Contributed by Colin Kass and Ryan P. Blaney, Proskauer Rose LLP
The healthcare industry is undergoing a massive restructuring, driven by fundamental shifts in the economy. The recession, the aging population, and – of course – healthcare reform are causing a surge in healthcare M&A activity. Although remaining one of the few bright spots in the transactional world, this activity raises untold numbers of competition issues. The Federal Trade Commission and the Department of Justice are not sitting idly by while competitors find new ways to collaborate, consolidate, and combine. They are filing unprecedented numbers of challenges and show no signs of letting up. In doing so, they are defining – some say pushing – the boundaries between the industry’s dire need to restructure and the antitrust laws’ resistance to change. This article focuses on those boundaries.
I. THE HYPOTHETICAL PATIENT
Healthcare touches everyone. But how it does so is shaped by the antitrust laws. To illustrate, we follow a hypothetical patient – William Rose – as he enters into the Pinehurst Healthcare System, taking detours to describe how the antitrust laws impact his life.
William Rose, a forty-five-year-old executive, wakes up before sunrise every Tuesday to meet nine other colleagues before work. For the past fifteen years they have been playing basketball at a local YMCA. This morning was a particularly heated game. Driving the lane for the winning basket, William was fouled and landed badly on his left leg.
Following the game, William called Dr. Carr, his primary care physician. Dr. Carr was a solo family practitioner until last year, when he joined Pinehurst Physicians Group (PPG). PPG is the area’s largest physician group and is affiliated with the area’s largest hospital, Pinehurst Hospital, through the Pinehurst System. Dr. Carr initially wanted to remain independent, but decreasing insurance reimbursements and increasing costs made the change unavoidable. He now no longer competes with physicians in the group; he collaborates with them. Because PPG negotiates with insurers as a single entity, the FTC is investigating whether PPG’s formation violates the antitrust laws.
After examining William, Dr. Carr refers him to orthopedic surgeon Dr. Holtz at Pinehurst Sports Medicine Group, another affiliated entity within the Pinehurst System. Dr. Holtz refers William for an MRI at Pinehurst Radiology Center. Since the Pinehurst System acquired Pinehurst Radiology, its share of the radiology market has skyrocketed. Competing independent radiologists are up in arms, complaining about the lack of referrals and Pinehurst Radiology’s practice offering insurers discounts in exchange for being designated the exclusive in-network radiology center. Pinehurst Radiology calls this price competition; in its suit, the DOJ calls this abuse of dominance.
Unfortunately, the MRI confirmed that William tore the ligaments in his knee. A week later, Dr. Holtz performs reconstruction surgery on William at Pinehurst Hospital. Last year, Pinehurst merged with its nearest competitor, Oakridge Hospital, a small, antiquated, and financially-troubled hospital. Following the merger, Pinehurst closed part of Oakridge’s campus, consolidating non-emergency surgeries at the newer Pinehurst campus. The cost savings were substantial, but the FTC filed a post-closing challenge, contending that insurers were left without a viable alternative. At trial, the insurers testified in the FTC’s favor because Pinehurst’s reimbursement rates are higher than Oakridge’s.
Forty-five days later, William received a bill from Pinehurst Hospital. After being told that his insurance company does not cover overnight stays for knee surgery, he learned that his insurer reduced coverage last year after the area’s dominant insurance company, Indigo Cross, inserted a “most favored nations” provision in its contract with the Pinehurst System. This caused Pinehurst to raise rates for William’s insurer, resulting in the insurer’s decision to reduce coverage. Indigo Cross calls this price competition; in its suit, the DOJ calls this abuse of market power.
Six months later, William is back on the basketball court. He is now better and wiser. After spending hours on the phone with his insurer, he eventually gives up and pays the bill. At benefits renewal time, he switches carriers to Indigo Cross’s PPO plan.
II. HOW ANTITRUST SHAPES YOUR DOCTOR’S OFFICE VISITS
Typical of most patients, William’s first call after hurting his leg was to Dr. Carr, his primary care physician. Dr. Carr’s decision to join PPG reflects a broader trend by physicians to join ever larger practices and independent practice associations (IPAs). This raises two related antitrust questions: First, at what point is an IPA sufficiently integrated to justify allowing it to collectively negotiate prices with insurers? Second, at what point is a physicians group so big that it raises antitrust concerns?
— A. ANTITRUST KNOCKS WHEN DOCS DON’T COLLABORATE ENOUGH.
Prior to joining PPG, Dr. Carr operated his own office, renting out space in a medical office building. He still does. Only now, he no longer negotiates reimbursement rates with insurers. Such negotiations are now conducted exclusively by PPG.
Does this raise antitrust issues? You bet. IPAs raise antitrust concerns where they lack sufficient clinical or financial integration to justify their members’ inherent agreement not to compete on price.
This does not mean that IPAs are always problematic. To the contrary, the Antitrust Agencies recognize that significant benefits arise when physicians collaborate. “By developing and implementing mechanisms to encourage physicians to collaborate, many physician network[s] … promise significant procompetitive benefits for consumers.”1 Recognizing these benefits, the Agencies recently issued new guidelines governing Accountable Care Organizations (ACOs) that actively encourage greater coordination among healthcare providers.
The agencies, however, remain on the lookout for instances where the collaboration is really nothing more than an attempt to jointly negotiate price. Since 2005, the FTC has filed fifteen separate actions against various IPAs. Most recently, for example, in Southwest Health Alliances, Inc., the FTC challenged an IPA consisting of 900 members that “collectively negotiated the terms … on which it would deal with health plans.” As the FTC explained, “[a]n IPA that clinically or financially integrates its members’ practices may create efficiencies that would justify joint price negotiations.” But because Southwest failed to undertake such integration, the FTC barred it from “future price negotiations and from facilitating the exchange of information between physicians concerning the terms of which they will contract with insurers.”2
So where is the line between permissible and impermissible physician coordination? According to the FTC, “when we challenge a physician group for price-fixing, it tends to be a very clear-cut violation, where … there are no redeeming efficiencies justifications.”3 In the FTC’s view, if an IPA qualifies as an ACO by the Centers for Medicare and Medicaid Services, it is presumed to be “sufficiently integrated” to avoid price-fixing charges.
But even where those stringent requirements are not met, all hope is not lost. In such cases, the Agencies look at the degree of financial or clinical integration among the IPA’s members. Financial integration involves risk sharing, such as where members share profits and losses, serve enrolled patients for a fixed monthly or annual fee regardless of ailments, or contribute capital. Clinical integration involves taking steps to convert individual or stand-alone practices into a more efficient joint enterprise. In such situations, the Agencies consider “a broad range of possible cost savings, including improved cost controls, case management and quality assurance, economies of scale, and reduced administrative and transaction costs.”4
Of course, sometimes physicians do not want to integrate – either financially or clinically. This does not mean that they cannot coordinate. One way some IPAs avoid price-fixing charges is by adopting a “messenger model,” where the IPA acts as an intermediary between physician and insurer, but where each physician unilaterally decides whether to accept or reject the insurer’s terms. In such cases, the Antitrust Agencies focus on whether the IPA is a mere messenger or whether it fosters “collective” decision making.
— B. ANTITRUST KNOCKS WHEN DOCS COLLABORATE TOO MUCH.
In PPG’s case, the FTC’s investigation focused not just on whether there was too little integration, but also on whether PPG had too much market power and engaged in too much coordination.
In determining whether a physician group has too much power, the Agencies focus on both the group’s market share, as well as the exclusive or non-exclusive nature of their members’ affiliation. Under the Agencies’ new ACO guidelines, the Antitrust Agencies established a safe harbor if the group accounts for 30% or less of any type of service within any member’s primary service area. Even where this safety zone is crossed, however, the Agencies recognize that an IPA “may be procompetitive and legal.” In fact, the Agencies have rarely challenged bona fide physician practice groups based solely on market share.
That may be changing, as hospitals begin to employ more physicians or affiliate with larger physician groups. Last fall, the FTC challenged a merger of two hospitals in Rockford, Illinois. In doing so, the FTC focused not just on the hospital market, but also on the primary care physician market. The FTC alleged that, even though the merging parties would only control 37% of the primary care physicians, the merger would leave only one other hospital-owned physician group. With only two hospital-owned groups controlling about 60% of the primary care market, the FTC said that the merger will “strengthen [the defendant’s] bargaining leverage against health plans.” Because there has been no ruling yet, it remains to be seen whether the challenge to a firm with a mere 37% market share will succeed.5
In addition to concerns about IPAs having a dominant share of any medical service, the Antitrust Agencies also voice concern when an IPA’s affiliation with other providers creates the potential to foreclose competition. In the hypothetical above, for example, William never left the Pinehurst System, even as he was referred from primary care physician to orthopedic surgeon to radiologist to hospital.
In extreme situations, the Agencies will investigate whether such affiliations create a “vertical foreclosure” effect. Concerns “arise if a [group’s] power in one market … enables it to limit competition in another market;” and thus, the Agencies focus on both the group’s market shares in each of the relevant markets and the members’ obligations or incentives to exclusively refer patients to other members within the group.6 As a practical matter, however, there have been few enforcement actions based on such vertical concerns. Thus, the mere fact that William never left the Pinehurst System is unlikely to be the basis for an antitrust challenge.
In contrast, Pinehurst Radiology’s practice of giving discounts to health insurers in exchange for being the exclusive in-network radiology center does raise some issues. In its first monopolization case in over ten years, the DOJ entered into a consent decree with United Regional Health Care System, which had a market share of 90% for in-patient services and 65% for outpatient surgical services in Wichita Falls, Texas. The DOJ alleged that United Regional abused its dominance by offering health insurers discounts in exchange for being designated their exclusive in-network provider. This, the DOJ said, violates the antitrust laws because “competing hospitals and facilities could not obtain contracts with most insurers.”7
III. HOW ANTITRUST SHAPES YOUR COMMUNITY HOSPITAL EXPERIENCE
William’s surgeon referred him to Pinehurst Hospital, the only hospital remaining in the market following the acquisition of Oakridge. This acquisition reflects a powerful trend, as the industry transitions from the post-World War II era (when most of the nation’s hospital infrastructure was built) to the modern economy. Today, many of the nation’s hospitals are financially struggling because of reduced demand for inpatient services, shorter hospital stays, the growth of low-margin government-insured patients, the increased costs of information technology and new medical equipment, and the rising costs of maintaining aging facilities.
The Antitrust Agencies recognize these trends and will stay out of the way, to a point. When that point is reached, most hospital mergers rise or fall on four factors: (i) market definition, (ii) synergies, (iii) the failing firm defense, and (iv) the state action defense.
Market definition is typically the most important factor in determining whether the Agencies will challenge a hospital merger. In defining a relevant product market, the Agencies focus on “general acute care inpatient services,” excluding competition from outpatient facilities, long-term care facilities, stand-alone surgical centers, and rehab facilities.8 The Agencies, however, have had less success in defining narrower submarkets. For example, in ProMedica, the administrative law judge rejected the FTC’s alleged submarket for inpatient obstetrician services, noting that no court has ever recognized such a market.9
With respect to geographic markets, the Agencies have never stated a definitive test specific to hospital mergers. But they usually start by looking at market shares within each hospital’s primary service area, which is defined as those zip codes from which the target hospital draws 75% of its patients. In general, the Agencies begin to express concern where a merger reduces the number of significant competitors in this area from 4 to 3 or from 3 to 2.
In Rockford, for example, the FTC alleged that the merger would create a duopoly in Rockford, Illinois, with the two remaining firms controlling about 99% of the relevant market. In ProMedica, the FTC challenged a 4-3 merger in Lucas County, Ohio, where the merging parties had slightly less than 60% of the market.
If a hospital merger substantially increases concentration, the Agencies analyze the strength of the parties’ synergies analysis. As the Eleventh Circuit observed, “evidence that a proposed acquisition would create significant efficiencies benefiting consumers is useful in evaluating the ultimate issue – the acquisition’s overall effect on competition.”10 Such synergies analyses, however, have the greatest success in cases involving borderline concentration levels.
For example, Pinehurst’s acquisition enabled it to make better use of Oakridge’s antiquated facilities, and Pinehurst’s capital infusion averted Oakridge’s financial demise. Though a difficult defense to mount, such defenses can impact the antitrust analysis.
In Scott & White Healthcare, for example, the FTC took no action after investigating a consummated merger between two general acute care hospitals in Temple, Texas. There, Scott & White Hospital acquired its competitor, King’s Daughter Hospital, in order to convert it to a children’s hospital. The FTC agreed that King’s Daughter was “in poor, and deteriorating, financial condition and likely would have closed at some point if it was not acquired by another entity.” The FTC, however, insisted that Scott & White try to find a buyer who would commit to keeping King’s Daughter open as a general acute care hospital. When no buyer emerged, the FTC closed its investigation, satisfied that the process “answered … the [critical] question of whether there was alternative purchaser.”11
One additional defense that has had some recent success is the state action defense. The state action doctrine allows a State (or its instrumentalities) to engage in anticompetitive conduct. Where the defense applies, the FTC stands powerless to block even a merger to monopoly. Such was the case in Phoebe Health Systems. There, the FTC alleged that the merger would create a monopoly, with the municipal defendant controlling 86% of a six-county region. The Eleventh Circuit rejected the FTC’s challenge because the State passed legislation in 1941 that allowed a municipality to own and operate a hospital for the benefit of its citizens. Even though the specific merger at issue had not been contemplated by the legislature, the court held that “anticompetitive consequences were a foreseeable result of [the] statute.” As Phoebe demonstrates, the antitrust laws will not stand in the way of a State’s decision to create a “public healthcare option” even if doing so displaces private competition.12
IV. HOW ANTITRUST SHAPES YOUR HEALTH INSURANCE COVERAGE
As William found out to his chagrin, a patient’s experience with the healthcare system often depends on one’s insurance coverage. In William’s case, his insurer refused to cover his overnight stay because it could not negotiate favorable prices with Pinehurst. It is not that Pinehurst was unwilling to negotiate; it was that it was constrained by a “most favored nations provision” (MFN) that the area’s dominant insurer, Indigo Cross, insisted upon.
Does this raise an antitrust issue? According to the DOJ, yes. In United States v. Blue Cross and Blue Shield of Michigan, the DOJ challenged Blue Cross’s market power and MFN provisions. These MFN provisions, the DOJ alleged, effectively drove up costs for rival insurers, reduced their scale, and prevented them from developing a robust provider network. In rejecting the defendant’s motion to dismiss, the court held that it was certainly “plausible that the MFNs entered into by Blue Cross with various hospitals in Michigan establish anticompetitive effects as to other health insurers and the cost of health services.”13
After months of physical therapy, William is back on the basketball court, but his experience navigating the healthcare industry and the many ways that antitrust laws impacted his care were eye-opening. One thing is clear: Given the continued consolidation in the healthcare industry, the Antitrust Agencies will surely play an increasingly active role in defining how healthcare services are delivered in America.
Colin Kass is a Partner in the Antitrust Group and Ryan P. Blaney is an Associate in the Health Care Department. Both are residents in the Washington, D.C. office.
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