vertical integration in healthcare transactions
TRANSCRIPT
Vertical Integration in Healthcare Transactions:
Mitigating Risks and Creating FirewallsFraud and Abuse, Corporate Practice of Medicine, Conflicts of Interest, Antitrust, Data Sharing
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WEDNESDAY, APRIL 28, 2021
Presenting a live 90-minute webinar with interactive Q&A
Alexis J. Gilman, Partner, Crowell & Moring, LLP, Washington, DC
Robert E. Slavkin, Chair, Healthcare Practice Group, Akerman, LLP, Orlando, FL
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FOR LIVE EVENT ONLYProgram Materials
Vertical Integration in Healthcare Transactions
Alexis J. Gilman, Crowell & Moring, LLP
Robert E. Slavkin, Akerman LLP
Today’s Discussion
• Integration 101
• Legal risks
• Regulatory Challenges
• Antitrust
• Fraud and Abuse
• Data sharing
• Conflicts of interest
• Creating firewalls
• Corporate Practice of Medicine
• Structural Challenges
• Best practices for vertical integration
6
Horizontal v. Vertical Mergers
Horizontal Merger Vertical Merger
7
Vertical Integration
• Acquiring a company operating in the production process of the same industry.
• Strengthening its supply chain
• Reducing production costs
• Capturing upstream or downstream profits
• Accessing new distribution channels
• Combine complementary functions
• Align economic incentives and eliminate contracting frictions
• Streamline production, inventory management, distribution
• Eliminate double marginalization → lower prices to consumers
8
Vertical Integration in Healthcare
• Hospitals acquiring physician practices
• Hospitals acquiring ancillary providers and service lines
• ACOs, PCMHs, and other delivery models
• Insurers acquiring hospitals and physician practices
• More integrated care
• Increased stability of operations through coordination of care
• Uniformity in quality of care
• Facilitate value-based care and population health management
• ‘Captive’ sources of patient cases
• Better facilities management, increased efficiencies
• Eliminate costs incurred from outside entities contracting with the healthcare entities
9
Potential Harm: Foreclosure, Raising Rivals’ Costs
Pre-Merger Post-Merger
$ $ $ OR 0 ↑$$OR
10
Potential Harm: Customer Foreclosure
Pre-Merger Post-Merger
$/0
$ $
11
Potential Harm: Sharing Competitively Sensitive Information
• Vertical integration may allow one component of merged firm to share competitively sensitive information (CSI) of its customers/suppliers that compete with the other component of the merged firm
• What is CSI?
• Proprietary to a competitor
• Not available from public sources
• Susceptible to misuse as sharing may reduce competition
• Examples
• Pricing information: reimbursement rates, discounts, rebates
• Cost and margin information: employee salaries, COGS, margins
• Forward-looking strategies/plans: expansion, innovation, new offerings
• Protective measures
• Limit use
• Sequester and limit access
• Prevent disclosure
➢ Firewalls
12
Regulatory Challenges
13
Regulatory Challenges: Antitrust
• FTC, DOJ, and state AGs scrutinize and bring enforcement actions
• Mergers evaluated under new Vertical Merger Guidelines
• Reflect relatively neutral-to-favorable view of vertical mergers
• Contain broad definition of “vertical” merger
• Several cross-references to agencies’ Horizontal Merger Guidelines
• Key theories
• Foreclosure and raising rivals costs
• Sharing competitively sensitive information
• Coordinated effects
• Recognize potential for efficiencies and elimination of double marginalization – but must be cognizable
• Eliminated soft 20% market share-based safe harbor in draft VMGs
14
Antitrust Remedies in Vertical Mergers
• Behavioral relief is common remedy• Firewall to prevent merged-firm component from sharing
competitively sensitive information that it receives from competitors to other merged-firm component
• Nondiscrimination in supply of products/services to competitors of merged firm
• Structural relief (i.e., divestiture) may be required• See United/DaVita Medical Group
• Litigation remains an option• See Illumina/Grail
• But see AT&T/Time Warner
15
Cigna/Express Scripts
• In March 2018, Cigna proposed to acquire Express Scripts
• Small horizontal PBM overlap*
• Key issue was vertical
• In Sept. 2018, DOJ cleared transaction without remedy
• DOJ closing statement
• Horizontal: unlikely to harm PBM competition
• Vertical: unlikely to raise cost of PBM services to rival insurers
Merger
PBMPBM
InsurerInsurer
Purchasers of Health PlansPurchasers of Health Plans
*Not pictured
16
United/DaVita Medical Group – Nevada• United, a leader in MA plans
in Las Vegas area; its sub, Optum, owned leading physician practices (MCPOs)
• DaVita Medical Group owned leading MCPO
• FTC and Nevada AG alleged:
• Horizontal harm: 80% MCPO share
• Vertical harm: could foreclose, or raise rivals costs for, access to United-owned MCPOs
• Consent order required sale of DMG NV
MergerMCPOs
(Physicians)
MCPOs (Physicians
)
Medicare Advantage
Plans
Medicare Advantage
Plans
Purchasers of MA PlansPurchasers of MA Plans
Small Physician Groups
Small Physician Groups
17
United/DaVita Medical Group – Colorado
• United also a leader in MA plans in CO Springs area
• DaVita Medical Group owned leading MCPOs
• CO AG alleged vertical harm: UH could foreclose, or raise rivals costs for, access to DMG CO
• CO AG settlement required:
• Extend DMG CO’s contract with Humana for 1.5 years
• Eliminate United’s exclusive with area hospital for 3.5 years
• FTC split 2-2 on requiring remedy → no action
MergerMCPOs
(Physicians)
MCPOs (Physicians
)
Medicare Advantage
Plans
Medicare Advantage
Plans
Purchasers of MA PlansPurchasers of MA Plans
Small Physician Groups
Small Physician Groups
18
CVS/Aetna
• In Dec. 2017, CVS announced itsproposed acquisition of Aetna
• Horizontal issue: overlap in individual Rx drug plans
• Vertical issue: possible foreclosure or raising rivals costs for access to CVS’s pharmacy or PBM services to Aetna’s rivals
• DOJ, states settled case by orderingdivestiture of Aetna’s PDP business
• No remedy on vertical aspect
• Judge held unprecedented Tunney Act hearing, but ultimately approved settlement in Sept. 2019
Merger
PharmaciesPharmacies
Pharmacy Benefit
Managers
Pharmacy Benefit
Managers
Commercial Health
Insurers
Commercial Health
Insurers
Purchasers of Commercial Health InsurancePurchasers of Commercial Health Insurance
19
Fresenius/NxStage
• Fresenius operated outpatient dialysis clinics, sold dialysis equipment
• NxStage produced home dialysis machines and sold equipment
• Horizontal issue*: both parties produced bloodline tubing sets
• Vertical issue: foreclosure orraising cost to rival dialysis clinics
• FTC consent order (3-2 vote)
• Divestiture to address horizontal overlap
• No remedy for vertical issue
Merger
Home Dialysis Machines
Home Dialysis Machines
Dialysis Clinics
Dialysis Clinics
Dialysis PatientsDialysis Patients
Other?Other?
*Not pictured
20
• Illumina provides short-read next-generation DNA sequencing products
• Grail developing a multi-cancer early detection test
• Vertical issue: alleged foreclosure or raising cost for access to critical NGS platform
• In March, FTC sued to block merger
– First FTC vertical litigation in ~40 years
• Illumina offered contract commitment to other MCED developers
– 12-year supply agreement
– Guarantee not to discontinue any products
– Guarantee no price increase for products
• Case transferred from DC to CA
Illumina/Grail
MergerShort-
Read NGSShort-
Read NGS
MCED Test
MCED Test
PatientsPatients
MCED Test DevelopersMCED Test Developers
21
Practical Advice on Antitrust-Risk Assessment
• Evaluate available upstream and downstream alternatives
• More options at each level makes vertical harm less likely
• Assess merging parties’ upstream and downstream market shares
• Lower shares = less risk
• Identify potential entrants in upstream and downstream markets
• Review prior transactions to analyze post-merger effects
• Assess whether either merger partner receives confidential, competitively sensitive information from rivals of the other merger partner
• Ensure that deal documents emphasize procompetitive benefits
• Account for potentially lengthy vertical merger reviews by antitrust agencies
22
Regulatory Challenges
• Federal Anti-kickback Statute : (See 42 U.S.C. § 1320a-7b.) A criminal statute that prohibits the exchange (or offer to exchange), of anything of value, in an effort to induce (or reward) the referral of business reimbursable by federal health care programs.
• Physician Self-referral Prohibition, or Stark law: a set of federal laws that prohibit physician self-referral, specifically a referral by a physician of a Medicare or Medicaid patient to an entity for the provision of designated health services ("DHS") if the physician (or an immediate family member) has a financial relationship with that entity.
• Stark Law contains several exceptions, including physician services, in-office ancillary services, ownership in publicly traded securities and mutual funds, rental of office space and equipment, and bona fide employment relationship.
23
Regulatory Challenges: AKS
• OIG
• When a hospital, for example, acquires a physician practice, upfront payments are for hard assets
• Subsequent payments for services rendered
• Excess of either of these is likely to trigger suspicion of paying for a referral stream
• Intent: parties must demonstrate consideration is within range of fair market value
24
Anti-kickback, cont’d.
• Fair Market Value
• Revenue Ruling 59-60
• The price at which goods/services change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.
• Independent Third Party Valuation
25
Stark – Self-Referral Prohibition
• While a civil statute, it is also strict compliance
• Simply, intent here does not matter
• Many times, for example, physicians being acquired by a health system make referrals to that health system
• Stark Exceptions
• employment exception
• identifiable services
• FMV
• not related to volume or value of services
• Independent Third party valuation
26
Cautionary Tale
• US v. Halifax Hospital Medical Center
• Incentive bonus structure for 6 medical oncologists
• Alleged to have improperly included value of prescriptions prescribed as well as value of tests ordered by the doctors
• Also alleged to have paid 3 neurosurgeons greater than FMV for their work
• Settled the case
• $85 million
27
US ex rel. Parikh v. Citizens Medical Center
The Nightmare on Fraud Street continues
• Citizens Medical Center hired 5 cardiologists into the system as employees
• Salaries more than doubled than from private practice
• What’s interesting here is that Citizens showed it suffered net losses of up to $1 million a year post acquisition
• Court stated that the intent to employ the doctors was directly because of the volume/value of patient referrals
• $21.75 million settlement
28
Corporate Practice of Medicine
Regulatory Challenges
• Many states have such a doctrine
• Prohibits the employment of physicians by non-licensed entities, and prohibits non-physicians from having ownership in companies that employ physicians
• The theory behind it is that a for-profit employer could cloud a physician’s judgment
• Some states, such as New York, New Jersey and California, have strong prohibitions
• Other states, much more relaxed, or have no such prohibition
• Deal structure must be reviewed to take into account the CPM doctrine, if applicable.
29
Firewalls
Regulatory Challenges
• Mitigation tactic
• Goal is to reduce risks of legal issues and conflicts of interest
• Firewalls can be set up within different parts of an organization, or between companies
• IT Systems and servers – limit the flow of sensitive information
• Compliance programs – separate policies/procedures
• Marketing and sales teams
• Infrastructure and workplace
30
Structural Challenges
• Document challenges
• Legal challenges
31
Medical Staff
• Medical Staff Committees• MEC• Credentials• Performance Improvement• Quality Assurance• Peer Review
• Department Committees• Quality• Peer Review
Deal Documents
• Board of the Foundation
• Some Committee within the Foundation
• The Employer
• Human Resources
Structural v. Deal Documents
32
ACOs and Patient Centered Medical Homes
33
ACOs and PCMHs
• What’s each party’s role in these arrangement?
• How do you coordinate and not conflict with existing processes?
• Quality utilization and outcome standards and metrics will be incorporated into provider performance profiles
• Bylaws will need to address how these standards are to be incorporated and utilized with the hospital/practice group/ACO
34
Best Practices
• Third Party Valuation; Third Party Valuation; Third Party Valuation• Like Beetlejuice. Say it 3 times and it comes true.
• Antitrust• Start analysis early• Document procompetitive benefits (and avoid “hot docs”)• If potential questions/concerns, plan for more time (and cost) to close
• Identify areas of the company that will be affected immediately• IT• Specific areas of operations• Include them all in the process, before deal is concluded
• Integration begins the moment of conception of the deal
• Identify areas of the company that may be affected downstream
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