The Sioux City Journal reported last week (on 12/29/17) that a hospital-physician joint venture ASC, Pierce Street Same Day Surgery, filed suit to enforce covenants not to compete against a number of current and former physician investors.
Pierce Street is also suing the medical group, Tri-State Specialists, owned by some of the individual physician defendants.
The flashpoint is the defendants’ development of a competing ASC, Riverview Surgical Center.
That’s the straightforward news. But, what’s really going on? And why should you, probably not a surgeon in Sioux City, care? Keep reading. It will become clear, really clear.
Pierce Street, a joint venture between physicians and UnityPoint Health – St. Luke’s hospital, is located in Sioux City, Iowa, a Certificate of Need (“CON”) state. Pierce Street alleges that the defendant doctors signed agreements that bar them from being involved in a competing ASC located within 30 miles of Pierce Street, both while they are owners and for a year after.
Tri-State Specialists and the defendant physicians are developing their competing facility in Nebraska, just across the Missouri River, the state boundary, from Sioux City. That site is 4 miles away from the Pierce Street ASC.
Here’s what’s interesting for any physician, for any ASC, and for any hospital administrator, whether you’re in Sioux City, Scranton, or San Francisco, or anyplace else.
1. I haven’t seen the underlying agreements and so I can’t tell you if I think the specific covenants not to compete are enforceable or not, but either way, physicians that sign them and facilities that demand them must understand their limitations and their obligations. They may be BS (I’ve worked with a number of physicians on their escape from unenforceable provisions). They may be enforceable, in which case the damages could be severe. But either way, those that demand them are often serious about attempting to enforce them . . . whether they are ultimately enforceable or not . . . and the transaction costs of that battle can be staggering.
2. Nebraska is a non-CON state. Facilities located in a CON state, like Iowa, may think that they’ve blocked competition, but if they’re located anywhere near a border with a free state, the protection is illusory.
3. More telling of the future, and while I can’t get into the heads of the competing physicians or of the Tri-State Specialists’ medical group CEO, but I’d guess that they realized that they didn’t need a hospital partner to run an ASC. Pierce Street alleges that it will lose 60% of its volume to Riverview, and that’s sure to put a pile of profit into the Riverview physician-owners’ pockets. As a regular reader of the blog, you know that that’s one of my main points: hospitals are dying and, so, too, are hospital-affiliated ASCs. Hospitals are becoming anchors around the feet of entrepreneurial physicians.
4. Riverdale is being built next to an existing Marriott hotel, with the intention that patients and their families can stay right next door. That’s a low-cost twist on my concept of the Massive Outpatient Clinic™ (watch the related Success in Motion video), in essence, a “non-hospital hospital” campus. Just as physicians no longer need a hospital to partner in an ASC, you no longer need a hospital to partner in what is nearly equivalent to a hospital.
Comment or contact me if you’d like to discuss this post.
Mark F. Weiss