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John J. Miles Appeared in Health Lawyers News Few concepts are more important in healthcare antitrust analysis and in counseling healthcare clients than "integration" — defined in the dictionary simply as "[t]o make into a whole by bringing all parts together; [to] unify";1 or to link or coordinate various parts. The contrasting results between the Federal Trade Commission's (FTC) recent enforcement action in Surgical Specialists of Yakima (Yakima) 2 and the recent federal district court decision in HealthAmerica Pennsylvania, Inc. v. Susquehanna Health System (Susquehanna) 3 illustrate the point. In Yakima, the FTC alleged that a group of physicians and their separate practices purporting to constitute a single-entity limited-liability company, Surgical Specialists of Yakima (SSY), lacked the integration necessary to be deemed a single entity for antitrust purposes. In Susquehanna, the district court found, on summary judgment, that three hospitals, whose two parents had formed an "alliance" (but not merged their assets or created a single ultimate parent entity), had integrated to the extent that they were a single entity for antitrust purposes. Both SSY and Susquehanna negotiated contracts with payors on behalf of their constituent providers. In Yakima, the FTC believed SSY and its members engaged in per se unlawful price-fixing agreements by doing so. In Susquehanna, the court found no violation at all when the alliance did the same thing. The key difference in facts was the parties' degree of integration. Some Background (1) If competing physician practices completely integrate their separate practices into a single practice, that practice thereafter can negotiate prices with payors without antitrust worry that their actions result in a price-fixing agreement. 4 There is no concerted action subject to Section 1 of the Sherman Act. 5 If they partially integrate their practices through a vehicle such as an IPA, their joint negotiations of prices are subject to Section 16 and may result in a per se violation depending on several factors relating to their integration. 7 If these same physicians agree on prices while integrating their practices minimally or not at all, their agreement is per se unlawful, and they could face criminal prosecution by the Antitrust Division of the U.S. Department of Justice or a state attorney general. 8 In each scenario, the key variable is integration. Why? Because in antitrust analysis, integration is a surrogate for efficiencies — that is, the more the parties integrate their operations, the greater the efficiencies their collaboration is likely to achieve. Total integration, through, for example, a consolidation or merger, just like cartel price-fixing agreements, results in the firms' agreeing on prices thereafter; but the per se rule does not apply because of an underlying assumption in antitrust analysis that merged firms will integrate their operations in ways that achieve efficiencies. 10 Integration achieves efficiencies by making the whole greater than the sum of its parts. Integration can take a number of forms, including governance integration (for example, a single owner or single board of directors governing all the activities of the formally separate entities), administrative or "back-office" integration (for example, the consolidation of the separate entities' business functions), productive integration (that is, joint and interdependent production of the firm's products or services), and financial integration (for example, the entities sharing the business's economic risks). With respect to each form of integration, there are degrees; for example, a firm's governance integration may be weak even where it has a single board of directors if the constituent parts that comprise the firm retain substantial "reserved powers" to exercise individually in their own self-interest. When separate entities, such as competing medical practices or hospitals, are contemplating some type of partial or complete practice consolidation and then would engage in conduct normally per se unlawful, their counsel must answer two related questions about their degree and types of integration. The first is whether the integration would be sufficient so they will be deemed a single entity for purposes of antitrust analysis after the transaction. If so, the Copperweld doctrine11 will apply to their intraenterprise "agreements" with one another. That doctrine holds that the constituent parts of a single entity are incapable of conspiring with one another as a matter of law. Thus, no Section 1 violation is possible because there is no agreement subject to Section 1 regardless of any effect on competition. The second question is whether, even if the parties' integration is not sufficient so they are "Copperwelded" into a single entity, their integration is such that their otherwise per se unlawful price-fixing activities would be assessed under the rule of reason. As to the first question, determining whether the parties' integration is sufficient to "Copperweld" them into a single entity is sometimes easy and sometimes difficult. The easiest situation is that presented in the Copperweld decision itself — a parent and its wholly-owned subsidiary. Once a defendant shows a relationship of total control by one entity over another, the ballgame is over, regardless of the degree to which those entities have actually integrated their operations as a factual matter. Because the parent can always "pull the string" on the subsidiary if it objects to the subsidiary's actions, the two always have a single business conscience and economic interests that cannot diverge (at least for long). Thus, the two always function as a single entity. As the structural and operational relationship between the parties moves on a continuum away from total control of one entity by another and becomes more attenuated, more and more facts must be examined before reaching a decision about whether the parties truly function as a single entity. A plethora of decisions now address such situations as sister corporations, corporate divisions, different businesses owned by the same individuals, principals and agents, hospitals and their medical staffs, businesses and firms that manage them, franchisors and franchisees, and others. 12 The Supreme Court, in its Copperweld decision, emphasized that substance, rather than form, must govern the analysis, and the lower courts have been true to that mandate. The primary variables the courts examine often overlap but can be summarized as the extent to which the parties have integrated their operations, the extent to which they actually function as a single entity as a factual matter, and the extent to which they have (or could have) divergent economic interests that might interfere with the incentive of each to act in the best interest of the group rather than in its individual self-interest. The second question is whether, even if the integration is not sufficient to "Copperweld" the parties together as a single entity, it is sufficient so their activities are likely to achieve significant efficiencies and the agreements in question are reasonably necessary to achieve those efficiencies. If so, the agreements still are not per se lawful but rather are tested for anticompetitive effects under antitrust's rule-of-reason standard rather than under the per se standard. 13 Parties engaging in conduct normally condemned under the per se standard can still escape summary condemnation of their agreements, even if they fail the test for "Copperwelding." Flunking the Copperweld test merely means that the agreement is subject to Section 1, not that the per se rule applies to it or that it otherwise is unlawful. As Statement 8 of the Health Care Enforcement Statements explains, the joint negotiation of prices by physician networks is analyzed under the rule of reason if the physicians share substantial financial risk, clinically integrate sufficiently and in a way that their joint negotiations of contracts are reasonably necessary for the network to achieve its efficiencies, offer a new product for which the negotiations are reasonably necessary, or otherwise integrate in ways so that the joint negotiations are "ancillary" — that is, subordinate, collateral, and supportive-to their efficiency — enhancing activities. 14 If so, the questions turn primarily to the parties' market power and whether the efficiencies from what integration does occur offset that power so that, on balance, the parties' activities benefit consumers. In advising competing provider groups contemplating some form of collaboration, ensuring that the clients (and their consultants if they use any) understand these basic antitrust principles is crucial. A mistake can carry a heavy penalty — resulting in conduct that, although perfectly lawful if the parties constitute a single entity or the agreements are ancillary and pass muster under the rule of reason, constitutes a per se violation of Section 1 absent sufficient integration. Yakima Apparently, the formation of SSY was an attempt to integrate the physicians into a single entity so they could negotiate prices without fear of violating Section 1 of the Sherman Act. But according to the FTC's complaint: These physicians did not... want to combine or integrate their practices. To assure prospective members that joining SSY would not affect any doctor's ability to operate his or her individual practice, an SSY document states, "[a]lthough your employees will be paid through the PLLC, you will retain management control of your own office including personnel, and all day to day operations as you currently control them." That same document goes on to assure, "[a]lthough collections will be done on a centralized basis the actual billing of your services will be done through your own office and under your own control to ensure that each specialty maintains the knowledge to bill using the CPT codes for their individual specialty services." The cost of joining SSY was addressed in another organizational document, which states, "[n]et costs may well be insignificant if the organization enables us to improve our reimbursement rates by even a few points on the relative value scale." Thus, according to the FTC's allegations, SSY was what can be labeled a "sham" single entity. Although the complaint does not state explicitly whether the FTC believed that per se condemnation of SSY's joint negotiations was appropriate, it does allege that SSY's "joint negotiation of fees... has not been, and is not, reasonably related to any efficiency-enhancing integration." This suggests the FTC would have argued, had the case gone to adjudication, that the per se standard would be appropriate because the conduct was not ancillary to any procompetitive effect resulting from SSY's operations. Unfortunately, the SSY-type physician organization is not unusual — that is, physician practices establishing a loosely integrated umbrella entity, such as a limited-liability company with the practices as members, primarily for the purpose of negotiating prices with payors rather than for delivering services more efficiently. Indeed, some physicians have the misimpression that all they need do is establish a new entity and obtain a single provider number for it, and they are home free from antitrust problems. But whether a limited-liability company including a board with relatively little power over all the physicians or an entity denominated as a "clinic without walls" as some are, these entities can expect antitrust trouble if payors complain to the enforcement agencies about their joint negotiations. Of course, there is no black letter rule specifying "how much integration is enough" to justify single-entity treatment. Rather, counsel must examine a plethora of factors, including the following:
Of course, depending on the specific facts of the situation, there are other ways in which greater integration can be achieved. The above represent only some of the more obvious, generally applicable variables. The analysis, in effect, involves identifying and weighing "integration-plus" factors and "integration-minus" factors in the new entity's structure and operation. Different relevant factors have different weights in the analysis, and there cannot be many integration-minus factors. In sum, if physicians want single-entity treatment for antitrust purposes, they should totally integrate their separate practices into a new entity and the new entity should actually function as a single entity rather than as a group of individual practices, each acting (or with the ability and incentive to act) in its own individual self interest. Power over the practices must be centralized. Because physicians tend to value individual autonomy so highly, effective counseling to convince them that they "can't have their cake SUSQUEHANNA Why the difference in antitrust treatment for SSY and Susquehanna? Simply because, absent the Copperweld parent-wholly owned subsidiary situation, specific structural and operational facts are important in determining whether single-entity treatment is appropriate. In Susquehanna, the facts showed that the hospitals had essentially integrated their operations completely. In Yakima, the FTC believed the facts showed the opposite. Prior to the formation of their alliance in 1994, two competing healthcare systems operated in the Williamsport, Pennsylvania area of North Central Pennsylvania. The North Central Pennsylvania Health System (NCPHS) operated The Williamsport Hospital & Medical Center (WHMC), and the Providence Health System (PHS), a Catholic system, operated Divine Providence Hospital (DPH), about two miles from WHMC, and a smaller hospital about fifteen miles from Williamsport. With minor exceptions, WHMC and DPH provided the same services. For several years prior to 1994, Williamsport area businesses had strongly urged the two hospitals to collaborate in a manner to reduce overlapping services. The systems considered, but rejected, outright merger because of DPH's religious status and desire to retain its Catholic identity. So, as a second-best solution, NCPHS and PHS decided to form what they called an "alliance" to jointly operate the hospitals. Both the Antitrust Division and the Pennsylvania Office of Attorney General investigated the proposed transaction. The Antitrust Division closed its investigation when the systems negotiated a consent decree with the state attorney general permitting the transaction to proceed, but, among other things, requiring the alliance to achieve and pass on a set dollar amount of efficiency savings to the public and to limit its price increases during the term of the ten-year decree. 18 Under the alliance arrangement, NCPHS and PHS retained ownership of their hospitals but established the alliance to operate them. Each of these "parents" appointed a fixed number of representatives to the alliance board of directors, whom they could remove at will. The alliance, however, was given complete power to operate the hospitals. The alliance merged the hospitals' medical staffs and, most important, with minor exceptions, consolidated all the services offered by the hospitals. In effect, most of the "hard" services were consolidated at the WHMC campus, and most of the "soft" services were consolidated at the DPH campus. The alliance intended, in future years when sufficient capital was available, to build a single new facility to replace both WHMC and DPH. The hospitals' parents did not merge their assets or debt into the alliance. But the alliance did take over all the hospitals' business and clinical functions. Departments and employees were merged, and the systems shared revenues and expenses, operating pursuant to a global budget. Although they had separate debt obligations, money was transferred between them to ensure that each complied with its debt obligations. 19 The hospitals contracted with payors as a single entity through the alliance, and that led to the suit. The plaintiff, a managed care company dissatisfied with a contract it negotiated with the alliance, filed suit, alleging in effect that because the hospital systems admitted they had not "merged," they remained separate entities for purposes of Section 1 and engaged in per se unlawful price-fixing agreements when the alliance negotiated contracts. The alliance argued that while no merger in the technical sense occurred, it had so integrated the hospitals that they and the alliance constituted a single entity. The court, in finding that the alliance was a single entity for purposes of Section 1, emphasized the Supreme Court's admonition in Copperweld that "’substance, not form, should determine whether a separately incorporated entity is capable of conspiring under § 1.’"20 As a result, the court rejected the argument that Copperweld was inapplicable simply because, as a structural matter, the alliance had two parents, neither with ultimate control over its activities, explaining that "defendant's corporate structure does not prohibit a finding of single entity status." 21 Rather, the court looked to the rationales for the Supreme Court's conclusion in Copperweld and then at whether the facts relating to the alliance's actual operation conformed to those rationales. The rationales for holding that a parent and its wholly owned subsidiaries are incapable of conspiring, according to the court, were that they have a "’complete unity of interests,"' that "’their objectives are common, not disparate,"' and that their operations "are ‘guided or determined not by two separate corporate consciousnesses, but one."'22 A close examination of the facts of the alliance's operations, according to the court, showed that "the [a]Iliance functions as a single entity... akin to a corporate parent (Susquehanna Alliance) and its subsidiaries (the hospitals... )," 23 in part because there was almost nothing the hospitals could do without the alliance's approval. Importantly, the court distinguished the facts in Susquehanna from those in New York v. St. Francis Hospital 24 in which another district court had found that a purported hospital virtual merger unlawfully fixed prices when it negotiated contracts. There, according to the Susquehanna court, the hospitals had consolidated only three services and there was no single decision maker analogous to the alliance here. The Susquehanna case, although it seems to have received relatively little notice, is an important decision. Virtual hospital mergers, such as that in Susquehanna, are a common form of transaction, especially when Catholic and secular hospitals wish to achieve the efficiency benefits of an outright merger but, for various reasons relating to religious status or objectives, are unable to merge assets or transfer complete control to one of the parties. From the time this form of transaction became popular in the early 1990s, antitrust attorneys have had some question about whether courts would hold that this form of transaction would result in a single entity for antitrust purposes. Susquehanna may not be the end of this query, but its legal analysis seems sound. Because, however, the factual details of virtual-merger transactions can differ substantially, particularly the degree of power centralized in the new entity and the degree of actual integration, no two cases are likely to be alike. Even, however, had the court rejected single-entity status for the alliance, it seems highly unlikely that the court would have applied the per se rule to the alliance's joint negotiations because of its degree of integration. Indeed, because the alliance's two major hospitals had consolidated their overlapping services at their different campuses, it was unlikely that requiring them to negotiate contracts separately would have resulted in competition between them. Conclusion Jeff Miles is an antitrust attorney in the Washington, DC office of Ober|Kaler He has undergraduate and graduate degrees from Virginia Tech, and a law degree from Washington & Lee University. Prior to entering private practice, he was in charge of the Virginia Office of Attorney General's Antitrust Unit and then was a trial attorney with the Antitrust Division of the U.S. Department of Justice. He currently is chair of AHLA's Antitrust Practice Group and writes and speaks frequently on healthcare antitrust law. Special thanks to the Antitrust Practice Group for providing this feature article. Endnotes 2Dkt. No. C-4101 (FTC Nov. 14, 2003) (consent order), at www.ftc.gov/os/2003/11/031118do0210242.pdf. 3278 F.Supp. 2d 423 (M.D. Pa. 2003). 4Of course, the physicians' integration itself may violate Section 7 of the Clayton Act under antitrust merger principles if it substantially lessens competition. 5See generally Smith v. N. Mich. Hosps., 703 F.2d 942 (6th Cir. 1983) (shareholders of single professional corporation incapable of conspiring among themselves). 6See, e.g., Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d 537 (2d Cir. 1993) (IPA not a single entity for purposes of antitrust law). 7See generally U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, STATEMENTS OF ANTITRUST ENFORCEMENT POLICY IN HEALTH CARE, Statement 8 (1996) [hereinafter Health Care Enforcement Statements), reprinted in 4 Trade Reg. Rep. (CCH) 13,153. 8See generally United States v. Lake Country Optometric Soc'y, Cr. No. W9CR114 (W.D. Tex., filed Jul. 9, 1996) (criminal case charging defendant with fixing prices members charged for eye examinations; guilty plea and $75,000 fine), summarized at [1988-1996 Transfer Binder] Trade Reg. Rep. (CCH) 45,095 at 44781. 9See New York v. St. Francis Hosp., 94 F.Supp. 2d 399 (S.D.N.Y. 2000); also see Health Care Enforcement Statements, Statement 3 n.9. In addition, if two hospitals do actually merge, the lawfulness of their merger may depend on the degree to which the hospitals intend to, and then do, integrate their operations subsequent to the merger. See generally U.S. DEP'T OF JUSTICE & FED. TRADE COMM'N, HORIZONTAL MERGER GUIDELINES § 4 (1992) (discussing efficiency considerations in merger analysis), reprinted in 4 Trade Reg. Rep. (CCH) 13,104. 10See, e.g., Khan v. State Oil Co., 93 F.3d 1358 (7th Cir. 1996) ("A merger between competitors and a price-fixing agreement between competitors have the same effect in extinguishing price competition between the parties, but the merger is more likely to produce offsetting cost savings and is therefore treated more leniently by the antitrust laws."), vacated on other grounds, 522 U.S. 3 (1997); see also Chicago Prof'l Sports Ltd., P'ship v. NBA, 95 F.3d 593, 598-99 (7th Cir. 1996) ("[c]onduct that 'deprives the marketplace of the independent decision makers that competition assumes'…without the efficiencies that come with integration inside a firm, go on the 'concerted' side of the line"). "Efficiencies," as used here, refers to the economist's term "productive efficiencies" — that is, increasing the amount or value of goods or services produced in relation the amount of resources used to produce them — in lay terms, "getting a bigger bang for the buck." See generally HERBERT HOVENKAMP, FEDERAL ANTITRUST POLICY: THE LAW OF COMPETITION AND ITS PRACTICE § 2.3c at 74 (2d ed. 1999) ("Productive efficiency is most simply understood as a ratio of a firm's outputs to its inputs. A firm that produces a product valued at $100 and requires inputs valued at $80 is more efficient then a firm that produces a product valued at $100 but requires inputs valued at $90"). In antitrust analysis, almost any consumer benefit achieved with a less than proportional increase in necessary resources can be viewed as an efficiency — lower prices, lower resource use, higher output, higher quality, better service, better access, greater choice, and the like. 11Copperweld Corp. v. Independence Tub Corp., 467 U.s. 752 (1984). 12See generally ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS 25-34 (5th ed. 2002). 13See generally FED. TRADE COMM'N & U.S. DEP'T OF JUSTICE, ANTITRUST GUIDELINE FOR COLLABORATIONS AMONG COMPETITORS § 3.2 (2000). For an example, see FTC Staff Advisory Opinion to MedSouth, Inc. (Feb. 19, 2002), at www.ftc.gov/bc/adops/medsouth.htm. 14The cases, unfortunately, are somewhat inconsistent in describing how supportive or how essential the agreement must be to the achievement of the group's efficiencies for it to be ancillary. Some decisions, such as New York v. St. Francis Hospital, 94 F.Supp. 2d 399 (S.D.N.Y. 2000), appear to hold that the restraint must be essential for the group to offer its product at all. Most, however, apply a "reasonably related" standard or some close variant of it. See, e.g., Addamax Corp. v. Open Software Foundation, Inc., 152 F.3d 48 (1st Cir. 1998). The federal enforcement agencies adopt the later standard in both their Collaboration Guidelines and Health Care Enforcement Statements. Of course, "reasonableness," like beauty, can be in the eye of the beholder, and the beholder is often a governmental enforcement agency. 15Surgical Specialists of Yakima, P.L.L.C., Dkt. No. C-4101 (FTC Nov. 14, 2003) (complaint), at www.ftc.gov/os/2003/11/031118comp0210242.pdf. Not only did the FTC sue SSY, but so did the state attorney general, a class of SSY's patients, and a disgruntled former member. See Press Release, Washington State Attorney General, Yakima Physicians Barred from Jointly Negotiating Reimbursement Rates (Sept. 24, 2003), at www.atg.wa.gov.releases.rel_ssy_092403.html. Thus, the federal enforcement agencies are not the only concern and not necessarily even the greatest concern, given the possibility of treble damages. 16The author was one of the attorneys of record for Susquehanna but did not play a major role in the defense. 17For a discussion of virtual hospital mergers, see Thomas H. Brock, Minimizing Antitrust Exposure in a Virtual Merger, HEALTHCARE FIN. MGMT., Sept. 1999, at 38. For a helpful view of the antitrust analysis of hospital virtual mergers, see Mark J. Botti, Assistant Chief, Litigation II Section, Antitrust Division, "Virtual Mergers of Hospitals: When Does the Per Se Rule Apply?", Prepared Remarks Before the American Health Lawyers Association Antitrust in the Healthcare Field Seminar (Feb. 14, 2000), reprinted in 4 JOHN J. MILES, HEALTH CARE & ANTITRUST LAW, App. E83 (Supp. 2003). Mr. Botti is now Chief of the Antitrust Division's Litigation I Section, which handles the Division's healthcare matters. 18See Pennsylvania v. Providence Health Sys., 1994-1 Trade Cas. (CCH) 70,603 (M.D. Pa. 1994) (final judgment). The alliance met both these requirements; as to the former; it generated over $105 million in savings from its inception through 1999. See Susquehanna, 278 F.Supp. 2d at 428. 19The Susquehanna opinion mentions other facts relating to the types and degree of integration among the hospitals. See Susquehanna, 278 F.Supp. 2d at 426-30, 435-36. 20Id. at 433 (quoting Copperweld, 467 U.S. at 773 n.21). 21Id. at 434. 22Id. 23Id. at 435 (emphasis in original). 2494 F.Supp.2d 399 (S.D.N.Y. 2000). |
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Ober, Kaler, Grimes & Shriver Maryland
Washington, D.C. Virginia |
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