DOJ and FTC's Increased Antitrust Enforcement in Health Care-Accountable Care Organizations Beware

Bloomberg Law®, an integrated legal research and business intelligence solution, combines trusted news and analysis with cutting-edge technology to provide legal professionals tools to be...

Contributed by James A. Reeder, Carly Milner, and Nicholas Shum, Vinson & Elkins LLP

In recent years the Department of Justice and the Federal Trade Commission have emphasized enforcement of the antitrust laws as applied to the health care industry, with strict review of hospital and health system acquisitions and increased enforcement actions against entities engaging in joint price negotiations, restrictions on purchases of other providers’ services, and similar activities. The passage of the health care reform legislation added a layer of complexity to this enforcement program: health care providers may now join together in Accountable Care Organizations (ACOs) to participate in Medicare's Shared Savings Program. Health care providers need to navigate between joining together in legitimate ACOs and risking the initiation of an enforcement action by the FTC or DOJ.

Enforcement Atmosphere

When President Obama appointed Christine Varney to head the DOJ’s Antitrust Division in 2009, she promised increased enforcement of the antitrust laws. That promise took time to materialize, but in the last two years, both the DOJ and the FTC have very actively pursued enforcement actions, particularly involving the health care industry. Varney’s successor, Sharis Pozen, has continued her program of enforcement, and health care enforcement actions show no signs of declining. Given the increased political attention to the problem of rising health care costs, the focus on maintaining competition in the health care industry is not surprising. These enforcement actions have touched a wide variety of health-care-related entities, from insurance companies to hospitals to state regulatory boards. Although the context varies, all of the actions involve activities that allegedly exclude participants from the market in one way or another and have the potential to raise prices. Last December, the FTC held that the North Carolina State Board of Dental Examiners (the Board) violated the antitrust laws by sending cease and desist letters to non-dentists engaged in providing teeth whitening services in North Carolina.1 Beginning around 2003, the Board began receiving complaints from dentists throughout North Carolina about non-dentists providing teeth whitening services. In response, the Board, which consisted of six licensed dentists, began issuing cease and desist letters to non-dentists who were offering teeth whitening services and products at mall kiosks. Additionally, the Board sent letters to mall operators and the North Carolina cosmetology board warning them that non-dentists were violating the Dental Practice Act and requesting they take certain actions against non-dentists, such as refusing to lease them mall space. On June 17, 2010, the FTC filed a complaint against the Board claiming these actions had the effect of restraining competition for teeth whitening services, thereby injuring North Carolina consumers. Although the Board admitted many of its actions, it argued these actions were neither illegal nor anticompetitive.2 The Administrative Law Judge (ALJ) hearing the case ultimately ruled against the Board. The Commission unanimously affirmed the ALJ’s ruling, finding the Board’s actions violated Section 5 of the Federal Trade Commission Act, because they amounted to concerted action that unreasonably restrained trade and resulted in an unfair method of competition. Further, the Commission rejected the Board’s argument that its actions were justified to promote health and safety, explaining that such concerns do not justify restraints on competition. As a result, the Commission entered an order prohibiting the Board from directing non-dentists to cease providing their teeth whitening products or services. While this administrative proceeding was pending, the Board filed suit against the FTC in the U.S. District Court of North Carolina seeking a declaratory judgment and injunction and arguing that the FTC did not have subject matter jurisdiction to bring this enforcement action. The district court granted the FTC’s motion to dismiss, finding that the state action exemption to antitrust laws did not apply here.3 The Board’s appeal on that issue is currently pending before the Fourth Circuit Court of Appeals. The FTC has also actively investigated many health care provider mergers. Many of these investigations end in a simultaneously filed complaint and consent decree, rather than moving to contested proceedings before the Commission, but even these actions can place significant burdens on the merging parties, such as requirements to divest certain assets. In some cases, the FTC has taken more aggressive action. In January 2012, the FTC took aim at another health care provider merger by issuing a complaint to block Omnicare Inc.’s proposed $440.8 million deal with PharMerica Corporation.4 According to the FTC, a merger between Omnicare and PharMerica, the country’s two largest long-term care pharmacies, would injure competition and raise drug prices. In particular, the FTC believes a consummated merger would drastically increase the new company’s negotiating leverage with sponsors of Medicare Part D plans. As part of Medicare Part D plans, sponsors reimburse long-term pharmacies, such as Omnicare, for prescription drugs they supply to nursing homes or other long-term facilities. But, with Omnicare and PharMerica combining, the FTC predicts Part D plan sponsors will be forced to accept reimbursement rate hikes or be entirely excluded from offering Part D plans. The FTC further warns that such costs will be borne by the government and, ultimately, taxpayers. The DOJ has also turned its enforcement focus to the health care industry. In a high-profile action, the DOJ and the State of Michigan sued Blue Cross Blue Shield of Michigan (Blue Cross) over its use of most-favored-nation clauses in its contracts with hospitals.5 The DOJ alleged that these clauses unreasonably restrained trade in violation of Section 1 of the Sherman Act because they limited other health insurers’ ability to compete with Blue Cross. The most-favored-nation clauses required hospitals either to charge other insurers more than Blue Cross or to charge other insurers at least as much as they charged Blue Cross in exchange for receiving higher reimbursement payments. The DOJ focused on Blue Cross’s market dominance and the high percentage of Michigan hospitals with which it had these agreements as well as whether these agreements had the effect of raising prices for all privately insured health care consumers, whether insured by Blue Cross or others. The district court denied Blue Cross’s motion to dismiss; Blue Cross's interlocutory appeal is pending. One of Blue Cross’s competitors, Aetna, filed a follow-on suit against Blue Cross in December 2011. On February 25, 2011, the DOJ teamed up with the State of Texas Attorney General’s Office and filed an action in the Northern District of Texas against United Regional Healthcare System (United Regional), the largest healthcare provider in Wichita Falls, Texas.6 In the complaint, the DOJ alleged United Regional violated Section 2 of the Sherman Act by unlawfully using exclusionary contracts to maintain its monopoly on hospital services. In the DOJ’s view, the contracts United Regional entered into with commercial health insurers, such as Blue Cross Blue Shield, Aetna, or United Healthcare, violated the antitrust laws. Specifically, these contracts contained a “pricing penalty” feature where an insurer would receive a higher discount off billed charges (e.g., 25 percent) if United Regional was the only local hospital in the insurer’s network but a far reduced discount (e.g., five percent) if the insurer also contracted with United Regional’s area competitors. Though United Regional began using these contracts in 1998, it had broadened their exclusionary terms in subsequent years. Most importantly, the DOJ asserted that these contracts effectively foreclosed United Regional’s rival healthcare providers from competing for the most profitable patients, i.e., those with commercial health insurance. United Regional immediately reached a settlement with the DOJ, and the court entered final judgment on September 29, 2011, prohibiting United Regional from directly or indirectly conditioning discounts to insurers based on the insurers’ relationship with other healthcare providers. Upon settlement, Christine Varney remarked that “[u]nfettered competition among hospitals is vital to ensuring that patients receive high-quality, low-cost health care.”7

Accountable Care Organizations

While the FTC and DOJ have been rigorously enforcing the antitrust laws against health care entities in an effort to protect competition and, theoretically, prevent cost increases, the health care reform legislation8 has permitted a different avenue to achieve the same goal, one that seems directly opposed to the FTC and DOJ actions: the formation of accountable care organizations (“ACOs”). ACOs are collaborations among groups of providers of health services and suppliers working to manage and coordinate care for Medicare fee-for-service beneficiaries. ACOs can reap the benefits of their efforts through the Medicare Shared Savings Program (which sends some of the savings back to the ACO participants) and by expanding the same collaboration to commercially-insured patients. The question, then, is how to collaborate without engaging in anticompetitive behavior that creates the risk of an antitrust enforcement action. To provide guidance, the DOJ and FTC issued a joint Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program (ACO Statement) on October 28, 2011.9 The ACO Statement explains the agencies’ concern that, while most ACOs will be legitimate collaborations genuinely attempting to reduce Medicare and private-payer costs, ACOs could be used to reduce competition and, accordingly, raise prices or decrease the quality of services provided. Aspiring ACOs must meet certain criteria to qualify for the Medicare Shared Savings Program, including management of clinical and administrative processes, promotion of evidence-based medicine, and coordination of patient care – essentially a plan to meet the goals of reducing costs and improving care. The FTC and the DOJ have found that these criteria are similar to the “clinical integration” component they already use to determine whether health care provider joint ventures will produce sufficient benefits and cost savings to justify their anticompetitive effects. If an ACO meets these requirements and intends or has been approved to participate in the Shared Savings Program (an Eligible ACO), the FTC and DOJ believe the ACO likely has a legitimate purpose. Therefore, the agencies will apply the same flexible “rule of reason” analysis that they use for provider joint ventures in analyzing Eligible ACOs. The agencies will also recognize that Eligible ACOs will need to enter into joint negotiations with private payers and that such negotiations do not necessarily constitute price fixing, collusion, or some other illegal behavior. In addition, the agencies have created a safe harbor for eligible ACOs that also meet market share requirements. Eligible ACOs within the safe harbor do not dominate their markets, and the DOJ and FTC will not “challenge” them except in extraordinary circumstances (such as obviously illegal behavior). The ACO Statement includes an appendix with detailed instructions on how to calculate market share, but the essential criteria for the safe harbor are: (1) where two providers in the ACO provide the same service (e.g., orthopedic surgery) in the same Primary Service Area (PSA), the ACO providers’ collective share of the market in the PSA for that service may not exceed 30 percent; (2) all hospitals must participate in the ACO on a non-exclusive basis, regardless of market share; and (3) where only one ACO participant provides a particular service in a particular PSA, if that participant’s market share is more than 50 percent, that participant must participate in the ACO on a non-exclusive basis. Participation on a “non-exclusive basis” means that the provider will also provide services and enter into contracts outside the ACO, such that private payers are not required to go through the ACO to access the provider’s services. The safe harbor includes some exceptions for providers in rural areas where greater market concentration is likely. ACOs have the option of seeking a 90-day expedited antitrust review to determine whether they meet these requirements or are otherwise in compliance with the antitrust laws. For ACOs that do not fall within the safe harbor, the ACO Statement provides guidance on what the agencies consider “conduct to avoid.” Much of this conduct relates to the type of activities that have led to enforcement actions outside the ACO context. First, ACOs cannot engage in price fixing or collusion in their sale of competing services outside the ACO. For example, an inpatient facility and an outpatient facility participating in an ACO as to certain services but not as to cardiology services cannot use their ACO as justification to reach an otherwise illegal agreement on prices for their respective cardiology services. Second, ACOs with a high level of market power are subject to particular scrutiny, and the agencies have set out certain behaviors that are of concern in these ACOs: (1) forcing private payers (i.e., insurance companies) to purchase services exclusively from the ACO by restricting their ability to steer patients to certain providers, such as providers outside the ACO; (2) tying sales of ACO services to sales of non-ACO services, such as requiring private payers to buy non-ACO services from an affiliate of an ACO participant as a condition of being able to buy ACO services; (3) requiring ACO participants to participate exclusively in the ACO (rather than having the ability to contract with insurance companies outside the ACO umbrella); and (4) telling insurance companies that they cannot distribute information about the ACO’s costs and quality of care to health plan enrollees. The ACO Statement applies to physicians and physician groups, inpatient facilities, and outpatient facilities. Although the agencies have not created safe harbor criteria for other types of health care providers, the general principles can be extended to guide other health-care providers and suppliers eligible to participate in ACOs.


Although both antitrust enforcement actions and the health care reform provisions permitting ACOs have the same goal – lowering health-care costs and raising health-care quality – the tendency of the DOJ and FTC to look critically at any type of health care consolidation is in tension with the ACO policy of collaboration. The ACO Statement makes clear that the FTC and DOJ are most concerned with the possibility that ACOs will facilitate price fixing and exclusion of non-ACO participants from the market. Enforcement actions in recent years have focused on the same priorities, and it appears that the FTC and DOJ have no intention of backing off enforcement in light of the ACO provisions of the health care reform legislation. ACOs that do not have sufficiently low market share to meet the safe harbor requirements will be held to the same standards as other types of joint ventures and collaborations: to avoid the risk of enforcement actions, they must avoid actual or apparent anticompetitive behavior and be able to demonstrate that the collaboration actually creates cost and quality benefits for consumers. Jim Reeder is a Partner and Leader of the Antitrust Practice Group at Vinson & Elkins LLP. Jim has extensive antitrust experience in the commercial aviation, energy, entertainment, and healthcare industries. He has represented clients regarding claims of price-fixing, group boycott, exclusive dealing, tying, monopolization, discriminatory pricing, and conspiracy and has advised clients on the antitrust implications of mergers, contracting decisions, and group purchasing arrangements. Jim has been recognized by The Best Lawyers in America(r) in antitrust law and commercial litigation and Chambers USA: America's Leading Business Lawyers in antitrust. For further information, contact Jim at or 713-758-2202.Carly Milner is an associate in the complex commercial litigation section at Vinson & Elkins LLP. She represents clients in matters involving contractual disputes, antitrust issues, and commercial torts. She can be reached at Shum is an associate in the complex commercial litigation section at Vinson & Elkins LLP whose practice focuses on antitrust, energy and other business litigation. He has also represented clients in contractual disputes, suits alleging business torts, and suits implicating transnational litigation issues. He can be reached at © 2012 Vinson & Elkins LLP

Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy.

Request Bloomberg Law®