JOINT CONTRACTING OPPORTUNITIES INCLUDING AN OVERVIEW OF GROUP INTEGRATION AND PHYSICIAN GROUP MODELS

1. JOINT CONTRACTING OPPORTUNITIES INCLUDING AN OVERVIEW OF GROUP INTEGRATION AND PHYSICIAN GROUP MODELS Presented by James A. Christopherson, Esq. Dingeman, Dancer & Christopherson, PLC Attorneys at Law christopherson@ddc-law.com (231) 929-0500

2. Overview of James A. Christopherson • Extensive health care practice with focus on physician practices, physician organization and joint ventures • Counsel for many physician entities and joint ventures

3. SomeAlternatives to consider: 1. Integration of group practices without a merger of the practices utilizing a Messenger model (for example an IPA) 2. Group practice without walls (loose merger of practices) 3. Complete merger 4. Physician practices acquired by hospitals or integrated delivery systems (IDSs) 5. Physician practices managed by physician practice management companies (PPMCs)

4. The Planning Process should include: • Assessment of physician objectives • Business planning; determining project feasibility • Review of structuring options, including areas of legal risk and reimbursement analysis • Organization of “deal” process

5. CRITICAL QUESTIONS • Choice of “partners” and “participants” • Alternatives for physician investment in the market • Location and services mix; real estate issues • Legal and financial feasibility of proposed venture • Capital requirements and financing options • Who will manage the venture • Timeline for implementation

6. LEGAL ISSUES • Reimbursement analysis; provider-based rules • Stark Law • Anti-kickback Statute • Tax-exempt issues including private investment and fair market value issues • Securities law (applicable to physician investment) • Anti-Trust Issues

7. STARK LAW • Unless exception applies, law prevents a physician from referring designated health services (“DHS”) to an entity, or the entity from billing for the DHS, if the physician has a financial relationship with the entity • DHS are services “ancillary” to the physician service, including substantially all diagnostic imaging services (other than interventional radiology) and all hospital services; freestanding ASC and cardiac cath services are not DHS • Financial relationships include ownership and compensation

8. STARK LAW EXCEPTIONS • Examples • “In-office ancillary exception” for referrals within a physician practice • Personal services agreements, equipment leases and space leases structured to meet specified requirements • Exception for ownership of certain rural entities • Referrals by radiologist for diagnostic radiology or by radiation oncologist for radiation treatment pursuant to a consultation • Exceptions generally require fair market value compensation

9. ANTI-KICKBACK STATUTE • Unlike Stark Law, the Anti-kickback Statute is an intent-based statute that is not limited to physician ownership or DHS • Elements of the offense • Knowingly and willfully • Offer, pay, solicit, or receive • Remuneration • In return for referring, purchasing, leasing, ordering, or arranging for • Any item or service that is reimbursed under a federal health care program

10. TAX EXEMPT ISSUES • Private Investment • Fair Market Value Analysis • Intermediate Sanctions • Governance and Contract Issues

11. SUMMARY OF ANTI-TRUST ISSUES TheSherman Act prohibits contracts, combinations, and conspiracies in restraint of trade. Examples of conduct that could violate Sherman § 1 are: 1. Agreements to fix prices; 2. Agreements to allocate markets or customers; 3. Agreements to engage in group boycotts; and 4. Refusals to deal.

12. Sources of Guidance to Counsel for Physicians Case law and FTC decisions, which apply the antitrust laws to physician action through physician controlled provider networks are relatively few. Federal enforcement agencies have chosen a number of non-litigation alternatives to try to shape antitrust policy.

13. Among these are: Policy statements, Consent decrees; and Business review / advisory opinions.

14. Because investigations are fact intensive and the consequences of a violation severe, the costs of responding to an investigation, even if the end result is a settlement or a successful defense, can be huge. Therefore, following the guidance provided by the DOJ and FTC is a prudent course to take to minimize the risk of investigation by either agency.

15. 1996 Joint Policy Statements In 1996, the joint DOJ and FTC issued Statements of Antitrust Enforcement Policy in Health Care (the “Policy Statements”) that contain 9 policy statements that outline the framework under which the agencies analyze particular transactions or issues and define safety zones within which transactions or activities will not be challenged by the agencies.

16. The agencies will also provide antitrust guidance regarding specific proposed conduct through the DOJ business review procedures or the FTC’s advisory opinion process. A business review letter or advisory opinion is prospective, applying only to proposed conduct, not to existing behavior. Thus, the time to ask for one is before engaging in proposed conduct.

17. Statement 8 defines clinical integration as the implementation of: …an active and ongoing program to evaluate and modify practice patterns by the network’s physician participants and create a high degree of interdependence and cooperation among the physicians to control costs and ensure quality. This program may include: (1) establishing mechanisms to monitor and control utilization of health care services that are designed to control costs and assure quality of care; (2) selectively choosing network physicians who are likely to further these efficiency objectives; and (3) the significant investment of capital, both monetary and human, in the necessary infrastructure and capability to realize the claimed efficiencies.

18. Unreasonable Restraint of Trade There are two basic standards applied to conduct when determining if the conduct unreasonably restrains trade in violation of Sherman Act § 1: 1. the per se rule; and 2. the rule of reason.

19. Courts have found concerted action to be unreasonable per se if it involves: (a) Horizontal price fixing (i.e., an agreement among competitors regarding the prices they will charge for their products or services);

20. (b) Market division or customer allocation (i.e., an agreement among competitors to allocate among them the geographic or demographic markets in which they will sell their products and services); or (c) Group boycotts (i.e., an agreement among competitors not to deal with certain customers or potential customers for the products or services they offer).

21. An example of group boycotts would be a situation in which all the doctors in a community refuse to sign contracts with a particular commercial health insurance plan. Recent Example: Carle Clinic Association in Illinois

22. Conduct that does not fall within a category considered per se unlawful is analyzed under the rule of reason, which requires a balancing of the reduction in competition from the challenged conduct with the competitive benefits flowing from it. Often, this requires a lengthy analysis of the relevant product or service and geographic markets to determine the pro- and anti-competitive effects of a particular conduct.

23. The general framework for a rule-of-reason inquiry is set out in the DOJ Collaboration Guidelines. This inquiry may itself proceed in a stepwise fashion. The first step typically will involve market definition and calculation of market shares. If the market shares are low enough, the inquiry can stop at this point. (For physician joint ventures specifically, market share “safety zones” of twenty percent for exclusive ventures, and thirty percent for non-exclusive ventures, are specified in the separate Health Care Policy Statements.) If further inquiry is needed, the second step will be to “examine whether the relevant agreement is reasonably necessary to achieve procompetitive benefits that likely would offset anticompetitive harms.

24. Physician-Controlled Provider Networks Some IPAs have been investigated as shams, triggering per se rule violations of Sherman Act Section 1 because they operated simply to keep prices high. But, if an IPA is economically or clinically integrated, its agreements on price and other significant terms for participating physicians will be analyzed under the rule of reason.

25. If a network is not economically or clinically integrated, then it must use a messenger as a conduit between the physicians and the health plans to discuss price and other competitively significant terms.

26. Distilled to its essence, the legal framework described above demands that any network of independent physician who wish to use a clinical integration program as a justification for joint contracting with fee-for-service health plans must be able to positively answer the following three questions: 1. whether the program is “real,” i.e., composed of legitimate, well-founded initiatives, involving all the physicians in the network; 2. whether the program is designed to create likely efficiencies in terms of better health care quality or lower cost; and 3. whether joint negotiations with fee-for-service health plans is “reasonably necessary” to achieve the efficiencies sought by the program.

27. Economic Integration Economic integration is found where physicians and other providers participating in the network share the risk of costs from overuse of network services by individuals who are covered by the health plans with which the network contracts.

28. The Policy Statements describe the following 5 types of procompetitive risk sharing: 1. Capitated contracts between the network and the health plans; 2. Where the network creates significant financial incentives for its providers to meet cost containment goals;

29. 3. Where provider reimbursement is based on a percentage of health plan premiums or revenues; 4. Where overall cost or utilization goals are established and subsequent financial rewards or penalties apply to those goals; and 5. Where the network has global or all inclusive case rates.

30. Substantial Clinical Integration The Policy Statements indicate that substantial clinical integration consists of an ongoing program to evaluate and modify the practice patterns of network participants to create a high degree of interdependence and cooperation among them.

31. According to the Policy Statements, such a program may include: (i) Establishing mechanisms to manage utilization and to control costs and ensure quality; (ii) Selectively choosing network participants who are likely to further efficiency objectives; and (iii) Investments in resources needed to realize the network’s efficiencies.

32. Substantial clinical integration permits networks to negotiate fee-for-service reimbursement and other nonrisk-sharing pricing arrangements without fear of a per se violation of Sherman Act Section 1.

33. Messenger Model Another alternative to financial and clinical integration is for a physician controlled provider network to use a messenger mode approach to contracts with health plans.

34. In the messenger model approach, an independent third party “messenger” serves as a conduit for communications between the network physicians and the health plans with whom they wish to contract. To avoid price fixing concerns, the messenger must not communicate information among the physicians in the network.

35. The messenger’s role is limited to communications between the payers and individual physicians who participate in the network. Each physician or medical group must decide on their own whether or not to agree to the health plan terms and conditions communicated by the messenger.

36. The FTC has aggressively pursued price-fixing cases, challenging the use of messengers in negotiations by physician networks that also lacked financial and clinical integration sufficient to permit joint negotiations regarding price and other competitive terms. From 2002 until the present time, there have been more than a dozen consent decrees.

37. A number of common elements appear in most of the consent agreements such as: (i) Little clinical or financial integration among the physicians; (ii) The messenger’s refusal to communicate to the physicians offers deemed insufficient; (iii) The messenger’s substantive involvement in evaluating the offers;

38. (iv) A pattern of offering participating physicians an opportunity to “opt in or out” of the agreement once it was negotiated; and (v) Participating physician ownership or control of the network that retained the messenger.

39. On November 29, 2005, the FTC issued an opinion finding that the North Texas Specialty Physicians Corporation (“NTSP”), an IPA with approximately 500 members in 26 medical specialties, engaged in unlawful price fixing. NTSP’s physicians practice primarily in Tarrant County, Texas, surrounding the City of Fort Worth. Many members of NTSP compete with one another.

40. The Challenged Restraints The FTC findings include: An agreement to fix prices existed among NTSP’s members although there was no evidence of any direct communication between and among the members.

41. An agreement among physicians to fix prices can exist without a finding that the competing physicians agreed directly with each other. Rather, the IPA itself acts as the physicians’ collective agent, through which the physicians exert the bargaining leverage of their total numbers through a classic “hub-and-spoke” conspiracy theory.

42. Because NTSP was controlled by competing physicians, and because NTSP negotiated prices for services that the members would provide, the FTC held that NTSP’s conduct was that of a conspiracy or combination of its members, rather than unilateral action of NTSP itself.

43. Even if NTSP failed to obtain its desired price, the starting point in fee negotiations was set artificially high by use of a collectively developed minimum schedule. Consequently, payors were required to begin negotiations at a higher level than they would have absent the collective bargaining. The use of a minimum fee schedule, coupled with NTSP’s right of first negotiation under the Agreement, hindered payors’ ability to contract directly with physicians.

44. The Regional Delivery Network of West Michigan is a taxable Limited Liability Corporation comprised of five member organizations: • Carson Health Network PHO and Sheridan Hospital • Metro Health PHO • Saint Mary’s Mercy Medical Center • Lakeshore Health Network • Physicians’ Organization of Western Michigan Each organization appoints two managers to the Board of Managers – one administrator and one physician. In addition, each member organization appoints two alternates to the Board. The RDN has been clinically integrated in certain ways.

45. Group Practice Without Walls A group of physicians practicing under one legal entity, even if the subgroups of physicians practice in different locations and with separate cost centers, can jointly negotiate contracts.

46. At a minimum, this requires: 1. One legal entity; 2. One billing entity; 3. Individual physicians cannot opt in or opt out of negotiated contracts; 4. One retirement plan; 5. Benefits should generally be uniform throughout the different cost centers.

47. The cost centers may: 1. Have different physician compensation models (assuming they are Stark compliant); 2. Make hiring and firing decisions within each cost center. 3. Make financial decisions within each cost center, such as buying equipment, leasing or purchasing office space, etc.

48. Conclusion Some Possible Options are: 1. Complete merger of practices 2. Group practice without walls 3. IPA with Messenger Model 4. Hospital owned or employed physician practice • Physician Practice(s) managed by practice management company • If you have any questions about the issues raised in these materials, please contact Mr. Christopherson at christopherson@ddc-law.com or 231-929-0500. • The opinions expressed in these materials are intended for general guidance only. They are not intended as recommendations for specific situations. The laws, rules, regulations and statutes are subject to change. As always, please consult a qualified attorney for specific legal guidance.