The Patient Protection and Affordable Care Act, commonly called the Affordable Care Act, was signed into law March 23, 2010. On June 28, 2012, the U.S. Supreme Court upheld the constitutionality of the major portions of the act. Effective dates of provision of the act are staggered, but on October 1, open enrollment in health insurance exchanges is set to begin and coverage will be effective January 1, 2014.

The popular name for the new health care law is Obamacare. Given the heated opposition to the act, it is certain the Obama administration will devote substantial resources to make health care reform a success. Both Edith Ramirez, the chairwoman of the Federal Trade Commission, and Eric Holder, attorney general of the U.S. Department of Justice, have testified before Congress and promised that competition in health care markets is a top priority. On that note, a review of the interplay between competition laws and the health care market is in order.

Federal Antitrust enforcement in Health Care

The FTC and Antitrust Division of the DOJ have dual jurisdiction to enforce the nation’s federal antitrust laws, although only the DOJ can bring criminal cases. When an agency wants to conduct an investigation, it puts in a “claim” through a clearance process. The other agency usually defers to the agency seeking clearance. For example, the FTC and DOJ have developed an informal division of labor based on past experience and expertise. The FTC brings cases involving hospitals and doctors, particularly those involving mergers. The FTC also covers pharmaceuticals where recent high-profile cases have taken place. The DOJ brings most cases involving health insurance. Occasionally a clearance dispute may arise that is usually resolved on the basis of institutional expertise, available resources or some old-fashioned horse-trading. State antitrust agencies are also active and often join in federal suits that affect consumers in their jurisdiction. Private litigants also bring many types of health care-related antitrust lawsuits that will be covered in a subsequent update.

Antitrust Laws and the Limits on Collaboration

Two major areas of reform sought in the health care field are: (1) greater collaboration among providers of health care service; and (2) greatly increased public information about pricing and costs of health care goods and services. Greater cooperation and integration of the delivery of services to a patient among the many health care providers such as hospitals, specialists and outpatient services should lead to lower costs and better patient outcomes. And, both providers and consumers of health care services could arguably inject needed competition into the market if they had an idea of what goods and the services cost. These goals of health care reform, however, can sometimes be in tension with the competition laws. Integration of services may lead to organizations with monopoly power. And transparency in pricing can increase the risks of collusion, especially in health care markets where there is often already high concentration.

Cooperation — But not Monopoly

Under the Affordable Care Act, physicians, hospitals and other health care providers are encouraged to reduce costs and increase patient care through integrated health care systems. The act provides for the establishment of accountable care organizations (ACO), which may share in some portion of any Medicaid savings the collaboration creates if the ACO meets certain performance standards. But, ACOs don’t have a free pass on antitrust scrutiny. A senior DOJ official recently remarked: “We want to make sure people understand we are looking at collaborations and joint activities between parties regardless of what the title of the group is.” The FTC and DOJ have also jointly issued a “Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations.”

The line between pro-competitive collaboration and antitrust violations depends on the market power of the collaborators. Two recent investigations illustrate the point. In an ongoing case, the FTC and the state of Idaho have challenged the acquisition by St. Luke’s Hospital of Saltzer Medical Group, Idaho’s largest independent multispecialty practice group. The FTC alleged that St. Luke’s Hospital’s acquisition of Saltzer Medical Group created a dominant single provider with nearly 60 percent of the market, resulting in higher prices for the services that those physicians provide.

At the other end of the spectrum, the DOJ recently investigated and took no action on an arrangement in Western Pennsylvania regarding a Highmark Blue Cross Blue Shield affiliation agreement with West Penn Allegheny Health System. Finding no competitive concerns, the DOJ closed its investigation, stating, “The affiliation holds the promise of bringing increased competition to Western Pennsylvania by providing West Penn with a significant infusion of capital and increases the incentives of market participants to compete vigorously.”

Mergers between hospitals have been another area of hot focus of the federal agencies. Mergers can reduce costs by eliminating redundancies such as multiple hospitals buying high-priced state-of-the-art equipment. A merger may also reduce administrative overhead. But, hospital mergers may also result in market power or even monopoly power, allowing the remaining hospital to increase prices above a competitive level. Hospital mergers, like other mergers, are evaluated under the DOJ/FTC Horizontal Merger Guidelines, where factors such as market shares, concentration and possible entry of new firms determine whether the agency will challenge the transaction.

The FTC has been increasingly active in challenging hospital mergers. Recent cases have been brought in Toledo, Ohio, and Rockford, Ill. Other transactions have been abandoned when the FTC has indicated that it intends to challenge the deal. The most significant recent merger challenge was brought by the FTC challenging the acquisition by Phoebe Putney Health System of Palmyra Park Hospital in Georgia. The case was significant on several fronts. The FTC challenged the merger after it had been consummated, a reminder that the federal agencies can and do challenge consummated mergers. Also, the case went to the Supreme Court on the issue of state action immunity. The unanimous Supreme Court decision in the FTC’s favor clarified the test and narrowed the scope for when state action immunity applies to anti-competitive actions by non-sovereign state actors. In a bit of an irony, however, the FTC just settled the case without requiring the divesture by Phoebe Putney of the Palmyra Park Hospital. While Phoebe Putney agreed in the settlement that the acquisition was anti-competitive, the FTC determined that due to the unique features of Georgia’s Certificate of Need laws, Palmyra could not resume operation as a stand-alone hospital because it would be unable to obtain the necessary Certificate of Need. This is one case where the FTC was unable to “unscramble the egg” that had been created by the consolidation.

Price Transparency urged; Collusion Prohibited

Consumers in the health care market rarely, if ever, know the cost of the goods and services they are purchasing and providers of health care services likewise do not know how their pricing compares to the competition. Increased information about prices is essential to a competitive market. But sharing of pricing information can be an antitrust danger zone. To provide guidance to the health care community so that pro-competitive activity is not deterred by uncertainty, the FTC and DOJ have issued “Statements of Antitrust Enforcement Policy in Health Care,” which includes guidance on exchange of price and cost information. The guidelines encourage greater dissemination of cost and price information to increase competition while cautioning that such exchange of information can facilitate collusion or otherwise reduce competition. Medical trade associations as well as for-profit entities have begun to collect cost and pricing information to distribute to relevant parties.

While a great deal of collaboration is permitted and even encouraged, an agreement among competitors on prices is per se illegal, whether engaged in by road contractors or heart specialists. For example, earlier this year the DOJ sued and reached a settlement with the Oklahoma State Chiropractic Independent Physicians Association for jointly determining prices and negotiating contracts with insurers. According to a DOJ press release, “By jointly negotiating fees on behalf of competing chiropractors, the association increased the prices that consumers paid for chiropractic services in Oklahoma.”

Miscellaneous

The agencies have also taken enforcement actions in other areas of health care. Two important developments are:

Reverse payment settlements.

In a much anticipated decision, the Supreme Court in FTC v. Actavis, 133 S.Ct. 2223 (2013), held 5-3 that reverse payment settlements in patent infringement suits are not immune to antitrust scrutiny and are to be judged under traditional antitrust rule of reason analysis. Justice Samuel Alito recused himself from the case. A reverse payment settlement can arise when a branded drug patent holder sues a generic for infringement and the case is settled with the branded patent holder making a payment to the generic to delay entry into the market. The Actavis decision resolved a split between the U.S. Court of Appeals for the Third Circuit, which found, in In re K-Dur Antitrust Litigation, 686 F.3d. 197 (3d Cir. 2012), such agreements to be per se illegal, and other circuits that held such agreements were immune from antitrust liability.

In Actavis, the challenged settlement involved a large monetary payment to the generic company to delay entry. In ongoing litigation, the FTC is now trying to extend the holding of Actavis to cover a nonmonetary payment from the branded company to the generic for delayed entry. This is sure to be an area of continued litigation, a great deal of which will take place in the Third Circuit, which has already acknowledged its receptiveness to antitrust challenges.

Most-favored nations clauses.

The DOJ and Michigan’s attorney general sued Blue Cross Blue Shield of Michigan over the use of most-favored nations clauses. In its contracts with hospitals, Blue Cross required that it always receive a lower price than competing insurers. In many situations, MFNs serve pro-competitive purposes or are competitively neutral. In the insurance field, where dominant players often have extremely large market shares (Blue Cross of Michigan had a 60 percent market share), MFNs have been argued to stifle competition. The DOJ alleged that Blue Cross’ use of MFN had reduced competition in the sale of health insurance by inhibiting hospitals from negotiating competitive contracts with other providers. The case ended when the Michigan Legislature passed a bill banning MFN clauses.

It Is Not As Confusing As it Sounds

While there is an apparent tension between health care reform and antitrust, in reality the goals of both are aligned and compatible. The agencies have issued several relevant guidelines that have been mentioned in this article. These guidelines are issued so that pro-competitive activities are not discouraged by fear of costly antitrust lawsuits. The agencies provide guidance concerning when they are likely to take action and “safe harbors” outlining when enforcement action is not to be expected, barring unusual circumstances. The guidelines typically indicate that market shares under 30 percent are not likely to raise antitrust concern.

The agencies also have procedures for seeking “business review letters” whereby people concerned about the legality under the antitrust laws of proposed business conduct may ask the agencies for a statement of current enforcement intentions with respect to that conduct. The business review process provides the business community an important opportunity to receive guidance on a fairly fast track from the department with respect to the scope, interpretation and application of the antitrust laws to particular proposed conduct. A business review letter doesn’t guarantee that the government may not at some point challenge the conduct if facts and circumstances may change, but the process is important to give a high degree of comfort to entities contemplating collaborative conduct in antitrust gray areas.

Area of Opportunity and Peril

Health care consumes an ever-increasing share of the nation’s gross national product and with the rollout of the new health care law, it is likely to consume an increasing share of the legal national product. It is an area full of tremendous business opportunities, and a measure of peril. Familiarity with and legal advice concerning enforcement intentions of the DOJ and FTC along with other developments can maximize the vast opportunities and minimize the grave risks. Stay tuned.

Carl W. Hittinger is the co-chair of DLA Piper’s U.S. antitrust and trade regulation group and head of the litigation practice in Philadelphia, where he concentrates his practice in complex commercial trial and appellate litigation with a particular emphasis on antitrust and unfair competition matters. He can be reached at 215-656-2449 or carl.hittinger@dlapiper.com.

Robert E. Connolly is of counsel at the firm’s Philadelphia office, focusing on antitrust and unfair competition matters. He was previously with the DOJ’s Antitrust Division, including 20 years as the chief of the division’s Middle Atlantic Office.