On March 31, 2011, CMS announced its proposed regulations for how health care providers can qualify to participate in the “Shared Savings Program” (“SSP”) as “Accountable Care Organizations” (“ACOs”). Simultaneously with the release of the CMS proposed regulations, the federal antitrust regulators – the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”) – jointly released a proposed Policy Statement that meshes with the regulations and attempts to provide guidance to providers with respect to antitrust concerns that otherwise might deter the formation of ACOs.

How The Proposed Policy Statement Works – Two Big Changes to Existing Enforcement Practice.

Rule of Reason Treatment. First, the Statement eliminates the risk normally inherent in any collaboration among competing providers that their conduct will be condemned as a naked price-fixing or market-allocation agreement -- that is, per se illegal -- because the FTC or DOJ deems insufficient their clinical or financial integration. Based on the conclusion that the CMS criteria for approval of a provider collaboration as an ACO are sufficiently rigorous that it is reasonably likely that a qualifying ACO is a bona fide arrangement intended to improve quality and reduce health care costs, the Statement provides that the conduct of a CMS-approved ACO, whether in connection with providing Medicare services, or in connection with providing essentially the same services in the commercial market, will be evaluated by FTC and DOJ under the “Rule of Reason.”

The elimination of the risk of per se treatment is important. By contrast with the per se rule, which essentially permits no defenses, the Rule of Reason examines the anticompetitive effects of the collaboration to determine if they are substantial. If they are, the ACO may still defend its conduct because those effects are outweighed by procompetitive efficiencies create by the ACO. The difference between categorizing conduct as covered by the per se rule instead of the Rule of Reason can be outcome determinative to the antitrust analysis.

To extend the protection of Rule of Reason analysis to conduct in the commercial sector, the ACO must use the same governance and leadership structure and the same clinical and administration processes as it uses to qualify for and participate in the Shared Savings Program. This extension of Rule of Reason protection to the commercial sector is very significant in that it will cover joint negotiations by ACO participating providers with commercial payers, as well as agreements among the ACO participants to allocate market segments or service areas.

Requirement of FTC/DOJ Approval. The second big change in the proposed Statement meshes with the inclusion of mandatory or optional FTC/DOJ antitrust approval for certain ACOs in the CMS regulatory structure for qualifying ACOs. To implement this requirement, the Policy Statement divides ACOs into three categories based on their potential for competitive significance. The determination of the category, which in turn controls how the ACO comes to qualify as an ACO, is based on the combined share of ACO participants that provide competing services in their “Primary Service Area (“PSA”).

The three categories are as follows:

Safety Zone – Under 30%. The first category is for ACOs whose participants that provide the same service have a collective share in their PSA for the common service of 30% or less – these fall into a “Safety Zone.” An ACO in the Safety Zone can apply to CMS without FTC or DOJ clearance and, if approved by CMS, automatically qualifies for Rule of Reason treatment of its conduct for both Medicare and commercial services.

There are some qualifications. For example, a hospital or ambulatory surgery center participating in an ACO must be non-exclusive to the ACO without regard to PSA share for the ACO to qualify for the Safety Zone. The Policy Statement also creates exceptions to permit ACOs in rural areas or with a dominant provider (one with a 50% or higher share but whose service is not provided by any other ACO participants) to qualify for the Safety Zone.

Mandatory FTC/DOJ Approval – Over 50%. The second category, at the opposite end of the spectrum, is for ACOs whose participants that provide the same service have a collective share in their PSA for the common service of 50% or more – these cannot be approved by CMS for participation in the Shared Savings Program without a letter from either FTC or DOJ stating that the reviewing agency has no present intention to challenge or recommend challenge to the ACO.

ACOs In The Middle – Between 30% and 50%. The middle category is for ACOs whose participants that provide the same service have a collective share in their PSA for the common service of between 30% and 50% – the Statement acknowledges that such ACOs, although they are outside of the Safety Zone, may well be procompetitive. While making clear that ACOs in this middle category may be approved by CMS without an FTC/DOJ letter, the Statement also reserves the right to bring an antitrust challenge to such an ACO at any time during its participation in the SSP. To reduce this risk, the Statement offers two suggestions to providers:

First, the Statement lists five types of conduct the avoidance of which reduces “significantly” the likelihood of an antitrust violation. The goal of the list of discouraged conduct (discussed in more detail below) generally is to facilitate the ability of payers to offer insurance products that differentiate among providers based on cost and quality, as well as to deter collusion among ACO participants that contract with payers outside the ACO.

Second, this middle group of ACOs is given the option of asking the FTC/DOJ for an approval letter through the expedited review process. The documents to be provided are the same as what is required for the mandatory review. The agencies commit to a response within 90 days of a complete application. The conundrum faced by ACOs considering whether to get the comfort of an approval letter is that CMS will not approve an ACO for participation in the SSP if the optional letter gives a negative response.

Measuring the PSA Share.

The PSA for each service is defined as the lowest number of contiguous postal zip codes from which the ACO participant draws at least 75% of its patients for the specific service. CMS has committed to making publicly available all of the information needed to determine the service category applicable. For physician and out-patient services, the share is calculated by reference to Medicare fee-for-service payments or allowed charges during the most recent calendar year for which data are available. For in-patient services, the share is calculated by reference to discharges, using state-level all-payer hospital discharge data. For service lines rarely used by Medicare beneficiaries (e.g., pediatrics, obstetrics), the ACO has the option to use other data such as the number of actively participating physicians within the specialty.

Despite the insistence in the Statement that a high PSA provides “a valuable indication of the potential for competitive harm from ACOs with high PSA share,” it is unclear whether the PSA share will merely be a screening device to allocate ACOs into the three categories, or whether the agencies will truly treat the PSA share as a surrogate for “market share,” as the term is used in traditional antitrust analysis. The PSA share for physicians and out-patient services look only at Medicare data, which will distort the share up or down, for example because it will exclude competitively significant providers that do not accept Medicare. Moreover, PSA shares are not real market shares based on competitively drawn relevant product and geographic markets.

In recognition of this problem, the Statement invites ACOs to provide additional information about competition in the market. In addition, the application for approval expressly permits the applicant to include additional information demonstrating substantial procompetitive justification why the ACO needs the proposed share to provide high-quality, cost-effective care to Medicare and commercial patients. The agencies commit to considering this information in making the determination. Nevertheless, it remains far from clear what kind of competitive market analysis the regulators will conduct during the 90 day period, including whether the analysis of ACOs in the mandatory review category will differ from those seeking optional review.

Documents that Must Accompany the Application.

In addition to everything to be submitted to CMS, as well as the documents establishing that the ACO was formed after March 23, 2010, the proposed ACO seeking an agency approval letter must provide the following:

  • Documents relating to the ability of ACO participants to compete with the ACO, including any incentives to encourage ACO participants to contract through the ACO.  
  • Documents discussing the ACO’s business strategy or plans to compete and the ACO’s impact on price, cost or quality of any service.  
  • Information sufficient to show:  
    • the PSA shares;  
    • any restriction that prevent ACO participants from getting access to price information for other ACO participants that contract outside of the ACO;  
    • the identity of the five largest commercial payers; and  
    • the identity of any other ACO in any PSA in which the ACO will provide service.  
  • Other information that the FTC or DOJ may request.  

Expedited Review Complete Within 90 Days – Maybe.

The FTC/DOJ commit to competing their review within 90 days of receipt of all of the required information. The proposed Statement is not clear what happens to the deadline if the reviewing agency asks for additional information. Another joint program administered by FTC/DOJ (the HSR pre-merger notification program) stops the clock when there is a request for additional information, which does not restart until the production is complete. Moreover, the 1996 Health Care Statements included a promise of expedited review that turned out to be somewhat hollow. It remains to be seen whether this new promise of expedited review will really work.

Conduct to Reduce the Likelihood of Antitrust Concern.

ACOs outside the Safety Zone raise potential antitrust concerns. To minimize these concerns, the Statement lists conduct to be avoided. For ACOs in the mandatory approval group (PSA shares over 50%), avoidance of this conduct reduces the likelihood of antitrust concern. For optional approval ACOs (PSA shares between 30% and 50%), avoidance of this conduct reduces “significantly” the likelihood of an antitrust investigation.

Four of the five types of discouraged conduct deal with restrictions on the ability of payers to differentiate among providers based on cost and quality:

  • Preventing commercial payers from steering patients to certain providers, including non-ACO providers;
  • Tying sales of ACO services to the commercial payer’s purchase of other services from providers outside the ACO (such as an ACO hospital that requires a commercial payer to contract with all other hospitals in the same network);  
  • Exclusive contracts with ACO specialists, hospitals or other providers (except primary care physicians); and  
  • Restricting the commercial payer from providing cost, quality and performance information to its health plan enrollees to aid enrollees in selection of providers.

The fifth type of discouraged conduct relates to the potential for price collusion. ACOs are urged to avoid sharing competitively sensitive pricing information for use in price setting for service provided outside the ACO.

Limitations – The Policy Statement Does Not Bind Private Litigants or State Attorneys General.

Policy Statement does not alter the underlying antitrust laws. Therefore, the risk remains that a private litigant or a state attorney general may attack conduct by an ACO as per se illegal. While the fact that the conduct is governed by the Rule of Reason when examined by the FTC or the DOJ may be persuasive to a Court entertaining such a challenge, it is not dispositive.

Mergers Are Not Covered – Encouragement of ACOs Is Not Intended to Encourage Consolidation.

The Policy Statement is clearly intended to encourage integration and coordination, but not consolidation. Outright mergers are not covered. Rather, mergers remain subject to the usual Clayton Section 7 analysis laid out in the Horizontal Merger Guidelines.

Optional Review – A Hobson’s Choice?

For ACOs falling between 30% and 50% PSA shares, the decision whether to take advantage of the expedited optional review may be a difficult choice. At least at the early stage of this program, it will be hard to predict what kind of analysis the regulators will perform and what factors will control which ACOs will be approved and which will not. Further, it remains unknown how long the expedited review will really take. The consequences are important. An ACO can participate in the SSP without approval of FTC/DOJ if it is in the middle category. However, if it opted to seek expedited review, and receives a letter informing it that a challenge is likely, CMS will not approve it for the Shared Savings Program. Experience will likely inform on what now appears to be a Hobson’s choice.

Invitation for Comments.

Both the FTC and the DOJ have emphasized that the proposed Statement is just that – proposed. Despite the fact that it does not constitute formal rule making and could theoretically be implemented without further public input, the agencies have nevertheless invited public comment on the draft and have been clear that adjustments will be made if the public comments raise issues that were not considered. Comments, which will be displayed on the FTC website, should be sent to the FTC and should be focused on the following issues:

  • The substance of the Statements and the guidance offered in them;
  • Whether other sources of data exist for use to determine PSA shares for physicians or hospitals where the Medicare data is not relevant or not available; and  
  • Whether providing the documents required for expedited review are appropriate or unduly burdensome.  

The comment period is open until May 31, 2011. This request for comments comes on the heels of the public FTC Workshop held in October 2010. Clearly, the agencies want the Statements to be thoroughly vetted before rolling them out for use. Of particular interest is likely to be comments that suggest effective ways to ease the burden of compliance with the Statements, particularly the mandatory approval provision, as well as comments that point out perverse incentives or unintended consequences, that is, ways in which the Statement itself or the underlying antitrust laws will deter the formation of the kinds of ACOs that the Affordable Care Act is seeking to encourage.

Controversy Over DOJ Participation in ACO Review.

Before the release of the Policy Statement, rumors flew about a turf war between the FTC and DOJ over control of the ACO review process. The release of the Statement jointly by the FTC and DOJ ends the rumors, particularly in light of the clear statement that applications should be submitted to both FTC and DOJ, but only one will perform the review. Obviously, the Statement contemplates that they must agree on which agency will conduct the review within the 90 day period.

Evidence of the turf war remains in the dissent to the Statement by occasionally controversial Republican Commissioner J. Thomas Rosch. Commissioner Rosch disagrees with DOJ participation in the ACO review process. His rationale is based not only on the FTC’s greater experience with ACOs, but also on the fact that, by contrast with the FTC, which is relatively independent of the political process, the DOJ is embedded in the Executive branch and is more susceptible to lobbying and political pressure. His criticism of DOJ is candid – he believes that the DOJ has been too supportive of physicians and hospitals, as shown by its opposition to the FTC’s efforts to engage in antitrust review of clinically integrated health care providers.


The proposed Statement will certainly draw a cacophony of comment. Nevertheless, while there are certainly points that can, and likely will, be clarified or tightened up during the comment period, the relative certainty offered by the Statement to providers seeking to jump into the ACO waters is a welcome development.

Useful Links.

The Federal Trade Commission webpage with links to all of its work to date on ACOs may be found here.

The Federal Trade Commission’s press release (including reference to Commissioner Rosch’s dissent) may be found here.

The proposed Policy Statement may be found here.

The electronic comment form may be found here.