Mergers, Acquisitions & Other Transactions

On March 29, 2018, the Attorney General of California filed an antitrust action against Sutter Health and its affiliates (“Sutter”) alleging Sutter engaged in various anticompetitive conduct in violation of California’s Cartwright Act.[1]  According to the Complaint, healthcare costs in California have rapidly increased, and prices in Northern California are higher than in other areas of the State.  For example, the State asserts that “unadjusted inpatient procedure prices are 70% higher in Northern California than Southern California, corresponding to hospital market concentration being 110% higher in Northern California than Southern California . . .”

The State believes that the increased cost of healthcare in Northern California is largely “attributable to Sutter and its anticompetitive contractual practices,” which it allegedly imposed as a result of securing market power in certain local markets in Northern California.  The State asserts that Sutter has “compelled all, or nearly all, of the Network vendors operating in Northern California to enter into unduly restrictive and anticompetitive contracts” that have:

  • Established, increased and maintained Sutter’s power to control prices and exclude competition;
  • Foreclosed price competition by Sutter’s competitors; and
  • Enabled Sutter to impose prices for hospital and healthcare services and ancillary services that far exceed the prices it would have been able to charge in an unconstrained, competitive market.

Sutter Health is the largest hospital system in Northern California, with 24 state-licensed acute-care hospitals and 4,311 acute care beds, 35 outpatient centers, a 5,500 member physician organization, and other ancillary providers.

Summary of the State’s Complaint

The State argues that Sutter began to implement a strategy to acquire market power at the time of the merger between Sutter’s Alta Bates Hospital and Summit Medical Center (“Summit”), noting that the transaction enabled Sutter to “increase prices, and thus costs, for its healthcare services.”  According to the complaint, a 2008 Federal Trade Commission retrospective review of the transaction found that contracted price increases for Summit post-merger ranged from approximately 29% to 72% depending on the insurer, compared to approximately 10% to 21% at Alta Bates, and that the Summit post-merger price increases were among the highest in California.”  Sutter defended the merger by arguing, in part, that it would not be able to exercise market power to raise prices post-merger, because insurers could incentivize patients to seek care at lower-cost alternatives through various steering and tiering mechanisms.  The district court agreed.

The State alleges, among other things, that Sutter is now leveraging and maximizing its “market power in certain local healthcare markets across all markets” and preventing insurers from “using steering and tiering to counter its excessive pricing.”  Moreover, Sutter is accused of successfully demanding that all, or nearly all, of its contracts with its “Network Vendors[2]” include implicitly or explicitly:

  • An agreement that contains an “all-or-nothing” contract provision requiring that all Sutter hospitals and healthcare providers throughout Northern California be included in the payor’s provider network.  The State alleges that Sutter has exploited its substantial market power to illegally tie or bundle each of its individual hospitals to all of the other hospitals and providers in its Northern California hospital network.
  • An agreement that prohibits anyone offering access to a provider network from giving incentives to patients that encourage them to use the healthcare facilities of Sutter’s competitors.  The State alleges Sutter entered written or oral agreements that forbid or severely penalized health plans that used tiered networks by eliminating or nearly eliminating the health plan’s negotiated discounts off of Sutter’s pricing.
  • An agreement prohibiting the disclosure of Sutter’s prices for its general acute care hospital services (including inpatient and outpatient services) and ancillary and other provider services, before the service is utilized and billed.  The State alleges that this has the effect of concealing Sutter’s inflated pricing from the self-funded and other payors, and preventing them from determining the prices they will later have to pay to Sutter for the healthcare services included in their health plans at the time they select among the provider network options offered by competing Network Vendors.  As a result, payors and enrollees in health plans were allegedly “less able to exert commercial pressure on Sutter to moderate its inflated pricing.”

According to the State, Sutter also uses “punitively high Out-of-Network Hospital pricing in combination with the anticompetitive provisions in its agreements with Network Vendors to make it economically unfeasible for Network Vendors to choose higher-quality and/or lower-cost hospital competitors.”

The State alleges that such provisions have had significant anticompetitive effects in Northern California, including: (1) creating barriers to entry and expansion for existing and potential general acute care competitors in each of the geographic markets where Sutter’s hospitals are located; (2) depriving patients of the ability and the incentive to choose a better-quality and/or lower cost competing hospital or ancillary provider; and (3) depriving Sutter’s competitors of the ability to effectively compete based on price or quality, which allows Sutter to maintain system-wide prices at levels that are significantly higher than the prices currently charged by its competitors and substantially higher than prices that could be charged in a competitive market.

Relevant Market Definition

In an interesting twist, the State notes that it need not define and identify “the particular economic markets that Sutter’s conduct has harmed” given evidence of the direct negative effects Sutter’s “anticompetitive conduct has caused Network Vendors and Self-Funded Payors,” who the State alleges have paid substantial overcharges compared to what they would have paid in a competitive market for healthcare services.  The State notes that Sutter’s ability to impose anticompetitive contract terms in all of its agreements with payors and its ability to “persistently and directly charge supracompetitive prices to payors on a system-wide basis” are direct evidence of its market power  that “obviates any need for further analysis of competitive effects in particular defined markets.”[3]  Notwithstanding this assertion, the State also defines the relevant product market as “the cluster of general acute care hospital services (including inpatient and outpatient services), as well as ancillary services, that are made available for purchase, in whole or in part, through Network Vendors out of the funds of Self-Funded Payors.”

The State asserts that the relevant geographic market can alternatively be defined either (1) as a 15-mile/30-minute driving time from any Sutter hospital or on the basis of counties in which a Sutter hospital is located, or (2) based on the regions set out in Paragraph 84 of a complaint filed against Sutter by the UFCW & Employers Benefit Trust (UFCW & Employers Benefit Trust v. Sutter Health, et al., Case No. 15-53841), in which one or more Sutter facilities are located.

The State alleges that health plan enrollees who live and work in the vicinity of a Sutter facility do not view hospitals located outside of the relevant geographic market as viable substitutes for facilities located within the geographic market.  Similarly, the State alleges that not only are network vendors (who seek to assemble provider networks for health plan enrollees), unwilling to consider hospitals outside of the relevant geographic market to include in their networks, due to Sutter’s market shares in a large number of zip codes and the existence of “must have” Sutter hospitals, the Network Vendors are “unable to assemble commercially viable Providers Networks that exclude all Sutter hospitals.”

Conclusion

This case serves as an important reminder that State Attorneys General can be just as aggressive in enforcing the antitrust laws as the federal antitrust authorities.  While integrated health care systems can often provide a number of efficiencies and benefits to consumers, under certain circumstances the antitrust authorities may view specific business and contracting practices with skepticism.  Large health care providers with significant market share in one or more geographic areas need to be mindful of their contracting practices and ensure that their business strategies are closely scrutinized by antitrust counsel prior to implementation.  This matter, as well as the ongoing litigation the Department of Justice Antitrust Division and the State of North Carolina have against the Carolina’s Healthcare System, is another example that contractual provisions that reference competitors and/or anti-tiering or anti-steering clauses in payers contacts may, depending on local market conditions, raise antitrust concerns.

 

[1] The Cartwright Act is California’s principal state antitrust law.  It is intended to prevent anticompetitive activity, and it mirrors the same concepts as the federal antitrust laws (the Sherman Act and the Clayton Acts).  It prohibits agreements between competitors to restrain trade, fix prices or production, or lessen competition, and other conduct that unreasonably restrains trade.

[2] Network Vendors are defined in the complaint as a small group of specialized insurers that possess the expertise necessary to develop and assemble provider networks that will be useful to all of the people enrolled in the health plans offered by a variety of employers and Healthcare Benefits Trusts operating in a variety of locations in Northern California.  Healthcare benefits are sometimes funded through a trust that is established and maintained under the terms of a collective bargaining agreement between a labor union and one or more employers (i.e.,  Healthcare Benefits Trusts).

[3] Direct effects evidence is evidence indicating the likely competitive effects of a practice (or transaction) that is not based on traditional inferences drawn solely from market concentration.  Such evidence can include price increases or a reduction in output following a consummated merger or other indicia that helps to determine the presence or the likelihood of the exercise of market power.

The Department of Justice (“DOJ”) Antitrust Division recently announced plans to hold a series of public roundtable discussions to analyze the relationship between competition and regulation, and its implications for antitrust enforcement policy.  As the Antitrust Division continues to scrutinize the healthcare industry, these roundtables may give a window into the Division’s current thinking about mergers and acquisitions and contracting practices in the industry.  The roundtable series starts on Wednesday, March 14, 2018, with a focus on antitrust exemptions and immunities, including a focus on the appropriate role of the state action doctrine.  The roundables will include perspectives from various industry participants as well as “academics, think tanks, and other interested parties to discuss the economic and legal analyses of competition and deregulation.”  The second roundtable will be held on April 26, 2018, and will focus on consent decrees.  The third roundtable will be held on May 31, 2018, and will analyze the consumer costs of anticompetitive regulations.  The DOJ will accept public comments (not to exceed 20 pages) in advance of each of the roundtables.  The federal antitrust agencies often hold public events of this nature to further inform their antitrust enforcement agendas.  It will be interesting to see if this roundtable series results in any major enforcement policy changes for the Antitrust Division, which is now under the leadership of Assistant Attorney General, Makan Delrahim.

A New Jersey Supreme Court case earlier this summer has New Jersey lawyers re-examining their clients’ business structures under the State’s corporate practice of medicine doctrine.

Many states prohibit the corporate practice of medicine (“CPOM”) in order to prevent or limit a lay person from interfering with a physician’s independent medical judgment. In New Jersey, for example, the State Board of Medical Examiners’ regulations prohibit a licensee with a more limited scope of practice (e.g., physical therapists, chiropractors, nurse practitioners, etc.) from employing physicians.

In Allstate Ins. Co. v. Northfield Med. Ctr., P.C., 2017 BL 148804 (N.J. May 4, 2017), the New Jersey Supreme Court  ruled that a chiropractor (and his attorney that advised on the structure) may have violated the Insurance Fraud Prevention Act because, under the structure,  a chiropractor could terminate a physician’s employment at any time and had more control over the practice’s profits than the physician (who is required to own a majority interest of the practice in New Jersey).  Thus, the court ruled that the medical practice was controlled by the chiropractor instead of the physician in violation of the New Jersey CPOM prohibition.

Submitting claims while a practice is structured in violation of the CPOM doctrine can lead to insurers recouping payments as false claims. Individual physicians, corporations, and attorneys can also face disciplinary action for their involvement in setting up or operating the fraudulent entity.

It is important that the organizational documents are set up to give the physician control over the practice, but this control should be exercised in reality and not just on paper. Physicians often have managers run many of the business aspects of the practice, but the physician should have the final say with respect to the medical and financial decisions of the practice and the hiring and firing of professionals.  Courts may look past the face of the documents to see who is really calling the shots on a daily basis.

While this recent case is spurring attorneys to evaluate their clients’ structures in New Jersey, this is a good reminder to take a fresh look at CPOM restrictions in other states as well.  Make sure your structure works at the outset and re-examine every so often to adapt with evolving laws and court interpretations of such laws.

On Monday, September 11, our colleagues in the Antitrust Section published an alert describing a developing antitrust lawsuit against Franciscan Health System (“CHI Fanciscan”): State of Washington v. Franciscan Health System, et al. No. 3:17-cv-05690 (W.D. Wash. Aug. 31, 2017). The Washington State Attorney General’s office accuses CHI Franciscan of accumulating a controlling share of the “Orthopedic Physician Services” market through incremental acquisition which has led to substantial lessening of competition and illegal price fixing, in violation of Section 7 of the Clayton Act and Section 1 of the Sherman Act, respectively, as well as Washington State antitrust laws.

The alert cautions that health care provider acquisition strategies may come under antitrust scrutiny, even when acquisitions target multiple small physician practices, if the cumulative effect of such acquisitions results in substantial condensation of market share in a particular area of health care services.

For greater insight on this issue, read the full alert here.

The Massachusetts Department of Public Health (DPH) Determination of Need (DoN) Program has promulgated final DoN regulations (shown here compared against the draft revisions.)  Approved by the Massachusetts Public Health Council (PHC) on January 11, 2017, DPH anticipates that the DoN regulations (105 CMR 100.000, et seq.) will be published in the Massachusetts Register on January 27, 2017, which will be their effective date.

Commissioner Monica Bharel, M.D., MPH emphasized that the overarching goal of these revisions is to meaningfully infuse public health and population health principles within this longstanding health care regulation. The Commissioner noted that it is her belief that successful cost containment must occur in the context of tackling social determinants of health. Our previous blog post, published at the time the draft revisions were presented to the PHC, reviews in some detail the DoN Program’s public policy goals underpinning these revisions, and we refer you to that post for more information.

At the presentation of the draft revisions to the PHC on August 23, 2016, DPH announced its intent to solicit and encourage robust public comment, and the public did not disappoint. A January 11, 2017 memorandum from senior DPH staff to Commissioner Bharel and members of the PHC requesting approval of the final proposed DoN regulations stated that DPH received over 100 comments, submitted at two public hearings and in writing during the 45-day public comment period. The memorandum summarizes not only the comments received, but the stakeholders who submitted the comments and DPH’s public policy rationale for its reaction to many of the comments. Materials (available here and here) accompanying the presentation of the final proposed DoN regulations also summarize the draft revisions, comments received and final proposed DoN regulations.

Many comments addressed the requirements for DoN review of ambulatory surgery, transfer of ownership, Community Health Initiative (CHI) projects, as well as application requirements, review process and criteria, and standard conditions.  Two areas that generated many of the public comments, and which resulted in adjustments to the proposed DoN regulations, are discussed below.  Continue Reading Massachusetts Determination of Need Program – Final Regulations

Earlier this week my colleagues, Bruce Sokler and Farrah Short published an alert detailing the FTC‘s creative solution to permit a presumptively anticompetitive merger for a financially failing medical practice.  The FTC entered into a proposed settlement with two Minnesota health care providers, allowing them to proceed with a planned merger that, according to the agency, combines “the two largest providers of adult primary care, pediatric, and OB/GYN services in the St. Cloud area.” The FTC’s willingness to accept the proposed settlement permitting was premised on (1) the fact that one of the medical groups “is a financially failing physician practice” and (2) “concerns regarding disruptions to patient care and possible physician shortages.”

The full alert on the FTC’s envelope-pressing consent solution can be found here.

 

 

You can access the slides here and the recording here!

On Friday, Robert Kidwell and Bruce Sokler, members of the Firm’s Antitrust and Federal Regulatory practice group, presented a webinar on the Third Circuit’s hotly anticipated decision on the FTC’s appeal of the District Court’s denial of its request for a preliminary injunction on the merger of Penn State Hershey Medical Center and Pinnacle Health System.

This case became a topic of interest after the U.S. District Court for the Middle District of Pennsylvania denied the FTC’s request for a preliminary injunction in May 2016.  In reaching its decision, the District Court defined the “relevant geographic market” in a manner that, if upheld on appeal, would have essentially gutted the FTC’s approach to hospital merger enforcement.  Ultimately, the Third Circuit found that the District Court committed legal error in failing to properly formulate and apply the “hypothetical monopolist test” and issued an opinion that Rob and Bruce characterized as a “big win” for the FTC.

Rob and Bruce also expect this decision to be helpful to the FTC in its ongoing challenge to the Advocate/North Shore merger in Chicago (check out our previous blog post on this topic by clicking here).  Stay tuned for further updates!

On Tuesday, June 14, 2016, the U.S. District Court for the Northern District of Illinois declined to temporarily block the proposed merger of Advocate Health Care Network and NorthShore University HealthSystem in the Chicago area, handing the FTC its second hospital merger loss this year.  The FTC and the State of Illinois filed an administrative complaint in December 2015, seeking a temporary restraining order and a preliminary injunction to block the transaction.  As discussed in our previous blog post, the FTC alleged that the combined entity would operate the majority of the hospitals in the North Shore area of Chicago, and control more than 50% of the general acute care inpatient hospital services. Continue Reading FTC Suffers Another Hospital Merger Loss in Advocate-NorthShore

The Third Circuit granted on Tuesday the Federal Trade Commission’s (“FTC”) request for an injunction pending appeal of the proposed merger between Penn State Hershey Medical Center and Pinnacle Health System.  The injunction comes just before the temporary restraining order against the merger issued by the U.S District Court for the Middle District of Pennsylvania was set to expire on Friday.  Earlier this month, the district court denied the government’s request to block the merger. Continue Reading FTC Wins Stay of Pennsylvania Hospital Merger Pending Appeal in Third Circuit

The OIG recently issued a favorable advisory opinion permitting a health system (the “Health System”) to become the sole owner of a Group Purchasing Organization (“GPO”), some of whose members were also owned by the Health System (the “Proposed Arrangement”).

Despite determining that the Proposed Arrangement does not qualify for protection under the GPO safe harbor, the OIG considered whether allowing the GPO to be wholly owned by the same entity that also owns almost 1% of the member pool increases the risk of fraud and abuse to Federal health care programs.

The GPO Structure

The GPO has over 84,000 members nationwide, many of which are hospitals, nursing facilities, clinics, physician practices, laboratories, home care, and equipment organizations. It operates by negotiating products and pricing with vendors on behalf of its members and receives administrative fees from the vendors based on a percentage of the value of sales to the members.  The GPO provides annual written disclosures to the members regarding purchases made on behalf of each member and maintains records regarding discounts and vendor administrative fee distributions to members.

The Proposed Arrangement

To increase efficiencies, the GPO underwent a series of mergers and stock sales (not at issue here), after which the Health System owned 95% of the GPO, with an unrelated entity owning the remaining 5%. About 800 of the 84,000 members (just under 1%) are owned by the Health System.  Under the Proposed Arrangement, the Health System would purchase the remaining 5% of the GPO to become the sole owner. Continue Reading OIG Issues Favorable GPO Advisory Opinion