United States: Just How Much Integration Is Enough: FTC Advisory Opinion Finally Provides Guidance For Competitors Seeking To Collaborate Or Jointly Negotiate

The Federal Trade Commission (FTC) recently issued its first advisory opinion addressing clinical integration programs since the enactment of the Affordable Care Act (ACA). Without a doubt the advisory opinion is useful for the health care industry, but importantly it also is instructive for all counselors advising competitor collaborations. The FTC staff's statement of the relevant facts and explanation of why it would not recommend a challenge to the network confirm that the same fundamental antitrust principles apply after the ACA and provides a level of detail regarding what is necessary to jointly contract that has not been seen before.

The Obama administration's commitment to antitrust enforcement in health care is evident from its actions. Just a few examples of that commitment include that:

  • the Department of Justice, Antitrust Division's (DOJ) decided to challenge the Blue Cross Blue Shield of Michigan's planned 2010 acquisition of a small competitor
  • the DOJ barred New West, a group of Montana hospitals which also own Montana's second-largest insurance plan, from switching their hospitals from their own insurance plan to Blue Cross Blue Shield of Montana, the state's largest insurer, without divesting control of New West's commercial health insurance business to a third party
  • the DOJ filed a lawsuit challenging a series of Blue Cross Blue Shield of Michigan agreements requiring most-favored-nation pricing
  • the FTC secured a hold separate order preventing ProMedica Health Systems from fully consummating its acquisition of a rival hospital and issued a decision declaring the acquisition illegal (now on appeal in the Sixth Circuit), and
  • the FTC, in its ongoing challenge of Phoebe Putney's proposed acquisition of Palmyra Park Hospital, convinced the U.S. Supreme Court to narrowly construe the State Action Doctrine. For details on this case, see Pepper's February 22, 2013 Client Alert, "Supreme Court Limits State Action Immunity in FTC v. Phoebe Putney Health System, Inc." (available online at www.pepperlaw.com/publications_update.aspx?ArticleKey=2563).

Some suggest that these enforcement actions unnecessarily interfere in business conduct and relationships that would create efficiencies and reduce costs to consumers. Most recently, however, the FTC issued an advisory opinion that clarifies some of the ways in which health care providers may collaborate lawfully to share information, improve health care, and jointly contract with health insurers. The line between lawful coordination (including as to pricing) and unlawful price fixing, though obvious in some situations, has been uncertain and troubling for those competitors seeking to collaborate on more than merely production. At the request of Norman Physician Hospital Organization (Norman PHO), the FTC's advisory opinion examined the formation and operation of a clinically integrated health care network and provided the most detailed guidance yet on the level and type of clinical integration necessary for joint action consistent with the antitrust laws. While the collaboration examined is in the health care industry, the principles discussed apply equally to non-health care joint ventures. The Norman PHO advisory opinion can be found at http://www.ftc.gov/os/2013/02/130213normanphoadvltr.pdf.

Basic Facts

Originally established in 1994, Norman PHO was founded by a group of physicians with clinical privileges at Norman Regional Health System facilities. As founded, Norman PHO used the "messenger model" for contracting between third-party payers and health care providers, in which each provider was responsible for individually providing clinical services and setting its own reimbursement rates for those services. Norman PHO and its participating providers determined that they wanted to replace their messenger model operations with a clinically integrated program in which providers collectively offer a network of coordinated services. Id. at 2.

Norman Regional includes an acute care hospital and satellite hospital, a medical center, and family medical centers in each of five surrounding communities. The physician organization currently includes approximately 280 participating physicians in roughly 38 different specialties. Norman PHO includes only approximately 10 percent of the physicians and hospitals in the network's reported service area. However, its participating hospitals account for more than 50 percent of patient discharges. In addition, the network includes most of the physicians who practice in and around Norman, Oklahoma and the only hospital system in the "immediate Norman area." The network intends to continue to add members so long as applicants meet its membership guidelines and criteria. Id. at 3-4.

Proposed Structure

Norman PHO's structure is designed to ensure that the members work together to establish clinical practice guidelines, to create a high degree of transparency and visibility with respect to their practice patterns, and to provide mechanisms for monitoring and enforcing compliance with Norman PHO's clinical practice guidelines. The "key components" of Norman PHO's new structure referenced by the FTC include:

  • Specialty Advisory Groups: responsible for development and updates of practice guidelines. Each Specialty Advisory Group will be comprised of physicians practicing in a specialty represented by a medical department of the hospital system. All physicians will be required to participate in a Specialty Advisory Group
  • Mentor's Committee: responsible for oversight of quality improvement planning across Norman PHO. The committee will approve clinical practice guidelines as well as monitor implementation and enforcement of such guidelines. The committee will include physicians practicing in a variety of specialties
  • Quality Assurance Committee: responsible for establishing the measures for individual and group performance benchmarking, monitoring individual and group compliance with the network's standards, and administering corrective actions as necessary.

Norman PHO also retained a Medical Director, new employees to support the clinical integration program, a Medical Informatics Officer, a registered nurse to serve as Director of Quality Assurance, and several full-time records management employees. Importantly, the structure proposed should allow Norman PHO to not only formulate best practices and guidelines, but also to require provider buy-in, PHO oversight sufficient to assess compliance, and penalties for providers who fail to adhere to those guidelines. The Quality Assurance Committee will have the power to implement corrective actions, such as physician-to-physician mentoring and other counseling and educational activities, and, should those fail, can implement financial penalties. In extreme cases of noncompliance, the Quality Assurance Committee may even expel physicians from the network.

Norman PHO collected and analyzed data to identify the high-prevalence, high-cost, and high-risk chronic conditions that most affect its current population. In addition, Norman PHO invested substantial time, money and effort in development of an electronic platform, including a clinical decisions support system, e-prescribing, an electronic medical records system, and an electronic health interface system. The information systems established should permit participating providers to use quality parameters in patient care, make more efficient and more accurate prescription submissions, and improve communications among treating physicians. The FTC noted that Norman PHO ensured its electronic platform will reach its potential by requiring providers to acquire and maintain the necessary equipment and software and by making available the practice data and medical records necessary to develop and enforce clinical practice guidelines. Id. at 8-9.

Interestingly, the FTC dedicated a separate section of its advisory opinion to the ways in which Norman PHO would ensure that the physicians act consistently with the efficiency- and quality-enhancing goals of the PHO. For example, the FTC noted that each physician must meet eligibility criteria (credentialing and medical staff appointment requirements) and make financial investments (membership fee, annual dues, IT costs). Moreover, Norman PHO providers must invest substantial time and effort in development, implementation, and enforcement of clinical practice guidelines. Specifically, each physician must serve as a member of one of the above-referenced committees, and adopt, implement, and comply with the applicable practice guidelines. Also, each physician is subject to peer education and corrective action as mandated by the network, and must regularly provide practice data and medical records for review and analysis by the network. Id. at 9. Each physician subjects himself or herself to financial penalties and expulsion for failure to comply.

Payer Contracting

Norman PHO will form a contracting committee that will be responsible for evaluating payer contract proposals to assess whether the network's goals can be achieved within the proposed arrangements. Norman asserted that the network would be financially viable only to the extent that customers recognize its value and want to do business with the network. Additionally, although all participating physicians will be required to participate in any contract Norman PHO negotiates with a payer, the providers will remain free to contract independent of Norman PHO with any payer that chooses not to contract with the network. The network's stated reasons for requiring full participation by all physician members were: (1) to offer "a stable and identifiable roster of physicians and facilitate in-network referral," and (2) increase volume and harness network effects and economies of scale, while providing efficiencies and reducing transaction costs to physicians and payers.

Norman PHO committed to implementing certain basic antitrust risk-mitigation tools, like compliance training and limited access to competitively sensitive information (pricing, negotiating strategies or business plans).

FTC Analysis

The FTC noted that Norman PHO could affect several relevant markets, but that the only horizontal agreements (agreements among competitors) involve the markets for physician services. Under Norman PHO's proposal, competing or potentially competing physicians will make joint decisions about the price of their services and other terms in payer agreements, as well as about some patient care protocols. Because the PHO only involved one hospital system, the organization did not involve any horizontal agreements among providers of inpatient hospital services or outpatient hospital and ambulatory care services. Next, the FTC determined that the proposed arrangement should be examined under the rule of reason standard, not be treated as automatically illegal. The rule of reason was deemed the appropriate standard because the physicians will be required to "integrate their clinical services in a manner that appears to create the potential for significant efficiencies that benefit patients and payers and because the participating physicians' pricing agreements are reasonably necessary and subordinate to—that is ancillary to—their integrative activities." Id. at 14 (emphasis in original). The FTC also determined that Norman PHO is not likely to have a substantial negative effect on competition for the provision of physician services and any such potential adverse effect is likely outweighed by "plausible procompetitive efficiencies." Id.

The critical element of the FTC's analysis was its conclusion that joint contracting with payers was ancillary to the efficiency-enhancing aspects of the proposed collaboration. The FTC relied on the potential efficiencies described by Norman PHO and that binding the physicians to participation in all Norman PHO's payer contracts incentivized the physicians to contribute their time and effort to the clinical integration and to develop and pursue the network's procompetitive goals. Further, the FTC pointed to the PHO's statements that joint contracting is necessary to establish and maintain a consistent physician panel of practitioners with a shared commitment to all aspects of the clinical integration program for all patients covered under the network contracts. Without joint contracting, each physician would have to evaluate his or her payer opportunities and decide whether or not to participate in the proposed network agreements. Norman PHO represented to the FTC that in its experience this can result in physician panels varying significantly from among the different payer contracts. Accordingly, the FTC deemed joint contracting an ancillary restraint. Id. at 16-17.

Although the FTC recognized that Norman PHO included a substantial portion of the area physicians with clinical privileges at the only local hospital and that such a combination could adversely affect competition, the FTC determined that these concerns were mitigated by the fact that potential customers who do not see Norman PHO as offering an attractive product will have the ability to bypass the network and contract directly with the individual providers. Id. at 18. The FTC further concluded that there were no vertical agreements that would permit Norman PHO to use any network market power that might exist in the sale of services to limit competition in the sale of any other services. The advisory opinion lists vertical restraints that, if present, could concern the FTC: a requirement that payers have to do business with all of the networks participating hospitals, anti-steering provisions, anti-tiering clauses, guaranteed inclusion requirements, and most-favored-nation terms or other similar contractual provisions that could prevent payers from directing or incentivizing patients to choose certain providers.


The key elements to Norman PHO's successful review by the FTC were:

  • clarity of strategy and goals focused on improved quality, efficiency, and reduced costs
  • an established structure focused on the procompetitive goals of the collaboration, including retention of personnel dedicated and necessary to those efforts
  • the requirement of investment/commitment by physicians, including an initial participation fee, annual dues, administration fees, and substantial time obligations focused again on improved quality, efficiency, and reduced costs
  • a mechanism to force compliance so that the procompetitive goals can be achieved or end participation, including subjecting physicians to counseling and penalties
  • the existence of a reasonable alternative to dealing with collaboration, which here was the non-exclusive contracting with payers, and
  • antitrust compliance training and control of flow of competitively sensitive information.

As a result of Norman PHO's careful planning and ability to demonstrate to the FTC that it had or would put in place the key elements above, the advisory opinion recommended that there be no enforcement action against the collaboration. Every step of the FTC's review was focused on whether the facts provided by Norman PHO were consistent with the goals of improved quality and efficiency. For example, the FTC examined the structure, the hiring of certain personnel, and the electronic information systems in terms of how each supported the claimed procompetitive goals. Additionally, the FTC evaluated the investment required in terms of how that investment was related to quality care and improved efficiencies.

Potential collaborators, whether in health care or other industries, should find the road map in the Norman PHO advisory opinion instructive. The forethought and planning that the FTC found so convincing can only be achieved if the business teams are prepared to consult with counsel on a careful legal review of the initial plan, documentation, and implementation of the collaboration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Deirdre E. McInerney
Barbara T. Sicalides
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