Adopted unanimously in both houses of the New York State Legislature, this legislation will permit NuHealth to maintain its public status and mission, while collaborating with other healthcare facilities to achieve improvements in clinical outcomes, to share services with the goal of reducing costs of purchasing and back-office functions, and, finally, to jointly negotiate reimbursement rates with commercial payors. The legislation removes risks of successful antitrust challenges that have inhibited these collaborations in the past, following the blueprint provided by the United States Supreme Court in the Phoebe Putney case.
This issue arises because, in normal circumstances, entities that are not corporately linked are viewed as “competitors” and therefore are limited in their ability to engage in clinical integration and other joint activities and information sharing by state and federal antitrust laws. At the same time, while public hospitals and related facilities are committed to continuing their public status and missions, the evolving healthcare system has made it increasingly important for public hospitals to collaborate with other healthcare providers on clinical, back-office and managed care issues in a manner that draws on mutual strengths to maintain the highest level of care for the communities served by the public hospitals.
In the absence of exemption from antitrust laws, potential collaborators and public hospitals have been limited in their ability to fully integrate clinically and work together in the full range of potential collaborations. Other options exist, such as seeking approval from the Federal Trade Commission (FTC) of a plan for “Clinical Integration” as defined in a series of FTC Advisory Opinions, or seeking a Certificate of Public Advantage (COPA), in those states that provide them. However, those processes are time consuming and the inhibiting uncertainty continues during the process.
Another approach has been for public hospitals to assert that the “State Action” antitrust immunity that applies to States extends by implication to public hospitals that qualify as subordinate State entities. This is what was relied upon when the Phoebe Putney Health System entered into a transaction to acquire Palmyra Park Hospital from Hospital Corporation of America (HCA) for $195 million. The legal transaction was carried out through the Hospital Authority of Albany-Dougherty County, which holds title to Phoebe Putney, based on an argument that “State Action” antitrust immunity should insulate the deal from federal antitrust laws, even though the acquisition was alleged to have created a monopoly in general acute care in the region. The FTC had sought to void the acquisition, on the grounds that Phoebe Putney had violated antitrust laws.
When challenged on antitrust grounds by the FTC, the Supreme Court ultimately ruled that extension of State Action antitrust immunity could not be implied, but had to be explicit in the public hospital’s enabling legislation.
Origins of the Collaboration Legislation
While, at first, the Phoebe Putney decision was widely viewed as restricting state action immunity, closer reading of the decision revealed that it provided important guidance. In Phoebe Putney, the Supreme Court clearly held that extension of state action immunity would not be implied from the grant of routine corporate powers, even the power to acquire other facilities, and thereby upheld the FTC’s challenge to a complex transaction between a public hospital and a for-profit hospital operator. Yet, the opinion also contains statements by the Supreme Court that show how State action immunity may be extended to public hospitals and other entities that come within the Court’s concept of “substate” entities.
In its February 19, 2013 decision in FTC v. Phoebe Putney Health System, the Supreme Court addressed the question whether state action antitrust immunity could be inferred from the grant of general contracting and acquisition powers to a hospital authority, which the Court described as a “substate” actor. While holding that such immunity could not be inferred from the grant of general powers, the Court provided guidance about how a state can extend its antitrust immunity to substate actors like NuHealth (Slip Op., pages 7-8):
“[S]ubstate governmental entities do receive immunity from antitrust scrutiny when they act ‘pursuant to state policy to displace competition with regulation or monopoly public service’…. As with private parties, immunity will only attach to the activities of local governmental entities if they are undertaken pursuant to a ‘clearly articulated and affirmatively expressed state policy to displace competition’…. But unlike private parties, such entities are not subject to the ‘active state supervision requirement’ because they have less of an incentive to pursue their own self-interest under the guise of implementing state policies.”
The Phoebe Putney guidance thus provided a reasonable approach for NuHealth to maintain its public hospital status and mission, while at the same time permitting it to collaborate with a stronger system and other entities. The Clinical Integration approach outlined by the FTC in a number of Advisory Opinions was an option, but did not provide the level of certainty needed for other entities to fully pursue collaborative activities with NuHealth, because of a concern that antitrust laws would place limits on the scope of clinical collaborations, and would not permit sharing of cost and price information or joint negotiations with commercial payors. Moreover, as evidenced by the most recent FTC Advisory Opinion on Clinical Integration, the process of obtaining approval took several years and many letters back and forth with the FTC. NuHealth also had sought a COPA under New York State legislation adopted in the past several years, but delays in the development of regulations and the need for those regulations to guard against abuses by non-public entities, limited the utility of a COPA, even if the recently proposed regulations eventually are adopted.
In this context, and given the urgent need for NuHealth to both maintain its public status and mission, while also collaborating with a stronger system, we worked with NuHealth to craft the Collaboration Bill, following the clear guidelines provided by the Supreme Court in Phoebe Putney quoted above. This language makes very clear that when a state seeks to extend state action immunity to other state governmental entities, which the Court referred to as “substate” entities, clear legislative policy direction must be explicitly incorporated into State legislation. Moreover, the Supreme Court made clear that the concept of “active state oversight,” which is so important to extension of state action immunity to private parties, does not apply when a substate entity is involved.
The Collaboration Bill
Following the guidance provided by the Supreme Court in the Phoebe Putney case, the Collaboration Bill contains specific findings by the New York State Legislature and affirmatively expresses a policy of the State to allow NuHealth to engage in collaborative activities consistent with its healthcare purposes, notwithstanding that those collaborations may have the effect of displacing competition in the provision of hospital, physician or other healthcare-related services.
By adopting the Collaboration Bill, the Legislature recognized that NuHealth’s very existence as a public hospital serving a significant under-served population depends on its ability to collaborate with other providers on clinical, purchasing, managed care and other activities, without exposing NuHealth or the other parties to potential challenge under state or federal antitrust laws, as long as the collaborations are linked to defined public policies and activities set forth in the Collaboration Bill.
The Collaboration Bill amends NuHealth’s enabling legislation to grant immunity from state and federal antitrust laws to NuHealth and to entities with which NuHealth collaborates to pursue state policy objectives, defined in Section 1 of the Bill as follows:
“[P]reserving and expanding needed health care services in [NuHealth’s] primary service area; consolidating unneeded or duplicative health care services; enhancing the quality of, and expanding access to, health care delivered to medically underserved populations; lowering costs and improving the efficiency of the health care services it delivers; and achieving improved reimbursement from non-governmental payors.”
Section 2 of the Bill defines the contemplated range of collaborations that NuHealth would be authorized to pursue in order to achieve the defined objectives, as follows:
“[NuHealth] is authorized to engage in arrangements, contracts, information sharing and other collaborative activities with public or private entities and individuals irrespective of the competitive consequences of these activities and notwithstanding that these activities may have the effect of displacing competition in the provision of hospital, physician or other healthcare related services. These collaborative activities may include without limitation: joint ventures; joint negotiations with physicians, hospitals and payors, whether such negotiations result in separate or combined agreements; leases; and/or agreements which involve delivery system network creation and operation.”
Although the Supreme Court made clear that NuHealth in general is not subject to the active state supervision requirement, because this concept is widely known and accepted and has conceptual validity, the Collaboration Bill addresses the issue of targeted State oversight as a way of making sure that the collaborations are appropriately linked to the specified public purposes. Guided by the Supreme Court’s Phoebe Putney decision, NuHealth’s actions do not need to be actively supervised by the state under the state action doctrine, since NuHealth is a substate entity. Nevertheless, the Collaboration Bill provides for two levels of oversight.
First, NuHealth has the responsibility to:
“exercise state oversight by determining whether particular collaborations with public or private entities and individuals further the interests of the state as set forth in [sections 1 and 2 of the Collaboration Bill].”
Second, the Collaboration Bill makes clear that generally applicable provisions of the New York Public Health Law and Department of Health Regulations continue to apply to NuHealth and its collaborators, and, in order to provide a second level of targeted state oversight, requires the filing of an annual report with the Department, and review and comment by the Department within 60 days. The annual report is mandated to provide information:
“concerning the impact of the collaborations… on the advantages and disadvantages identified by the department of health in its request for applications for HEAL NY Phase 21, . . . and concerning the impact on reimbursement to [NuHealth’s] facilities by managed care organizations with respect to commercial plan members, including the extent to which rates have been negotiated that more fairly compensate the corporation’s facilities for the cost of providing services to commercial enrollees, without cross-subsidy from Medicaid or other governmental programs.”
In sum, the Collaboration Bill, as adopted by the legislature and signed into law by Governor Cuomo, recognizes the need for full protection from state and federal antitrust challenges to foster collaborations between NuHealth and other entities that are designed to address defined state policy objectives, all of which are related to ensuring the continued operation of NuHealth’s safety-net facilities as providers of quality healthcare services to under-served populations, while achieving and maintaining financial stability.
How Was This Accomplished?
Development of legislative or other approaches is very fact specific, and requires careful analysis of each situation, development of an approach, and obtaining consensus within the public hospital or other public entity. Next, extensive briefing must be provided to all relevant stakeholders concerning the approach and the need to extend the extraordinary immunity from state and federal antitrust law to a proposed collaboration or series of collaborations. Input and comments from stakeholders must be considered and potentially incorporated into the proposed legislation, in order to obtain approval at the legislative and executive levels.
Public hospitals in other jurisdictions may wish to review the potential value of this approach in their specific circumstances.
Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this Alert or would like to discuss the topic further, please contact your Foley attorney or the following:
Jeffrey C. Thrope
New York, New York
J. Mark Waxman