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

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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.

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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.

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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

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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.

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Integration Strategies

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

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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.

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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.

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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.

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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.

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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.”

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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.

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� 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.

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� 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.

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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.

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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.

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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.

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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.

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

performance contracts.

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� 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.

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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.

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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.

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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.

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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.

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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.

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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.

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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).

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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.”

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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.

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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.

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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.

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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.”

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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.”

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Practical Advice

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

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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.

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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.

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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.

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Contact Information

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Polsinelli PCwww.polsinelli.com

Mitchell RaupAntitrust Shareholder

Washington, D.C.202.626.8352

[email protected]


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how to form and operate a network of competing providers

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