Will South Carolina Hospitals Expand the Use of Economic Credentialing if the Certificate of Need Program is Repealed?

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02.25.2022

The current version of South Carolina Senate Bill S. 290 that repeals the South Carolina Certificate of Need (CON) program, except for nursing homes, is now pending in the House Ways and Means Committee.  If CON repeal becomes law, many in the healthcare industry believe that there will be a significant increase in health care facilities and services. This increase could result in a more difficult economic environment for existing South Carolina hospitals.  Hospital leaders across the state have expressed their view that CON repeal will lead to the proliferation of facilities and services owned by physician members of hospital medical staffs.  The concern is that a physician or group of physicians will develop a for-profit healthcare facility (e.g. hospital or ambulatory surgery facility) or medical service (e.g. imaging or cardiac catheterization) to which the physician owners will refer their patients with the most lucrative medical insurance coverage thereby providing high margin economic benefit to the physician-owned facility/service. Uninsured patients or patients with lower paying health plans, however, could be referred to the community-based not-for-profit or government owned hospitals.  If this occurs, hospitals could see a decline in revenue that had previously been used to subsidize services that community-based hospitals have been able to offer, including services to patients with limited financial resources.  The merits of these points will continue to be debated as S. 290 makes its way through the General Assembly.  The result of this debate and the fate of S. 290 will be known by late Spring when the current legislative session comes to an end.  

If S. 290 becomes law, the concerns that hospital leaders have expressed about CON repeal could become a reality.  The question that will face hospitals at that point is what can be done to respond to the potential negative economic fallout? 

One option that hospitals may begin to explore to address these concerns is the use of economic credentialing.  This is not a new concept.  Economic factors in the medical staff credentialing process are often considered by South Carolina hospitals.   Exclusive contracting may be the most common example.   A hospital will contract with one physician group to cover a service to allow for greater predictability and control of that service.  This commonly occurs in ER, radiology and anesthesiology coverage, but it occurs in other service lines as well.  If CON is repealed, however, the focus of economic credentialing may turn more to the financial conflicts that may arise in the relationship between medical staff members and the hospital.   For instance, if a private group of surgeons who primarily perform outpatient surgical procedures in the hospital’s operating rooms decides to build a freestanding ambulatory surgery facility (ASF) across the street from the hospital and then shifts its most financially lucrative surgeries to that ASF, is the hospital required to allow these surgeons who are now competitors to continue to enjoy the privilege of medical staff membership?   South Carolina law appears to answer this question in the negative, providing a basis upon which hospitals may protect their own financial survival and further their community mission through credentialing actions.   

1. South Carolina hospitals have considerable discretion in medical staff credentialing decisions.

In South Carolina, no individual is automatically entitled to membership on a hospital medical staff or to the exercise of any clinical privilege merely because he is licensed to practice in any state, because he is a member of any professional organization, because he is certified by any clinical examining board, or because he has clinical privileges or staff membership at another hospital without first meeting the criteria for membership established by the governing body of the respective hospital.  S.C. Code Ann. § 44-7-260(D)  

South Carolina courts grant hospital boards broad discretion to make credentialing decisions, and the courts are reluctant to interfere with these decisions.  The South Carolina Court of Appeals specifically held that with respect to a public hospital:

It is not the function of the court to examine a hospital’s administrative decision if the hospital has granted the physician procedural due process and has not acted in an arbitrary or capricious manner.  See Lew v. Kona Hospital, 754 F. 1420, 1425 (9^th Cir. 1975).  Substantive due process requires only that a public hospital not exclude a physician from practice therein by rules or acts which are unreasonable, arbitrary, capricious or discriminatory.  See In Re: Zaman, 285 S.C. at 347, 329 S.E.2d at 437.

Huellmantel v. Greenville Hospital System, 303 S.C. 549, 402 S.E.2d 489 (Ct. App.1991).   The South Carolina Supreme Court subsequently adopted the Huellmantel holding giving broad discretion to public hospitals over medical staff membership decisions.  See Vora v. Lexington Medical Center, 354 S.C. 590, 582 S.E.2d 413 (2003).  Likewise, the South Carolina Supreme Court had previously established the court’s role in reviewing the credentialing decisions of private hospitals:

It is well settled in South Carolina, and throughout the country, that it is improper for the courts to review the decisions of governing boards of private hospitals concerning the staff privileges of practitioners.  This court adopted the majority rule many years ago in the case of Strauss v. Marlboro County Hospital, 185 S.C. 425, 194 S.E. 65 (1937).

Wood v. Hilton Head Hospital, Inc., 292 S.C. 403, 405 356 S.E.2d 841, 842 (1987).  “A private hospital is free to adopt reasonable regulations for the conduct of its affairs.” Gowan v. St. Francis Community Hospital, 275 S.C. 203, 268 S.E.2d 580 (1980).  This precedent firmly establishes solid legal footing upon which South Carolina hospitals may make difficult credentialing decisions.

1. Economic credentialing may be considered when there is a financial conflict of interest.

South Carolina hospital boards have a duty to take the necessary steps to preserve and maintain the hospital’s assets.  It is black letter law that the governing body of any corporate entity has a duty of loyalty to act in the best interest of the corporation, including the duty to preserve corporate assets.  See S.C. Code Ann. § 33-31-830 (Duties of Boards of Nonprofit Corporations) and § 33-8-300 (Duties of Directors of For Profit Corporations). 

Many governmental hospitals are exempt from tax pursuant to § 501(c)(3) of the Internal Revenue Code.  The boards of such tax-exempt organizations have a duty to assure that the organization operates to further its charitable purpose as opposed to benefiting private interests.  See Treas. Reg. 1. 501(c)(3) – 1(c)(2) and Treas. Reg. 1.501(a) - 1(c); see also, IRC § 4958 and Treas. Reg. 53.4958.  Further, the enabling legislation creating many public hospitals specifically charges the hospital board with the responsibility to protect the hospital’s assets. 

The South Carolina Court of Appeals has touched on economic credentialing involving exclusive contract arrangements but our courts do not appear to have directly addressed credentialing decisions based on a medical staff member’s financial conflicts of interest.  See Peek v. Spartanburg Reg’l Healthcare Sys., 367 S.C. 450, 626 S.E.2d 34 (Ct. App. 2005)(certiorari denied (Mar 08, 2007)).  In Peek the Court of Appeals did affirm a preliminary injunction allowing the plaintiff to maintain privileges while the case proceeded on the merits.   The Court of Appeals did not address the merits of the plaintiff physician’s challenge to the hospitals exclusive contract arrangement that acted as a barrier to plaintiff practicing medicine at the hospital.  It is not clear how to reconcile this outcome in Peek with Huellmantel and Vora, other than it was only preliminary relief that did not address the merits of the hospital’s action. 

It is from this legal backdrop that South Carolina hospitals will need to evaluate economic credentialing options if the repeal of CON results in further financial stress on hospitals and begins to jeopardize their community mission. 

In the past, some South Carolina hospitals, as part of the credentialing process, have sought to evaluate whether physician applicants for medical staff membership or current staff members have economic relationships that are in conflict with the hospital.   This inquiry has occurred when a physician is applying or reapplying for privileges and has also occurred as an ongoing process during staff membership.  The inquiry is typically done by submitting written questions to the physician addressing the nature of the physician’s relationships with other hospitals or healthcare entities.  The governing body of the hospital will review the physician’s answers to the questions to determine if a conflict of interest exists as a result of the relationship. If it does, the physician may be denied medical staff privileges or removed from the medical staff, or some other limitation on the medical staff membership or privileges may be imposed.

As economic credentialing policies have been implemented throughout the country, physicians have challenged the legality of the policies.  Their primary arguments are that such policies violate their constitutional right to due process, violate the federal anti-kickback statute, violate anti-trust laws, constitute unfair trade practices and breach their contractual relationship with the hospital.  Although a few physicians have successfully pursued these types of allegations, it appears that in most jurisdictions, like South Carolina, the courts are reluctant to interfere with the credentialing decisions of hospitals, even when those decisions are rooted in economic considerations. 

The seminal case with respect to this issue was a federal district court decision in Pennsylvania in 1981, Robinson vs. Magovern, 521 F.Supp. 842 (W.D. Pa. 1981).  In Robinson, Alleghany General Hospital denied a cardiovascular surgeon’s application for medical staff privileges on the basis that the physician’s addition to the medical staff would be inconsistent with the hospital’s institutional objectives and competitive strategy.  Id.  The court reviewed the hospital’s institutional objectives, marketing strategy, and revitalization campaign.  Id.  As the court noted, these campaigns relied heavily on the leadership of the hospital’s medical staff in order to accomplish the hospital’s various business objectives.  Id.  The court noted that, as a result of this dependency on medical staff leadership, “Alleghany General’s institutional objectives and competitive strategy influence the hospital’s evaluation of applications for staff privileges.”  Id. 

 The court further noted that, in reviewing the plaintiff’s application for privileges, the credentialing committee was concerned with the plaintiff’s ability to effectively contribute to the hospital’s medical staff and overall goals due to his active affiliations with competing institutions.  Id.  On the basis of this concern, and various others, the hospital denied the plaintiff’s application for medical staff privileges.  After a 10 week, non-jury trial, the court concluded, “(t)he hospital’s policy of encouraging its medical staff to concentrate their practices at Alleghany General does advance the hospital’s institutional objectives . . . . We conclude that the criteria that Alleghany General used when evaluating Dr. Robinson’s application for staff privileges were reasonably related to its institutional objectives . . . . The selectivity that Alleghany General exercises when reviewing applications for staff privileges enhances Alleghany General’s ability to compete with other regional referral hospitals, but it does not unduly impair a patient’s ability to obtain the services of a physician of his choice.  Therefore, we conclude that Alleghany General’s institutional objectives and competitive strategy do not impose an unreasonable restraint on trade.”  Id.

          In the South Dakota case of Mahan v. Avera St. Lukes 621 N.W.2d 150 (S.D. 2001), nonprofit hospital Avera St. Lukes (“ASL”) Board of Trustees passed two resolutions that closed the medical staff with respect to certain spinal procedures, and closed staff membership to any new applicants for orthopedic surgery services.  Id. at 153.  A suit for an injunction was brought by a group of Aberdeen orthopedic surgeons who had opened a day surgery center in direct competition with ASL.  Id.  On appeal from the trial court’s granting of an injunction in favor of the plaintiff-physicians, the state’s highest court stated ASL’s response “to the effect the [day surgery center] would have on the economic viability of ASL’s hospital and the health care needs of the entire Aberdeen community” was within its powers to ensure its economic survival, and “the courts should not interfere in the internal politics and decision making of a private, nonprofit hospital corporation when those decisions are made pursuant to its Corporate Bylaws.”          

         In contrast, the Supreme Court of Arkansas held that a hospital’s conflict of interest credentialing policy constituted tortious interference with a contract.  Baptist Health v. Murphy, 2010 WL 3835844 (Ark. 2010).  The court held that the cardiologists proved the elements for tortious interference.

It remains to be seen whether South Carolina courts will follow the majority of jurisdictions that have upheld hospital credentialing actions based on a medical staff member’s potential financial conflicts.   Well established precedent does suggest that South Carolina hospitals will be afforded considerable latitude in using credentialing to protect their financial health.