Antitrust Law - April 2018

by Manatt, Phelps & Phillips, LLP
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In This Issue:
  • Physicians’ Employment Agreements Raise Antitrust Concerns
  • DSRIP Antitrust Considerations: The Case for a COPA

Physicians’ Employment Agreements Raise Antitrust Concerns

By Lisl J. Dunlop, Partner, Antitrust and Competition | Shoshana S. Speiser, Associate, Litigation

Earlier this month, a physician group sued a healthcare system in North Carolina state court, accusing it of monopolization by including overly restrictive covenants in physicians’ employment agreements, thereby preventing the physicians from leaving and practicing independently. This case serves as an important reminder of the antitrust risks inherent in common restrictive covenants contained in physician employment agreements.

Atrium Health (Atrium), a nonprofit hospital system and the largest system in the Charlotte area, has over 1,100 physicians on staff at its flagship hospital and over 2,500 physicians in its clinically integrated network. Mecklenburg Medical Group (MMG) is a physician group with over 90 doctors. Each MMG physician individually contracts with Atrium, so that physicians’ employment agreements are not all identical. On April 2, 2018, MMG sued Atrium for a declaration that noncompete and nonsolicitation provisions in its physicians’ employment agreements are void, invalid or unenforceable on the grounds that they are overly broad and violate public policy.

According to the complaint, MMG’s employment agreements contain noncompete provisions that broadly prohibit employed physicians from operating a medical office, clinic or outpatient treatment facility, or otherwise engaging in any practice of medicine, within a 15-mile radius of certain Atrium-owned or -controlled offices. MMG claimed that the provisions effectively prevent the physicians from performing specialty work in the Mecklenburg County area for 12 or 18 months, even if that work is distinct from the work they performed as employees of Atrium. For example, the noncompete provision allegedly prevents the physicians from working as nonphysician managers of a practice or from performing charity physician work in the area.

Most of the employment agreements also contain a nonsolicitation provision that bars physicians from contacting, communicating with or targeting persons to provide services. The provision also restricts physicians from soliciting any Atrium patients who reside in the relevant geographical area and have consulted with, been treated by or been cared for by the physicians within the 12-month period immediately preceding termination for a 12-month period. These provisions prevented any physicians departing from Atrium’s employment from notifying their patients of the change or inviting them to continue receiving services at the physicians’ new practices.

MMG alleged that Atrium unilaterally decided to change certain physician employment terms, including by lowering physician compensation, effective January 1, 2018, and then notified the physicians that if they refused to execute the new agreements, they would be terminated “for cause.” Therefore, refusal to sign the new agreements would trigger the noncompete provisions.

The same day that MMG sued Atrium, Atrium announced that it would allow Mecklenburg to break away and operate as a new, independent group. Mecklenburg sent a letter on April 4 seeking to settle the suit, but as of April 9, Mecklenburg reported that it had received only a one-sentence email from Atrium stating that it was reviewing the suit.

Takeaways

As we reported in our April 2017 article, Atrium also was sued by the Department of Justice over anti-steering clauses in its insurer contracts, and the case survived an initial attempt to dismiss. Both anti-steering clauses and restrictive covenants are relatively common and can have procompetitive justifications, as well as serve legitimate business needs. For example, restrictive covenants may serve to prevent rivals from gaining an unfair advantage from a company’s investments in training its employees.

Agreements that unfairly restrict employees’ ability to practice their trade and compete with their former employer, however, may come under antitrust scrutiny. While the court has yet to make a determination on the validity of the noncompete and nonsolicitation provisions and whether they in fact run afoul of the antitrust laws, the case serves as an important reminder of the antitrust risks inherent in these common contractual clauses when they are not narrowly tailored.

DSRIP Antitrust Considerations: The Case for a COPA

By Lisl J. Dunlop, Partner, Antitrust and Competition

Editor’s Note: On March 27, 2018, the author partnered with Christine White, vice president of legal affairs at Northwell Health, Inc., to present a webinar for the Greater New York Hospital Association (GNYHA) entitled “DSRIP Antitrust Considerations: The Case for a COPA.” Highlights are summarized below.

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Under New York State law, providers who might otherwise be viewed as competitors can apply for a Certificate of Public Advantage (COPA) for certain collaborative arrangements. If approved, a COPA can confer immunity under state and federal antitrust law. The webinar explained the COPA background and reasons why parties participating in a Delivery System Reform Incentive Payment (DSRIP) Performing Provider System (PPS) might consider applying for COPAs. The deadline for applying for a DSRIP COPA has been extended to December 31, 2020. 

Background to COPA Laws: Healthcare and Antitrust Policy Issues

According to the federal antitrust agencies, the antitrust laws are consistent with healthcare reform’s triple aim of 1) improving quality, 2) enhancing patient experience and access to care, and 3) reducing costs. The antitrust agencies believe that mergers and collaborations consolidate market power, which can lead to adverse effects on competition, a position supported by economic research showing that consolidation leads to higher prices.

The agencies stress that regulation is not an effective substitute for competition and that COPA laws granting antitrust immunity are unnecessary to encourage procompetitive provider collaborations. While the agencies have consistently opposed COPA laws, they have also explained that competition is not a panacea for all of the problems with American healthcare.

COPA laws authorize “cooperative agreements” among competing providers where it is shown that the agreements can improve quality, moderate cost increases, improve rural access and help keep smaller hospitals open. These laws seek to balance competition with regulation and provide that competition is just one issue to take into account. Very few COPAs actually have been applied for or issued until recently, and there has been minimal research conducted on whether COPAs actually achieve their purported benefits.

Antitrust Laws and Provider Collaborations

The federal antitrust laws generally prohibit 1) agreements that restrain trade, 2) monopolization and 3) mergers that substantially lessen competition. Each state also has its own antitrust act which generally mirrors the federal statutes. Most often, the antitrust agencies will assess healthcare collaborations under the rule of reason, recognizing the fundamentally procompetitive reasons for entering into these arrangements.

In the DSRIP context, there are a number of issues that could give rise to antitrust liability:

  • Joint contracting could be viewed as price-fixing;
  • Value-based contracting may increase exposure to potential price fixing or boycott claims from payers who are not shy about suing or complaining to the Federal Trade Commission (FTC);
  • A PPS agreement that particular providers will serve particular patient segments or that particular specialties will be located at particular facilities and that competing facilities would not offer certain services could be viewed as market allocation;
  • PPS providers coming together to provide services to a group of patients could be viewed as taking away the opportunity for competitors to service that group of patients, which could be viewed as monopolization or group boycott activity;
  • Exclusive agreements can also violate the antitrust laws if they harm competition by restricting distribution channels or access to particular services or patients; and
  • Sharing of competitive information on which parties act can also be anticompetitive.

Lawsuits could be brought by local providers not participating in the PPS, or complaints could lead to government investigations. Excluded competitors may be incentivized to sue because if they are successful, they could be entitled to treble damages and attorneys’ fees. 

The New York DSRIP Program

The DSRIP program is a state-sponsored pilot program arising from the Federal Social Security Act § 1115. A state’s ability to participate in this waiver program is subject to the Department of Health & Human Services’ (HHS) approval. Section 1115 waivers permit states significant flexibility in how they deliver their Medicaid programs and allow states to direct supplemental payments to providers that also invest in delivery reform.

New York’s DSRIP program is a regulatory solution to the problem of high Medicaid spending and subpar quality. New York had the second-highest spending in the nation and was concerned about its rising costs, as well as quality issues. For example, New York was rated last in the nation for its overutilization of hospitals. DSRIP seeks to achieve health system transformation and a 25% reduction in avoidable hospital use over five years.

To accomplish these goals, DSRIP involves extensive data collection and reporting and requires every PPS to satisfy milestones for the creation of infrastructure, as well as for process and outcomes metrics and milestones. As a result, DSRIP brings providers together to share significant data and information. New York State, concerned about potential antitrust liability discouraging providers, encouraged providers to seek COPAs providing antitrust immunity for PPS activities to drive participation.

The New York COPA Law and Regulations

The New York COPA law expressly states that “the intent of the state is to supplant competition ... and to provide state action immunity under the state and federal antitrust laws.” This language would almost certainly pass muster as a clear articulation of a state policy to displace competition.

The second requirement for state action immunity is active supervision. The New York COPA law itself stresses that active supervision is required. Whether there is sufficient active supervision, however, depends on what the state actually does. There needs to be continuous monitoring and interaction for a COPA to be valid. Any challenge to the validity of a COPA would likely target active supervision. The regulations include specific provisions requiring active supervision throughout the process and the COPA’s life cycle and include the ability to modify or revoke the COPA. Whether there is active supervision ultimately will be a factual question.

The COPA review process requires the New York State Department of Health (DOH) to assess the COPA’s primary service area, as a proxy for the relevant market, and try to anticipate the benefits or disadvantages that may occur within that area. The review process allows DOH to consider factors other than competition, including whether the PPS will help preserve services for needy populations or whether it facilitates the implementation of payment methodologies designed to control unnecessary costs or utilization.

The Staten Island PPS COPA

Following the submission of several COPA applications, the FTC sent a letter to DOH expressing its views that COPAs are unnecessary and based on inaccurate presumptions about the antitrust laws and the value of competition, including in a letter directed to New York on April 22, 2015. According to the FTC, because the antitrust laws permit procompetitive collaborations, COPAs only serve to protect anticompetitive collaborations. Nonetheless, DOH granted a COPA to Staten Island in December 2016 after receiving this letter. Another COPA application is still pending.

While Staten Island’s final COPA was never published, DOH published an executive summary in connection with the proposed COPA. The executive summary explains that the COPA is valid through March 31, 2020, or termination of the PPS’s participation in DSRIP and that the COPA has no bearing outside of the PPS’s Medicaid activities in connection with DSRIP. Additionally, the COPA was proposed to be subject to certain conditions, including:

  • Acknowledgment by the PPS that it will not invoke COPA or antitrust immunity for any purpose outside of Medicaid activities under DSRIP;
  • Acknowledgment by the PPS that material changes may result in additional conditions or the COPA’s revocation; and
  • Continued compliance with the PPS’s reporting requirements.

The executive summary also set forth the considerations in granting the COPA. One factor was substantial coverage, which benefits DSRIP because accomplishing delivery system reform requires covering a large portion of the market. This, however, presents a conflict with the FTC’s concerns, which arise due to the participants’ high combined market shares. One key way to reduce antitrust exposure when bringing providers together is to ensure that participation is nonexclusive to the entity. In the PPS, the participating providers are permitted to provide services outside of the PPS, which reduces concerns.

DOH’s analysis also addressed the procompetitive benefits and efficiencies of the COPA, including increased access to local services, care coordination and disease management services, clinical integration, and performance-based financial incentives. The analysis also noted that there was a potential for anticompetitive effects through spillover into the commercial market, but those concerns were mitigated through nonexclusivity of the provider network, active supervision, an internal monitoring program, and an antitrust compliance policy and program.

COPA Filing Considerations

The webinar panelists discussed the advantages of the COPA’s grant of antitrust immunity from both private and government antitrust actions. The panelists explained that the additional time and expense, including the filing of the actual application and increased reporting obligations, are not burdensome, because the COPA is based on the DSRIP application. Finally, the panelists stressed the importance of compliance with COPA conditions and the need for active state supervision to ensure a good basis for state action immunity should the COPA ever be challenged.

Note: GNYHA members may access the webinar at https://www.gnyha.org/event/dsrip-antitrust-considerations-the-case-for-a-copa-webinar/.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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