“[T]his is managed care,” observed the U.S. District Court for the Northern District of California in its June 3rd order granting Sutter Health’s motion to dismiss an antitrust suit.  In so concluding, the court was merely echoing the same observation that Sutter Health repeated throughout its motion to dismiss.

While the case, Sidibe v. Sutter Health et al. (subscription required), is most certainly an antitrust suit about a health system in a strong bargaining position with third party payors, it is equally a case about the inner workings of managed care.  The topic of managed care can initiate endless discussions, but the court order’s focus on one contract provision commonly included in Sutter Health’s managed care contracts serves as a reminder that, despite the plethora of Federal law seemingly to the contrary, Federal law actually encourages patient steerage.

An instinctive response may be to point to the Federal fraud and abuse law behemoths, the Stark Law and the Anti-Kickback Statute.  Yet, despite these laws and many others, Federal policy and law is very different when it comes to managed care.

In the case of Sutter Health, the court quotes at length the following provision that Sutter Health “typically includes” in its agreements with health plans:

Sutter Health shall require each group health payer accessing Sutter Health providers through the [health plan] network to actively encourage members obtaining medical care to use Sutter Health providers. . . . “[A]ctively encourage” or “active encouragement” means incentivizing members to use participating providers through the use of one or more of the following: reduced co-payments, reduced deductibles, premium discounts directly attributable to the use of a participating provider, financial penalties, or requiring such members to pay additional sums directly attributable to the non-use of a participating provider.

If Sutter Health or any provider learns that a payer either does not actively encourage its members to use network participating providers, . . . Sutter shall have the right upon not less than thirty (30) days’ written notice to terminate that payer’s right to the negotiated rates.  In the event of such termination, the terminated payer shall pay for covered services rendered by providers at 100% of billed charges until such time as Sutter reasonably believes and notices that the payer does in fact actively encourage its members to use network participating providers . . . .

In sum, the Sutter Health provision will penalize a health plan by increasing its reimbursement obligation, if the health plan does not “actively encourage” its members to use Sutter Health providers.  By active encouragement, the health plan must use some combination of carrots and sticks (e.g., lower cost-sharing and “financial penalties”).

Rather than discourage this patient steerage, Federal policy and law support it.  The Anti-Kickback Statute allows managed care organizations (“MCOs”) to design networks that would encourage their members to utilize certain providers by excluding from the scope of the statute price reductions offered to MCOs under either a fee-for-service or a risk-sharing contract.  Likewise, despite HIPAA’s recently beefed up regulation of marketing, those marketing regulations carve out communications made to describe, among other things, “the entities participating in a health care provider network or health plan network.”  Even though the Stark Law would generally not be implicated by Sutter Health’s managed care contracts with health plans, even the Stark Law expressly permits managed care contracts to condition a physician’s compensation on his or her referral within a network of providers.  The Centers for Medicare and Medicaid Services has controversially allowed Medicare Part D plan sponsors to establish preferred pharmacy networks with lower cost-sharing.  While the list goes on, nothing emphasizes Federal policy’s support of patient steerage more than the many Federal Trade Commission Advisory Opinions on clinical integration (“CI”) programs.  The FTC has made in-network referrals such as key component of any CI program that, in the most recent FTC advisory opinion , the physician hospital organization establishing the CI program clearly made the promotion of in-network referrals a point of emphasis to the FTC.

In its motion to dismiss, Sutter Health assessed its own contract language unabashedly: “Of course, this language is the very essence of managed care.”  And the Federal court agreed.

Whether unbeknownst or not, the plaintiffs found themselves swimming against the current of not only well-established Federal policy but also the many Federal laws enacted to carry out this policy.  In this era of accountable care, providers will expand beyond providing patient care and into the realm of payors.  Payors are likewise looking to expand their own reach.  With the public health insurance exchanges set to open soon, narrow-network HMOs are likely to be a popular offering among payors.  In such case, rather than running from patient steerage, payors and providers will continue to embrace it in their efforts to manage costs and improve patient health.

Of course, in implementing patient steerage strategies, payors and providers must be wary of the very strict limits of Federal policy and law.  And that state policy and law may set different limits.