It is hardly a secret that the American health care industry is in a state of flux. Over the past few years, numerous innovative proposals claiming to increase access, to reduce costs, or to do both, have been floated. Some of these innovations made their way into the Patient Protection and Affordable Care Act (PPACA), widely known as Obamacare, which became law in 2010 but has yet to take full effect. As a result, health care providers—along with their patients, investors, strategic advisors, and legal counsel—are struggling to understand the new terrain. This brief article outlines some considerations of one body of law relevant to one PPACA innovation: the antitrust implications of Accountable Care Organizations (ACOs).
Accountable Care Organizations
ACOs attempt to improve the quality of patient care while reducing costs by coordinating the activities of a sizable number of local health care providers. While the internal mechanisms governing and guiding ACOs are rather complex, the theory behind them is fairly simple. As patients navigate today’s health care system, moving from primary care physicians to specialists to hospitals and back again, a fair amount of information is lost and/or duplicated. The lack of coherence serves neither the patient nor the physicians, and results in needless cost overruns. By introducing an umbrella organization capable of imposing coherent coordination, ACOs can—at least in theory—provide superior care at lower costs. Participating organizations each share in the cost savings.
Specifically, an ACO is a local “organization” that assumes responsibility for all aspects of the health care, and all consequent health care expenditures, for its member patients. The quotation marks around the term organization are not coincidental. Because the sponsoring/coordinating agent may be a hospital, a primary care physician, a specialist, a small or large practice, or some combination thereof, and because any and all such groups may participate in ACOs without assuming coordination responsibility, the interactions among them may quickly become complicated and confusing. To further add to the confusion, part of the ACO concept involves the alignment of incentives through reward sharing; to the extent that an ACO delivers care (particularly to government-funded programs) at less than top cost, all participants share in the savings.
This general approach to wringing costs out of the healthcare system is hardly new. In many ways, it motivated the emergence of Health Maintenance Organizations (HMOs) several decades ago, and impelled their growth as an important part of the contemporary healthcare landscape. HMOs, like ACOs, coordinate patient care across specializations, standardize pricing, and streamline paperwork. Unlike ACOs, however, HMOs achieve these goals by operating as a single, integrated, legal entity rather than as a loose collection of independent entities. This distinction has numerous legal ramifications. Antitrust concerns are among them.
The Sherman Act of 1890, the first and still the most important,antitrust statute in American law, prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.” As a result, any time that two companies work to coordinate their pricing or to share confidential information, antitrust concerns arise. Such behavior certainly constitutes (at a bare minimum) a “combination.” But when does it constitute a “restraint of trade?” That question remains among the most active foci of antitrust analysis.
In the years since 1890, analysts, courts, regulators, and Congress have all weighed in on the issue. They have developed guidelines and safe harbors that differentiate permissible mergers and joint ventures from seemingly similar yet impermissible ones. Because ACOs represent a fundamentally new type of joint venture, they necessarily reopen many of these questions. Anyone contemplating participation in an ACO needs to become familiar with the rules before entering.
Antitrust & ACOs
How are these antitrust concerns likely to manifest themselves in the ACO context? While the precise contours of the ACO terrain are still taking shape, a few things are clear. First, each ACO is intended to be local. Second, ACOs are designed to foster evidence-based medicine, including strict measurement of longitudinal outcomes. Third, ACOs must internalize cost sensitivity, because shared savings form an important motivator for participants to join. Fourth, internal contracts, referral procedures, cost sharing, and reward allocation schemes must comply with generally applicable antitrust principles.
The first and fourth of these points are critical from an antitrust perspective. Under normal circumstances, antitrust violations hinge on two factors: the violators must have enough power to be able to reduce competition, and they must then act in accordance with that power. The localization of markets means that participants in an ACO must be conscious of their market share—and consequent power—within a small and well-defined market. In many local markets, particularly those outside major metropolitan areas, competition in at least parts of the health care terrain is already scant. Consolidation of effort into an ACO might constrain it even further.
That market power then subjects those participants to antitrust scrutiny—basically a close look at whether their contracting or other business practices have a tendency to reduce competition. Potentially useful mechanisms like information sharing, price agreements, and exclusive arrangements, can all run afoul of the antitrust laws. In fact, certain forms of price agreements are per se illegal, whether or not they intend to serve some beneficial public purpose. Taken together then, the emphasis on local in ACO development is likely to drive antitrust scrutiny, and many of the practices that the PPACA encourages as cost-reduction mechanisms may also function as competition-reduction mechanisms.
This confluence of public policy and legal considerations should concern all health care providers even considering participation in an ACO. Smart participants will design all of their contracts, contacts, information flows, and incentive plans with at least one eye on market impact. They will ensure that they can show efficiency justifications sufficient to offset any negative market effects—much as they might were they submitting to another type of antitrust scrutiny, such as merger clearance. A well-designed ACO system will improve patient care and reduce costs without also reducing competition.
Fortunately for prospective ACO participants, the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ), the two federal agencies charged with enforcing the antitrust laws, have already considered these issues and provided some guidelines. They did so after specific consultation with the Centers for Medicare and Medicaid Services (CMS). As the federal agency administering Medicare and Medicaid, CMS is easily the largest payor for health care in the country. The guidelines that emerged from this discussion thus focus on these two mammoth federal programs, but nevertheless remain informative in any consideration of competition within the health care market.
Agency guidance—as always—starts with a reiteration of the purpose of antitrust law, and a consideration of the relationship between the policy concerns underlying that law and other potentially competing policy concerns—such as those of the PPACA. Stated simply, antitrust law is a form of consumer protection. Antitrust assumes that competition—not coordination—leads to pricing, output, and innovation levels that most benefit consumers. As a general rule, when firms coordinate their activities, they tend to fix prices at a higher level, curtail their innovative instincts, reduce the availability of goods or services, and leverage their combined market power. These activities harm consumers.
From an antitrust perspective, then, the question is whether ACOs will serve as a pretext for health care providers to fix prices, reduce output, or reduce innovation. After all, under the PPACA, ACOs must: coordinate care among providers; promote evidence-based medicine; report on quality and cost measures; and promote patient engagement. As a practical matter, achieving these goals requires at least some coordination at both the administrative/governance and the clinical practice levels.
The public policy concerns that guided the introduction of ACOs into the health care terrain imply that, at least if done “correctly,” ACOs can confer consumer benefits significant enough to let them coordinate their activities in ways that might normally be suspect. In antitrust parlance, this means that their activities will generate “efficiencies” that offset any potential harm to consumers. As a result, they will be evaluated subject to a “rule of reason” analysis, a case-by-case inquiry into the pros and cons of their behavior, rather than deemed “per se illegal.” In this respect, the general antitrust analysis permitting “combinations” that improve quality or lower costs dovetails nicely with the PPACA goal of motivating ACOs to meet quality and cost standards allowing them to share in a portion of their cost savings (i.e., to Medicare).
Nevertheless, standard antitrust rules do pose a specific challenge. As a matter of antitrust law, price fixing is per se illegal. As a result, if two or more health care providers—whether part of an ACO or not—agree to maintain a unified pricing schedule, they have run afoul of the antitrust laws. In a per se violation, no further analysis is performed, and violators have no opportunity to prevail by showing that their behavior, in their particular markets subject to their own particular circumstances, did more good than harm. In fact, when CMS studied the issue, it concluded that ACO participants could not possibly achieve the statutory goals of the PPACA without developing levels of coordination and interdependence that violate the standards of antitrust law as they are commonly understood. This inherent tension paved the way for the agencies to offer their guidance.
CMS thus set out to coordinate a set of safe harbor guidelines with the FTC and the DOJ, the two agencies charged with federal antitrust enforcement. The three agencies reached the following joint summary statement:
- If an ACO meets CMS’s eligibility requirements and is approved to participate in the SSP;
- AND the ACO uses the same governance and leadership structures and clinical and administrative processes it uses in the Shared Savings Program to serve patients in commercial markets;
- THEN joint price negotiations with commercial insurers will be evaluated under the rule of reason.
The agencies have thus announced that—barring extraordinary circumstances—they will not challenge Medicare ACOs that fall within a “safety zone.” To qualify, ACO participants must possess a combined market share of 30% or less of each service throughout the ACO’s Primary Service Area (PSA). In addition, hospitals and surgery centers must be non-exclusive, as must “dominant providers” (i.e., those with a market share of 50% or greater) of any service. In addition, they have provided some guidance about conduct to avoid, and announced an expedited voluntary antitrust review for prospective (pre-launched) ACOs.
Limitations to Safety
It is important to recall that there is a difference between an agency safe harbor and actual safety. There are two components to American antitrust, and as a general rule, the federal courts—not the enforcement agencies—have final say over the contours of the law. The FTC and the Antitrust Division of the Department of Justice serve as public watchdogs guarding the competitiveness of American markets. But they operate in this role primarily as enforcement agencies, rather than as regulators. Like all law enforcement agencies, they are endowed with significant discretion in determining which potential transgressions to pursue, and which to prosecute. They do not, however, have any authority to determine what the law permits and what it prohibits.
As a result, any “safe harbor” that the enforcement agencies announce is merely an assertion of current policy—grounded in an understanding of the legal and public policy terrain, but hardly a definitive statement of either. The agencies’ current statements cannot bind future agencies, operating at the behest of future Commissioners and Attorneys General. And they certainly cannot constrain the positions of private antitrust plaintiffs.
Private antitrust law is a critical part of the American legal terrain. While many countries restrict antitrust enforcement to government officials, American law deputizes competitors and customers—the people most likely to spot violations and their negative effects—to act as “private attorneys general.” Antitrust law actually encourages competitors who believe that they have been foreclosed from markets, and customers who believe that their providers have operated or conspired to increase prices and/or reduce quality, to file private lawsuits. These private lawsuits need not recognize the agency safe harbor guidelines. The same is true for the federal judges adjudicating such private disputes. Most federal judges will view agency guidelines as one source of informed opinion about the law—but will reserve to themselves the right to determine precisely what the law is.
Thus, it is entirely possible for the participants in an ACO to meet all agency safe harbor guidelines and still be ruled in violation of the antitrust laws. In assessing this risk, it is important for all potential ACO players to recall a critical rule of construction of antitrust law: Congress does not repeal the antitrust laws by implication. Whenever Congress enacts a law that may violate the normal federal preference for competitive markets, Congress must state that exemption explicitly. Implicit “waivers” that may serve other important policy interests are not truly waivers at all.
ACOs are a new addition to the American health care terrain. If they fulfill their promise, they will improve the quality of patient care while reducing costs. They will also reward participating providers by allowing them to pocket a portion of the cost savings. But they are also coordination mechanisms capable of reducing competition throughout numerous health care markets. Such reductions in competition rarely if ever serve the interests of consumers. Federal agencies and private parties may both litigate such negative effects on market competitiveness. Wise health care providers contemplating forming or joining ACOs will thus invest the time and effort to review their proposed teams, coordination mechanisms, and contracts with their legal and economic counsel to ensure that they do not run afoul of the antitrust laws.