June 2017 Vol. 31 / No. 3 A Publication of the Health Care and Editor’s Report Pharmaceuticals Welcome to the third issue of the Chronicle for the ABA 2016-17 term. In this Committee of the Antitrust issue, we are pleased to present three original articles, all of which relate to the Section of the American recent health insurance merger cases: Aetna/Humana and Anthem/Cigna. Bar Association Value Based Contracting – Could it be a Procompetitive Efficiency in the Antitrust Analysis of Healthcare markets? by Jody Boudreault, a Co-Chairs: Senior Associate at Squire Patton Boggs (US) LLP. Seth Silber The Importance of Innovation in Healthcare: Lower Reimbursement Wilson Sonsini Rates to Providers Do Not Mean Lower Healthcare Costs, by Joe Goodrich & Rosati Whatley, Edith Kallas, and Henry Quillen, Partners at WhatleyKallas, LLP. Washington, D.C. Reduced-Form versus Structural Econometric Methods in Market Leigh Oliver Definition: Lessons from Aetna-Humana, by Paul Wong and Hogan Lovells Subramaniam Ramanarayanan, Economists at NERA Economic Consulting. Washington, D.C. Executive Editors: We are always interested in hearing from our Committee members. If there is a Amanda G. Lewis topic that you would like to see covered in a Committee program or if you have any Federal Trade other suggestions, please contact the Committee Co-Chairs, Seth Silber Commission ([email protected]) or Leigh Oliver ([email protected]). Washington, D.C. Anthony W. Swisher If you would like to submit an article for the Chronicle, please contact Amanda Squire Patton Boggs Lewis ([email protected]) or Anthony Swisher ([email protected]). Washington, D.C. Executive Editors: Amanda G. Lewis Anthony W. Swisher Federal Trade Squire Patton Boggs Commission Washington, D.C. Washington, D.C. Editors: Lauren Battaglia Amanda Hamilton James Moore, III Hogan Lovells Haug Partners LLP Skadden, Arps, Slate, Washington, D.C. Washington, D.C. Meagher & Flom Washington, D.C. Antitrust Health Care Chronicle June 2017 Value Based Contracting – Could it be A Procompetitive Efficiency in the Antitrust Analysis Of Healthcare Markets? Jody Boudreault 2 Squire Patton Boggs (US) LLP Introduction Value Based Contracting Background The U.S. Department of Justice (DOJ) and the Over the past decade or more, the U.S. healthcare Federal Trade Commission (FTC) both recently system has shifted a percentage of its payments to evaluated the impact of value based contracting in providers from a “fee for service” arrangement that determining the overall effects of two proposed pays physicians for each procedure, to a different healthcare mergers. In one merger, Federal Trade approach with nicknames such as “value based Commission v. Advocate Health Care,3 the FTC contracting” (VBC), “value based care,” dismissed value based contracting as ineffective in “collaborative care,” or “risk based care,” among leading to better health, and thus it could not save others. One goal of value based contracting is to the merger from its anticompetitive effects. In the reduce the total number of healthcare procedures other, United States v. Anthem, Inc.,4 the DOJ lauded performed, by encouraging doctors to increase Cigna’s value based contracting (plus consumer- higher value care and keep people healthier. This facing wellness programs) as bending the cost curve kind of contracting attempts to integrate services, for patient health, but the defendants did not argue and shifts at least some of the risk for the total cost that this was the primary efficiency from the deal. of care from plans to providers. The ultimate While the Anthem court’s opinion did not reach a objective is global capitation (a fixed payment on a conclusion on whether value based contracting could per member per month basis) to bring about a overcome the loss of a competitor in evaluating a healthier population. merger, the DOJ planted a seed that may develop in a future merger. When taken to its logical conclusion, it may be that value based contracting is either restricted to a tiny parcel out on the margins, Efficiencies and the Merger Analysis or is a real and significant procompetitive benefit of Framework many mergers. The antitrust agencies regularly analyze hospital and health plan mergers. The agencies’ goal is to prevent 5 mergers that would enhance market power. A merger enhances market power if it is likely to cause 2 a firm “to raise price, reduce output, [or] diminish The author would like to thank Mark Botti and Anthony innovation.”6 Higher prices, lower output, and Swisher for their invaluable contributions to this article. 5 U.S. Dep’t of Justice & Fed. Trade Comm’n, Horizontal 3 2016 U.S. Dist. LEXIS 79645 (N.D. Ill. June 20, 2016). Merger Guidelines, 2 (2010). 4 2017 U.S. Dist. LEXIS 23613 (D.D.C. Feb. 8, 2017). 6 Id. 2 Antitrust Health Care Chronicle June 2017 reduced innovation are potential anticompetitive The FTC in Advocate analyzed the parties’ value effects of a merger. If these were the only effects, a based care efficiencies claims, but did not recognize merger would shrink consumer welfare, and the them as procompetitive, that is, “cognizable.” agencies would seek to enjoin it. Significantly, however, the DOJ in Anthem explained Cigna’s value based care products as But a merger may also have procompetitive effects, output-enhancing. Output-enhancing indicates called efficiencies. Efficiencies might result in procompetitive. As will be discussed below, this improved product quality, lead to lower prices or theory of value based care as procompetitive costs for consumers, or lead to innovative new supports the claim that Anthem marks a more products.7 Efficiencies are part of the overall profound cultivating of efficiencies doctrine than assessment of competitive effects.8 The agencies may initially be evident. routinely predict a firm’s post-merger incentives and decide whether they are more likely to lead to anticompetitive effects or procompetitive efficiencies.9 Agency Analysis of Two Recent Healthcare Mergers The ambiguity in what may count as an efficiency is clarified in the Horizontal Merger Guidelines. There, Federal Trade Commission v. Advocate Health the agencies insist that efficiencies are to be Care13: VBC Is Not Merger-Specific or substantiated in three ways. First, efficiencies must Cognizable be “merger specific” – both a likely consequence of the merger and unlikely to result through 10 If a merger efficiency requires something which will contracting. A company’s post-merger plan to make the combined firm more competitive post- create better products, reduce product costs, or merger, would value based care qualify? increase innovation, and a business assessment of Specifically, can a hospital that has a substantial contracts as an infeasible way to achieve these amount of value based contracting merge with one results is evidence of a merger specific efficiency. that has very little value based contracting and claim Second, efficiencies must be “cognizable” – not a the extension of VBC expertise from one to the other savings that stems from anticompetitive output as procompetitive? reductions but from something which makes the 11 merged firm a better competitor. And third, Advocate, with 11 hospitals in its system and more efficiencies must be “verifiable,” through an than two-thirds of its commercial revenues from evaluation of the merging parties’ analytical 12 some form of value based contracts, attempted to methods, data, and assumptions. merge with NorthShore, with 4 hospitals and just ten percent of its commercial revenues from value based 7 Id. at 29. contracts.14 NorthShore had no full risk capitated 15 8 contracts. NorthShore argued that it needed the U.S. Dep’t of Justice & Fed. Trade Comm’n, merger to “engage in large-scale full risk Commentary on the Horizontal Merger Guidelines, 49 contracting” because it could not expand its risk (2006). 9 See Carl Shapiro, The 2010 Horizontal Merger Guidelines: From Hedgehog to Fox in Forty Years 77 Antitrust L.J. 727-28, 752-53 (2010). 13 2016 U.S. Dist. LEXIS 79645 (N.D. Ill. June 20, 2016). 10 Horizontal Merger Guidelines, supra note 4, § 10. 14 Id. at *4, *8 (N.D. Ill. 2016). 11 Id. 15 Defs.’ Proposed Findings of Fact & Conclusions of Law at ¶ 50, Advocate, No. 15-cv-11473 (N.D. Ill. filed 12 Id. May 27, 2016) (Dkt No. 467). 3 Antitrust Health Care Chronicle June 2017 contracting without broader geographic coverage NorthShore Could Implement Value Based Care 16 and the appropriate tools and experience. On Its Own: VBC Not Merger Specific Advocate’s Arguments The FTC disputed that NorthShore needed to merge to expand into risk-based contracting. First, Advocate’s proprietary clinical practices NorthShore already was involved in risk-based care called AdvocateCare helped it “emerge as a and could continue without the merger.22 Even the leader in [population health management] hospitals did not deny that NorthShore could and and value-based health care.”17 would expand its value based contracting and population health management capabilities without Advocate’s total cost of care is lower than 23 18 the merger. Second, a number of third parties help NorthShore’s. hospitals manage risk, improve quality, and improve Advocate is better than NorthShore at population health, and can achieve results within a keeping people healthy.19 year.24 And third, NorthShore did not measure the NorthShore’s efforts to improve total health time and expense to achieve risk-based care goals have not been successful.20 independently as opposed to achieving them through the merger.25 The merger “will improve the quality of care while reducing total costs as NorthShore Additionally, the FTC maintained that providers do incorporates and applies the [population not even need to engage in risk-based care to health management] expertise and clinical improve patients’ health because incentives to integration quality measures that Advocate improve health also exist under fee for service 26 has developed.”21 arrangements.