The Centers for Medicare and Medicaid (CMS) recently announced the next ACO (Accountable Care Organization) venture in the release of its proposed “Next Generation ACO” initiative. It claims this initiative will create better opportunities for coordinated patient care and set higher standards for quality and safety. The Affordable Care Act has encouraged the formation of ACO entities through programs such as the Medicare Shared Savings Program, which launched in 2012 under the Affordable Care Act that ties quality targets with financial incentives, in an effort to focus on patient-centered care, quality improvement, and keeping a patient’s treatment closely linked. These targets, in turn, help facilitate the spread of information among providers and help better monitor chronic disease. This proposed “next generation” initiative builds off of the Pioneer ACO model, which was designed for organizations already following a care model comparable to an ACO in terms of financial risk and care coordination, but not yet officially labeled an “ACO.” Essentially, the Pioneer model was advertised as a “higher risk, higher reward” model that held potential for savings above and beyond what was possible via the Medicare Shared Savings Program. So how did the Pioneer ACO Model fare? The reviews are mixed.

As of September 2014, 19 of the original 32 enrolled participants remained in the program. After the first year of the program, the financial outcomes ranged from a gross loss of $9.31 million to a gross savings of $23.34 million. Thirteen organizations qualified for shared savings, one owed losses, and 18 did not save or lose. By the end of year two, 20 participant ACOs remained with a similar range of loss to savings. Despite the range of results, CMS clearly remains committed to this program and is taking things a step further in the creation of the Next Generation ACO project. According to CMS, this new model builds upon the experience from the Pioneer model and further increases the risk/reward schematic above and beyond what was offered in the Pioneer mode. Ultimately, the hope is that entities will be induced by the strong financial incentives offered with the continued end goal of increased efficiency, improved patient care quality, and better overall care management. CMS anticipates that anywhere from 15 to 20 entities will sign up for the new initiative. CMS is offering a wide variety of helpful tools to the entities that ultimately enroll in the program to assist in effective patient care management and coordination, including expanded coverage for telehealth, home services, and skilled nursing.

If the Pioneer model taught us anything, it seems as though some ACOs are better equipped to take on the increased risk than others. Despite the mixed results, CMS seems to believe that the ACO model is the key to controlling health care costs while maintaining high-quality metrics in the future. Hypothetically speaking, this may very well be the case, but the question is whether, in reality, this type of risk/reward model is feasible nationwide.

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As part of the recent tidal wave of physician practice groups being swallowed up by ever-growing hospital systems, the Federal Trade Commission (the “FTC”) has taken an increasingly aggressive position that certain acquisitions threaten trade, are anti-competitive, and must be divested.  Most recently, last month, the influential federal Ninth Circuit Court of Appeals issued an alarming decision largely upholding the FTC’s position.  In light of the FTC’s newly aggressive stance, and supporting federal appeals court decision, providers must actively assess the viability of their mergers and acquisitions through the lens of whether such a merger or acquisition stifles competition, is anti-competitive, or whether it negatively effects healthcare consumers. [1]

Litigation began in 2012 when the Saint Alphonsus Medical Center, a rival health system of the St. Luke’s Health System, both of which operate hospitals and employ physicians in the suburbs of Boise, Idaho, filed a lawsuit to challenge the proposed acquisition by St. Luke’s of the 41-physician Saltzer Medical Group.

Soon after filing the lawsuit, St. Luke’s completed the acquisition — however, the completion of the acquisition was not ultimately a barrier to Saint Alphonsus proceeding with its lawsuit.  The FTC joined entered the mix as a co-plaintiff in early 2013.

In 2014, following a bench trial, the trial-level district court found that the acquisition violated Section 7 of the Clayton Act, 15 U.S.C.A. § 12 et seq., determining that such an acquisition threatened to reduce competition in the adult primary care physician services market in the town of Nampa, Idaho, a suburb of Boise.

Of note, for the first time, the FTC litigated, through trial, a challenge to a physician group acquisition by a health system, suggesting a shift in policy for the Obama administration and an FTC that is looking more closely at the effects on health-care consumers of the wave of hospital-physician group mergers and acquisitions.

The Ninth Circuit determined that its analysis would be limited to the geographic market to Nampa, rather than a much broader market argued by St. Luke’s. In Nampa, the market share of the merging parties were high, together Salzter and St. Luke’s accounted for almost 80% of the Nampa primary care physician market.

A commonly used metric for determining market share is the Herfindahl-Hirschman Index (the “HHI”). The analysis considers both the post-merger level of the HHI and the increase in the HHI resulting from the merger.  The merger guidelines, utilized by regulatory agencies in reviewing the competitive/anti-competitive results of mergers and acquisitions, classify markets as (1) unconcentrated (HHI below 1500); (2) moderately concentrated (HHI between 1500 and 2500); or (3) highly concentrated (HHI above 2500).  Sufficiently large HHI figures establish the FTC’s prima facie case that a merger is anti-competitive. The district court calculated the post-merger HHI in the Nampa primary care physician market as 6,219, and the increase as 1,607.

Though the market shares were high, the number of physicians involved was surprisingly small as Saltzer employed sixteen primary care physicians in Nampa, St. Luke’s employed eight, and rival Saint Alphonsus employed only nine, again suggesting that the FTC is taking a more aggressive approach with regard to mergers and acquisitions, even when the total number of physicians involved was only thirty three.

Notably, the Ninth Circuit rejected the idea that an anti-competitive merger could be justified because a merger will produce efficiencies. The Ninth Circuit even accepted the lower court’s finding that the acquisition would improve health care in the area but said, given a very anti-competitive acquisition, efficiencies alone were insufficient so save an otherwise illegal acquisition.

Of perhaps the most importance, the Ninth Circuit rejected the argument that if a merger is anti-competitive, a remedy less than divestiture is sufficient to protect competition — rather, the Ninth Circuit found divestiture is simple to administer is the preferred remedy for anti-competitive mergers between hospitals and physician groups.

Again, as hospitals are in the process of actively acquiring and merging with physician groups, the FTC has equally become active in scrutinizing, and litigating through trial, mergers and acquisitions which it believes threaten trade and are anti-competitive, even when the number of physicians who are part of the transaction are low.  With the Ninth Circuit’s decision largely upholding the FTC’s position, providers need to continually examine how any proposed merger or acquisition effects trade, competition, and ultimately the healthcare consumer.

[1] See St. Alphonsus Med. Ctr. – Nampa, Inc. v. St. Luke’s Health Sys., 2015 U.S. App. LEXIS 2098 (9th Cir. Idaho Feb. 10, 2015), affirming, St. Alphonsus Med. Ctr.-Nampa, Inc. v. St. Luke’s Health Sys., 2014 U.S. Dist. LEXIS 9264 (D. Idaho Jan. 24, 2014).

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While a physician’s direct referral to a patient of a certain provider is the traditional definition of a “referral” prohibited by the Anti-Kickback Statue, the federal Seventh Circuit Court of Appeals recently found a prohibited “referral” in an instance where a physician merely authorized services despite providing patients with 10-20 brochures for various service providers and allowing the patient the decision to choose a service provider.  In light of the court’s decision, physicians and practice groups should reinsure that their referrals, even indirect referrals in which the patient chooses a service provider from a wide variety of options, do not run afoul of the broad definition of a prohibited “referral.”

The Seventh Circuit importantly held last month that a physician’s authorization for a service which was reimbursable by Medicare — specifically, certification for home health care chosen by a patient — was a prohibited “referral” under the Anti-Kickback Statute.[1]  See 42 U.S.C.A. § 1320a-7b et seq.

The Seventh Circuit acknowledged that directing a patient to a particular provider is one common usage of the term “referring,” however, and more expansively, the court also determined that “referral” also is commonly used to describe a physician’s authorization of care, even if the patient independently chooses the provider to deliver that care.  Of note, the Seventh Circuit determined that Congress intended for the preclusion of both the former and latter “referrals” under the Anti-Kickback Statute.

By way of background, after a significant decline in business, the court found that the Grand Home Health Care began offering to pay doctors, including a Dr. Patel, for Medicare referrals on a per-patient basis.  Under such a scheme, the Seventh Circuit noted that Grand’s owners would meet with Dr. Patel monthly to have him sign Form CMS-485 authorizations and that he was paid $400.00 for each new admission to Grand and $300.00 for each recertification.

In 2011, the government began investigating Grand Home Health Care for health care fraud. It subsequently indicted Grand’s owners and Dr. Patel on numerous counts, and following a bench trial, the district court found Dr. Patel guilty of violating the Anti-Kickback Statute. Dr. Patel was sentenced to serve eight months’ imprisonment and 200 hours of community service, and was required to forfeit $31,900.00 of kickback payments.

Notably, the Seventh Circuit found a “referral” despite several apparently mitigating factors in that 1) only a minority of Dr. Patel’s patients selected Grand as their home health care provider, 2) there was no dispute that the home care services were necessary, and that 3) Dr. Patel did not personally discuss the choice of providers with patients — his medical assistant gave patients a substantial variety of provider brochures, including Grand’s, from which the patient was ultimately able to choose a service provider.

While Dr. Patel vociferously argued that to “refer” under the Anti-Kickback Statute meant to personally direct to a patient to seek care from a particular provider, the panel of the Seventh Circuit disagreed, finding “referral” to be much broader, as necessary to carry out the Anti-Kickback Statute’s purpose, “to prevent Medicare and Medicaid fraud.”

Moreover, even as the home health care was apparently medically necessary in this case, the court held that “the danger of fraud at the certification and recertification stages is quite clear. At the certification stage, a physician could refuse to certify a patient to a patient-chosen provider unless the provider paid the physician a kickback. This behavior could increase the cost of care. It could also contravene the second purpose of the Anti-Kickback Statute—protection of patient choice—by interfering with the patient’s choice if the selected provider refused to pay.”  Again, the Seventh Circuit found this was the type of conduct Congress intended to criminalize in the Anti-Kickback Statute.

Given the Seventh Circuit’s recent ruling, again, physicians and practice groups should ensure that their referrals, even indirect referrals where patients choose the service provider, do not run afoul of the broadening definition of a prohibited “referral” under the Anti-Kickback Statute.

[1] United States v. Patel, 2015 U.S. App. LEXIS 2099 (7th Cir. Ill. Feb. 10, 2015).

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