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Clinical Integration

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Gary J. McRay & Nicole E. Stratton
Foster Swift Health Care Law E-News
August 16, 2013

One of the main concerns that healthcare providers have regarding clinical integration is whether there is an issue with anti-trust law. Providers often ask if there is any practical guidance from the Federal Trade Commission ("FTC") concerning the extent of clinical integration necessary to allow multi-provider networks to negotiate fee schedules with payers without violating the anti-trust laws.


Generally speaking, the anti-trust laws have four categories of agreements: (1) agreements for price fixing and market allocation among competitors which are per se illegal; (2) "rule of reason" agreements where practice might restrict trade in a way that it is seen as positive or beneficial for a consumer or society; (3) agreements where there is no easily identifiable proof or indication of wrongdoing but where they appear to act in concert (tactic collusion); and (4) vertical agreements between a business and the supplier. See Arizona v Maricopa County Medical Society. The United States Department of Justice ("DOJ") and the Federal Trade Commission ("FTC") have issued some guidance to the healthcare industry on anti-trust issues in the 1996 revision of the “Statements of Anti-Trust Enforcement and Policy in Healthcare” ("Guidance"). In Section 8 of this Guidance, there is a general discussion of physician networks and two safety zones. One safety zone that the DOJ and FTC will not challenge, absent extraordinary circumstances, is an exclusive physician network where the physician participants share a substantial financial risk and constitute 20% or less of the physicians in the relevant market in each physician specialty category. Likewise, in the second safety zone, the agencies will not challenge a non-exclusive physician network whose physician participants share a substantial financial risk and constitute 30% or less of the physicians in each physician specialty in the relevant market. The Guidance does emphasize that providers may share substantial financial risk through: (i) capitation arrangements or percentage of premiums or revenue, (ii) withholding arrangements, or (iii) cost or utilization targets with substantial financial rewards or penalties. However, physician networks which are economically integrated but fall outside the two safety zones will still be reviewed under the rule of reason analysis to see if the agreement to set prices by competitors is reasonably necessary to realize the efficiencies produced by the network. Physician networks that do not share substantial financial risk may show clinical integration as an alternative in order to obtain a rule of reason analysis by the federal agencies.

ACO Guidance

Most recently, on October 28, 2011, the agencies issued a statement of anti-trust enforcement policy concerning Accountable Care Organizations ("ACO") participating in the Medicare Shared Savings Program ("MSSP"). Through this most recent statement, the DOJ and FTC concluded that organizations which meet the ACO requirements of the MSSP are reasonably likely, due to clinical integration, to have bona fide arrangements to approve quality and reduce costs through the ACO participants’ joint efforts. Accordingly, the DOJ and FTC have created a new anti-trust "safety zone" for ACOs that meet the MSSP eligibility criteria. Unfortunately, the safety zone offered in connection with the MSSP is: (i) narrow, (ii) complex, (iii) only applicable while the ACO is participating in the MSSP shared savings program, and (iv) does not offer protection for agreements with commercial payers.

ACO Rule is Narrow

For an ACO to fall within the safety zone, independent ACO participants (e.g., physician group practices), that provide the same service (common service) must have a combined share of 30% or less of each common service in each participant’s primary service area ("PSA") whenever two or more ACO participants provide that service to patients from that PSA. The PSA for each service is defined as the lowest number of contiguous postal zip codes from which the ACO participant draws at least 75% of its patients for that service. Any hospital or ambulatory surgery center (ASC) participating in an ACO must be non-exclusive to the ACO to fall within the safety zone, regardless of its PSA market share. Therefore, to fall within the safety zone, each hospital or ASC must be allowed to contract with the other ACOs or commercial payers.

The safety zone for physician and other provider services will also, to some extent, be dictated by whether they fall within the rural exception or are subject to the dominant provider limitation. Under the rural exception, an ACO may include one physician per specialty from each rural county on a non-exclusive basis and qualify for the safety zone even if inclusion of these physicians causes the ACO share of any common service to exceed 30% in any ACO participant’s PSA for that service. In a similar fashion, the ACO may include rural hospitals on a non-exclusive basis and qualify for the safety zone, even if the inclusion of the rural hospital causes the ACO’s share of a common service (hospital services) to exceed 30% of hospital services in the relevant PSA. Under the dominant provider limitation, if an ACO has a participant with a greater than 50% share of its PSA for any service (that no other ACO participant provides to patients in that PSA), the dominant provider must be non-exclusive to the ACO to fall within the safety zone. Even though it may seem that 30% is a large market share, it may be easily exceeded by many proposed networks.

Complexity of ACO Rule

The next issue, then, is how does one calculate the percentage of common services in a PSA. The calculation of the market share for each common service in each PSA depends on the type of participant. For physician services, the share is calculated as the ACO’s share of Medicare fee for service allowed charges in the PSA for the most recent calendar year. For physicians, their common service to determine market share is the primary specialty as designated on the Medicare enrollment application as the Medicare Specialty Code (MSC). For in-patient facilities (hospitals), the service is the Medicare Diagnostic Code (MDC), and for out-patient facilities the common service to determine market share is an out-patient category as defined by CMS. The analysis to determine whether an ACO is within a safe harbor will be significant and complex.

Limitation on the Safety Zone

The safety zone only gives protection while the ACO is enrolled in MSSP and never gives protection from setting prices with commercial programs. Presumably, most ACOs would like to participate with commercial payers. So, this represents a large issue with the current safety zone.

Clinically Integrated

As mentioned above, one possibility of achieving a rule of reason analysis is for the physician network to become sufficiently clinically integrated beyond the safety zone allowed by MSSP, as was demonstrated in a series of FTC Advisory Opinions.See Med-South, Inc. Independent Physician Association Program (2002 and 2007); Greater Rochester Independent Practice Association ("IPA") (2007); Tri-State Health Partners, Inc. Program (2009); and Norman PHO (2013). All of these networks had certain characteristics that allowed the FTC to conclude the benefits of clinical integration outweighed the negative aspects of jointly contracting with payors.

Capital Commitment

All of the successful networks demonstrated significant capital investment in the network. In the Tri-State and the Rochester IPA the physician members invested significant time and effort in developing their respective clinical programs. At the Norman PHO all the physicians had to acquire and maintain certain computer equipment, software, rights or licenses and pay for the training to use the network’s electronic platform. Plus, many of the networks invested sufficient capital in developing clinical and practice guidelines to increase quality and reduce costs as part of their clinical integration.

Electronic Delivery of Health Information

All of the multi-specialty networks approved by the FTC invested in the electronic delivery of healthcare. For example, the Norman PHO invested in new electronic capabilities to commit the network to collect and review individual and aggregate data relating to cost, utilization and quality of care. The electronic interface enabled the Norman PHO network to efficiently monitor and review individual compliance with network standards, including the clinical practice guidelines. The network used its electronic systems to perform medical record audits and to generate reports on individual and aggregate performance. As patients were referred within the network, the network was able to track whether the guidelines were being used and whether quality was improving. Other networks all shared patient information by a web-based clinical data record system.

Significant Treatment Protocols

Each successful network developed many best practice protocols. Each participating physician in the Norman PHO had to serve as a member of one or more of the various physician committees that helped the physician-hospital organization ("PHO") develop clinical practice guidelines and increase the quality of services delivered by the PHO. Med-South developed clinical protocols covering 80% to 90% of the prevalent diagnoses in the practices of the participating members. Plus, Med-South adopted protocols for 60 major diseases. The Rochester IPA had approved 14 clinical practice guidelines and Tri-State had approved 18 clinical practice guidelines and 30 other clinical practice guidelines were under development. In the Norman PHO, they developed 50 disease-specific conditions and the PHO had collected and analyzed physician data for assessing high prevalence, high cost, and high risk chronic conditions that impacted patient populations.

Mandatory Physician Participation and Compliance

The advisory opinions show that successful networks monitor whether the physicians are complying with the evidence based guidelines to monitor compliance and then re-educate those who fall short or eventually dismiss them from the network if they do not comply with the network standards on treatment protocols. It is important for the network to require a commitment from its physicians to the clinical integration program.

Non-Exclusive Network

Finally, all the FTC endorsed networks have been non-exclusive. This non-exclusive aspect allows the federal agencies to feel comfortable applying the rule of reason analysis even through the market of physicians and hospitals in the network is greater than the safety zones mentioned above. It is typically important to the federal agencies that the network allow providers to contract with other networks and it is clear to payers and providers that the network is not exclusive. The Norman PHO, under its participating practitioner agreements, made it clear that each physician would be allowed to contract with other networks or with payers who did not wish to contract with the Norman PHO and the Norman PHO would not attempt to force payers to exclusively deal with the Norman PHO. Therefore, in Norman PHO, rule of reason analysis was applied despite the physicians accounting for a majority of patient discharges in Norman and McClain counties and despite including the only hospital in Norman, Oklahoma. In Tri-State, the Tri-State physicians represented 64% of the physicians at the only hospital in Washington County and half or more of the physicians in large number of specialties in the applicable PSA, plus there were no other PHOs in the county yet the clinical integration was endorsed by the FTC. It is hard to know how much of a market share would be allowed by the FTC before it felt that it was too high and would require a challenge. It is clear, however, that the more narrow the panel and lower the market share of the network participants, the more likely it will pass any review by any of the agencies. A narrow panel that is committed to increase quality is more important than a very broad panel that is unnecessary to achieve results and looks like a barrier to payers as they negotiate reimbursement rates.

Spillover Effects

Most of the approved networks who attempt clinical integration take steps to prevent their participating providers from collectively exercising market power (by setting prices) or refusing to contract with payers outside of the network. Norman PHO provided appropriate anti-trust training to its administrators and participating providers and prohibited sensitive information involving prices or negotiating strategies from being shared between or among competitors.


The advantage of achieving clinical integration that results in higher quality and lower costs is that then the PHO may be a single contracting entity for discussing rates with commercial payers. The clinically integrated network may also be a vehicle to participate as an ACO under the MSSP. Plus, payers such as Blue Cross Blue Shield of Michigan may welcome multi-physician networks if they understand that quality will be improved and costs may be reduced, especially if the network is willing to share its cost reductions with BCBSM.

The clinically integrated network is an alternative to financially integrated networks, and can pass anti-trust review if properly structured. Therefore, clinically integrated networks are being pursued by networks and PHOs across the country as hospitals and physicians search for ways to legitimately improve the delivery of care and reduce the cost of such delivery.