- CON Laws, COPAs and the FTC: 7 Antitrust Points for the Healthcare Sector
- September 10, 2015
- Law Firm: DLA Piper (Canada) LLP - Vancouver Office
The Federal Trade Commission is on a roll in its attack on what it considers anti-competitive effects in the healthcare industry. And that roll has consistently involved challenging activity that once appeared to be protected by state laws.
Now, the FTC has taken on state CON (Certificate of Need) laws, arguing that they restrict price and non-price competition and may stifle innovation in healthcare. And it has warned that COPAs (certificates of public advantage) could also be anticompetitive.
Do you now rely on these state-level antitrust immunities, or even plan to? If so, you need to consider potential vulnerabilities if the FTC manages to convince states to withdraw them.
First, a little background on the FTC’s increasingly aggressive posture in the healthcare market. Two Supreme Court decisions tell the tale.
In 2012, the FTC won the Phoebe-Putney case in the Supreme Court. That case was a merger challenge where a county hospital acquired a competing hospital and, essentially, a monopoly on acute-care services in the county. What made this case interesting was that the hospital claimed that the state-action doctrine immunized the merger from antitrust review because Georgia law specifically authorized county hospitals to make acquisitions. If a state “clearly authorizes” anti-competitive conduct and “actively supervises” it (when private parties are involved), it is exempt from federal antitrust law.
The Supreme Court sided with the FTC. It found that the state enabling statutes did permit acquisitions, but did not declare that the state had authorized monopolies or exempted county hospital mergers from antitrust law. The court ordered a divestiture. (However, even though the FTC won a major legal victory, it was hollow in substance, since Georgia’s CON laws made divestiture impossible. In April 2015, the FTC dropped its case after four years of expensive litigation, without achieving any remedy.)
Second, in March 2015, the FTC won its case against the North Carolina State Dental Board in the Supreme Court. The case was understood to have such vast ramifications that 68 organizations filed amicus briefs, including professional organizations representing virtually every form of medicine, bar associations, veterinary associations, undertakers, pharmacists, as well as the National Governors Association, the National Conference of State Legislatures and the Council of State Government.
The Dental Board, consisting of practicing dentists, had excluded non-dentists from the teeth whitening market. This granted practicing dentists a monopoly on teeth whitening services. There was no “active supervision” because the board was a state agency. The FTC challenged this as anticompetitive.
The Dental Board invoked the state-action doctrine and defended on the grounds that its actions were the actions of the “sovereign.” The Supreme Court sided with the FTC. It concluded that state boards, when controlled by practicing professionals, are not “sovereign” and do not enjoy state-action immunity because their actions represent the interests of private parties. The Court held that when state boards or agencies are controlled by practicing professionals, their actions need to be “actively” supervised by the state.
The North Carolina Dental Board decision left thousands of practicing healthcare professionals exposed to antitrust liability if they made up majorities of state boards that had exclusionary power. The most obvious example of a suspect board would be a medical peer review group that has the power to exclude fellow professionals. But in fact any professional serving on any regulatory board is potentially liable for exclusionary activity if the board is controlled (majority-run) by practicing professionals. If you fall into this category, you should independently make sure that your board is operating within antitrust safety zones. We suggest that you do not rely on the agency or board’s own statements. In the past, many people have lost antitrust immunities they thought they had because their groups deliberately or negligently misled them.
Having won two important Supreme Court cases that limited state-imposed antitrust exemptions, the FTC is expanding its efforts.
Certificate of Need (CON) programs
Recently, the FTC has taken a position on CON laws in healthcare, charging that they can be anti-competitive. Ironically, many CON laws were encouraged by the federal government’s Health Planning Resources Development Act of 1974. Today, 36 states still have CON laws.
On July 10, 2015, responding to an inquiry by North Carolina state representative Marilyn Avila, the FTC delivered its position on CON laws. Avila had asked about the impact of a bill that would exempt diagnostic centers, ambulatory surgical facilities and psychiatric hospitals from CON regulations. The bill would also prohibit limitations on the number of operating rooms and gastrointestinal procedure rooms.
The FTC concluded that “to the extent that HB200 narrows the application of North Carolina’s Certificate of Need (‘CON’) law, it likely represents a procompetitive improvement in the law as compared with the status quo.”
The seven-page letter went on explain that conclusion. It acknowledged that the goal of CON laws was “laudable” in the attempt to reduce facility costs and improve access to care. (The theory is that healthcare costs rise with excess capacity.) At the same time, the FTC said, CON laws create barriers to entry and can be exploited by incumbents to stifle innovation, as well as both price and non-price competition. Finally, the FTC also noted that CON laws have actually failed to control healthcare costs. The letter also tangentially observed that CON laws can limit antitrust remedies, as they did in the Phoebe Putney merger case.
COPAs (Certificates of Public Advantage)
A few months earlier, in April 2015, the FTC wrote to the New York State Department of Health warning that impending COPA designations by the New York Attorney General for three provider systems would provide immunity against federal antitrust law, which the FTC claimed was unnecessary.
The New York State Delivery System Reform Incentive Program was designed, like many recent healthcare innovations, to promote community-level collaboration among healthcare Medicaid providers. The program’s goal is to increase service and reduce costs. It does this by establishing community-based networks and ties Medicaid funding to performance benchmarks.
The FTC’s concern is that “combining the [State Delivery System Reform Incentive Program] program with the COPA regulations will encourage health care providers to share competitively sensitive information and engage in joint negotiations with payers in ways that will not yield efficiencies or benefit consumers.”
The FTC letter stated:
“Because procompetitive health care collaborations already are permissible under the antitrust laws, the main effect of the COPA regulations is to immunize conduct that would not generate efficiencies and therefore would not pass muster under the antitrust laws.”
The FTC’s argument here is essentially that any joint venture (including healthcare joint ventures) may have perfectly legitimate pro-competitive goals, and that, therefore, they don’t need antitrust immunity. Of course, the catch is that if the FTC, or a private plaintiff, challenges the joint venture, it could take years of very expensive and disruptive litigation to prove you were right.
What this means for you: 7 points
The FTC believes that no part of the healthcare market needs or should have any antitrust exemption. One can debate whether this is consistent with the integration and cost-reduction mandates of the Affordable Care Act. As HHS Secretary Kathleen Sebelius said two years ago, the Affordable Care Act was in "constant tension" with antitrust laws. She pointed to the conflicting demands of the ACA’s goals of integration and efficiency, on the one hand, and, on the other, the antitrust enforcers’ goals of independent, uncoordinated, aggressive competition.
However, since there is no prospect of any comprehensive federal competition policy on health-care anytime soon, we conclude:
1. Any level of the healthcare industry is subject to federal antitrust enforcement, most likely by the FTC.
2. An FTC case is extremely expensive, debilitating, distracting, potentially arbitrary, and extraordinarily frustrating to deal with.
3. The only way to stop an FTC proceeding, once it starts, is by settling. Settlement involves agreeing to a consent decree that may or may be reasonable, but that is the FTC’s condition of settlement.
4. Enforcement actions cannot accurately be predicted. The FTC claims that legitimate activity would never be challenged. But the question is: “what is legitimate activity?” We know clients who genuinely thought they were engaging in permitted pro-competitive activity, but instead found the FTC’s fang’s embedded in their legs.
5. What can be predicted is that joint activity among competitors is always suspect. Therefore, no matter how pro-competitive your activity seems, you should always seek antitrust advice before you act. Antitrust advice is much cheaper than antitrust litigation.
6. State professional boards should step cautiously. If you are a practicing professional, and you sit on a state professional board that makes decisions that affect competition, you could be subject to FTC (or even plaintiff plaintiff) attack. If you are in that position, you should get independent antitrust advice.
7. Finally, whether you are involved in competitor agreements, or sit on a state board, even if you get initial antitrust clearance, you should make sure to get periodic antitrust reviews of your activities. We know of many cases where clients got antitrust clearance for one project, and, unknown to them, found out too late that other people had changed the project around them. Don’t let that happen to you.
For example, we have clients who carefully established protocols for inter-competitor communications, only to find out later that their employees had expanded their practices into highly dangerous areas such as exchanging pricing information. In the same vein, we know of cases where professionals sat on state boards, but didn’t know that some of their fellow members had anti-competitive conversations going on.
In both cases, we assure you that there are chatty emails circulating, all of which are great sources of evidence for the FTC, the Department of Justice, state antitrust authorities and even private plaintiffs. If you are in the healthcare industry, and are party either to inter-competitor communications or state-board actions, you should independently verify that you are protected. Antitrust advice is relative cheap. Antitrust litigation is not.