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Clinical Integration: Decreasing Costs And Improving Care (Legally)

Clinical Integration involves collaboration  among physicians and other health care providers to help ensure higher quality, better coordinated and more efficient services for patients. 

Clinical integration includes both horizontal integration (coordination at the same stage of delivery of care) as well as vertical integration (the coordination of services at different stages). 

Clinical integration is achieved through clinically integrated networks (CINs).  CINs share similar goals with other entities such as Accountable Care Organizations (ACOs), Patient Centered Medical Homes (PCMHs), Physician Hospital Organizations (PHOs) and independent practice associations  (IPAs).  However, there are significant differences.  ACOs focus on care improvement for an entire patient population through various health care delivery systems; PCMHs focus on care improvement for primary care services; and IPAs and PHOs generally engage in financial integration through risk-sharing in order to legally be able to jointly negotiate rates on behalf of their participating providers.

CINs, by contrast, are broader than ACOs and PCMHs in that CINs both focus on all patient populations with access to the network and arrange healthcare services including but not limited to primary care services.  And, unlike PHOs and IPAs, CINs can jointly negotiate fees under certain circumstances, by integrating clinically in lieu of the financial integration implemented by PHOs and IPAs in order to be able to engage in joint negotiation on behalf of their provider network.

The success of clinical integration depends on how effectively the CIN can achieve seven components of clinical integration:

(1) Legal Options—selecting the best organizational structure and operational approach; (2) Physician Leadership—maintaining a robust physician leadership and permitting them to integrate clinical expertise into the CIN’s governance structure;

(3) Participation Criteria—clarifying expectations through participation agreements with participating providers and groups;

(4) Performance Improvement—establishing the baseline performance of the CIN and selecting realistic performance improvement metrics;

(5) Information Technology—using electronic health records, patient registries or health information exchanges to measure performance objectively;

(6) Contracting Options—creating a compliant and effective approach to negotiate with actors inside and outside the network; and

(7) Flow of Funds—incentivizing members through transparent, understandable performance based compensation

The increased quality of care, decreased costs and clearer, more efficient protocols resulting from a successful CIN can benefit patients, providers and hospitals.  Patients within the CIN can potentially stay healthier, longer.  Participating providers may experience increased demand through the CINs direct contracts, as well as increased revenue either from shared savings across the network or as a result of qualifying for incentive-based compensation.  Similarly, participating hospitals can potentially achieve decreased length of stay, provide more appropriate care, lower readmission rates and work more closely with local providers without exposing the hospital to tainted assets or other liabilities of the doctor’s practice (as might be the case with an acquisition or merger).

While the benefits of clinical integration are clear, CINs also face legal issues that, if not properly addressed, will negatively impact their success.  Among other things, clinical integration raises concerns with fraud and abuse statutes such as the Physician Self-Referral (Stark) Law, the Anti-Kickback Statute and the Civil Monetary Penalties Law, as well as federal and state antitrust laws.

Physician Self-Referral (Stark) Law

The Stark law forbids physicians from referring Medicare patients to entities for the furnishing of designated health services (DHS), if the physicians have a financial relationship with the entity and no exception applies.  42 U.S.C. § 1395nn.  Because the Stark law is a “strict liability” statute, bad motives or intent is not required for the government to prove a violation occurred.   

CINs implicate the Stark law when their contracts with participating physicians constitute “compensation arrangements” within the meaning of the Stark law.  Importantly, a compensation arrangement may exist indirectly even if a clinical integration network neither furnishes DSH to Medicare beneficiaries nor bills such Federal health care programs for those services.

If Stark applies, the compensation relationship must satisfy an exception to avoid significant penalties, such as denial of payment by (as well as refunds to) Federal health care programs, plus fines, exclusion from participation in the Federal health care programs and penalties under the Civil Monetary Penalties Law (CMP).  While the applicability of a Stark law exception to a particular clinical integration depends on how that clinical integration is structured, commonly used exceptions include:

(1) Fair Market Value;

(2) Risk Sharing Arrangements;

(3) Indirect Compensation;

(4) Personal Services;

(5) Employment; and

(6) Electronic Health Records Items and Services.  (see 42 C.F.R. § 411.357) 

Determining whether any of these exceptions applies can be complicated for several reasons.  First, physician compensation models commonly used by CINs—e.g., variable, performance-based compensation—are different from the more traditional “hours worked” model on which the Stark law is premised, creating greater risk of a violation.  See Letter from American Hospital Association to the FTC, DHHS and CMS (Sept. 27, 2010).  Second, many of the exceptions listed above require compensation arrangements to be consistent with fair market value (FMV); however, there often is no generally accepted method of calculating FMV for CIN payments to physicians, such as performance-based incentive compensation or shares of cost savings.  Therefore, those interested in clinical integration should consider retaining a valuator as well as legal counsel to achieve innovative compensation arrangements without violating Stark. 

The Anti-Kickback Statute (the AKS)

A criminal law, the AKS prohibits the knowing and willful payment of “remuneration” to induce or reward either the referral of patients or recommending or arranging for the ordering of goods or services that are reimbursable by a federal health care program, e.g., Medicare or Medicaid.  (see 42 U.S.C. § 1320a-7b(b)).  As with the Stark law, CINs should ensure their compensation arrangements with participating providers comply with AKS, or else physicians may face fines, jail terms, and exclusion from Federal health care programs, as well as other penalties under the CMP.

Of particular concern with CINs is the risk that prosecutors will misconstrue the network’s compensation arrangements as a veiled attempt to induce physicians to refer to participating hospitals.  This risk can be avoided by satisfying a voluntary safe harbor, such as:

(1) Risk Sharing and Other Arrangements with Managed Care Organizations;

(2) Personal Services and Management Contracts;

(3) Employment; and

(4) Electronic Health Records Items and Services.  (see 42 C.F.R. § 1001.952). 

Satisfying these safe harbors can be a difficult task, however, since variable compensation agreements and other at-risk incentives are automatically excluded from the first safe harbor mentioned above, since such payments are, by definition, not “set in advance.”

The Civil Monetary Penalty (the CMP) Law

The CMP law authorizes the imposition of substantial civil money penalties against any hospital that knowingly makes payments directly or indirectly to a physician involved in the direct care of a Medicare or Medicaid patient, for the purpose of inducing the physician to reduce or limit medically necessary services.  42 U.S.C. § 1320a-7a(b).  For many years the CMP law was a formidable barrier to hospitals participating in the creation of any financial incentive for physicians to control health care costs, because the OIG interpreted the CMP law as prohibiting even financial incentives to reduce or eliminate wasteful or unnecessary care.  A couple years ago, however, Congress added the words “medical necessity” to the wording of the CMP law, thus significantly easing the regulatory concerns presented by carefully tailored and closely monitored financial incentive programs designed to control costs by making care more efficient and effective, and eliminating waste.


The antitrust laws are intended to regulate businesses as to promote fair competition for the benefit of consumers.  Certain activities constitute per se violations of the antitrust laws, such as price fixing, market allocation and agreements not to compete. 

Notably, the Federal Trade Commission (FTC) has issued Advisory Opinions indicating that a CIN can jointly negotiate rates for competing providers without committing a per se violation of the bar against price fixing, so long as the CIN involves substantial clinical integration measured by four components:

(1) development, implementation and enforcement of detailed, evidence-based clinical practice guidelines;

(2) commitment by all participating physicians to the CIN’s goals and requirements, despite associated restrictions on the physician’s independent decision-making;

(3) measurement and evaluation of each participating provider’s compliance with the guidelines, perhaps through a Quality Assurance Committee; and

(4) investment by all participating providers of the time, energy and capital required to both develop and enforce clinical guidelines and have access to the proper computer infrastructure to facilitate the clinical integration.  FTC, Bureau of Competition, Health Care Div., Norman PHO Advisory Opinion Letter (Feb. 13, 2013).

If a CIN’s successful clinical integration does not constitute a per se violation, courts apply the fact-intensive “rule of reason” test to determine whether the CIN complies with the antitrust laws.  “A rule of reason analysis determines whether the formation and operation of the joint venture may have a substantial anticompetitive effect and, if so, whether the potential effect is outweighed by any procompetitive efficiencies resulting from the joint venture.”  U.S. DOJ and FTC, Statement 9A: Antitrust Enforcement Policy in Health Care (U.S. DOJ and FTC, Aug. 1996), available at https://www.justice.gov/atr/statements-antitrust-enforcement-policy-health-care#CONTNUM_106 (visited June 28, 2017).


At first blush, certain components to a successful clinical integration strategy may appear to conflict with key laws affecting the healthcare industry.  Compensation arrangements tied to outcome-based financial incentives may  risk violating fraud and abuse laws (Stark, the AKS and the CMP).  Similarly, developing a joint contract negotiation strategy among otherwise competing providers risks an enforcement action by state and federal antitrust regulators.  While CINs have been and continue to be successful when properly advised and structured, compliance with the fraud and abuse and antitrust laws is heavily fact-intensive.  Accordingly, early retention of competent legal counsel can make all the difference.

For additional information, please contact Charles Oppenheim or Kevin Royer in Los Angeles at 310.551.8111.

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