How to Form and Operate a Network of Competing Providers

Polsinelli PC. In California, Polsinelli LLP

Antitrust Rules for Provider Collaboration: How to Form and Operate a

Network of Competing Providers

Mitchell D. RaupMarch 13, 2015

real challenges. real answers. sm

Agenda:Antitrust Rules for Provider Collaboration

� Why collaborate?� Integration strategies� Ancillarity: what agreements are

reasonably related to the network’s legitimate goals?

� Rule of reason analysis� Practical advice for structuring antitrust-

compliant provider networks

Why Collaborate?

Competing providers often cooperate to offer services to payers:� Physicians form a group practice;� Larger groups of physicians form an IPA;� Hospitals and physicians form a PHO; � PHOs form a statewide network.

Why Collaborate?

Collaborations offer value to payers:� One-stop shopping;� Better care coordination;� Cost reductions by eliminating duplication; � A network large enough to manage

population health and take risk.

Antitrust Risks of Collaboration

� Pricing may be per se illegal price-fixing.� Pricing may violate § 1 under the rule of

reason.� Agreements allocating patients may

violate § 1 as an illegal market allocation.� If market shares are high, the joint venture

may violate § 2 of the Sherman Act, which prohibits monopolization.

Basic Questions to Begin the Antitrust Analysis

� What is the purpose of the network? � How much integration does it need?� What decisions will providers make jointly?� Will the network be exclusive?� What market share will the network have?

FTC Guidance on Provider Networks

� Statements of Antitrust Enforcement Policy in Health Care (August 1996)

� Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations (October 2011)

� Advisory opinions on specific networks– Four approved– One rejected

Integration Strategies

� Integration is a fundamental issue for provider networks.

� Networks without integration may not:– jointly negotiate price, – allocate services to eliminate duplication, or – enter into any other agreements that would be

illegal for a group of competitors.

Integration Strategies

� Messenger model (no integration)� Clinical integration� Financial integration� Hybrid strategies (clinical and financial)� Single-entity strategies

Messenger Model

� Competing providers who are not integrated can form a network, but they can’t agree with each other on price.

� Each provider must negotiate his own contract with the payer.

� The messenger can facilitate that negotiation by conveying offers and counteroffers.

Messenger Model

The messenger may:� Analyze a payer’s offer and compare it to others.� Negotiate contract terms other than price.� Communicate offers and acceptances.� Compile providers’ minimum acceptable prices.� Be authorized to accept offers above that price. � Inform payers that X% of providers would accept

an offer.

Messenger Model

A messenger may not:� Be one of the network providers.� Negotiate price.� Coordinate individual providers’ responses.� Encourage providers to refuse to deal.� Disclose any provider’s price or negotiating

position to a competing provider. � Recommend acceptance or rejection of an offer.� Refuse to communicate a bona fide offer.

Messenger Model

Messenger model strategies are risky:� It’s easy to violate the rules

– If the messenger negotiates, or– If the providers share information and plans.

� Any violation of the rules may lead to per se illegal price-fixing.

Clinical Integration

“An active and ongoing program to evaluate and modify practice patterns . . . and create a high degree of interdependence and cooperation . . . to control costs and ensure quality.”

Clinical integration generally requires:� A clear set of cost and quality goals;� Selectively choosing providers; � Significant investment of capital;� Electronic clinical records systems;� Comprehensive evidence-based clinical

guidelines;� Rigorous guideline implementation; and� In-network referrals to participating specialists.

� There is no formula or list of required steps.

� The key issue is whether the network’s clinical integration has a real likelihood of changing providers’ practice patterns and thereby achieving the network’s cost and quality goals.

� Clinical integration takes time.� Providers ask: “How much clinical

integration do I need before my network can negotiate payer contracts without fear of liability for per se illegal price-fixing?”

� The FTC has offered two answers.� A private standard-setting body offers a

third.

1. FTC Advisory Opinion to Norman PHO:� Non-exclusive network;� Clinical practice guidelines;� Electronic records allow network to

monitor and enforce clinical guidelines;� Providers commit to follow guidelines;� Substantial investments of capital;� Selective choice of providers.

2. ACO Statement: If a network is approved by CMS and participates in the Medicare Shared Savings Program, the FTC will presume that:� The network is clinically integrated;� Price negotiations are ancillary to

legitimate goals; and therefore� Negotiations with commercial payers are

not illegal per se.19

3. Third-party accreditation of clinical integration:� Clinical Integration Accreditation and

Accountable Care Accreditation Standards developed by URAC.

� Standards track 1996 Health Care Statements and FTC advisory opinions.

� Independent audit.

Financial Integration

� All network providers “share substantial financial risk in providing all the services that are jointly priced through the network.”

� Risk-sharing gives all providers a financial incentive to help the network reduce cost and improve quality.

� “Substantial financial risk” means enough to influence practice patterns.

Integration by contract between providers:� Providers co-own network, and share in its

profits and losses as owners;� Contractual joint venture, to share some or

all profits and losses on network business;� Contribute a substantial share of revenue

to a risk pool, to be paid back only if the network meets its cost and quality goals.

Integration through the network’s contracts with payors:� Capitation or case-rate contracts;� Withhold arrangements;� Bonus, shared savings and other pay-for-

performance contracts.

� Financial integration can be achieved quickly, by contract.

� The key issue is whether financial integration gives providers incentives to reduce costs that outweigh the normal fee-for-service incentive to increase costs.

Hybrid strategies

Most successful networks use a combination of clinical and financial integration:� Networks offer providers financial

incentives to follow clinical guidelines, or to achieve cost or quality goals;

� Pay-for-performance contracts with payers, tied to clinical integration goals;

� Clinical integration positions network to accept risk.

Single-Entity Strategies

� Most networks make decisions by agreement among providers, which are reviewed under the rule of reason.

� But a tightly integrated network may be considered a single entity.

� A single entity can’t conspire with itself; its decisions are not agreements and therefore can’t be challenged under § 1.

Limited case law:� Copperweld (U.S. 1984): parent and

subsidiary are a single entity.� Texaco v. Dagher (U.S. 2006) (dicta): a

corporate joint venture is a single entity.� Susquehanna (M.D. Pa. 2003): a

contractual joint venture is a single entity.

Medical Center at Elizabeth Place (S.D. Ohio 2014): A hospital joint operating agreement created a single entity.� Central management with all “operational,

strategic, and financial control”; � Sharing of all income, profits and losses;� “All of the money goes to one bottom line.”� Held: No § 1 liability, because “incapable

of conspiring.”28

� Maximum antitrust protection if your network’s members are willing to – pool all income, – share all profits and losses, and – delegate all business decisions to

network management. � No need to share ownership of assets.

What Agreements Are Permitted?

� A properly integrated network can make agreements that are “reasonably necessary” to achieve the network’s legitimate goals.

� When is joint price negotiation “reasonably necessary” to achieve legitimate goals?

� Again, the FTC offers two answers.

1. FTC advisory opinions: joint negotiation of payor agreements is reasonably necessary if the agreements:

� Create financial integration (e.g., capitated agreements).

� Create clinical integration (e.g., financial incentives for achieving clinical integration or for achieving cost or quality goals).

� Assure the full participation of all network providers in each payor contract.

FTC advisory opinions: joint negotiation of payor agreements is not reasonably necessary:� Simply to achieve higher fees (even if

providers would not participate unless paid higher fees).

2. ACO Statement: If the network is approved by CMS and participates in the Medicare Shared Savings Program, the FTC will presume that the network’s “joint negotiations with private payers [are] reasonably necessary to an ACO’s primary purpose of improving health care delivery.”

Rule of Reason

� Unless the network is a single entity, its actions and agreements are subject to the rule of reason.– Even if the network is properly integrated,– Even if the agreement is reasonably

necessary to proper goals.

� Networks that can and do reduce market-wide competition are at risk.

Rule of Reason

Market share and market power:� Will the network have a high market share

in any specialty, in any geographic market?

� Will the network be a “must-have” provider for payers?

� Will the network’s joint contracting lead to higher prices?

Rule of Reason

Market share and market power: How big is too big?� ACO Statement: 30% or less is a safety

zone.� FTC’s last two successful prosecutions

(Promedica and St. Luke’s) alleged shares of 80%.

� Realistic danger zone: 50% or more.

Rule of Reason

Exclusivity:� Market power concerns can be reduced by

making the network non-exclusive, meaning that providers are free to contract directly with payers.

� In its Norman PHO opinion, the FTC approved a network without considering its market share, because the network would be non-exclusive.

� Must be non-exclusive in fact, not just in name.

Rule of Reason

Effects on cost and quality:� Price increases signal that the network may be anticompetitive.� Cost reductions (if passed on to payors) and quality improvements signal that the network is procompetitive.

Rule of Reason

Do courts “balance” quality improvements against price increases?� FTC v. St. Luke’s (9th Cir. 2015) says no:

– “[T]he Clayton Act does not excuse mergers that lessen competition or create monopolies simply because the merged entity can improve its operations.”

– “It is not enough to show that the merger would allow St. Luke's to better serve its patients.”

Rule of Reason

Does the FTC “balance” quality improvements against price increases?� The FTC says yes:

– The FTC will “carefully consider evidence that the transaction will benefit consumers through improved quality, new services and/or decreased costs.”

– “Efficiencies may enhance a merged firm's ability and incentive to compete.”

Practical Advice

Integrate providers for the right reasons:– to improve quality, – reduce costs, and – achieve better patient outcomes not just to negotiate higher fees.

Practical Advice

� Be sure that your documents reflect your proper purposes.

� Be sure that your discussions focus on them.

� Bad documents can sink a good deal.

Practical Advice

� Be aware of your network’s market share in each specialty, and how it changes over time. � If your share is high enough that payers “must have” your providers, the safest course is to be truly non-exclusive.

Practical Advice

Build a product that payers will want to buy. � Payers will pay for demonstrated improvements in quality, efficiency and outcomes. � Involve payers in the development of the network, to be sure they will support it.

Contact Information

Polsinelli PCwww.polsinelli.com

Mitchell RaupAntitrust Shareholder

Washington, D.C.202.626.8352

mraup@polsinelli.com

About Polsinelli

Polsinelli, a national law firm ranked among the Am Law 100 with over 740attorneys located in 19 offices, deliberately seeks constant improvement in allthat we do. At its inception more than forty years ago, the firm established aculture of openness and entrepreneurship that still pervades today. As thefastest growing U.S. law firm for the past six years as ranked by The AmericanLawyer*, the firm’s growth has been fueled by the recruitment of like-mindedattorneys from top law firms across the country.

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