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Clinical Integration as an Alternative to the Messenger Model

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Gary J. McRay
Foster Swift Health Care Law Report
June 2008

Provider network organizations, such as IPAs and physician hospital organizations (PHOs), have always had to worry about federal antitrust laws, primarily because they often represent a form of joint conduct among providers who otherwise would be competitors. Ever since the Supreme Court’s decision in Arizona v Maricopa County Medical Society, 457 US 332 (1982), it has been clear that price fixing by competitors is a per se violation of the federal antitrust law. In contrast to an illegal agreement among competitors regarding price, it is possible that a PHO becomes a legitimate joint venture for antitrust purposes and is not subject to the strict per se rule but rather it is evaluated under the so called "rule of reason." The rule of reason analysis allows the facts of a particular case to be reviewed to determine whether the joint conduct of competitors, on balance, reasonably regulates or promotes competition.

A 1996 revision of the Statements of Antitrust Enforcement Policy in Health Care issued by the United States Department of Justice and the Federal Trade Commission and, in particular, Policy Statement 9 concerning multi-provider networks, described when IPAs or PHOs may be analyzed under the rule of reason standard. The Justice Department believes that a legitimate joint venture exists when the participants share significant economic risk and function as an integrated joint venture. The Justice Department concluded that substantial financial risk was shared among members of a multi-provider network if: 1) the venture agreed to provide services at a capitated rate, or 2) the venture created significant financial incentives for its members to achieve cost containment goals, such as withholding a substantial amount of compensation from all members with a return of the withhold only if the cost containment goals were met.

Many PHOs and IPAs could not meet the financial integration standards of the 1996 guidelines and, as a consequence, were left trying to comply with the Messenger Model to avoid illegal joint pricing agreements. In the Messenger Model, the network acts solely as a communications agent between the providers and the prospective payor and does not perform any negotiations with respect to price. The ultimate agreement on price is reached between the payor and the individual provider. Typically, the messenger process begins with an offer from a payor (HMO or insurance company) that is communicated to all other providers in the network. If not enough providers accept the payor’s offer, theoretically, the payor makes a slightly better offer and the messenger conveys that offer to all of the providers. Obviously, pure messenger arrangements are very cumbersome and, in many cases, simply impractical from a business standpoint because of the extensive potential negotiations between the payor and all of the providers.

As an alternative, the 1996 revision of the Statements recognized utilization management and quality assurance activities (UM/QA) as a form of integration sufficient to afford rule of reason analysis to PHO network activities. The 1996 Statements indicated that such an integrated network would show: 1) a significant provider capital investment (such as information systems), 2) an investment in UM/QA staff and infrastructure, 3) development and actual implementation of cost and quality benchmarks, 4) a program of education and remedial action to discipline providers who did not comply with the network’s benchmarks and protocols, and 5) selectivity in network membership.

Since the 1996 Statements, the federal government has reduced one stumbling block to physician and hospital integration when on August 8, 2006, the Department of Health and Human Services published a final regulation that created an exception under the Stark II law (42 CFR § 411.357(w)) and a safe harbor under the Anti-Kickback law (42 CFR § 1001.952(y)) that permitted a hospital to make certain non-monetary subsidies in the form of software (no hardware, such as computers), or information technology and training services to a physician on its medical staff. The subsidy must be necessary and used predominantly to create, maintain, transmit, or receive electronic health records. On May 11, 2007, the Internal Revenue Service ("IRS") released an internal memorandum from the Director of the Exempt Organizations Division (the "IRS EHR Memorandum"), which concluded that if a tax exempt hospital provides financial assistance to physicians with medical staff privileges in connection with shared electronic health records that comply with the Anti-Kickback and Start II regulations, then such electronic health record arrangements would not result in impermissible "private benefit or inurement" in connection with the exempt hospital. However, such a subsidy may still be viewed as taxable income to the medical staff physician recipients of the subsidy. On May 30, 2008, CMS issued an Advisory Opinion 2008-01 which concluded that if a hospital licensed certain software interfaces to its medical staff so that they could order and review laboratory tests and procedures, such was not "compensation" under the Stark Law. In addition to this endorsement of physician hospital integration by final regulations under Stark II, the Anti-Kickback statute, and the IRS EHR Memorandum, the FTC has also now given some guidance to certain clinical integration between competitors.

In 2002, the FTC issued a staff advisory opinion with respect to MedSouth, Inc. ("MedSouth"). MedSouth was an IPA with some 400+ physicians that created clinical integration through a clinical resource management program that involved sharing patient information, developing practice protocols and reporting physician performance concerning pre-established benchmarks to improve patient outcomes. MedSouth developed a web based electronic clinical data record system that allowed physicians to access and share clinical information relating to their patients and also adopted and implemented clinical practice guidelines relating to the quality and appropriate use of services by MedSouth physicians. MedSouth required its physicians to purchase designated computer equipment to access and use its web clinical data system. Based upon all of this clinical integration, the FTC allowed MedSouth to jointly contract and negotiate fees with payors. On June 18, 2007, the FTC published a follow up letter to MedSouth’s activities (the "2007 Letter"), in which it noted that MedSouth, over five years, had developed certain clinical guidelines or screening protocols for 60 major diseases. Also, MedSouth had a pay-for-performance program in which physicians who were collectively meeting or exceeding performance targets were receiving performance-based bonuses or rewards.

In addition, the FTC, on September 17, 2007, issued a staff advisory opinion/comment letter involving the Greater Rochester Independent Practice Association, Inc. ("GRIPA"). GRIPA was an IPA operating in Rochester, New York that proposed a clinical integration model. GRIPA proposed to develop a network of primary care physicians and specialty care physicians and, through designing and implementing evidence based guidelines or protocols and quality benchmarks, GRIPA would improve patient outcomes. It proposed to integrate its physicians and providers through a web based electronic clinical information system in which it would share clinical information related to common patients, order prescriptions and lab tests electronically, and access patient information from hospitals and ancillary providers throughout the local community. Each physician would pay $7,000 for the cost of access through a proposed web portal. This amounted to significant capital of $2,700,000 in total costs. The physician members of GRIPA also had to invest $6,000 to $7,000 per office for computer equipment, and there was mandatory Internet access, at a cost of $70 per month. There were also mandatory training sessions for each physician and the physician’s office staff to use the web portal. The FTC concluded that given the extensive clinical integration, GRIPA’s joint pricing negotiation with payors was not per se illegal behavior, but should be analyzed under the rule of reason.

IPAs and PHOs have often looked for legitimate ways to jointly negotiate with payors through a joint venture that is not an illegal activity. Many multi-provider networks attempted to avoid illegal activity by having the joint venture agree to provide services based upon substantial financial risk shared in the form of capitated rates or with significant withholds distributed only if cost containment goals were met. These substantial financial risk models have become unpopular over time and as an alternative, PHOs and other multi-provider networks have started to create clinical integration through UM/QA activities. The FTC and the Justice Department have acknowledged in recent staff advisory opinions that there can be sufficient clinical integration (especially through web-based electronic medical records) to allow multi-provider networks to negotiate with payors and have that not be per se illegal price fixing. In addition, CMS has created exceptions under Stark II and also safe harbors under the Anti-Kickback law to allow hospitals to provide certain non-monetary subsidies for software to create electronic medical records. CMS and the FTC are both, through various regulations and advisory opinions, promoting the integration between hospitals and physicians to improve quality and to promote better healthcare.