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. Raup
March 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
2

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.
3

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.
4

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.
5

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?
6

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
7

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.
8

Integration Strategies
Messenger model (no integration)
Clinical integration
Financial integration
Hybrid strategies (clinical and financial)
Single-entity strategies
9

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.
10

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.
11

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.
12

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.
13

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.”
14

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.
15

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.
16

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.
17

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.
18

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.
20

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.
21

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.
22

Integration through the network’s contracts
with payors:
Capitation or case-rate contracts;
Withhold arrangements;
Bonus, shared savings and other pay-for-
performance contracts.
23

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.
24

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.
25

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.
26

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.
27

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.
29

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.
30

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.
31

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).
32

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.”
33

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.
34

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?
35

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.
36

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.
37

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.
38

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.”
39

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.”
40

Practical Advice
Integrate providers for the right reasons:
– to improve quality,
– reduce costs, and
– achieve better patient outcomes
not just to negotiate higher fees.
41

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.
42

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.
43

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.
44

Contact Information
45
Polsinelli PC
www.polsinelli.com
Mitchell Raup
Antitrust Shareholder
Washington, D.C.
202.626.8352
mraup@polsinelli.com

46
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47
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