In the spirit of the current debate over healthcare reform, we have decided to reform Dorsey & Whitney’s health law newsletter, Vital Signs. Instead of being a wire-based newsletter, Vital Signs will provide you with a few short articles analyzing topical issues that we hope you may find useful in your practice. As always, if you have any questions about the issues discussed in Vital Signs or about any other health law question, Dorsey & Whitney’s health law attorneys would welcome the opportunity to discuss them with you.


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In This Issue

An Outlier or an Omen? FTC Breaks-Up Hospital’s 2008 Acquisition of Outpatient Imaging and Surgery Clinics

New Bills Seek to Resolve Provider Difficulties in Self-Reporting Stark Violations, But Questions (and Risk) Remain in the Meantime



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We welcome questions from our readers on health law topics. Please submit your question by clicking here. We'll answer some of the questions we receive in future issues of Vital Signs.


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An Outlier or an Omen? FTC Breaks-Up Hospital’s 2008 Acquisition of Outpatient Imaging and Surgery Clinics


By John Liethen

For the first time since 1994, the Federal Trade Commission (“FTC”) challenged and forced the divestiture of an exclusively outpatient service line acquisition not involving a full-scale hospital or health care system merger or acquisition. On October 7, 2009, Carilion Clinic agreed to sell the outpatient imaging center and outpatient surgery center it had purchased in 2008 in Roanoke, Virginia. For years, the greatest focus of antitrust concern in mergers and acquisitions in health care has been the mergers of hospitals and health care systems. In fact, after numerous failures, the FTC had recent success against Evanston Northwestern Healthcare’s acquisition of Highland Park Hospital in Chicago and prevented the merger of Inova Health System with Prince William Healthsystem in Northern Virginia. With the recent Carilion Clinic victory, the question now is whether this was simply a case of bad facts or if this is a signal by the FTC that it is shifting focus to integration efforts in outpatient service lines. In either case, it is a reminder that even partial acquisitions or acquisitions of service lines can create antitrust risks that an acquirer has to address.

In August 2008, Carilion Clinic in western Virginia acquired two physician-led outpatient clinics: Center for Advanced Imaging, a clinic providing advanced imaging, including MRI and CT services (“CAI”); and Center for Surgical Excellence, an ambulatory surgery center (“CSE”). The purchase price was $20 million. As alleged by the FTC, the acquisition resulted in the reduction of competitors for advanced outpatient imaging and for outpatient surgery services from three to two: Carilion Clinic and the large HCA-Lewis-Gale Medical Center (“HCA”). Because of the $20 million purchase price, Carilion’s acquisition of CAI and CSE did not trigger pre-merger notification to the FTC and the U.S. Department of Justice under the Hart-Scott-Rodino Act (“HSR”). Regardless, the FTC challenged the acquisition during the summer of 2009, and Carilion ultimately conceded in October. The result was full divestiture of the acquired clinics by Carilion with the sale of the clinics at no minimum price, a stiff penalty given the state of the economy and because the transaction had closed just a year earlier.

There are a few takeaways from this settlement. First, just because a deal does not trigger HSR pre-merger notification does not mean regulators cannot or will not challenge it. If a transaction results in greater market concentration in the hands of fewer competitors, regulators will scrutinize the deal, even if actual anticompetitive effects of the transaction are not readily apparent. For example, the anticompetitive harm in the Carilion matter, on its face, seems speculative. Because Carilion agreed to settle and avoid contesting the merits of the FTC’s complaint, Carilion did not test the validity of the FTC’s allegations in the complaint which are the only statements of fact regarding the acquisition and the impact on competition that we have. As alleged by the FTC, prior to the merger, both CAI and CSE offered services “in a facility more accessible than Carilion’s or HCA’s hospital-based services” and “offered high-quality services at prices substantially lower than Carilion’s or HCA’s pricing.” Post-closing, the FTC could only allege that out-of-pocket costs could significantly increase for some patients and only for certain services. These factual allegations raise a few questions. If the acquired clinics were the more accessible, high-quality and cheaper providers in the market, why didn’t consumers, i.e., commercial payers, purchase more from CAI and CSE to challenge the larger Carilion and HCA facilities? Did the one year operation of CAI and CSE by Carilion not provide any evidence of actual and broad based price increases? Regardless of whether these questions could be answered, the mere presence of a concentrated market post-closing led to FTC action. Second, it serves as a reminder that even though there may be legitimate reasons for integration of certain service lines, buyers must be prepared to explain, and if necessary, defend, the benefit of their acquisitions if the acquisition results in greater market concentration. Here, it is unclear whether the FTC had valid allegations, e.g., that prices would increase because of the acquisition, or whether Carilion made a cost-benefit analysis, especially in the current market environment, and chose to settle rather than incur legal expenses on top of its $20 million purchase price. Given the increased integration over the past few years between health systems and physician groups and their ancillary service lines in numerous markets, it is likely that other Carilion-type challenges will occur.



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New Bills Seek to Resolve Provider Difficulties in Self-Reporting Stark Violations, But Questions (and Risk) Remain in the Meantime

by Kari Bomash

Two bills currently before Congress seek to resolve the problems created by the Office of the Inspector General’s (OIG) change to the self-disclosure protocol to exclude matters raising issues solely under the federal physician self-referral, or Stark, statute from the protocol. Representative Jim McDermott has introduced H.R.3556 which would require the Secretary of Health and Human Services to develop a self-disclosure protocol for providers that discover Stark violations. The health care reform bill that recently came out of the Senate Finance Committee contains a similar provision. While it is still too early to know whether either of these bills will become law, their presence indicates that lawmakers are aware of the problems the OIG self-disclosure change created for providers.

Under the previous self-disclosure rules, providers could disclosure technical Stark violations through the protocol, and had incentive to do so because the disclosure could result in (1) lower settlement amounts, (2) likely avoidance of exclusion from federal health care programs, and (3) the less likely imposition of a corporate integrity agreement. Additionally, self-disclosure could generally cut off potential qui tam liability under the False Claims Act. As Stark is a strict liability law, technical violations are subject to penalties regardless of a provider’s intention to violate the law. Consequently, it is relatively easy for the government to prove Stark violations and collect significant penalties in the absence of self-disclosure. The earlier protocol encouraged providers to openly redress Stark violations because of the clear benefits to using the self-disclosure protocol.

In an open letter dated March 24, 2009, the OIG dramatically narrowed the scope of the self-disclosure protocol. The OIG no longer accepts self-disclosure of violations that involve only Stark liability. In order to take advantage of the benefits of the self-disclosure protocol with regard to a Stark issue, a provider must also disclose a colorable anti-kickback violation for the same matter that would settle for a minimum of $50,000. The change in the protocol raises questions as to how a provider should report and cure matters involving Stark violations only.

Given the OIG’s current position, self-disclosure is not nearly as attractive. Violations of the anti-kickback statute are felonies. Unlike the Stark law, the anti-kickback statute is intent based. Thus, the government must show that one intent of the party involved is to make a payment in exchange for referrals of services or goods that are reimbursable by a federal health care program. Due to the severity of the criminal sanctions and the difficulty of proving an anti-kickback violation, many lawyers may advise against using the self-disclosure protocol for an anti-kickback violation. Therefore, the new self-disclosure protocol may not be the best course of action, or even effective, in disclosing a Stark matter.

Until Congress acts, the change in the self-disclosure protocol leaves open the question of how a provider can limit its liability for a Stark violation, in addition to immediately fixing the arrangement that is causing the Stark law violation. Some form of disclosure of a Stark violation may still be desired because of the significant consequences of failing to disclose. For example, failing to disclose a Stark violation could expose a provider to a qui tam lawsuit under the False Claims Act. Under the False Claims Act, a third-party with knowledge of a false claim, e.g., an employee or independent contractor, can bring a suit on behalf of the government. Qui tam suits are driven in part by the huge financial awards a successful qui tam plaintiff receives. However, if properly disclosed, a qui tam action is generally unavailable in many jurisdictions if the government already knows of the facts supporting the allegation of the false claim. In addition to False Claim Act liability, a Stark violation exposes a provider to liability under 42 U.S.C. § 1320a, which makes it a felony to keep federal money when a provider knows that it is not entitled to keep it. A provider’s liability under 42 U.S.C. § 1320a, would only be cut off once the funds are repaid. In light of these two concerns, would a provider now be required to report the problem to both its fiscal intermediary, and either CMS or the DOJ? These are the questions that a provider at its counsel must struggle with given the current limitations on the self-disclosure protocol.

Both of the legislative proposals would help, in part, resolve the problems above by requiring the Secretary of the Department of Health and Human Services to create a self-disclosure protocol. At a minimum, the Secretary would be required to designate an individual or office to receive self-disclosure of Stark violations. Reporting to this entity would cut off any liability under the False Claims Act or 42 U.S.C. §1320a. The bills would leave the Secretary discretion to determine the level of sanctions to be imposed on the disclosing provider. The change in the self-disclosure protocol has created difficult questions for providers regarding the best method to limit the liability of a Stark violation. While there may be no clear path currently for disclose, it is clear that a provider must act expeditiously to cure Stark violations and cautiously to determine the best means of disclosing a violation.