The Importance of Integration In A Group Practice

April 13, 2006

Integration within a medical group practice is fundamental.  A minimum amount of integration is required to be considered a “group practice” under Stark and Federal antitrust laws.

Generally, a physician is prohibited from referring patients for designated health services (“DHS”) where the physician has a financial relationship, unless an exception applies to permit those referrals.  The most prominent exception for group practices is the in-office ancillary services exception.  A key factor in meeting that exception is compliance by the group with the “unified business test.”

The unified business test is intended to ensure that a group practice is organized and operated on a bona fide basis as a single integrated business enterprise with legal and organizational integration.  Although Stark does not prescribe particular processes for achieving integration, it allows a group to divide into separate divisions, but demands significant “group level” management and operation.  To meet this requirement, the governing board of the group practice must exercise substantial control over all of its operation, including the operation of separate divisions, and not simply “rubber stamp” decisions.

Under an antitrust analysis, integration is fundamental.  As healthcare entities continue to merge and consolidate, the threat of antitrust liability and criminal prosecution becomes more of a dangerous reality.  In October, 2005, a Federal Trade Commission Administrative Law Judge ruled that a merger between Evanston Northwestern Healthcare (“ENH”) and Highland Park (Ill.) Hospital violated Section 7 of the Clayton Act.  The issue first came to the attention of the Government as a result of five health plans filing complaints with the FTC to protest the large price increase demands from ENH.  Aetna, Cigna Corporation, Health Care Services Corporation, Humana and United Healthcare of Illinois were among those “grumbling to the FTC.”  If managed care plans are willing to formally protest price increases forced upon them by a merger of two hospitals, one can only surmise that they would not be reticent to complain about a consolidated physician group that they believe is being unduly aggressive in its reimbursement demands.

There are at least two pertinent antitrust legal questions regarding integration.  One is whether the integration is sufficient so that the two former entities are in fact consolidated as a single entity.  As a matter of law, constituent parts of a single entity are incapable of conspiring with one another.  Thus, the single entity could not by itself violate antitrust laws.  The second legal issue, known as the “Rule of Reason,” asks whether the entities are sufficiently integrated to achieve significant efficiencies.

Both Stark and recent antitrust enforcement actions illustrate the necessity of integration within a group practice.  If the goal is to create a single entity for these purposes, the integration must be substantial and real to achieve single-entity status pursuant to Stark Law; and is an important element in any antitrust analysis.  Upon a complete review of its practices, the group practice should implement the policies that will help it achieve its maximum integration.  Otherwise, without taking further action, any expansion that the group practice undertakes could significantly magnify any integration concerns – making them harder to solve further down the road.

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