Success requires good contract or none at all

December 1, 2005

Over the years, I have been invited to speak at a number of conferences for radiologists that focus on practice management issues. As a result, I have enjoyed the opportunity to listen to many excellent talks that provided radiologists with incredibly good information and advice on how they can structure their group to be successful.

Over the years, I have been invited to speak at a number of conferences for radiologists that focus on practice management issues. As a result, I have enjoyed the opportunity to listen to many excellent talks that provided radiologists with incredibly good information and advice on how they can structure their group to be successful.

After hearing those talks and after reflecting on my experience working with radiology groups, I developed a short list of what I consider to be the attributes of a successful group practice, or at least one capable of being successful. Others probably have their own criteria, but here is my list of the features of a successful group:

- a "good" hospital contract (or none at all);

- no (or limited) noncompete agreement with the hospital;

- an intra-radiology group noncompete;

- ownership in the technical component services through imaging centers that are wholly radiology-owned by the radiology group or joint-owned with a hospital and/or other physician groups; and

- outside professional reading arrangements.

Of course, there are many other attributes of success: a cadre of quality generalist and subspecialty radiologists, good governance that nurtures leadership, talented business managers, a first-rate coding and billing operation, attention to compliance with regulatory requirements, and so on. But I keep going back to my short list.

- Hospital contract. It is still true that most radiologists provide their services within hospitals, despite a significant migration of diagnostic imaging services from hospital to freestanding settings over the past several years. Radiologists and their pathology, anesthesiology, and emergency medicine colleagues still retain the characterization as "hospital-based" physicians.

Almost universally, hospital CEOs want all hospital-based groups to be under contract. Whether to sign on to such an agreement is the real question.

Undoubtedly, an exclusive contract can be of great benefit to a radiology group. If it is genuinely exclusive, such an agreement can assist the recruitment and retention of well-trained radiologists to the group. Unfortunately, the hospital agreement can also serve as the principal vehicle by which the hospital gains leverage over the group regarding any number of economic management issues.

A good hospital-radiology contract is exclusive and carefully defines the scope of radiology services to include existing and new services. It clarifies that the group is the exclusive provider of all professional radiology services throughout the facility and at any other facility the hospital owns or manages. A good agreement would not mandate participation in all managed-care plans, would not subject radiologists' fees/charges to hospital approval, would not make medical staff privileges coterminous with the termination or expiration of the agreement, would not require free services to hospital employees, and would not require radiologists to take all the call for radiology services that are nonexclusive.

- Avoidance of noncompete. Most important, a good hospital agreement does not keep the radiology practice from competing for technical and professional radiology services. The radiology group that has the ability to invest in technical component radiology services and provide outside professional component services is most likely to take advantage of new opportunities in today's imaging market.

I view the avoidance of the noncompete clause as the most important issue in any hospital-contract negotiation today. A decade ago, I would have characterized preservation of fair hearing rights as the most important element of a hospital contract. Today, because of the shift of imaging from the hospital to freestanding settings and the need to be able to provide services outside the hospital setting, avoidance of contract obligations that prevent competing with a hospital is essential to the success of any radiology group.

Should the radiology group be compelled for any reason to accept a noncompete clause, the group would be best served if it can narrowly restrict the clause to technical component services. The best approach generally is to offer the hospital a right of first refusal to participate in any technical component venture the radiologists pursue. But, in all events, should the radiologists accept any restrictions on their ability to provide technical or professional component services, the agreement should not limit their ability to provide services after the termination or expiration of the hospital contract. A "tailing" noncompete clause is one that would continue the restriction for one or more years after the contract ends. Such a contract provision would require radiologists in some communities to actually relocate if they were unable to provide services in the geographic market of the hospital after the contract expires.

The bottom line is that no contract is better than a bad contract. No regulatory requirement mandates that radiologists have a special contractual relationship with a hospital. When faced with an agreement that places the radiologists in a worse position than they would be in without a contract-particularly if the proposed agreement includes a noncompete-my recommendation would be to just say "no" to that agreement.

- The intra-radiology group noncompete. Despite my strong admonitions against noncompete provisions in hospital contracts, I believe it is vital to the interest of a radiology group that it have an intragroup noncompete for both nonshareholder and shareholder radiologists. In a contract negotiation with a hospital, the radiology group is a single economic entity and should be able to leverage its integrated group status.

The noncompete clause by and among the radiologists has the effect of making the hospital deal with the group as a whole and, candidly, makes it more difficult for the hospital to replace the incumbent group. Radiologists need leverage sometimes, and this is one feature of their structure that can lawfully give it to them.

Hospitals have come to understand the potential obstacles that the intragroup noncompete clause may have in replacing the incumbent radiology group. If the hospital can contract with a new group that may need to "cherry-pick" from the old group to assure enough full-time equivalents to staff the hospital radiology department, the ability to hire some holdovers from the old group makes the incumbent group easier to replace. Because hospitals have recognized the power of the noncompete feature of radiology group employment agreements, I now regularly see hospital-drafted contracts containing language that would have the radiology group agree not to enforce its intragroup noncompete clause upon expiration or termination of the agreement. The astute group would never allow itself to be cherry-picked. It says no to these waiver provisions and uses its integrated group status to its maximum benefit in its relationship with the hospital.

- Joint ventures. Radiologists who confine themselves to providing services solely to hospitals unnecessarily exclude themselves from the trend in outpatient imaging, which is clearly shifting from hospitals to freestanding imaging centers. The market share of outpatient MRI, CT, and nuclear medicine services performed outside the hospital has grown dramatically in the last five to seven years. The radiology group with ownership in the technical component of services will not be left on the sidelines as this trend continues.

The successful group will be unencumbered by a noncompete with the hospital and will find a way politically to become an owner of the technical component of the services. Particularly for PET services, being a provider of only the professional component deprives radiologists of the significantly more lucrative technical component opportunity.

A radiology group unencumbered by a noncompete would do well to retain a knowledgeable radiology business consultant to help evaluate the group's market and to open its own imaging centers or propose imaging joint ventures to hospitals or other potential partners.

While the Stark rules currently permit imaging ventures between radiologists and nonradiology physician investors, the Office of the Inspector General does not favor such arrangements. The radiology group that considers joint ventures with cardiologists, orthopedic surgeons, or neurologists should work closely with legal counsel to structure such arrangements in a manner consistent with regulatory requirements.

- Outside radiology arrangements. Technology allows radiologists to receive and interpret radiological studies from hospitals and imaging centers in their own communities and beyond. And recent modifications to Medicare rules for billing for purchased interpretations have opened the door somewhat for teleradiology services. The successful group will learn to market its subspecialty expertise and harness technology to increase its portfolio of interpretation arrangements.

So, here is my personal template for the (potentially) successful radiology group. It is a group that may provide significant hospital services, but it does so pursuant to a good radiology contract, or it has no contract at all. The radiology group not encumbered by a hospital noncompete will take advantage of the trend in outpatient imaging toward freestanding settings.

Mr. Greeson is a partner in the healthcare group of Reed Smith LLP in Falls Church, VA. He can be reached at 703/641-4242 or tgreeson@reedsmith.com.