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Health Care Industry

Case studies: the legal implications for health care's bad business practices

Physician Executive, March-April, 2005 by Timothy McIntire

Bad, or unethical, business practices have always been a concern for physicians and health care organizations. But recent high-profile business catastrophes refocused our attention on the responsibilities physicians must keep in mind when functioning as officers or board members.

Following federal legislation arising from the corporate scandals at Enron and WorldCom--and in light of the recent litigation against health care organizations for fraud or unethical billing practices--a review of potential ethical conflicts and pitfalls is important.

Case study 1: I was merely doing my duty as a medical staff member when I agreed to serve on the hospital's board of directors.

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Dr. Smith, the president of a local multispecialty clinic, was flattered and pleased to be nominated to serve on the board of directors of his local hospital. Competent in medical management from his tenure as a medical staff officer at the hospital and his experiences at the clinic, Smith gladly accepted the board position.

While serving on the board, Smith learned much about hospital governance and operations. Additionally, his expertise on quality and patient care served the other non-medical board members well because many operational and financial issues required both clinical and non-clinical guidance.

While attending the annual spring board of directors' retreat, Smith participated in many strategic planning discussions. The hospital's census was declining and hospital management engaged a national health care consulting firm to present the board with new ideas for producing revenue.

The consulting firm studied both national and local health trends, accessed both national and local utilization and demographic information, and formulated three specific strategic opportunities to reverse the hospital's declining revenues.

1. The first involved building facilities for a comprehensive oncology program and recruiting both a medical and radiation oncologist.

2. The second called for the alignment and merger with other hospitals in a 200-mile radius to form a regional, multi-hospital corporation to achieve some economies of scale.

3. The final strategic opportunity called for development of an outpatient imaging and surgery center.

As a practicing physician at the hospital, Smith raised numerous issues regarding operational inefficiencies at the hospital, all of which, if remedied, would cut costs and increase profitability. While Smith liked the oncology program plan and was neutral on the regional merger concept, he did not feel that the hospital should expand into what he felt was a physician outpatient imaging and surgical market.

After lengthy discussions and analysis by hospital management, the consultants and the board, however, it was decided that the best strategic opportunity for the hospital would be to build and to operate an outpatient imaging and surgery center.

Later the following summer, Smith's multispecialty clinic held its own strategic planning meeting. Suffering from the same declining revenues as the hospital, the clinic physicians began brainstorming ideas to enhance their revenues. Several suggested building an outpatient imaging and surgery center.

Should Smith participate in these discussions?

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Duty of loyalty

Any time a person has a duty of loyalty to a competitor or potential competitor, ethical conflicts often arise.

Here, Smith has a duty of loyalty to both his clinic as its president and to the hospital, as a member of the board of directors. He must be very careful with the information he learns at both the hospital and the clinic. Using information learned at one place to assist the other forces an ethical and legal conflict. Because he is the president and an officer in the clinic, and before accepting a board position, Smith should fully disclose his position and duties as the clinic's president to the hospital and his position and duties as a hospital director to the clinic.

Even after full disclosure, as a director on the hospital's board faced with attending part or all of a strategic planning retreat, Smith should

* Get the hospital to consent, in writing, that he can share any confidential information learned at the retreat or in his position as a director with his clinic (very unlikely)

* Not attend any board or planning retreat presentations or discussions regarding issues that may potentially conflict with the clinic

* After intentionally or accidentally attending any board or planning retreat presentations or discussions regarding potentially conflicting issues with the clinic, dismiss himself from any discussions and decisions the clinic may make regarding the information he learned from the hospital.

Courts take very seriously a breach of one's duty of loyalty. If the clinic were to use the information Smith learned from the hospital in his role as a director to "beat the hospital to the market" in an imaging and outpatient facility, any lost profits the hospital suffered from having two competitors in the market rather than one may come from Smith's personal assets.

Health Care Industry

Case studies: the legal implications for health care's bad business practices

Physician Executive, March-April, 2005 by Timothy McIntire

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