Top Five Healthcare Antitrust Trends to Watch in 2017
Antitrust enforcement and litigation had a big year in 2016. In this article, we look back at the most significant cases for the healthcare industry over the last year to identify key trends to watch for in 2017.
1. Provider Mergers
Expect to see the Federal Trade Commission (FTC) vigorously investigating and challenging provider mergers though 2017 and beyond. Last year was a roller-coaster ride for FTC merger enforcement in the healthcare field, with the agency first losing two preliminary injunction cases, and then having both decisions reversed on appeal. The FTC has emerged from these cases with its enforcement record and market definition theories intact.
The basic rubric that emerges from the FTC’s hospital merger cases is that: (1) hospital product markets are well established as “general acute care services;” (2) geographic markets are based on insurer requirements for creating saleable insurance products, rather than on historical patient movements; (3) a significant increase in market concentration in the market is presumed to adversely affect competition; and (4) courts will likely continue to be hostile to arguments that merger efficiencies outweigh the presumed competitive harm of substantial increases in market concentration. Absent highly competitive markets or compelling reasons to merge—such as a genuine “failing firm” situation—the FTC is likely to maintain a hard line against significant hospital merger transactions.
There is likely to be continued provider merger activity through 2017. The pressures that have led to provider consolidation over the last several years are not going away, and may even be heightened if the Affordable Care Act (ACA) is, in fact, repealed. Providers will continue to face the financial pressures of low, non-negotiable Medicare and Medicaid rates and uninsured care, and commercial insurers will continue to seek ways to lower costs through playing off competitive providers, network design and promotion of value-based contracting. Although collaborations short of merger may alleviate antitrust concerns, the investments and time required to achieve efficiency-creating integrations that permit collective negotiation and value-based contracting will still be challenging, and mergers remain the fastest and simplest way to achieve these goals.
2. Certificate of Public Advantage (COPA) Laws
In 2016, we saw the successful use of a state COPA law to shield a hospital merger from FTC attack. After the FTC challenged the proposed merger of West Virginia hospitals Cabell Huntington and St. Mary’s in late 2015, the state enacted a law subjecting certain transactions between teaching hospitals (such as Cabell Huntington) and other hospitals to review and authorization by the West Virginia Health Care Authority, removing the Cabell/St. Mary’s transaction from the reach of federal antitrust laws. In light of this, the FTC was forced to drop its challenge to the merger.
The FTC has been vociferous in its opposition to COPA laws, making numerous policy submissions to state legislatures and Departments of Health over the last few years. The FTC argues that COPA laws undervalue the important role of competition in the healthcare sector, and that placing healthcare providers under state regulatory authority to the exclusion of federal antitrust enforcement and judicial review permits anticompetitive activity. Proponents of the laws note that achievement of state healthcare policies often requires the consideration of broader concerns than competition. They reject the FTC’s contention that state review cannot adequately protect competition where it is desirable.
Several states now have various forms of COPA legislation, and providers are beginning to make use of it. The first COPA under New York’s law permitting collaboration by providers forming a performing provider system for coordination and delivery of healthcare services to Medicaid patients was granted to Staten Island Preferred Provider System (PPS) in December 2016. It is likely that there will continue to be activity in this area, as well as FTC opposition.
3. Pay-for-Delay Litigation
The pharmaceutical industry continues to be beset with suits surrounding so-called “reverse payment” or “pay for delay” patent settlements arising from patent litigation between branded and generic drug manufacturers. These cases arise from the Hatch-Waxman Act, under which generic companies submitting an abbreviated new drug application (ANDA) with the Food and Drug Administration (FDA) must certify that their drug will not infringe a patent (initiating patent litigation with the patent owner). If such certification is made, the first ANDA filer gains a valuable 180-day generic exclusivity period.
Earlier cases made clear that large reverse payments (money payments by the branded manufacturer to the generic manufacturer) in return for delaying market entry were antitrust violations. Since then, there have been fewer settlements involving clear reverse payments, and cases have focused on more ambiguous agreements.
In one case concerning Wellbutrin, for example, the settlement actually permitted the underlying patent dispute to continue and allowed the generic manufacturers to launch their products when they prevailed in the suit or by the end of May 2008. In other cases, agreements have been made about the branded manufacturer holding off on introducing an “authorized generic (AG)” during the exclusivity period, raising disputes about whether such an agreement is actually a “payment.”
The FTC also continues to keep a close eye on the industry, aided by legislation requiring drug companies to report all patent settlements between branded and generic drug manufacturers that relate to branded or generic drugs subject to an ANDA or the 180-day exclusivity period. Relatively few agreements reported to the FTC in 2015 contained significant cash settlements to the generic manufacturer, and the use of “no-AG” commitments also has declined.
4. Generic Drug Pricing Investigations
In November 2016, it was revealed that the Department of Justice (DOJ) Antitrust Division had been conducting a two-year investigation into collusion in generic drug pricing. While public and congressional attention had been focused on branded drugs earlier in 2016 (for example, Mylan’s pricing of the Epipen), the DOJ’s investigation is now bringing generic drugs into the fray. A large number of listed generic companies made disclosures about the inquiry, including Mylan, Teva, Actavis, Impax, Sun, Endo and Taro.
The DOJ’s investigation focuses on “hard-core” cartel conduct— price fixing, bid rigging and market allocation that attracts criminal antitrust charges. Such investigations typically yield large corporate fines, as well as jail terms for individuals involved. In past years, the DOJ has targeted companies in industries as diverse as auto parts, LCD screens, real estate foreclosure auctions, and ocean shipping, obtaining penalties of many millions of dollars from both U.S. and foreign companies, as well as prison terms for many executives.
In January 2017, the first charges were announced when two executives from Heritage Pharmaceuticals pleaded guilty to felony charges that they participated in a seven-year conspiracy to manipulate prices and divvy up customers for doxycycline hyclate, an antibiotic, and glyburide, a medicine used to treat diabetes. Around the same time, 20 states filed a civil suit against Heritage and other generic companies, including Mylan and Teva, relating to the same drugs.
It is typical for investigations like this to spawn additional investigations into other companies and other drugs, as companies under investigation seek to cooperate in return for more lenient treatment. The investigation also could extend to other parts of the pharmaceutical industry such as drug wholesalers and pharmacies.
5. Anti-Steering Rules
In 2016, the U.S. Court of Appeals, Second Circuit, reversed a win by the DOJ in its suit against American Express. The DOJ had alleged that non-discrimination provisions in AmEx’s merchant agreements violated antitrust laws. The non-discrimination provisions prevented merchants from encouraging consumers to use other credit cards that are cheaper for the merchant to accept. The district court had held that AmEx had market power in the credit card market and that the restrictions created an incentive for AmEx to charge higher prices without procompetitive benefits. The appeals court reversed, finding in particular that the lower court made an error in considering the impact of the rules only on one side of the market—the impact on merchants—rather than both sides, which would require considering the impact on both merchants and cardholders.
As in the retail credit card industry, in the healthcare industry insurers have an incentive to steer their insured consumers to the lowest-cost provider. This has led to innovations such as tiered and narrow networks and other mechanisms to incentivize patients to use particular providers with whom insurers have negotiated preferred rates. The DOJ and FTC have hailed these developments as procompetitive in that they promote price competition between different providers seeking preferred status in various plans, ultimately resulting in lower prices.
The DOJ is currently suing the Carolinas Healthcare System in North Carolina, alleging that the CHS used its dominant market position to impose provisions in its contracts with major health insurers preventing the insurers from using steering mechanisms. (See Steering and its Broad Implications for Payer-Hospital Negotiations). The DOJ alleges that by preventing steering Carolinas Healthcare has interfered with the competitive process and has been able to impose significant annual reimbursement rate increases as a result. CHS has argued that the AmEx decision undermines the legal arguments at the core of the DOJ’s case and has sought to dismiss the case. The Court’s decision is pending. The CHS case has important implications for the ability of providers to restrict insurers, and could lead to even broader adoption of tiering and steering in insurance products.
Many of the trends that made 2016 a banner year for antitrust litigation and enforcement are continuing and even strengthening in 2017. Provider mergers—and the market forces that drive them—remain strong. States continue to enact COPA legislation and providers are learning to use it. The FTC continues to increase its scrutiny of the pharmaceutical industry and the practices and pricing around generics. In addition, depending on its outcome, the CHS case could pave the way for potential increases in insurance product tiering and steering. All these signs point to 2017 as another significant year for antitrust, with the need to keep a close watch on pending and upcoming cases.