In this article, David A. Argue presents a model of hospital competition in which mutual free riding by hospitals (for patients) and physicians (for privileges) results in a “second-best” allocation of resources. That allocation is upset when physicians own a competing specialty facility and thus are able to limit the free riding of the hospital at which the physicians have privileges. Hospitals often respond to physician ownership of competing facilities by (1) limiting or terminating admitting privileges of physicians who have ownership in a competing facility, which is also known as economic credentialing, (2) restrictive managed care contracting in which plans that contract with the hospital on an exclusive basis receive more favorable discounts, or (3) vertically integrating into the employment of physicians. Each of these responses has the potential to harm competition. But each of them also has the potential to mitigate the economic inefficiency that arises from eliminating the “second-best” result of mutual free riding.
The article discusses the model in depth and applies it to several litigated cases involving physician ownership of specialty facilities. The decisions in these cases, including Mahan v. Avera St. Luke’s, Gordon v. Lewistown Hospital, Baptist Health v. Murphy, and others, are not written in terms of free riding and second-best solutions, and some of them are not even antitrust cases. Nevertheless, the applicability of the economic model is apparent in the facts of the cases.