI Franciscan bought out the The Doctors Clinic's ambulatory surgery center, imaging and laboratory services.

Both The Doctors Clinic and WestSound Orthopaedics joined CHI's Franciscan Medical Group, though The Doctors Clinic remains physician owned.

At the time, executives of WestSound Orthopaedics and The Doctors Clinic acknowledged the financial strain of trying to remain independent as one motivation for working with CHI Franciscan but also extolled the potential benefit to patients.

"This is a relatively creative way to work with CHI Franciscan, and at the same time continue to deliver a product into the health care marketplace we believe the patients of Kitsap County appreciate," Burghart told the Kitsap Sun after the arrangement was announced.

Partnerships raised prices

The state's lawsuit contends the deals were harmful to patients and violated both state and federal antitrust laws.

By acquiring WestSound Orthopaedics and partnering with The Doctors Clinic, CHI Franciscan consolidated the largest providers of orthopedic services in Kitsap, greatly reducing options for patients, according to the news release.

The state contends the arrangements with the two practices gave CHI Franciscan greater negotiating power with insurance companies, allowing the medical group to charge higher prices for services. The lawsuit seeks to prove The Doctors Clinic and Franciscan Medical Group were competing for patients while working together to negotiate rates, an arrangement that would constitute illegal price fixing.

By referring more patients to Harrison Medical Center facilities, CHI Franciscan also could charge more expensive hospital-based fees.

Insurers saw double-digit percentage price increases "overnight," according to the attorney general's office. The complaint also claims Kitsap patients have experienced longer wait times, difficulty scheduling appointments, fewer options for services and the locations where they receive care.

Officials at CHI Franciscan and The Doctors Clinic acknowledged financial motivations for their agreement in private communications. According to the lawsuit, CHI Franciscan Chief Financial Officer Mike Fitzgerald wrote in an email: "I am all for taking advantage of hospital based pricing... It would be great to drop a couple of million more to our bottom line, if we think we can do it."

In response to the partnership with Franciscan Medical Group, a former president for The Doctors Clinic wrote sarcastically to the group's current medical director: "You can now get your outpatient care in a complex, relatively unsafe, and vastly more expensive location. You are welcome, Kitsap County..."

The state's lawsuit asks the court to unwind the arrangements between CHI Franciscan and the two Kitsap practices and issue civil penalties. The complaint also asks the court to order the defendants to pay back "ill gotten gains of the price-fixing agreement," estimated by the state to be more than $1 million.

Unusual case

Representatives of the Attorney General's office could not say for certain whether this was the first antitrust suit brought against health care provider groups in the state.

The Federal Trade Commission and the attorney general for Idaho recently prevailed in a similar case, forcing St. Luke's Health System of Boise to relinquish ownership of Saltzer Medical Group, Idaho's largest independent physicians group.

With health care mergers and affiliations becoming commonplace in Washington and across the country, Ferguson said more antitrust actions are possible.

"It would not surprise me if we were to see something similar in the future," Ferguson said. "This is an area of focus for me and my team."

Stephen Calkins, a law professor at Wayne State University in Detroit and former general counsel for the Federal Trade Commission, said antitrust cases are common in the health care industry, particularly with so many large hospital groups, pharmaceutical companies and insurance carriers attempting to merge.

“Health care represents a large part of the antitrust docket in America,” Calkins said Thursday.

The case against CHI Franciscan and its partners is somewhat unusual, he said, because it involves mergers with small physicians groups and was brought solely by the state’s attorney general, without federal involvement.

In the matter of price fixing, Calkins said the state needs to prove the businesses remained autonomous but worked together to negotiate prices.

“If you prove that two competitors agree on prices, then that’s illegal automatically,” he said.

The defendants, however, could argue their organizations were integrated on many levels and were not simply working together on prices.

In defense of their merger, the defendants could argue the small physicians groups would have failed financially and shut down had they not joined the larger health system. Calkins said the groups would have to prove that they exhausted all other alternatives, including mergers with other health systems.

Growing influence

CHI Franciscan, a subsidiary of Colorado-based Catholic Health Initiatives, rapidly expanded its reach in the West Sound region after entering into an affiliation agreement in 2013 with Harrison Medical Center.

In addition to its arrangements with WestSound Orthopaedics and The Doctors Clinic, the medical group bought five medical imaging centers in Kitsap in 2015 and now owns all but one imaging center in the county. It also partnered with Seattle's Virginia Mason Health System, which operates a Bainbridge Island clinic.

CHI Francisan encountered growing opposition from residents, independent medical providers and elected officials this year as it moved ahead with plans to construct a new hospital campus in Silverdale and close Harrison Bremerton. Opponents decried the potential loss of services in Bremerton and expressed alarm over CHI Franciscan's overwhelming influence in the peninsula's health care market.

In a guest column published in the Kitsap Sun in February, state Reps. Sherry Appleton and Michelle Caldier called attention to increased costs for services related to CHI's partnerships with medical practices in Kitsap.