Health Law Update

National Issues

The annual meeting of the National Health Lawyers Association was held during the first week of June. The following areas are particularly active from a legal standpoint and have generated a great deal of interest across the country.

Antitrust Developments

Recently the Justice Department filed suit against the Women's Hospital in Baton Rouge, Louisiana, and its associated physician hospital organization. Almost all obstetricians and gynecologists in the area practice at the hospital and participate in the PHO. The PHO jointly negotiated managed care contracts for the hospital and its physician members. In addition, the PHO set a minimum fee schedule for physicians which the Justice Department asserted was higher than the normal fees usually charged by the physicians independently.

Like two previous suits filed in September of 1995 against PHOs in St. Joseph, Missouri, and Danbury, Connecticut, the Women's Hospital case will be settled by Consent Decree. From these three cases, it appears that the Justice Department continues to be interested in issues of over-inclusiveness of doctors within a PHO or similar organization as well as joint pricing by doctors who are not economically integrated. A further refinement of these antitrust issues is anticipated by September of 1996 when the Department of Justice and the Federal Trade Commission intend to release a third revision to their Statements of Enforcement Policy regarding antitrust law and the health care industry.

Marshfield

Also of interest, on March 18, 1996, the Supreme Court declined to hear further appeal in the Blue Cross/Marshfield Clinic case. As a result, the opinion of the Court of Appeals for the Seventh Circuit will stand. This Opinion is significant for at least two of its holdings: (1) HMOs compete with PPOs, indemnity plans and other kinds of health care financing products and, therefore, do not constitute a separate product market; (2) market power is not created merely because a large percentage of physicians are affiliated with a particular managed care organization if the relationship is not exclusive.

While these developments should make it easier for HMOs to compete, particularly in developing markets, they are still subject to the antitrust laws. For example, in May, Philadelphia-based U.S. Health Care lost a $1.2 million antitrust verdict in a case alleging it had used its market power to force contracting pharmacies to require their employees to enroll as members of the HMOs. While reciprocal dealing agreements like that employed in this case are common in the industry, they raise antitrust concerns when they are used by one party to gain leverage in another market or are used by a party with substantial market power to foreclose freedom of choice by the other party.

Provider De-selection

Once considered to be the exclusive province, in most cases, of the HMO, PPO or other managed care organizations, deciding which physicians will be "de-selected" from a provider panel is no longer a simple issue. The significance of new cases recently decided in New Hampshire and California in this area may be substantial. As a result, physicians appear to have more opportunity to challenge their de-selection from a particular panel. If these cases are followed, provider de-selection will not be just a question of what the managed care organization wants to do. They will be required to comply with National Council on Quality Assurance standards, Health Care Quality Improvement Act provisions, due process and contractual rights as well as state public policy when terminating provider contracts.

Incentive Disclosures

New rules by the Department of Health and Human Services require HMOs and other managed care organizations to disclose certain financial incentive arrangements between the HMO and its participating physicians. The disclosure must be provided to Medicare and Medicaid recipients and is required when more than 25 percent of a physician's compensation is at risk for services the physician does not provide. Consequently, managed care plans may be required to inform Medicare and Medicaid recipients if their physicians are paid, for example, on a capitated basis. The issue is unsettled because the Administration suspended the May 28 compliance date pending further review in light of comments received from HMOs and their trade associations.

Consolidation

The trend continues toward greater concentration within the health care industry in all areas of the country. Most notable is the buyout of Caremark by MedPartners-Mullikin Inc. Not only is the $2.5 billion sale price remarkable, but also, the new group combines 7,250 doctors and 1.5 million prepaid enrollees. While the Caremark merger obviously affects Oklahoma City, it is also apparent that other physician practices in this community are merging with what seems to be increasing rapidity. The consolidation on the hospital side started several years earlier but continues as well, as evidenced by Columbia's recent acquisitions in Tulsa and Enid.

Physician Management Companies

With increasing frequency, large medical practices and management groups are forming "physician management companies." These physician management companies acquire the clinical assets of a medical practice and enter into long-term management agreements with the physician for the management of the medical practice. The physician management company may be focused on a sub-specialty area, but has also been used with respect to primary care or physician practices which satisfy other criteria, such as practice size or market area.

The acquisition of the clinic assets is a bifurcation of the medical practice into its two component parts - the clinic facility component and the licensure component. The clinic facility component consists of certain tangible assets such as the furniture, fixtures, equipment and certain supplies and certain intangible assets such as the trade name or trademarks associated with the practice, employees (other than professional employees), management and financial systems. The licensure component includes the professional work force, patient records, managed care or other provider agreements, and dispensing of drugs and supplies which require licensure.

The most common structure is for the physician management company to acquire the clinic assets in exchange for stock, cash, debt, or some combination thereof. Following such acquisition, the physician management company enters into a long-term management services agreement with the physician or professional entity which continues to employ the physicians. Under the terms of the management services agreement, the physician management company provides the following to the medical practice: billing services, facilities, supplies and equipment, and medical practice personnel services (except for physician and technical personnel services). The practice pays the physician management company a fee which is typically equal to the actual cost of such services, facilities, supplies and equipment, plus a designated management fee intended to serve as compensation to the physician management company.

Generally, the ultimate goal of the physician management company has been to initiate a public offering to provide a source of capital to the physician management company for further expansion and development and to provide a public market for the stock of the physician management company so that the physician and promoters may cash out their interests in the company at relatively high profit/earnings multiples.

These acquisitions and management services contracts must be carefully structured, with consideration given to corporate practice of medicine, fee splitting, enforceability of non-competition provisions, federal and state securities laws, antitrust issues, and healthcare regulatory issues, including fraud and abuse and Stark laws.

Direct Contracting

Rumors and reports continue to come out of the National Association of Insurance Commis-sioners about their concern with so-called direct contracting. Insurance companies are licensed as are HMOs. The problem which concerns the commis-sioners is that PHOs or physician groups which directly contract with self-insured employers on a capitated or other risk-shifting basis are not separately licensed or regulated. These contracts appear to be indistinguishable from other insurance contracts. However, these provider entities are not currently subject to any regulation or supervision, much less, the level of regulation and supervision applicable to insurance companies and HMOs. Consequently, providers should be careful in contracting to provide health services when not doing so through an HMO or insurance company.

ANDREWS DAVIS- Health Law Practice Group

The Health Law Practice Group represents clients in a broad array of matters, including:

• Integrated Delivery Systems
• Mergers and Acquisitions
• Securities Issues
• Antitrust
• Employee Benefits
• Employment Law
• Healthcare Receivables, Financing and
• Asset Securitization
• Stark and Fraud and Abuse Regulations
• Medicare and Medicaid Reimbursement
• General Business Representation

ERISA

After the Supreme Court's decision in the Travelers case last year, ERISA preemption cases have begun to settle into two categories. Where the claim is based on the denial or refusal to provide treatment, the courts generally take the position that this is a benefits issue related to a plan and, therefore, preempted by ERISA. However, where the claim is based on the quality of treatment provided or alleged negligence on the part of a provider, including negligent hiring or selection of providers by a managed care organization, some courts have ruled that these cases are not preempted by ERISA.

Recent Tenth Circuit decisions reflect these views. In the Cannon case, an insured's surviving spouse brought an action against the health insurer seeking to recover for a negligent or bad faith refusal to authorize an autologous bone marrow transplant. Because the claim related to the improper processing of benefits for treatment, the Court of Appeals held the claim "related to" the employee's benefit plan, and thus, was preempted by ERISA.

In the Pacificare case, a party sought to hold the HMO vicariously liable for the medical malpractice of a doctor who was providing treatment for the plan. The Court held that the malpractice claim did not involve the plan's administration of benefits or the quality of benefits. Therefore, the claim did not "relate to" the plan and was not preempted. Further, just as ERISA did not preempt the malpractice claim against the doctor, it should not preempt the vicarious liability claim against the HMO if the HMO held out the doctor as its agent.

Copyright © 1996 Reprint permitted with acknowledgment