Applying Legal Analysis to Integrated Rural Health

by James Teevans J.D.

The DRIS Initiative has been an excellent vehicle to help providers and their communities better understand and address managed care issues. To minimize legal risks arising from networking, this article will address potential issues to keep in mind.

Antitrust

The role of health care consumers has helped to minimize antitrust concerns with provider cooperation. Because the antitrust laws seek to protect consumers (often with rural inappropriate standards), the input from consumers themselves helps to provide antitrust enforcement agencies and the courts with realistic evidence of the need for provider cooperation. Consumer input can also help ensure that the perceived benefits of cooperation and case management enure downstream to the consumer.

Bona Fide Versus Sham Networks

Antitrust issues are important to understand because rural communities considering successful integrated networks will typically encounter these issues. I say “successful” networks because to achieve success in many of the DRIS sites, substantial provider participation will be necessary. The antitrust enforcement agencies, as well as non-participating providers will be suspicious whenever many providers join together and have the potential to raise prices or reduce the quality of health care services.

I do not want to minimize antitrust concerns, but DRIS participants should be aware that most successful antitrust lawsuits have involved sham integrated networks as opposed to bona fide integrated networks. A sham network typically involves providers that come together merely to increase their revenues by fixing prices or reducing quality without any interest in benefitting health care consumers. To help avoid potential civil and criminal penalties and to be found to be a bona fide joint venture, network participants need to continue emphasizing the procompetitive goals of the network and ensure that the participants respect network formalities. Case law and federal antitrust enforcement speeches recommend adequate pooling of capital and resources, as well as risk sharing (provider financial incentive to control consumer costs).

The DRIS sites, who have demonstrated committment to pro-consumer goals, should be applauded for their continued cooperation not only between the providers themselves, but also the joint efforts between providers and consumers. The DRIS sites also need to understand the power of consumer support to help minimize antitrust concerns of “anti-consumer” or anticompetitive activities. It is difficult for the government or a few individual providers to complain about cooperation when consumers support and expect cooperation.

Because the DRIS Initiative is unique in its approach to networking (empowering non-providers to help decide care management issues), the impact on antitrust analysis is still too new. While it will not immunize providers from antitrust suits, the role of community leaders in non-profit hospital mergers has been a very helpful fact in cases challenging procompetitive cooperation.

Market Power Analysis

Assuming that an integrated network is found to be a bona fide network, it must continually be aware of the combined market shares of the participants. Networks that include too many competing providers (determined by defining appropriate product and geographic markets) may have market shares that are considered high (i.e. exceeding 30 percent) and, thereby, could allow the network to raise prices or restrict output. Exclusive arrangements between more than 20 percent of available providers could further increase the potential antitrust risks.

A recent antitrust case highlights the importance of understanding the antitrust risks of provider networks with high market shares and little to no consumer involvement. On February 19, 1998, the Federal Trade Commission (FTC) announced a settlement with a western Colorado physicians organization involving charges that it fixed prices and prevented market entry by third party payors (HMOs and PPOs).

The FTC had issued a complaint against the Mesa County Physician Independent Practice Association (“Mesa IPA”) which was the de facto exclusive bargaining agent for its membership, which included at least 85% of all of the physicians and at least 90% of the primary care physicians in private practice in Mesa County, an area of over 100,000 people. The FTC claimed that Mesa IPA and its members agreed to fix the terms on which they dealt with health plans and collectively refused to deal with other health plans. This agreement apparently resulted in higher prices for physician services and hindered the development of low-cost alternatives for consumers.

The Mesa case highlights the problems faced by rural providers that build a viable network and are not always sensitive to antitrust issues. Rural providers must learn from the Mesa case and the difficult burden faced by other defendants in rebutting allegations of high market shares in isolated geographical areas.

First, integrated rural health systems should always be aware of their market areas (typically larger than their service areas) and their corresponding market shares. The addition of new providers into an integrated health system must involve an analysis of the effect on the overall market share of the system. Second, rural providers must adequately document the benefits resulting to consumers as a result of their cooperative activities. The burden will rest on the network or health system to prove that any procompetitive effects outweigh any alleged anticompetitive effects from a high percentage of participating providers. Investing some time in the beginning to address these concerns and to periodically refresh participant’s memories will ultimately help to save the network from the costly liability resulting from an antitrust case.

News reports about “relaxed” government antitrust enforcement in rural areas should not mislead DRIS participants. Antitrust enforcement is still an active threat. In addition, an increasing number of future antitrust claims will be brought by private parties. It is important, therefore, for networks to ensure that they evidence the objective and procompetitive reasons for their decisions, including whether or not to include a specific provider in a network.

It is important to point out that even rural integrated networks that have market shares exceeding 40 or 50 percent can pass antitrust scrutiny. Many defenses and immunities exist for such networks and many have been argued successfully on behalf of rural clients. The argument becomes even stronger, however, with wide community consumer participation in the network.

Partial Versus Complete Integration

Assuming that an integrated network is bona fide and the combined market shares of the network participants are at appropriate levels, the participating providers must be careful to avoid discussions of prices and other confidential information if they are only partially integrated. Partial integration refers to joint activities between providers whereby the providers come together for a limited purpose (i.e. sharing equipment or negotiating for managed care contracts) but retain their own individual decision-making authority. This type of partial integration is to be distinguished from complete integration (such as mergers, acquisitions and consolidations) where the parties come together for all purposes and are each governed by a single decision-making authority. With complete integration, the parties operate as a single economic entity and, therefore, are able to discuss proprietary matters. On the other hand, as a partially integrated network, the parties are still viewed as competing providers and must refrain from discussing information that is not ancillary to the joint activity.

Contract Negotiations

While our efforts to educate federal and state antitrust enforcement agencies as well as rural communities continue, new antitrust issues have emerged now that rural networks throughout the country have had an opportunity to operate. As managed care payors (HMOs and PPOs) begin to enter rural areas, rural health networks are now beginning to deal with contract offers. It is important for rural networks to understand some of the general “dos” and “don’ts” concerning networks and their contract negotiations with HMOs and PPOs.

In the “do” category, network members can collectively discuss how best to provide care to their communities by determining policies and procedures that are best for their rural areas and collectively negotiating those non-price terms with HMOs and PPOs. These non-price terms include but are not limited to the collection and review of patient outcome data or the development of practice parameters or standards (quality assurance and utilization management issues, such as clinical pathways). These terms raise very few antitrust concerns. The Department of Justice and Federal Trade Commission have recognized that the collective assessment and formulation of terms has the potential of increasing quality and efficiency.

In the “don’t” category, rural networks must be careful concerning the extent to which a network seeks to prevent individual network members from dealing with the HMO once the network and the HMO are unable to agree on non-price terms. Some networks can exceed the limits of their authorized negotiating for the group and be found to participate in a group boycott. The DOJ and FTC have provided some examples of network overreaching. For example, providers’ collective refusal to provide x-rays to an HMO that seeks them before covering a particular treatment regimen would constitute an antitrust violation. Another example would be when providers collectively attempt to force an HMO to adopt recommended practice parameters by threatening to or actually boycotting the HMO for refusing to accept the providers’ joint proposal.

Price Terms

With respect to price terms, I want to emphasize that networks must carefully structure their price negotiation process to avoid committing a price fixing violation. The benefit of a network is that it allows rural providers to lower administrative costs and burdens of dealing with HMOs and PPOs on an individual basis. This benefit, however, has its limits for networking providers. Networks must limit the exchange of price terms and other proprietary information to that necessary for the legitimate operation of the network and in a manner which minimizes participating providers’ knowledge of other providers’ price schedules.

The most conservative way of negotiating price terms between the network and the payor is the “messenger model.” This model operates by having the network’s negotiating agent, who is not otherwise affiliated with any Network participant, merely acting as a conduit for price terms. The agent finds out what the HMO is willing to pay providers. The agent then conveys that price offer individually to each provider member in the network. The agent at no time negotiates price on behalf of an individual network provider. As mentioned previously, the agent merely acts as a conduit.

The messenger model has been helpful for rural networks seeking to include greater than 40% of the providers serving a geographic area. This manner of negotiating price terms minimizes the DOJ’s or FTC’s fears of such a network exercising monopoly power while still allowing the providers to collectively learn from one another about practice patterns and other quality and efficiency issues.

On the other hand, this pricing method is very inefficient. For those rural networks seeking to better serve their members and payors, rural networks have turned to the “attorney-in-fact” approach. This approach entails greater risks and needs to be carefully implemented and reviewed to avoid price fixing concerns. Under this method of negotiating price terms, the network agent, who is once again not otherwise affiliated with any network participant, obtains a fee schedule or conversion factor that represents the minimum payment that an individual network provider will accept from a payor. Depending on particular facts, the agent is essentially authorized to contract on the provider’s behalf with payors offering prices at this level or better. The agent does not share pricing information among network providers. As the federal safety zones point out, price offers that do not meet the authorized fee are conveyed to the individual provider.

Fraud and Abuse

Many integrated networks will include physicians or physician organizations. Payments to these participating network physicians must be in accordance with the federal anti-kickback statute which, among other things, prohibits payments for referrals of Medicare or Medicaid patients. Rural providers should be aware of safe harbors which provide guidance in this area and help to prevent investigations or challenges by the Inspector General’s office. Under the Balanced Budget Act of 1997, enforcement activities in this area are expected to increase considerably.

Self-Referral

Federal laws and some state laws prohibit physicians from referring patients to certain entities in which the physicians have a financial interest, unless specific exceptions apply. Integrated networks which have physician participants should be sensitive to outside ownership interests of those physician members in order to minimize any network liability exposure.

Tax-Exempt Status

Many integrated networks will also involve joint activities between both tax-exempt and non tax-exempt providers. These networks can be structured in a manner to help a tax-exempt participant from losing its tax-exempt status. In fact, the Internal Revenue Service has issued private letter rulings which provide substantial guidance in this area. Networks can help avoid tax-related difficulties by ensuring that the network’s activities:

further the tax-exempt organizations’ purposes,
allow the exempt organization to continue operating exclusively in furtherance of its tax-exempt purpose
protect the exempt organization’s financial interest and protect against improper financial gain by non-exempt participants or investors, and
give tax exempt providers majority control over critical governance issues.

Tort Liability

Network participants must also be sensitive to potential liability for malpractice or other tort claims brought by third parties. It is helpful to ensure that individual participants are adequately insured, that liability exposure is limited as much as possible through network agreements, or that reasonable peer review is in place, if possible. Network participants must always carefully consider the quality and temperament of the participants being considered as network members.

The particular facts of an individual situation will determine the extent of potential liability, if any under the above legal issues. It is recommended that DRIS participants contact an attorney to advise them on a particular fact situation.

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