State AG sues CHI Franciscan, alleging ‘price-fixing and anticompetitive deals’ in Kitsap

OLYMPIA — Attorney General Bob Ferguson filed a federal lawsuit today against CHI Franciscan, The Doctors Clinic and WestSound Orthopaedics, seeking to undo two agreements that he alleges raised prices and decreased competition for healthcare on the Kitsap Peninsula.

Thousands of Kitsap Peninsula patients have faced higher prices, increased wait times, difficulty in scheduling procedures, and a reduction in their choice of services and locations, Ferguson alleges. Increased prices and decreased competition have netted an additional $1 million for CHI Franciscan, Ferguson alleges.

“These transactions were intentionally made to decrease competition, increase prices, and pad CHI Franciscan’s bottom line at the expense of its patients,” Ferguson said in an announcement of the lawsuit.

Kitsap News Group tried to contact CHI Franciscan regional president David Schultz and senior vice president Thomas A. Kruse for comment and received these emailed responses from Cassandra Hoch of Quinn Thomas public relations:

Statement from CHI Franciscan Health: “We are disappointed that the Attorney General took this extreme action against physicians and caregivers on the Peninsula. The Doctors Clinic and Westsound Orthopaedics came to us separately, and each group asked us to consider an affiliation with them, because both groups were in financial distress and needed CHI Franciscan’s assistance to be able to continue to serve patients in the Kitsap community. We are very concerned that the AG’s actions will drive away physicians from the community, inhibit our ability to recruit new physicians to the area, and will ultimately result in fewer choices and less quality health care available to the residents of the community. Because of our concern about what a lawsuit of this nature might do to health care in the community, TDC, WSO, and CHI Franciscan attempted to negotiate in good faith with the AG to try to respond to his concerns without the need for him to file a lawsuit and cause disruption in the local health care community. The AG rejected our attempts to negotiate, and instead chose to act in a way that will cause instability in the Kitsap health care market for some time to come. CHI Franciscan plans to vigorously defend this case, and believes that the AG’s allegations are misguided and unfounded.” – Cary Evans, vice president, Communications & Government Affairs, CHI Franciscan Health

Statement from The Doctors Clinic: “Like many small clinics across the country, our doctors just want to care for their patients. Yet we face enormous pressures in today’s healthcare environment. Insurance reimbursement rates are way down and patient volumes can be unpredictable. In the face of these financial pressures, we approached CHI Franciscan about a partnership that keeps our clinics open and ensures our doctors can continue to live and practice on the peninsula.” – Jay Burghart, executive director, The Doctors Clinic

Statement from Westsound Orthopaedics: “As Orthopedic specialists, our primary goal is to provide high quality, accessible patient care. Our viability hinges on the patients we serve, as well as our relationship with the broader medical community and insurance providers. In the current healthcare economy, small practices like ours are increasingly squeezed and unsustainable. To remain open and keep expert specialist doctors on the Peninsula, we joined CHI [Franciscan Health] so we could continue to provide world-class care to our patients.” – Dawson S. Brown, MD

Bremerton Mayor Patty Lent, who helped compel the state Department of Health to reconsider its approval of the closure of Harrison Medical Center in Bremerton, was in a meeting this afternoon and unavailable for comment.

In July 2016, CHI Franciscan acquired the assets of WestSound Orthopaedics, a practice of seven orthopedic physicians based in Silverdale. Two months later, CHI Franciscan announced an affiliation with The Doctors Clinic, a multi-specialty practice with more than 50 physicians, which has seven locations throughout Kitsap County.

In the lawsuit, filed in U.S. District Court for the Western District of Washington, the state alleges that both transactions violate state and federal antitrust laws. Antitrust laws protect consumers by ensuring that companies compete to offer high-quality goods and services at low prices.

At the time of the transactions, CHI Franciscan and TDC said the affiliation was “an exciting direction [that would] enhance patient access and efficiency.”

But the Attorney General’s Office says it obtained documents during its investigation that showed officials at CHI Franciscan and TDC discussing the deals as a boon to their bottom line.

According to the Attorney General’s office, CHI Franciscan chief financial officer Mike Fitzgerald wrote in an email: “I am all for taking advantage of hospital based pricing. … It would be great to drop a couple of million more to our bottom line, if we think we can do it.”

The Attorney General’s Office said it began investigating CHI Franciscan’s agreements in Kitsap County in 2016 after receiving complaints from consumers.

The Attorney General’s Office alleges “the true motive for both deals was to gain negotiating clout over healthcare insurers and win the ability to charge higher rates for physician services.”

Both transactions also enabled CHI Franciscan to capture more patient referrals and shift services to its wholly owned hospital, Harrison Medical Center, Ferguson alleges.

“The transactions have hobbled CHI Franciscan’s competitors while allowing it to reap the benefit of more expensive, hospital-based rates, Ferguson alleges.

“Overnight, commercial insurers saw double-digit percentage price increases. Rate increases hit the vast majority of procedures covered by contracts with the defendants. These increases were passed on to patients in the form of higher out-of-pocket costs.”

The state asks the court to unwind the deals and prevent their recurrence. The complaint also asks the court to order the defendants to pay back revenues gained from the alleged price-fixing, as well as pay civil penalties and the state’s costs and fees.

Franciscan Health System, doing business as CHI Franciscan Health, is a non-profit healthcare system headquartered in Tacoma. It owns and operates seven hospitals in the Puget Sound region and includes more than 600 physicians.

Assistant attorneys general Erica Koscher and Stephen Fairchild are representing the state in the case.

Reconsideration hearing
The lawsuit comes eight days before the state Department of Health’s hearing to reconsider the proposed closure of Harrison Medical Center in Bremerton as part of the medical center’s move to an expanded campus in Silverdale. Harrison Medical Center is owned by CHI Franciscan.

The hearing is scheduled for 10:30 a.m. Sept. 8 in the Bremerton School District Office board room, 134 Marion Ave. North, Bremerton. The reconsideration as spurred by information related to CHI Franciscan’s bond rating, and CHI Franciscan’s financial feasibility based on 2016 data.

Mayor Lent and other city officials have long contended that the proposed move of 242 of 253 acute care beds from Bremerton to Silverdale will make medical care less accessible to residents of Kitsap’s largest city. She said in an earlier interview: “We do know that [Harrison Bremerton] is costly to operate with the infrastructure that is in place, but the thing is, we really need to concentrate on the beds. We need to retain some of those beds. They need to be operating acute care there.”

Earlier this year, the state Department of Health determined there was a need to relocate Harrison Bremerton’s acute care services to an expanded Harrison Silverdale, on which construction is now underway. The relocation project is proposed to be completed in two phases. The total estimated capital expenditure for both phases of the relocation project is $484.7 million, according to the Department of Health.

The expansion will put all of Harrison’s doctors, nurses, surgeons, and specialists in one place, resulting — proponents say — in improved coordinated care for patients. Construction is expected to be completed in 2020. Harrison Bremerton is expected to close after the expansion is completed. However, CHI Franciscan announced it plans to open a 30,000-square-foot outpatient clinic, with primary care and urgent care services, in Bremerton by 2018.

The City of Bremerton’s request for reconsideration of the certificate of need was one of three submitted to the state. The others were submitted by Deborah Pedersen of Port Townsend and Nancy Field of Sequim. They and the city say the department “erred in the sources, material and/or analyses upon which its decisions were based.” They present data that alleges CHI Franciscan doesn’t meet state benchmarks for ratios in long-term debt to equity, assets/current liabilities, assets funded by liabilities, operating expense/operating revenue, and debt service coverage.

“All four bond-rating agencies have lowered the CHI bond rating,” one of the reconsideration requests states. “As recently as March 2017, Moody’s rated CHI’s debt as one level above ‘junk bonds.’”

Kruse, CHI Franciscan’s senior vice president, wrote to the state Department of Health that although the company’s bond rating had changed, the company has $6 billion cash and the city “fails to demonstrate that the change had any impact on the ability to finance the Harrison project. Because of the uncertainty in health care caused by a new [presidential] administration, changes in bond rating are occurring frequently.”

Schultz, CHI Franciscan’s market president for the Peninsula Region, said in an earlier statement, “Our commitment to expand access to care across the peninsula remains steadfast and we look forward to the conclusion of this important process and opening state-of-the-art facilities in Bremerton and Silverdale in the coming years.”

Bremerton’s long ties to its hospital
Harrison Medical Center began in 1911 as City of Bremerton Hospital; Benjamin Harrison — a local merchant, not the 23rd U.S. president — was an early investor in the hospital, and his wife Anna volunteered there to care for people stricken during the flu epidemic of 1918. It became City General Hospital that year, was gifted to a community foundation in 1942 (it was initially gifted to the city, but that was prohibited by state law), and merged in 1956 with a surplused government hospital purchased by a foundation of local residents.

When times were tough — the Depression, the war years — the community raised money to keep the hospital going. The community raised more than $600,000 for the current medical center on Cherry Avenue.

Harrison Bremerton is located on 7.31 acres at 2520 Cherry Ave. The medical center, built in 1964, is 261,462 square feet.