Law does not stop payers from buying providers

May 1, 2012

Rise of payers buying providers leads to complex legal issues.

If an insurer can remove a link in the chain, it can improve efficiency and forget about contracting with independent doctors and hospitals. Indeed, the insurers would own the doctors and hospitals.

Not every insurer is a fan of consolidation. Physician groups and hospitals are being acquired even when they are contractually bound to the acquiring insurer's competitors. The trend, therefore, has the potential to alienate certain insurers and physician groups, especially smaller ones who may lack the size or sophistication to be part of any mega-merger.

As a result, insurers' attempts to enter, or at least influence, the provider side of the industry have not gone unnoticed in legal circles, especially by those who feel they may be getting shoved out of the market.

There is no provision of law that prevents insurers from purchasing doctor groups or hospitals. There is likewise usually no business relationship between insurers that would reasonably lead to litigation between them. Accordingly, the only place that jilted insurers can look for recourse is the network contract they had signed with the doctors groups who spurned them.

As such, Blue Shield of California (BSC), an insurer, recently filed for arbitration in California against Monarch Healthcare, a physician's group, over the latter's decision to merge with a subsidiary of UnitedHealth Group, one of BSC's largest competitors. BSC is accusing Monarch of various breaches of contract.

It claims that Monarch breached the parties' agreement by selling itself without BSC's permission. BSC also claims that Monarch solicited BSC's insureds to switch to other insurers and otherwise refused to treat persons insured under a BSC plan. The BSC case will serve as a litmus test for whether dissenting insurers and providers have any power to buck the trend of consolidation.

Although BSC's contract gave it the ability to consent to any sale of Monarch, it is unclear whether BCS's veto power was meant to be as unfettered as BSC suggests. Furthermore, whether Monarch actually breached its contract by soliciting BSC's members or refusing care to its participants remains to be seen and will be determined by the facts presented to the arbitrators.

If BSC wins its arbitration, it will do so solely on the strength of the language in its contract with Monarch. Accordingly, insurers would be wise to review the contracts of the groups they are acquiring. If they are among the insurers simply trying to maintain their current contractual relationships, insurers would be wise to structure their contracts with the consolidation trend in mind.

This column is written for informational purposes only and should not be construed as legal advice.

Jeffrey J. Lauderdale is a partner in the Litigation Practice group of Calfee, Halter & Griswold LLP.

Molly A. Drake is an associate in Calfee's Litigation Practice group.

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