The 2006 Health Law And Policy Forum-Part II (Antitrust Issues)

Thursday, June 1, 2006 - 01:00

Editor: Jeff, please tell us about your clients.

Spigel: I advise clients in all different segments and industries on antitrust issues. With respect to the healthcare industry, I generally represent two different categories of healthcare clients - (1) physicians, hospitals, physician/hospital organizations (PHOs) and individual physician associations (IPAs), and (2) pharmaceutical and medical device companies.

Editor: What are some of the antitrust issues that arise in healthcare?

Spigel: Issues can arise under Sections 1 and 2 of the Sherman Act, Section 7 of the Clayton Act and Section 5 of the FTC Act. Section 1 of the Sherman Act prohibits agreements that unreasonably restrain trade. It covers collective behavior. Section 2 of the Sherman Act prohibits monopolizations and attempted monopolizations. It covers unilateral behavior. Section 7 of the Clayton Act prohibits transactions that substantially lessen competition. Section 5 of the FTC Act prohibits unfair competition. Every state also has its own antitrust or unfair competition laws.

A current issue on the pharmaceutical side is the antitrust risk that arises from settlements of patent litigation by a branded drug maker against a generic, and in particular settlement payments by the branded drug maker to the generic, known as a "reverse payment." There has been a great deal of antitrust litigation and FTC enforcement in this area, although there is a helpful decision by the 11th Circuit in Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), in which the 11th Circuit reversed the FTC and found that a reverse settlement payment by Schering Plough to a generic was lawful under federal antitrust law. The FTC has petitioned the Supreme Court for cert., although it is doubtful that cert. will be granted given that the United States and interestingly, the Antitrust Division of the Department of Justice just urged the Supreme Court to deny cert.

Another current antitrust issue is the use of "authorized generics." Under the Hatch-Waxman Act, generic drug companies can enter a market after filing an abbreviated new drug application (ANDA) and obtaining FDA approval. Under Hatch-Waxman, as an incentive for generics to enter a market, the first generic to file receives 180 day exclusivity for that generic, which is important because substantial profits can be made in that first 180 days. There can also be generic entry, however, by "authorized generics," which are generics that have been "authorized" by the branded drug maker, who can enter the market immediately without FDA approval (the FDA views the generic as a distributor of the branded drug, which has already received FDA approval) to provide competition to the first filer generic. Generics do not like this and believe branded drug makers are using "authorized generics" in a predatory manner to remove the 180 day exclusivity incentive for first filer generics. In contrast, branded drug makers argue that authorized generics are procompetitive because the additional competition ensures lower prices for generic drugs and to date, the law has been on the branded side. What we will all need to stay tuned for is the result of a comprehensive "authorized generics" investigation that the FTC has announced it will be conducting this summer and fall. It will be critical for drug companies to participate in that investigation if they want to provide input to the FTC.

Editor: Is there much provider network case law?

Spigel: Unfortunately, there is not a lot of case law, although the industry is fraught with antitrust issues that have arisen from the fact that some hospitals and physicians naively believe that because they talk to each other on treatment and care issues, they can also talk with each other about their charges and negotiations with insurance companies without much antitrust concern. This, however, is not the case and joint venture antitrust case law is well settled going back to the Supreme Court's decision in Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982) that naked price agreements among competitors, even if they are physicians, are per se illegal. We do have the FTC and DOJ's guidance, which is contained in the U.S. Department of Justice & Federal Trade Commission Statements of Antitrust Enforcement Policy in Health Care (Aug. 29, 1996), so there is some structure to follow to minimize the antitrust enforcement risks.

Why there is not much provider case law is that physicians simply do not have the financial war chests to fight the FTC and litigate, and I am afraid the FTC knows this, which is why most FTC complaints are settled. That said, more guidance may become available depending on what the Fifth Circuit does in the appeal by North Texas Specialty Physicians (NTSP), which is a large network of physicians that is appealing a decision by the FTC that NTSP was fixing prices on managed care contracts with insurance companies. This will be the first legal precedent we have regarding a FTC network challenge since the FTC/DOJ 1996 Guidelines were released so providers will need to stay tuned.

Editor: How can physicians and hospitals collaborate?

Spigel: Before I answer that question, it is important to understand that the reasons why physicians and hospitals want to contract through joint ventures is because (1) they believe they can create a more competitive model by working together, (2) they can better control the quality of care, and (3) they can let a venture employee with managed care experience negotiate contracts while they focus on practicing medicine. Networks also advantage insurance companies because they offer "one stop shopping" to obtain a panel of providers, which should make it easier for smaller insurance companies to enter the market and make insurance markets more competitive. The 1996 Guidelines provide a number of different structures for providers to collaborate in a presumptively lawful manner. If an IPA or PHO uses a fee schedule to negotiate with insurance companies, they must be financially or clinically integrated or a combination of the two. They can also not have a fee schedule and still contract as a group using a messenger model structure.

For financial integration, there must be financial risk sharing among all participating network providers. The common structure used to create financial risk is to implement a "risk withhold." This works by the network making the distribution of a certain percentage of the network's managed care revenue contingent on the network providers, as a group, changing their behavior to meet a number of efficiency-enhancing targets. The key here is that the targets must be ones that are set at levels that when coupled with the withhold, incentivize the physicians to change their behavior in an efficiency-enhancing way. In addition, if the targets are not met, forfeitures must occur. The conservative approach would also say that the system-wide withhold risk should be 15-20% of managed care revenues.

For clinical integration, the basic rules under the 1996 Guidelines are that providers must participate in active and ongoing programs of the network that (i) evaluate and modify practice patterns, and (ii) create interdependence among the providers, and that this interdependence results in cost controls and ensures the quality of services provided through the network. The problem, though, with clinical integration is that the 1996 Guidelines don't give any guidance on what is a sufficient "program" and what little guidance exists doesn't give networks much legal comfort so you end up having to rely on financial integration if you want to proceed in a manner that minimizes the antitrust risks.

The messenger model network is one in which you use agents who do not negotiate contracts between the insurance company and the network, but only transmit messages (i.e., they are mailmen). The important thing here is that there is never any price agreement among the network providers either directly or indirectly through the messenger.

Editor: Most enforcement actions seem to be bad news.

Spigel: Yes. For the most part, the cases are mostly consent orders or FTC decisions in favor of the government. Most consent orders effectively dissolve a network and the end result is that the FTC oversees these providers' network managed care contracting for the next 20 years.

Editor: What is the liability when a company is found guilty?

Spigel: There is significant liability. Violations of Section 1 of the Sherman Act have criminal penalties for individuals of up to $1 million and 10 years in jail and for corporations up to $100 million. There is also alternative sentencing that can result in greater fines. There has not been anything like that in the healthcare sector, but it doesn't mean it cannot happen. The second related exposure is that there are treble damages under antitrust laws for private lawsuits. That's why I would encourage all companies, including small healthcare networks or small hospital groups, to make sure they have an antitrust compliance program.

Editor: It must be important to know when a competitor gets into trouble so that corrective action can be taken.

Spigel: That's right. Also, the way the legal structure is set up today for criminal antitrust cases, the first to come into the DOJ gets immunity, their civil exposure is limited to single damages and they are no longer jointly and severally liable. Also, if someone else receives amnesty on product A, you may still be able to get amnesty on product B.

Editor: Does your firm assist clients in identifying compliance issues at an early stage?

Spigel: We take a very pro-active stance on that front. We create compliance programs with our clients, provide routine compliance training and do audits of clients' compliance programs.

Editor's Note: This interview captures some of the highpoints of the presentation by the interviewee on March 20 at the 2006 Health Law and Policy Forum organized by King & Spalding LLP. Part I of the interviews regarding this Forum appeared in our April 2006 issue. Part III of these interviews will appear in our July issue.