Snapshot

As recent rulings signal continued federal scrutiny of physician employment deals, antitrust risk management must become a board priority.

As the focus in health care shifts from volume to value, hospitals and systems are pursuing alliances to help them meet the challenge of delivering better coordinated, more efficient care.

Hospitals that are trying to deliver such care to their communities are partnering with a range of providers, from outpatient settings such as retail clinics and imaging centers to such post-acute care organizations as rehabilitation hospitals and home-health agencies. But the most important — and increasingly popular — provider partnership is between hospitals and physicians. Employment is not the only way for hospitals and physicians to partner, but it is one of the most common models used to achieve alignment.

Closer collaboration has been encouraged by federal policy. Hospitals often seek to purchase physician group practices to facilitate the building of clinically integrated networks that can thrive with new payment models like accountable care and bundled payment arrangements.

At the same time, the Federal Trade Commission has signaled that it will continue its intense scrutiny of mergers and acquisitions. The FTC won a significant victory involving health systems’ acquiring physician group practices when a federal district court in Idaho ruled earlier this year that St. Luke’s Health System of Boise, Idaho, violated the antitrust laws with its acquisition of Saltzer Medical Group. The combination of Saltzer physicians with the physicians already employed by St. Luke’s would include a high percentage of the primary care physicians in the relevant market. The court recognized that the acquisition was intended to improve patient care outcomes, and believed that would be the result. But the court also found that the market share was too high and would allow St. Luke’s to restrain trade. St. Luke’s was ordered to divest Saltzer, which illustrates the seriousness of the potential consequences. [St. Luke’s is appealing the ruling.]

A trustee of a nonprofit hospital or system must make this policy tension central to the consideration of strategies designed to better align the organization with physicians. To remake care delivery through physician acquisitions while staying within the antitrust laws, trustees have four strategic considerations to understand and investigate:

1. Ensure that your physician alignment strategy has a pro-competitive justification.

2. Choose your partner wisely.

3. Consider the variety of ways to achieve your organization’s objectives.

4. Perform thorough contingency planning.

First, however, boards need to understand the industry and legal context for these strategies.

Converging Trends

The increasing number of physicians who are working for hospitals and systems has been one of the strongest trends in health care for a decade. The latest survey by the American Medical Association, conducted in 2012, illustrates this: In 2007–2008, an AMA survey found that 16.3 percent of physicians were employed by hospitals, either directly or in a group practice owned wholly or in part by a hospital or system. By the 2012 survey, that percentage had climbed to 28.6 percent.

Economic and lifestyle factors have played significant roles in the increase in physician employment. But changes in health care delivery that put a premium on reducing waste and inefficiency and improving care coordination have made coordination between hospitals and physicians more important than ever.

As more health systems seek to acquire physician practices, there has been more activity by antitrust enforcers — both the FTC and state attorneys general, often working together. Some examples:

• In Washington state, a health system in 2011 dropped its proposed acquisition of two cardiology groups after the FTC and the state attorney general expressed strong concerns about the anticompetitive effects of the proposed transaction.

• The Maine attorney general in 2011 won a consent decree against a health system in its acquisition of two cardiology groups; the agreement restricted the health system from raising its fees for cardiology services for five years after the transaction.

• The Pennsylvania attorney general in 2011 initiated an investigation of five urology practices that merged in Harrisburg, alleging that they controlled 84 percent of the market. A consent decree imposed significant restrictions on the conduct of the merged practice.

• In Nevada in 2012, the FTC and the state attorney general secured a consent decree that suspended noncompete agreements for a certain number of cardiologists acquired by a health system until sufficient doctors could be hired away by competitors.

• Then, in Idaho in 2014, came the decision in the St. Luke’s case, ordering divestiture of the newly acquired Saltzer Medical Group.

These cases represent a revival in the fortunes of antitrust enforcers in blocking or reversing mergers, including hospital-hospital and hospital-physician combinations. After a string of losses in the 1990s and early 2000s, the FTC has won several cases against health care mergers and has deterred several announced mergers from proceeding by signaling its intent to give close scrutiny to these deals.

The streak began with the FTC’s ruling in 2007 against Evanston (Ill.) Northwestern Healthcare, now known as NorthShore University HealthSystem. This action, initiated in 2005, five years after Evanston Northwestern acquired Highland Park (Ill.) Hospital, was the FTC’s first successful challenge of a hospital merger in many years.

Risk Management Perspective

The FTC’s successes mean a health system must have antitrust risks in mind from the very start when considering a strategic partnership with physicians.

1. Ensure that your physician alignment strategy has a pro-competitive justification. To provide the best chance of a physician acquisition’s surviving antitrust scrutiny, make sure the strategy serves the goals of increasing efficiency, improving quality and expanding access to care. These pro-competitive effects are good for patients and purchasers of health care services, from insurance companies to self-insured employers. Trustees should direct their management teams to put these goals at the center of the health system’s alignment strategy and use them as a guide to evaluate proposed transactions.

Antitrust enforcers have signaled that they will weigh pro-competitive effects of an alignment arrangement against the potential anticompetitive effects, such as price increases. In an advisory opinion given to Norman (Okla.) Physician Hospital Organization last year, the FTC said Norman PHO could proceed with a clinically integrated network that also contracts on behalf of a very high percentage of physicians in the market and the only hospital system there. One reason the FTC cited was the convincing case Norman PHO made about the arrangement’s impact on quality and efficiency. Norman PHO also demonstrated that it had the information infrastructure to support these goals.

An acquisition strategy designed to increase market share, tie up referral sources and increase clout with payers is going to have a much tougher time satisfying antitrust enforcers.

Trustees must also be mindful of a practical consideration from the outset: Communications are part of the record that could be considered in an antitrust review of an acquisition, including communication among and between trustees, management, a potential partner, consultants and financial advisers. Enforcers rely heavily on communications that do not support or contradict purported pro-competitive justifications.

2. Choose your partner wisely. When your hospital or health system is sizing up potential physician group practices with which to partner, perform an antitrust risk assessment on each one. This includes:

• Understanding the potential partner’s motivations for the arrangement and ensuring that they are pro-competitive and in sync with your organization’s reasons for pursuing the transaction.

• Defining the relevant geographic market — always the crucial question in antitrust analysis. With the help of experienced antitrust counsel, investigate the factors that play a role in determining the market, including patient origination data, physical barriers, drive times and the urgency of the conditions the physicians treat (the more serious and emergent these conditions are, the tighter the market may be drawn and the harder it is to pass antitrust scrutiny). Estimate the best- and worst-case scenarios for the market definition to give the board a range of likely outcomes.

• Determining your combined market share under the different best- and worst-case scenarios, the vital metric for antitrust risk assessment.

• Assessing current and potential competitors. Are there other non-aligned physicians in the market who can provide the same services? Will there likely be new entrants to the market if your transaction is completed? Are there barriers to entry, such as a Certificate of Need process that restricts new entrants? A high likelihood that new competitors will enter can ease some of the antitrust concerns about an initially high market share resulting from a partnership.

Trustees and management also must consider how competitors and payers will react to the alignment. In the St. Luke’s case in Boise, two competitors filed the initial antitrust lawsuit. Later, the FTC and the Idaho attorney general joined the case and actively prosecuted it.

Payers’ reaction is an even more critical test. Government enforcers often take their cues from payers, because they are perceived as standing in the shoes of consumers. Trustees must ensure that management has considered briefing key payers to gauge their reactions to the potential transaction.

3. Consider the variety of ways to achieve your organization’s objectives. Acquiring a group practice is just one way to align with physicians to improve efficiency and quality, better coordinate care and participate in new payment models. Trustees and executives must have a frank discussion of whether the goals of alignment can be achieved through another form, such as a clinically integrated network, an accountable care organization, clinical comanagement agreement or other models.

These alternatives sometimes can pass antitrust muster in situations in which an outright acquisition would be difficult at best to win antitrust clearance. One key is that these models can feature nonexclusive contracting with payers. In an acquisition, the health system and physician group practice jointly approach the payer to negotiate, amplifying the market power for the health system and the practice. In the alternatives, they may jointly approach the payer, but if the arrangement is nonexclusive, payers can attempt to negotiate with some of the physicians separately from the health system. Knowing the payer has the option to divide and conquer alters the behavior of the hospital-physician negotiating team.

The example of the FTC’s advisory opinion in favor of Norman PHO is instructive. The FTC advisory opinion allowed this clinically integrated network to go forward and to negotiate jointly with payers despite combining all of the hospitals and most of the physicians in the Norman market. The FTC recognized that Norman PHO likely would obtain higher prices for its services by jointly contracting. Yet, the FTC allowed the collaboration to proceed because, as mentioned previously, Norman PHO persuaded the FTC that it would improve quality and efficiency and its nonexclusivity would constrain its ability to demand higher prices from payers.

While traditional PHO models are based on joint contracting, Norman PHO also showed that it was going further by following the clinical integration guidelines published by the FTC and the Justice Department [see sidebar, Page 29].

4. Perform thorough contingency planning. Even if your health system undertakes this process in the best way from the start, contingency planning is a must. Some questions to consider:

• Evaluate each potential partner with a hell-or-high-water test: Are the benefits so clear and significant that your system should fight to complete the deal as intended, come hell or high water?

• What conditions on post-closing behavior could you live with? Does the transaction deliver such clear benefits that you can live with conditions enforcers win in court or negotiate in a settlement?

• If the deal were challenged post-closing and the FTC wins, how would you unwind the transaction?

Proceed Cautiously

The importance of hospital-physician alignment to executing strategies in the reform era and the heightened scrutiny of alignment transactions makes proper antitrust risk analysis a vital duty of the board.

The lesson from St. Luke’s underscores this point: Just because you can see great benefits from a deal doesn’t mean you will get to complete it or keep it. Your organization can convince a judge that you have the best motives for improving and expanding access to care, but still lose the case on the basic antitrust analysis. The ACA explicitly encourages providers to collaborate, but it is not a license to violate the antitrust laws. 

R. Dale Grimes (dgrimes@bassberry.com) is a partner and leader of the antitrust and trade practices group at Bass, Berry & Sims PLC, Nashville, Tenn.


FTC, Justice Lay Out Requirements

As recent rulings signal continued federal scrutiny of physician employment deals, antitrust risk management must become a board priority.

The Federal Trade Commission and the Department of Justice provide the following guidelines for a typical clinical integration arrangement:

• clinical practice guidelines — has protocols developed by providers;

• physician commitmenthires and contracts with physicians who agree to follow the protocols;

• metrics — establishes performance measurements under these protocols;

• infrastructure — invests in information technology and personnel to measure and monitor adherence to protocols;

• enforcement — has the ability to expel providers who fail to follow protocols.

The FTC and the Justice Department have made clear that these elements are not a cookbook or one-size-fits-all answer, and each clinical integration arrangement must be evaluated on its own. They also have said, however, that Medicare Shared Savings Program ACOs do qualify as clinically integrated. R.D.G.