A key strategy for Columbia/HCA Healthcare Corp. is to offer physicians ownership interests in its local healthcare systems, but those ownership ties can preclude them from entering other healthcare deals.
A copy of Columbia/HCA's confidential offering document for Broward Healthcare System in the Fort Lauderdale, Fla., area reveals that physicians who become equity partners with Columbia can't invest in any other healthcare ventures.
The restriction, which is part of a non-compete clause in the shareholder agreement, bans its physician shareholders from having ownership interests in other hospitals, diagnostic centers or ambulatory businesses.
The Broward syndication was the Louisville, Ky.-based chain's most successful, raising $30 million from more than 450 physicians (March 7, p. 3). Physician shareholders now own a 20% stake in Columbia/HCA's Broward system of five hospitals, one home healthcare agency, one surgery center and one psychiatric hospital.
Physicians bought the shares for $15 each. They had to buy from 1,000 to 10,000 shares, putting their investments at from $15,000 to $150,000 each.
Obstructions.But the non-compete clause apparently got in the way of one physician's potential investment.
Jaswant Pannu, M.D., said that because he is opening an outpatient surgery center in the area next month, he was told that he couldn't invest in the Broward syndication.
"They're picking on me," Dr. Pannu complained. "I desperately want to buy. Why is it other people are able to make a good investment and I'm not?"
Dr. Pannu contends that he's been a longtime admitter of patients to 204-bed Westside Regional Medical Center, a Columbia/HCA hospital in Plantation, Fla. While he's contributing to the profitability of the hospital, he isn't allowed to benefit from it through an investment interest, he said.
However, Daniel Moen, Columbia/HCA's Florida group president, said Dr. Pannu is in error. "We'd welcome his investment," Mr. Moen said.
However, he said non-compete clauses are standard and necessary parts of such syndications. He also said he considers Columbia/HCA's a "friendly non-compete" because Columbia/HCA will buy back a physician's shares at the current market value rather than the original price.
Waivers.However, the non-compete clause was waived for physicians investors of a Medical Care America surgery center in the area. That could stem from Dallas-based Medical Care's affiliation agreement with Columbia/HCA.
Medical Care, the nation's largest chain of outpatient surgery centers, is a natural partner for Columbia/HCA because 42 of its 93 freestanding centers are located next to the chain's hospitals.
Because of that, a non-compete clause in the Columbia/HCA syndication could pose a problem for Medical Care if its physician shareholders also wanted to invest in a Columbia/HCA syndication.
What's more, most of Medical Care's surgery centers are joint ventures with physicians, and those shareholder agreements also have non-compete clauses, said Jonathan Bond, Medical Care's senior vice president.
However, in the Broward Health System syndication, Columbia/HCA and Medical Care "came to a settlement on how to deal with that situation," Mr. Bond said. However, he declined to provide further details.
Columbia/HCA's next syndication in Florida-where it operates one-fifth of the state's hospitals-will be in the Orlando area. That deal is expected to include seven Medical Care surgery centers. Obviously, that would preclude any non-compete problems.
Safe harbors.Columbia/HCA has developed strategies to overcome other problems that might normally be associated with physician partnerships. For example, the Broward offering includes an extensive explanation of HHS' "safe harbor" regulations and Florida's Medical Practice Act. Both are aimed at potential abuses in physician ownership of healthcare services.
For example, Columbia/HCA fits in the safe harbor that requires that no more than 40% of a healthcare venture's ownership come from physicians who could make referrals to it. Physicians own 20% of the Broward system.
However, another "safe harbor" could prove more difficult. It requires that no more than 40% of a system's gross revenues come from physician investors. In the Broward offering, Columbia/HCA executives say they can't guarantee that the system will stay within that percentage.
Harvey Yampolsky, an attorney who specializes in safe harbors, said it's difficult for healthcare systems to predict what percentage of revenues will come from physician investors.
"You have to monitor your referrals, and if you're tipping over 40%, maybe your investors are going to have to refer to the competition," he suggested.
However, Mr. Yampolsky, a partner in the Washington law firm of Arent Fox, said that exceeding the 40% standard may not mean trouble.
"It's not as if the day you go to 40% you commit a criminal offense," he said, noting that if the venture fits other parts of the safe harbor regulations, the federal government may not challenge it.
Mr. Moen said the Columbia/HCA hospitals aggressively recruit other non-investor physicians to the hospital so the networks can stay below the 40% threshold. Columbia/HCA's ventures in Broward and Miami's Dade County involve 1,500 physicians, or one-tenth of the physicians practicing in that area.