Antitrust News. FTC Orders Cease & Desist Dental Board Violates Section 5 of FTC Act. 4ALL Friday, March 2, 2012 see back cover for details

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1 Published by the Antitrust & Trade Regulation Law Section of the North Carolina Bar Association Section Vol. 22, No. 2 January 2012 The Chair s Comments This is the first issue of our newsletter during my year as section chair, and I am honored to serve in this role. Our Bar Association and this section have many exciting initiatives underway. In this newsletter, I want to discuss three goals of our section Greg Holland for this year: to continue to keep you apprised and up to date on the developments in our field; to increase the pro bono services we offer to the citizens of North Carolina; and, to grow our section membership. In these dire economic times, one of the major concerns of business leaders and companies is the current regulatory environment. At a recent seminar, I heard a panel of General Counsels for several major corporations speak, and each indicated that the government s regulation of their various businesses was the major issue that kept them up at night right now. By some estimates, regulatory costs represent nearly twelve percent of U.S. Gross Domestic Product. In that context, our annual CLE and this issue of our newsletter are particularly relevant. The annual CLE on February 9 at the Bar Center in Cary promises to be both especially timely and informative. George Sanderson has put together a terrific program entitled, Current Issues in Healthcare and Pharmaceutical Competition Law. We are very excited to have Commissioner Julie Brill from the Federal Trade Commission as a featured speaker. She will discuss recent FTC enforcement activity in the healthcare industry and recent policy statements issued by the Commission, and participate in a question and answer session. In addition, we have many distinguished lawyers on the faculty that will provide informative, FTC Orders Cease & Desist Dental Board Violates Section 5 of FTC Act By Dorrian H. Horsey The North Carolina State Board of Dental Examiners (the Board ) has one less thing to smile about these days. On July 19, 2011, Chief Administrative Law Judge D. Michael Chappell (the ALJ ) issued an Initial Decision finding that the Board s conduct related to thwarting the operation of non-dentist teeth whitening services constitutes an unreasonable restraint of trade and an unfair method of competition, in violation of Section 5 of the FTC Act. Initial Decision, In the Matter of The North Carolina Board of Dental Examiners, Dkt. No. 9343, 2011 WL , (July 14, 2011) (hereinafter, Initial Decision ), available at The Initial Decision stems from an administrative complaint issued by the Federal Trade Commis- Inside this Issue... 6 Analysis of the Final Statement of the Antitrust Enforcement Policy Regarding Accountable Care Organizations By Jackson R. Price 9 In re OSF Healthcare: Hospitals vs. the FTC Under New Merger Guidelines By Kip Nelson Continued page 3 Continued page 2 4ALL Friday, March 2, 2012 see back cover for details

2 Practice Management Published by the Antitrust & Trade Regulation Law Section Practice Section of the North Carolina Bar Association Vol. 22, No. 2 January 2012 Editors Brian A. Hayles C. Bailey King Jr. Chair Gregory G. Holland Immediate Past Chair Jennifer K. Van Zant Vice Chair George F. Sanderson III Secretary Lawrence C. Moore III Treasurer Jason D. Evans Section Council J. Mitchell Armbruster E. Bradley Evans Jason D. Evans Stephen D. Feldman Stuart C. Gauffreau Brian A. Hayles Judge Shannon R. Joseph C. Bailey King Darryl R. Marsch Alan M. Ruley Michael P. Thomas David M. Wilkerson 2012 North Carolina Bar Association. Views and opinions expressed in articles published herein are the authors only and are not to be attributed to, the Antitrust & Trade Regulation Law Section or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations. No portion of the publication may be reprinted without permission. Chair s Comments, Continued from Page 1 practical and entertaining presentations. We publish our newsletter three times each year. This edition features three articles that discuss regulatory issues in the healthcare industry while providing important insights to practitioners. These articles should also pique your interest in the upcoming presentations at our CLE. Dorrian Horsey of Brooks Pierce contributed an article entitled FTC Orders NC State Dental Board to Cease and Desist its Efforts to Stop Non-Dentists from Providing Teeth Whitening Services, provides an interesting look at how the FTC handled the efforts of the NC Dental Board, comprised largely of dentists, to prevent competition in the provision of teeth-whitening services. Jackson Price at Womble Carlyle wrote a piece called, Analysis of the Final Statement of the Antitrust Enforcement Policy Regarding Accountable Care Organizations. This article discusses the impact that one aspect of ObamaCare will have on Accountable Care Organizations and antitrust enforcement efforts. Finally, Smith Moore Leatherwood s Kip Nelson provides an excellent summary of the FTC s recent efforts to regulate hospital mergers in light of the recently promulgated Horizontal Merger Guidelines issued in late 2010 in In re OSF Healthcare: Hospitals vs. the FTC under the New Merger Guidelines. Another area of focus for the section this year is to increase our pro bono efforts. To accomplish this goal, our section again will actively participate in the 4ALL service day, and we encourage all members to sign up for this rewarding program. In addition, as a section, we set a goal for our members to handle at least 11 pro bono cases in our practice area. To accomplish this task, we are taking advantage of the NCBA s new Call 4ALL program, which in conjunction with N.C. Legal Aid, allows lawyers to provide pro bono counsel in a timely and efficient manner. Please contact Stephen Feldman if you would like more information about this effort. We need everyone s help! Finally, we hope to grow the membership of the section. We have several exciting initiatives underway in this regard, and I will address them in more detail in subsequent editions. We are excited about the work of our section, and appreciate your support. I hope to see you in Cary in February at the Annual Meeting and CLE. Gregory G. Holland is a partner in Smith Moore Leatherwood s Greensboro office and focuses his litigation practice on complex commercial, antitrust, intellectual property, and products liability disputes. Current Issues in Healthcare and Pharmaceutical Comptetion Law Antitrust & Trade Annual Meeting and CLE Friday, February 9 N.C. Bar Center See page 5 for details, or register online at /CLE/programs/897ATM.aspx

3 Dental Board, continued from page 1 sion (the FTC or Commission ) in June Complaint, In the Matter of The North Carolina Board of Dental Examiners, Dkt. No. 9343, 2010 WL (June 17, 2010) (hereinafter, Complaint ), available at The Complaint alleged that through the Board, North Carolina dentists are colluding to exclude non-dentists from competing with dentists in the provision of teeth whitening services. Complaint, Statement of the Case. According to the FTC, the Board s actions have the effect of preventing and deterring non-dentists from providing teeth whitening services in North Carolina, depriving consumers of the benefits of price competition and reducing consumer choice in North Carolina for the provision of teeth whitening services. Complaint 25. The Board is a state agency created to regulate the practice of dentistry in North Carolina under the Dental Practice Act, N.C. Gen. Stat Board membership is comprised of six licensed dentists, one licensed dental hygienist and one consumer member who is neither a dentist nor a hygienist. N.C.G.S (b). Under this statute, the six dentist members are elected by other licensed dentists, the hygienist member is elected by other licensed hygienists, and the consumer member is appointed by the Governor. All members serve for three year terms. The Board does not directly regulate nondentists, but it is empowered to file suit to challenge any conduct it determines is the unlicensed practice of dentistry. Initial Decision, Finding of Fact 45, 48. The Board answered the FTC charges by denying the substantive allegations in its Response and then moved to dismiss the Complaint by claiming immunity from antitrust scrutiny under the state action doctrine. See Response to Complaint, In the Matter of The North Carolina Board of Dental Examiners, Dkt. No. 9343, 2010 WL (July 6, 2010), available at ftc.gov/os/adjpro/d9343/index.shtm; see Motion to Dismiss, In the Matter of The North Carolina Board of Dental Examiners, Dkt. No (Nov. 3, 2010), and Memorandum in Support of Motion to Dismiss (Corrected), In the Matter of the North Carolina State Board of Dental Examiners, Dkt. No. 9343, 2010 WL (Nov. 5, 2010), both are available at index.shtm. Under this doctrine, conduct of a state agency is exempt from antitrust scrutiny if it is an act of government by the State as sovereign. City of Lafayette, La v. Louisiana Power & Light Co., 435 U.S. 389, 410, 98 S.Ct. 1123, 1135 (1978) (internal quotation marks omitted). The full Commission flatly rejected this argument in a unanimous Opinion and Order (the Opinion ), finding that the Board could not claim state action protection to evade the reach of the FTC Act for its conduct. Opinion and Order Denying Respondent s Motion to Dismiss and Granting Complaint Counsel s Motion for Partial Summary Decision on the Issue of Whether the State Action Doctrine Exempts Respondent From Antitrust Liability, In the Matter of The North Carolina Board of Dental Examiners, Dkt. No. 9343, 151 F.T.C. 19, 2011 WL (Feb. 3, 2011), available at adjpro/d9343/index.shtm. The Commission held that the Board is not the sovereign and is subject to the requirements of the antitrust immunity test articulated by the United States Supreme Court in the California Retail Liquor Dealers Ass n v. Midcal Aluminum, Inc. decision. California Retail Liquor Dealers Ass n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980) (hereafter Midcal ). In Midcal, the Supreme Court held that the state action defense is available to nonsovereign entities if the challenged restraint is 1) clearly articulated and affirmatively expressed as state policy ; and 2) actively supervised by the State itself. Id. at 105 (internal quotation marks omitted). The Commission held that the Board is a state regulatory body controlled by private market participants, and, therefore, must satisfy both prongs of the Midcal test. Opinion at 11, 13. The Opinion did not address the clear articulation prong of the Midcal test because the Commission held that the Board failed to show sufficient state supervision to claim the state action exemption. Id. at 7. See also Id. at n.8. In its analysis, the Commission held that requiring active supervision by the state where the state agency has a financial interest in the restraint that the agency seeks to enforce, especially when the state agency is not accountable to the public but rather to the very industry it purports to regulate is consistent with Supreme Court precedent. Id. at 10. The Commission reasoned that the rationale behind the Midcal test was to assure political accountability by the state for actions taken by private parties; the only assurance the electorate can have that private parties will act in the public interest is if the state is politically accountable for any resulting anticompetitive conduct. Id. at The Commission found that the Board is controlled by dentists who are elected by other dentists, and the undisputed facts show that dentists perform teeth whitening in their practices; therefore, common-sense and economic theory dictate the conclusion that the Board s conduct to exclude non-dentists from providing teeth whitening services could have been self interested and thus required state supervision. Id. at 13. Ultimately, the Commission concluded that the Board offered no evidence that its challenged conduct had been reviewed or approved by a disinterested state actor and could not satisfy the active supervision prong of the Midcal test. Id. at Consequently, the Board was not permitted to use the state action exemption as a defense to antitrust scrutiny. In February and March 2011, the ALJ presided over a lengthy trial of the matter which generated over 300 findings of fact detailed in the Initial Decision. Among them, the ALJ found that many of the dentist Board members derive income from provision of teeth whitening services in their private practice. Initial Decision, Findings of Fact 9. Specifically, one dentist Board member earned over $75,000 from teeth whitening services from 2005 through 2010; the same period during which he assigned teeth whitening investigations conducted by the Board to himself and served as the case officer on most of the teeth whitening cases. Id. at Findings of Fact 10. The case officer is the Board member assigned to oversee investigations, and only a dentist may serve in this capacity for teeth whitening investigations. Id. at Findings of Fact 183, 184. In North Carolina, there are four categories of teeth whitening ser- Continued page 4 3

4 Dental Board, continued from page 3 vices or products available to consumers: 1) in-office teeth whitening services provided by dentists; 2) take-home kits provided by dentists; 3) over-the-counter teeth whitening products; and 4) non-dentist teeth whitening services offered in salons, retail stores and mall kiosks. Id. at Findings of Fact 105. The Board began receiving and investigating complaints from dentists about non-dentist teeth whitening services in Id. at Findings of Fact 193, 194. Many of the complaints referenced the prices charged by non-dentist whitening services, which are significantly less than in-office teeth whitening services provided by dentists. Id. at Findings of Fact 117, 147, 148, 193, 194. The cost of in-office teeth whitening by dentists commonly ranges from $400-$500. The cost of non-dentist whitening services ranges between $75-$150. Starting in 2006, the Board sent at least 47 letters to non-dental teeth whitening providers and manufacturers. Id. at Findings of Fact 218. Most of the letters were captioned with headings NOTICE AND ORDER TO CEASE AND DESIST and similar language, and stated You are hereby ordered to CEASE AND DESIST any and all activity constituting the practice of dentistry or dental hygiene as defined by North Carolina General Statutes and and the Dental Board Rules promulgated thereunder. Id. at Findings of Fact These statutes define the practice of dentistry and dental hygiene in North Carolina. The letters specifically referenced the portions of that define the following as the practice of dentistry: [The removal] of stains, accretions or deposits from the human teeth; Tak[ing] or mak[ing] an impression of the human teeth, gums, or jaws; and Perform(ing) or engag(ing) in any of the clinical practices included in the curricula of recognized dental schools or colleges. Id. at Findings of Fact 221, referencing 90-29(b)(2), (7), (10). Board members testified that the intent of the cease and desist letters was to stop the non-dentist providers from performing teeth whitening activities and to imply that non-dentist teeth whitening service providers would be fined or in prison for continuing the service. Id. at Findings of Fact One Board member referred to the letters as essentially the same thing as an injunction or a court order, because the expected impact of a cease and desist order is that the recipient will stop doing what the Board wants them to stop doing. Id. at Findings of Fact 237. As a result of receiving the letters, several non-dentist whitening service providers stopped providing the service. Id. at Findings of Fact The ALJ analyzed the allegations brought under 5 of the FTC Act, through the lens of Section 1 of the Sherman Act, which states every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States... is declared to be illegal. 15 U.S.C. 1. Under this analysis, a determination must be made of: 1) whether there was a contract or agreement and, if so, 2) whether it unreasonably restrained trade in the relevant market. Realcomp II, Ltd. v. F.T.C., 635 F.3d 815, 824 (2011) (internal quotation marks omitted). The relevant market has two components: a geographic market (determined by the ALJ to be North Carolina) and a product market. Initial Decision at 64. The product market is composed of products [or services] that have reasonable interchangeability for the purposes for which they are produced-price, use, and qualities considered. Id. at 64, citing United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 404 (1956). The ALJ determined that the relevant product market to evaluate the Board s conduct was the market for teeth whitening services provided in-office by dentists and in other locations by non-dentist service providers. Id. at 70. This analysis was based upon the time required to perform the service compared to take-home or over-the-counter products, and the similarity of the peroxide products and methods used to perform the service. Id. at The ALJ next determined that the Board s issuance of cease and desist letters evidenced an agreement to prevent or eliminate the provision of non-dentist teeth whitening services in North Carolina. Id. at The ALJ cited the consistency and frequency of the Board s message regarding non-dentist teeth whitening over time and the direct evidence that Board members discussed and approved some of the communications sent to non-dentist teeth whitening providers in advance. Id. at 78. The ALJ also noted that the cease and desist letters contained nearly identical messages which supported the inference that their issuance was an agreed policy of the Board s members, in response to complaints from dentists, in furtherance of the dentist members common purpose to eliminate non-dentist teeth whitening. Id. at 79. The ALJ referenced the Commission s earlier decision to deny the Board s state action defense as the basis for rejecting the Boards argument that its efforts to enforce the Dental Practice Act were not an unreasonable restraint of trade. Id. at 81. According to the ALJ, the arguments were logically indistinguishable. Id. The ALJ held that the Board s challenged conduct was by its nature, anticompetitive, and the Board s aim was to eliminate non-dentist teeth whitening service providers that competed with Board dentist members and the Board s constituents. Id. at 84, 93. The ALJ also held that as a state agency, the Board possessed market power to exclude competition and did so by setting a standard that teeth whitening could only be performed by or supervised by, a dentist and then extra-judicially enforced that standard through the issuance of cease and desist letters. Id. at 96. As a result, the Board s conduct: 1) excluded non-dentists from the teeth whitening service market; and 2) deprived consumers of a reasonable alternative to dentist provided teeth whitening services. Id. at 100. The ALJ concluded his restraint of trade analysis by addressing the Board s arguments that it had four procompetitive justifications for its actions. First, the Board argued that it was acting in its capacity as a state agency to protect the public interest. Id. at 105. The ALJ again rejected this argument as a duplicate of the state action defense. Id. Second, the Board argued that its actions were intended to promote social welfare, necessitated by concerns over the dangers of unsupervised teeth whitening. Id. at 106. The ALJ held that the Board could not justify a restraint on competition solely on the basis of social welfare concerns, including concerns about health hazards. Id. Third, the Board argued that its actions had the procompetitive effect of ensuring that prices charged for teeth whitening would reflect[] 4

5 the higher skills of dentist providers, rather than cheaper, less skilled non-dentist providers. Id. at 108. The ALJ characterized this argument as counter to the policy of the Sherman Act and rejected the idea that withholding a lower cost service from consumers is ultimately beneficial to consumers. Id. at 109. Finally, the Board argued that its actions had the procompetitive effect of serving to protect legal competition within the marketplace among qualified teeth whitening providers. The ALJ rejected this argument as a presumption that non-dentist teeth whitening is illegal, which even if true, does not justify collusion among competitors to prevent it. Id. (internal citation omitted). Ultimately, the ALJ issued his own cease and desist order (the Order ) pursuant to Section 5 of the FTC Act. Id. at 123. The Order required the Board to stop directing non-dentist teeth whitening providers to cease providing goods and services, to stop communicating to non-dentist providers and other related parties that the provision of non-dentist teeth whitening goods and services is a violation of the Dental Practice Act, and to send notices and affirmative disclosures to parties affected by the Order. Id. at , 124. The Order specifically permitted the Board to conduct investigations and file suit against non-dentist providers suspected of violating the Dental Practice Act and to communicate to third parties its belief that a particular method of teeth whitening may violate the Dental Practice Act and notice of its intentions to file a court action or pursue administrative remedies in response. Id. at 112, 113, 125. On Aug. 25, 2011, the Board appealed the ALJ s decision to the full Commission. Respondent s Appeal Brief, In the Matter of The North Carolina Board of Dental Examiners, Dkt. No. 9343, 2011 WL (Aug. 25, 2011), available at d9343/index.shtm. On Dec. 7, 2011, the Commission issued a unanimous opinion upholding the ALJ s decision, largely adopting the order entered by Judge Chappell. Opinion and Order, In the Matter of The North Carolina Board of Dental Examiners, Dkt. No. 9343, 151 F.T.C. 19, 2011 WL (Dec. 7, 2011), available at The Dental Board may file a petition for review with the Fourth Circuit Court of Appeals within 60 days of service of the Commission s order. North Carolina is not the only state currently grappling with this issue: In June 2011, the Connecticut State Dental Commission ruled that non-dentist teeth whitening constitutes the practice of dentistry and may only be performed under the supervision of a licensed dentist. Re: Declaratory Ruling: Teeth Whitening, (CT State Dental Commission, Jun. 8, 2011), available at dental_commission/declaratory_rulings/2011_teeth_whitening_ declaratory_ruling_-_corrected.pdf. Conversely, the same month a New Jersey judge held that the New Jersey Dental Association did not have standing to sue a tanning salon offering teeth whitening services for practicing dentistry without a license. Dorrian H. Horsey is an associate in the Raleigh office of Brooks, Pierce, McLendon, Humphrey & Leonard, LLP. Her practice focuses on civil litigation, employment law, media and communications, and representing nonprofit organizations.

6 Analysis of the Final Statement of the Antitrust Enforcement Policy Regarding Accountable Care Organizations by Jackson R. Price On March 23, 2010 President Obama signed into law the Patient Protection and Affordable Care Act ( PPACA ), Pub. L. No , 124 Stat. 119 (2010), and the Health Care and Education Reconciliation Act of 2010 ( HCERA ), Pub. L. No , 123 Stat (2010), collectively, and more commonly known as ObamaCare. The overarching goal of the PPACA is to improve the quality and reduce the costs of health care services in the United States. One way in which the PPACA seeks to accomplish this goal is by encouraging physicians, hospitals, and other health care providers to become accountable for a patient population through integrated health care delivery systems. The Medicare Shared Savings Program (the Shared Savings Program ) is one such delivery system and promotes the formation of Accountable Care Organizations ( ACOs ) to serve Medicare fee-for-service beneficiaries. Despite the focus of creating ACOs for Medicare beneficiaries, due to the time and resources required to form and operate an ACO, some health care providers are likely to use the same ACOs to serve commercially insured patients as well. See Fed. Trade Comm n & Dep t of Health and Human Serv., Workshop Regarding Accountable Care Organizations, and Implications Regarding Antitrust, Physician Self-Referral, Anti-Kickback, and Civil Monetary Penalty (CMP) Laws (Oct. 5, 2010). The use of ACOs, however, raises a number of antitrust concerns. As a result of these antitrust concerns, the enforcement agencies the Federal Trade Commission ( FTC ) and the Antitrust Division of the Department of Justice ( DOJ ) (collectively, the Agencies ) have issued a Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program. Federal Trade Commission & Antitrust Division of the Department of Justice, Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program, available at public/health_care/ pdf (hereinafter Final Policy Statement). The Final Policy Statement, issued on Oct. 20, 2011, differs from the earlier Proposed Policy Statement in several important ways. This article seeks to provide an overview of ACOs and the differences between the Proposed and Final Policy Statements as well as to discuss the impact of the new rule from an enforcement standpoint. An Overview Of Accountable Care Organizations Before delving into the substance of the FTC and DOJ s Enforcement Policy, it is important to have an understanding of how an ACO is defined. An ACO is a network of physicians, hospitals, and other health care providers that shares responsibility for providing care to patients. See Overview of Accountable Care Organizations, Centers for Medicare & Medicaid Services, The goal of assembling an ACO is to coordinate care and, in doing so, to help ensure that patients, especially the chronically ill, get the right care at the right time, while avoiding the unnecessary duplication of services and preventing medical errors. Id. The Shared Savings Program is structured such that when an ACO succeeds in both delivering high-quality care and minimizing costs, it shares in the savings that it achieves for the Medicare program. Id. Many observers argue that the fragmented state of the American health care system is a direct cause of the poor quality and inefficient care that runs rampant throughout the system and that such a fractured system serves as a barrier to improvement of medical services. It is with this principle in mind that the PPACA seeks to encourage the development of ACOs, in the hopes that doing so will generate opportunities for health care providers to innovate in both the Medicare and commercial markets and to simultaneously increase quality and decrease costs for consumers. However, as the FTC and DOJ have recognized, not all ACOs are likely to benefit consumers, and under certain conditions ACOs could reduce competition and harm consumers through even higher prices and a lower quality of care. These antitrust concerns are what prompted the Agencies to develop a policy regarding ACOs and how their anticompetitive potential will be monitored and limited. Analyzing The Antitrust Enforcement Policy The Agencies released their Proposed Policy Statement on March 31, Federal Trade Commission & Antitrust Division of the Department of Justice, Proposed Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program, available at (hereinafter Proposed Policy Statement). The Proposed Policy Statement required any ACO formed after March 23, 2010 to calculate its share of a Primary Service Area (PSA) market using Medicare data. See Id. at Appendix. This PSA market share would then be used to determine the extent to which an ACO would be subject to review by the Agencies and whether an ACO would fall into: (1) a safety zone in which the agencies would not challenge its competitiveness except in extraordinary circumstances; (2) a category mandating agency review; or (3) an intermediate category in which review is voluntary. See Id. at Following the issuance of the Proposed Policy Statement, many health care providers expressed concerns that the provisions of the Proposed Policy Statement were too burdensome especially the mandatory pre-certification review that an ACO would have to undergo if its market share for any service provided by two or more participating providers in their primary service areas exceeded 50 percent. The Final Policy Statement has significantly relaxed the antitrust enforce- 6

7 ment mechanisms in order to make the ACO model more appealing to health care providers. Changes Made in the Final Policy Statement. 1. Expansion of the Safety Zone to Include More Potential ACOs Through Expanded Exceptions. Under the Agencies policy, if an ACO has a PSA share of less than 30 percent in all areas in which participating providers provide a common service, it will fall into a safety zone in which it is assured that neither agency will subject it to an antitrust challenge, absent extraordinary circumstances. See Final Policy Statement at 6. Extraordinary circumstances could include ACO participants engaging in collusion or improper exchanges of price information or other competitively sensitive information. Id. Additionally, to fall into the safety zone, any participating hospital or ambulatory surgery center (ASC) must contract with an ACO on a non-exclusive basis, regardless of the relevant PSA shares. Id. at 7. The Proposed Policy Statement provided for two exceptions to these requirements. First, the Rural Exception provided that an ACO could include one physician per specialty from any rural area on a non-exclusive basis and still qualify for the safety zone, even if the inclusion of that physician causes the ACO to exceed a 30 percent threshold for any common service in any ACO participant s PSA for that service. See Proposed Policy Statement at 7. Second, the Dominant Provider Limitation provided that the ACO could include a provider with a PSA share of greater than 50 percent so long as the dominant provider (1) provides a service that no other ACO participant provides to patients in that PSA and (2) participates in the ACO on a non-exclusive basis. Id. The Final Policy Statement has expanded the Rural Exception by changing the language of the exception to allow an ACO that exceed a 30 percent PSA to fall within the safety zone if it includes one physician or physician group practice per specialty from each rural area. (emphasis denotes changes). See Final Policy Statement at 8. Altering the language to include one physician group practice eliminates the impracticability that the Proposed Policy Statement created in regards to having to choose a single physician from a particular group practice to become a member of an ACO. To qualify as a physician group practice, the group must be treating patients as a fully integrated practice group as of the date of the Policy Statement. Id. at 8 n.31. Additionally, the Final Policy Statement changed the geographic definition for the exception from a rural county to a rural area, which is defined as any county containing at least one zip code that the WWAMI Rural Health Research Center of the University of Washington has classified as isolated rural or other small rural. Id. at 8 n.32. Another way in which the Rural Exception has been expanded is through the addition of a third category of hospitals that are characterized as rural hospitals under the exception. In addition to Sole Community Hospitals and Critical Access Hospitals, under the Final Policy Statement, any other acute care hospital located in a rural area that has no more than 50 acute care inpatient beds and is located at least 35 miles from any other inpatient acute care hospital may also participate in an ACO without eliminating it from the safety zone. Id. at 9 n.34. These two changes to the Rural Exception effectively expand the scope of the exception and allow more health care providers to become participants in ACOs without jeopardizing their safety zone status. 2. Elimination of Mandatory Review for High-Concern ACOs: Lowering the Burden on ACOs. By far the most significant difference between the Proposed Policy Statement and the Final Policy Statement is the elimination of any mandatory agency review requirement. The Proposed Policy Statement made mandatory agency review a prerequisite for participation in the Shared Savings Program for any ACO with a PSA share exceeding 50 percent in any service common to independent ACO participants. See Proposed Policy Statement at The Final Policy Statement removed this regulation in response to the overwhelmingly negative comments it received in regards to the Proposed Policy Statement. In place of the mandatory review, the Final Policy Statement simply provides that newly formed ACOs seeking further antitrust guidance may voluntarily request from the Agencies an expedited 90-day antitrust review prior to participating in the Shared Savings Program. See Final Policy Statement at In order to obtain voluntary review, an ACO must submit its request for review to both the FTC and DOJ prior to entering into the Shared Savings Program, after which time the ACO will be informed which of the Agencies will conduct the review. In order to start the 90-day review period, the reviewing agency must receive certain documents and information. The required information includes: (1) the ACO s application and all supporting documents that it plans to submit, or has submitted, to CMS; (2) documents discussing the ACO s business strategies and plans to compete in the Medicare and commercial markets; (3) the level and nature of competition among participants in the ACO and of participants within the markets they serve; and (4) information sufficient to show (a) the common services that two or more participants provide to patients in the same PSA, (b) the PSA of each ACO participant, (c) any restrictions that prevent ACO participants from obtaining information regarding the prices charged by other participants, (d) the identity of the five largest commercial health plans for the ACO s services, and (e) the identity of any other existing or proposed ACOs in any market in which the ACO will provide services. Id. at 12. Furthermore, to the extent possible in the 90-day review period, the reviewing agency will consider the factors of the rule of reason analysis. Id. at 11. Within 90 days of receiving all of the necessary documentation and information, the reviewing agency will advise the ACO whether it: (1) does not likely raise competitive concerns; (2) potentially raises competitive concerns; or (3) likely raises competitive concerns. Id. at 13. As is consistent with existing practices, if this review process indicates that an ACO s formation or conduct may be anticompetitive, the Agencies may investigate the ACO and, if appropriate, take enforcement action at any time before or during the ACO s participation in the Shared Savings Program. Id. at Agency Monitoring of Competitive Effects: A Replacement For Mandatory Review. While the Final Policy Statement does not require a mandatory review of any ACO, the Agencies will be monitoring the competitive effects of all ACOs based on data provided to them by the Centers for Medicare and Medicaid Services (CMS). CMS will collect and evaluate cost, utilization and quality metrics relating to each ACO s performance in the Shared Savings Program in order to assess whether an ACO has improved quality and reduced costs. Additionally, the Agencies will vigilantly monitor complaints about an ACO s formation or conduct and, if necessary, take enforcement ac- 7

8 Accountable Care, continued from page 7 tion. Id. at Specifically Delineated Conduct Guidelines to Help Avoid Agency Review. In addition to providing for voluntary review and vigilantly monitoring ACOs, the Final Policy Statement outlines five categories of conduct that should be avoided to reduce the likelihood that an ACO will be scrutinized by the Agencies and found to be anticompetitive. Regardless of whether an ACO has a high market share or other indicia of market power, the Agencies caution against pricefixing and the exchange of competitively sensitive information among ACO participants that could facilitate collusion among them in the sale of competing services outside the ACO. Id. at 10. To avoid Agency scrutiny, all ACOs should both avoid engaging in such collusion and implement appropriate firewalls and other safeguards to prevent such collusion. Id. The Agencies outline additional behaviors that should be avoided specifically by ACOs with high PSA shares or other indicia of market power. Id. at These include: 1) Avoiding the use of contractual provisions that prevent or discourage private payers from directing or incentivizing patients to choose certain providers; 2) Explicitly or implicitly tying sales of the ACO s services to the private payer s purchase of other services from providers outside the ACO and vice versa; 3) Contracting with ACO participants on an exclusive basis, thereby preventing or discouraging providers from contracting with private payers outside the ACO; and 4) Restricting a private payer s ability to disclose cost and quality data to its beneficiaries. Id. the request. Despite the fact that the Final Policy Statement notes that the Agencies will share their proposed business review and staff advisory opinion letters with each other before issuing them in final form, this dual-agency review system could lead to inconsistent enforcement of the antitrust laws. An antitrust analysis under the rule of reason is necessarily individualized and therefore opens the door for the Agencies to weigh factors differently in their approaches to antitrust enforcement. As such, the decision as to which agency will review an ACO s application could play a significant role in the ultimate outcome of that review and may not be accurately predictive of whether an ACO will be reviewed or challenged by the non-reviewing agency. 2. The Underinclusiveness of the Policy Statement s Definition of an ACO. Despite the fact that the Final Policy Statement expanded its definition of what constitutes an ACO from that contained in the Proposed Policy Statement, it is still underinclusive. The Final Policy Statement expanded the definition of ACO by including collaborations formed before March 23, Now the Final Policy Statement defines an ACO as all collaborations of otherwise independent providers and provider groups that are eligible and intend, or have been approved, to participate in the Shared Savings Program and may also operate in commercial markets. Id. at 1. This definition, while expanded from its original conception, is still limited in that it does not include ACOs that exclusively provide services to commercially insured patients. The failure of the Final Policy Statement to include such organizations means that those organizations cannot take shelter within the safety zone provided by the Final Policy Statement. This lack of protection could deter or discourage the formation of potential efficiency-enhancing collaborations. While it is unclear whether such organizations would arise in significant numbers if they were protected by the safety zone, it is nevertheless a noteworthy potential effect of the Final Policy Statement. An ACO is significantly less likely to be subject to scrutiny and review by the Agencies if it avoids engaging in the aforementioned activities and conduct. B. Evaluating the Final Policy Statement. Now that the Agencies have released their Final Policy Statement, the issues of enforcement and effectiveness rise to the forefront of the discussion. There are at least three specific issues that arise in this regard. First, will the proposed system work efficiently and consistently despite being monitored by two different agencies? Second, how will the exclusion of some ACOs from regulation under the Final Policy Statement inhibit their development and use? And third, will the categorization of the competitiveness of various ACOs by their PSA shares prove accurate and effective in curbing anticompetitive activities in the commercial market? 1. Consistency of the Voluntary Expedited Review By the Agencies. The voluntary expedited review may prove to be ineffective and inconsistent due to dual agency supervision. When an ACO submits its request for a voluntary review, it must submit it to both the FTC and the DOJ. The Agencies will then determine which agency will review 3. The Accuracy of PSA Shares in Predicting Market Share and Power is Yet to Be Established. The Agencies monitoring and review process especially in determining whether an ACO falls within the safety zone relies heavily on a single measure of competitiveness: an ACO s PSA shares. PSA shares are based on Medicare fee-for-service allowed charges. Id. at Appendix. While the selection of this measure of market share reflects limitations imposed by currently available data, an ACO s share of the Medicare market may not accurately predict its market share in the commercial market. It is possible, for instance, that an ACO could have a PSA share below 30 percent and thus fall in the safety zone while commanding a higher share of the commercial market. Thus, whether the Agencies reliance on PSA shares to determine competitiveness proves ineffective in limiting anticompetitive collaborations in the commercial market is yet to be seen. Conclusion The Final Policy Statement has enlarged the umbrella of coverage to extend to a greater number of provider collaborations while at the same time relaxing the integration requirements by eliminating all mandatory review processes. The likely effect of these two changes in 8

9 the Policy Statement, in particular, will be to encourage the formation of a greater number of ACOs than would have been formed under the strictures of the Proposed Policy Statement. Jackson R. Price is an associate in the Charlotte office of Womble Carlyle Sandridge & Rice, LLP. Mr. Price s practice focuses on business litigation and he has been involved in various complex litigation cases representing corporations and individuals. In re OSF Healthcare Hospitals vs. the FTC Under New Merger Guidelines By Kip Nelson Citizens of Rockford, Ill. may be surprised to know that they are at the center of a major dispute between the health care industry and the Federal Trade Commission ( the FTC ). The city has three major hospitals in the area, and the FTC recently initiated an action to prevent two of them from merging. This action reaches far beyond Rockford, though, and exemplifies the FTC s approach to combinations in the health care industry and mergers more generally. On Nov. 18, 2011, the FTC announced that it had filed an administrative complaint against two of the major health care systems in Rockford. According to the FTC, this action is part of its ongoing effort to protect U.S. health care consumers. The FTC began its complaint by alleging that the proposed merger of the two systems would substantially lessen competition for critical health care services in the Rockford, Illinois area. In re OSF Healthcare System, No (FTC Nov. 17, 2011). The FTC argues that the merger of the two systems would leave only one competitor in the area, and the resultant lack of competition would increase health care costs, reduce the quality of care, and restrict the range of health care choices. The FTC based its complaint on information provided by health plans, local employers and physicians, third party hospitals, and the merging parties themselves. These sources, according to the complaint, confirm that the current competition among the three largest hospitals is vigorous and robust. In addition, this competition is buttressed by the fact that local health care plans usually consider two, but not three, of the hospitals as in-network. Thus, the FTC argues, eliminating one of those players would have several anticompetitive effects. The combined entity would have significantly higher market leverage. The merged health care systems would no longer compete over nonmonetary advantages, such as access to care and scope of services. Finally, and perhaps most importantly, the resultant situation in which there are only two major players would incentivize them to engage in coordinated interaction. The FTC has rejected the hospitals counterarguments. According to the FTC, it is not sufficient to leave one major competitor. Furthermore, significant barriers to entry would prevent the arrival of another competitor, at least in the near future. Finally, any efficiency gained by the merger (which was apparently not clarified by the hospitals) would be outweighed by the anticompetitive effects. The FTC s argument is not entirely novel, as this is neither the first dispute centered around Rockford s hospitals nor the first action against hospital mergers. It is against this backdrop that the FTC moves forward in its enforcement actions. The Past Rockford has three main hospitals, and federal courts enjoined a different combination of two of them over 20 years ago. In United States v. Rockford Memorial Corp., the Seventh Circuit affirmed an injunction against the merger. 898 F.2d 1278 (7th Cir. 1990). Even though patients (and insurers) would have had some alternatives for health care, the court ruled that the hospitals immense shares in a reasonably defined market create a presumption of illegality. Therefore, the court affirmed the trial court s injunction against the merger. The Eleventh Circuit reached a similar conclusion in a similar situation the following year in FTC v. University Health, Inc., 938 F.2d 1206 (11th Cir. 1991). Despite the similarities in the situation, given that the health care landscape in Rockford has not changed dramatically in the intervening time period, one interesting wrinkle in the current complaint is the basis of the FTC s prosecution. In Rockford, the Seventh Circuit held that the proposed merger would violate Section 1 of the Sherman Act. Yet, apparently ignoring this conclusion, the FTC brought its current complaint against Rockford under Section 7 of the Clayton Act. Perhaps given courts interpretation of the two sections as approaching synonymous, the FTC held onto its traditions and attacked the Rockford merger under the Clayton Act. Rockford is not the only place where the FTC has sought to prevent mergers of health care systems. Indeed, the FTC has been challenging hospital acquisitions since In that year, the FTC attacked the acquisition of a hospital in San Luis Obispo, California. The administrative law judge upheld the FTC and, after modifying the order twice, so did the full commission. Am. M ed. Int l v. FTC, 104 F.T.C. 1 (1984), as modified by 104 F.T.C. 617 (1984) and 107 Continued page 10 9

10 New Merger Guidelines, continued from page 9 F.T.C. 310 (1986). More recently, the FTC successfully challenged another hospital merger in Illinois, although the action was brought after the merger was complete and therefore the FTC ordered the merged entity to establish independent negotiating teams rather than unwinding the merger itself. In re Evanston NW Healthcare Corp., No (Aug. 6, 2007). Of course, not all courts have approved of the FTC s attempts to exert its power over the health care industry. For example, six months before the Seventh Circuit granted the FTC broad authority in Rockford, the Fourth Circuit rejected a similar line of argument. See United States v. Carilion Health System, No , 1989 WL (4th Cir. Nov. 29, 1989) (unpublished). As did the Seventh Circuit, the Fourth Circuit analyzed a proposed merger of two hospitals under Section 1 of the Sherman Act. Unlike the Seventh Circuit, however, the Fourth Circuit rejected the FTC s arguments. Instead, the court accepted the district court s findings that the merger would produce significant efficiencies and that a single, large competitor would still be enough to exert competitive pressure. Therefore, the proposed merger passed the rule of reason. The Fourth Circuit was not alone in this determination, as the FTC subsequently lost all seven cases it brought against hospital mergers from 1994 to Still, given the relevant precedent from the Seventh Circuit, it is unlikely that the current OSF Healthcare complaint will fail. With such strong language directly on point, the FTC took care to include several references to the prior case in its current complaint. Thus, Rockford citizens can probably count on having three health care providers in the foreseeable future. In that regard, this complaint is not much of a surprise. What is a surprise, however, is what the complaint represents of the FTC s current thought processes and what the complaint portends for the future of antitrust enforcement in the health care industry. The Present After Evanston in 2007, the FTC had a lull in enforcement activity related to hospital mergers. But recently the agency expanded its presence in the industry once again. Of the four administrative complaints filed in 2011, three of them disputed acquisitions of health care providers. In fact, complaints against hospital mergers in both Georgia and Ohio are remarkably similar to the most recent complaint in Rockford. In re Phoebe Putney Health System, Inc. involves a merger between the two main hospitals in Albany, Georgia. No (FTC Apr. 19, 2011). According to the FTC, the merger would create a virtual monopoly and thereby increase health care costs for local residents. As in Rockford, the FTC argues that the current landscape is one of healthy competition that is being threatened. The FTC also cites similar leveraging and barrier-to-entry concerns. The proceedings are currently stayed while the hospitals await a ruling from the Eleventh Circuit on a tangential issue of state action immunity. The FTC made similar arguments regarding a merger in Lucas County, Ohio, although there it brought the complaint after the transaction occurred. In re ProMedica Health System, Inc., No (FTC Jan. 6, 2011). The FTC used the same rationale and made the same arguments as in the other two cases. As the Ohio case was initiated in Jan. 2011, the parties have had more time to fight over the details of the allegations. Still, the case has not been fully resolved. This recent expansion may be due to the revised Horizontal Merger Guidelines ( Guidelines ), issued on Aug. 19, Originally passed in 1968, the Guidelines were intended to acquaint the business community, the legal profession, and other interested groups and individuals with the standards currently being applied by the Department of Justice in determining whether to challenge corporate acquisitions and mergers. The Guidelines underwent significant amendment in 1982, with revisions added in 1984, and again in Except for a revision in 1997 regarding efficiencies, these Guidelines were in place until The most recent version is three times longer than the 1968 version and approximately 50 percent larger than even the revised 1992 version. As one drafter explained, the 2010 Guidelines reflect the ongoing evolution of merger enforcement that has taken place since the DOJ first issued merger guidelines in Carl Shapiro, The 2010 Horizontal Merger Guidelines: From Hedgehog to Fox in Forty Years, 77 Antitrust L.J. 701, 702 (2010). The 1982 Guidelines focused on the coordinated effects of a merger, which are apparently still a major concern of the FTC. The 1992 Guidelines added the concept of unilateral effects and more fully emphasized barriers to entry. The 2010 Guidelines built upon that concept to reflect the ascendency of unilateral effects as the theory of adverse competitive effects most often pursued by the [federal] Agencies. These Guidelines apply to most all hospital mergers. Although the FTC has provided a safety zone for certain small hospitals, the exclusion is not applicable to larger health systems. The Future The most significant change in the 2010 Guidelines is the introduction of a section labeled Evidence of Adverse Competitive Effects. The section, notably placed as the first substantive material, begins with the caveat that the FTC and DOJ will consider any reasonably available and reliable evidence to address the central question of whether a merger may substantially lessen competition. The agencies then go on to clarify that they will examine various types of evidence, such as actual post-merger effects, comparisons to similar mergers, the market situation, and the competitive landscape. They will gather their information, as can be seen in OSF Healthcare, from the merging parties, customers, and other industry participants. The declaration of these principles does not necessarily reflect a monumental change in FTC decisionmaking, as the agencies have been using these ideas for years. The enunciation of these specific policies at the forefront of the Guidelines, however, is an example of how the FTC views itself and its role in the American marketplace. According to the FTC, most hospital mergers and acquisitions do not present competitive concerns. Given recent enforcement actions, however, one wonders how much the FTC believes that statement. The increase in activity probably stems from the FTC s conclusion that imperfections in the health care system have impeded competition from reaching its full potential. The FTC does recognize, however, that extensive regulation can actually limit competition. 10

11 More generally, the FTC prides itself as the benevolent guardian of competition. According to the FTC s press materials, competition in America is about price, selection, and service. It benefits consumers by keeping prices low and the quality and choice of goods and services high. Competition makes our economy work. Thus, the FTC has the responsibility to ensure that our markets are open and free. Although there is some debate over whether the FTC has authority over nonprofit hospitals, most would agree that the agency has authority to regulate the health care system in general. The more difficult question may be whether the FTC has properly researched its efforts in the health care industry. The Seventh Circuit indicated more than twenty years ago that judges would like to see more effort put into studying the actual effect of concentration on price in the hospital industry as in other industries. Rockford, 898 F.2d at In the OSF Healthcare complaint, there is little indication that the FTC has conducted those studies. Although the FTC has proceeded as if health care systems are the same as any other service providers, some have argued that the health care industry is sufficiently different to require different standards. Unique facets of the contemporary health care industry, including the fact that revenue often comes from government payors rather than individuals, confuses the conventional analysis of supply and demand. Others have argued that hospitals do not behave like ordinary commercial entities and therefore it cannot be assumed that they maximize profit. If, however, the FTC is the harbinger of the future of the health care industry, a view that the FTC expresses for itself and in which many courts have apparently acquiesced, hospitals and health care providers may need to take a closer look at their business development models. In short, hospitals contemplating mergers will want to assess the likely sources of challenges to such transactions. Scott Becker, Ronald Lundeen Jr. & Alison Vratil Mikula, Health Care Law 9.04 (2011). In addition, those who practice in the antitrust field more generally should also be aware of the FTC s evolving policies. Kip Nelson is an associate in the Greensboro office of Smith Moore Leatherwood LLP and practices in the litigation group. Twitter Live updates from NCBA Facebook Like the NCBA for updates, articles and videos. LinkedIn Search Groups for NCBA Network with other NCBA members. One s mind, once stretched by a new idea, never regains its original dimensions. Oliver Wendell Holmes Mentors are the foundation for success, building the leaders of our next generation stretching minds, encouraging growth, shaping the future of the profession. Be a Leader. Be a Mentor. Join the NCBA Mentorship Program. Visit us online at /mentoring

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