Bureau of Competition
ANTITRUST ISSUES RAISED BY RURAL HEALTH CARE NETWORKS
Robert F. Leibenluft, Esq.
Assistant Director, Health Care
Bureau of Competition
Federal Trade Commission
Presented at a Meeting of the Network Development Grantees Sponsored by the Federal Office of Rural Health Policy, U.S. Department of Health and Human Services Washington, D.C.
FEBRUARY 20, 1998
I appreciate the opportunity to be here today to discuss the application of the federal antitrust laws to provider networks, particularly those encompassing rural providers.(1) I hope I can answer some of your questions and address some of your concerns about antitrust issues, and let you know about the information that is available from the federal antitrust enforcement agencies that can help you distinguish between conduct that is likely to be anticompetitive and that which may be procompetitive. In addition, I would be very interested in hearing about your perspectives and experiences as rural providers. We recognize that this is a time of significant change for health care providers generally, and that rural providers face unique challenges.(2)
Rural health care markets often have distinctive characteristics that can raise challenging antitrust issues when providers form networks or engage in other cooperative activities. We must be sensitive, of course, to the increased danger of serious consequences that may flow from anticompetitive conduct in rural areas, given the scarcity of alternative providers. But if there is one thing I wish to leave you with after the discussion today, it is the following: while the demands of the antitrust laws, and the competitive values on which they are based, need to be kept in mind by those who develop and operate provider networks and health plans, antitrust should not be a barrier to efforts by rural providers to combine in ways that improve the efficiency or marketability of their services.(3)
As I discuss below, our analysis of rural provider networks encompasses far more than the collective market share of the participants. We look at a wide variety of factors relating to the potential competitive effects of the network, including the efficiencies that it may produce, the extent to which it adds a new choice to the market, and the views of consumers and payers. In markets with only a limited number of providers, the extent to which those providers, in practice, will contract individually with other networks or health plans also is extremely important.
I will begin with a brief overview of antitrust law, describe the basic issues that are raised by provider networks that contract with payers for the services of their members, and explain the questions we consider in evaluating rural networks. I also will describe some government enforcement actions and opinion letters involving provider networks. Finally, I will touch on a few other types of activities that networks might undertake.
BRIEF ANTITRUST OVERVIEW
A brief overview of the antitrust statutes and the conceptual framework of antitrust analysis is necessary for you to understand how we approach network issues. The goal of antitrust law is to ensure that markets operate competitively, so that consumers can choose from a variety of offerings in accordance with their individual preferences. Neither the Federal Trade Commission as an institution, nor antitrust law as a discipline, favors managed care, fee-for-service, or any other particular form of health care delivery. Nor is antitrust designed to protect any group or type of competitor. Rather, our aim is to protect the competitive process for the benefit of consumers.
Section 1 of the Sherman Act is most directly relevant to provider networks. It prohibits "contracts, combinations, and conspiracies" that restrain trade.(4) One crucial element of a violation of Section 1 is an agreement -- which need not be express or formal -- between two or more separate economic entities. For this reason, only collective conduct by independent entities, such as is present when physicians in separate practices or separately-owned hospitals join together to operate through a network, can violate Section 1. Where this collective conduct is absent -- when, for example, members of a single integrated group practice or of a single hospital system contract jointly -- Section 1 issues usually are not present.
Because most contracts "restrain trade" in some sense, Section 1 has been interpreted to prohibit only agreements that "unreasonably" restrain trade or competition. Many types of agreements are analyzed under what is called the "rule of reason," where the procompetitive aspects of the conduct in question are weighed against its anticompetitive effects. Normally, a case brought under the rule of reason requires what can be a fact-intensive inquiry into whether the parties have "market power," which generally is understood to mean the power to raise prices, limit output, or restrict entry into a particular market.
However, the antitrust laws have long recognized that certain types of conduct, including price-fixing and market divisions among competitors, and some group boycotts, are so inherently anticompetitive, and so unlikely to have procompetitive effects, that they are presumed to be illegal. In these cases, involving so-called per se illegal conduct, no analysis of the actual competitive effects of the specific conduct is needed, and the government is not required to demonstrate that the parties to the agreement have market power. Conduct that would be per se illegal standing alone, however, will be evaluated under the rule of reason if it is "ancillary" to an otherwise permissible joint venture or collaborative undertaking. In determining whether an arrangement is ancillary, we look at whether the conduct -- for example, price fixing -- accompanies and is reasonably related to a significant integration of productive assets of independent firms that has the potential to produce efficiencies.
For purposes of illustration, let me explore a couple of hypothetical situations. First, assume that two hospitals create a joint venture to operate a new PET scanner, because neither hospital alone has the volume of patients necessary to support the equipment. Each facility contributes capital to purchase the machine and shares in profit or losses generated by its operation. Both hospitals participate in management, including setting the fee for use of the machine. In a sense, the agreement "fixes" the price of the PET scan technical fee. Nonetheless, this type of agreement generally will be considered "ancillary" to the joint venture and evaluated under the rule of reason, rather than being deemed illegal per se.
Second, assume that a group of doctors, or doctors and hospitals, jointly establish, fund and operate an HMO. Through the HMO, the providers agree on premium prices and on how participating providers will be paid for specific services provided to enrollees. While the providers have agreed on the fees they will receive through the HMO, the agreement will be judged under the rule of reason.
On the other hand, assume that a group of physicians or hospitals decides to negotiate jointly with health plans in order to create a "united front" in dealing with managed care. All the providers do is agree on the fees they will charge, on the payer utilization review terms they will accept, and on which providers will serve patients from certain insurers. This agreement, because it has no potential to create procompetitive effects, is per se illegal under the Sherman Act, and carries a risk of criminal prosecution. The law conclusively presumes that the agreement will reduce competition, even if the parties are mistaken in their belief that they can suppress discounting, and even if they are totally unable to prevent entry of managed care into the market as they intend.
What is the fundamental difference between these examples? In the first and second examples, unlike with the third, the parties have integrated productive assets in a manner likely to benefit consumers, and the price agreement is ancillary to the legitimate goals of the venture. These actions create a new choice for consumers, and thereby may promote competition, and thus are not "naked" restraints of trade. They must be examined under the rule of reason to see what their likely competitive effects will be on the market, given the particular facts and circumstances involved. In the third example, in contrast, prices are likely to be higher than they otherwise would, consumer choice has been restricted, and the antitrust laws presume there is little likelihood that the conduct will offer any benefits for consumers; thus the arrangement can be condemned summarily without a detailed examination of market conditions.
These cases illustrate a very important point. While antitrust law is based on the fundamental premise that competitive markets are the norm and best serve to benefit consumers, it is not inherently hostile to cooperative activity among firms that otherwise are competitors. On the contrary, antitrust analysis encourages cooperative activities that create efficiencies, despite incidental restrictions of competition that flow from the activities, so long as they do not, on balance, restrain market competition unreasonably. Joint ventures among firms that compete with one another are common throughout the economy. However, joint activity can violate the antitrust laws if it restrains competition among the venturers, or between the venturers and outsiders, in ways that are not reasonably related to the beneficial cooperative activity, or if the collective power of the venturers is so great that market-wide competition is significantly restrained, and the inclusion of all the participants is not necessary for the venture to operate effectively.
Unreasonable restriction of competition in violation of the antitrust laws is most likely to arise in the context of agreements among firms that compete with one another; such agreements are termed "horizontal." Arrangements involving sellers of different products or different levels of distribution of a product (such as joint contracting between a hospital and a physician group), or firms that operate in different geographic markets, may raise issues in certain circumstances. Even in those cases, however, the primary concern is likely to center on horizontal effects -- that is, the effect of the arrangement on competition between the parties to the agreement and their direct competitors.
BASIC ISSUES RELATING TO PROVIDER NETWORKS
Issues relating to provider network joint ventures are of two main types. First, are questions relating to agreements that restrain competition among the network participants, such as agreements among competing hospitals, physicians, or other types of health care providers to jointly negotiate contracts with insurers, HMOs, or other third-party payers that determine the prices they will be paid for services they furnish as members of a network. Such agreements, standing alone, would be considered price fixing and thus inherently violative of the antitrust laws. Essentially, therefore, the question is whether such agreements are reasonably related to, and reasonably necessary for, the network's realization of significant potential efficiencies, such as lower prices, better service, or increased quality, and thus are subject to rule of reason analysis; or instead are part of an effort primarily to eliminate price competition among the network members, and thus per se illegal.
Second, assuming that the agreements pass muster under the first test, is the question of the overall impact of the network on competition in the market. This analysis considers matters including definition of the product and geographic markets in which the network participants and the network operate; the proportion of providers included in the network and the competitive significance of other actual or potential competitors; and the effects of the network on possible entry by new competitors and on buyers and consumers. This analysis always considers a variety of factors concerning competitive conditions in the market, and not just the market share of the network providers. This orientation to case-by-case consideration of network activities can in some cases make it hard to draw bright lines between permissible conduct and activity that violates the law. On the other hand, it does permit the analysis to take into account variations among markets, and to prohibit only arrangements that on balance are harmful.
The federal antitrust enforcement agencies -- the Federal Trade Commission and the Department of Justice -- have taken unprecedented steps to provide information and guidance about the application of antitrust law to cooperative arrangements among health care providers. Since 1993, the Federal Trade Commission and the Department of Justice have issued, and twice updated, statements of enforcement policy discussing how the agencies analyze a number of common types of cooperative activity, including various types of provider networks. These antitrust enforcement policy statements are intended to give guidance to the public and the provider community about the nature of our analysis and the types of factors we consider, and to offer specific hypothetical examples showing how we apply the analysis in particular cases.(5) Four of these examples involve rural provider networks.(6) The most recent revisions of the Policy Statements, issued in August 1996, were prompted by concerns about the impact of the agencies' enforcement policies toward provider networks in light of rapid changes in the industry and the development of new service delivery and financing arrangements.
Under the Policy Statements analysis, joint pricing agreements will not be condemned as per se illegal if the participants have integrated their activities through the network in a way that is likely to produce significant efficiencies that benefit consumers, and the price agreements are reasonably necessary to realization of those efficiencies. Such integration can be present when competing providers share with one another substantial financial risk for the services provided through the network. This kind of risk sharing occurs when mechanisms are in place that make the network providers as a group accountable for the total cost of defined services delivered to a group of covered individuals, so that the providers have incentives to cooperate in controlling costs and improving quality by managing the provision of services. Under traditional fee-for-service payment, by contrast, each individual provider stands to maximize his or her revenues by increasing the number of services provided to patients.
The Policy Statements discuss four general types of arrangements currently used by networks that can entail the sharing of substantial financial risk. The kinds of risk-sharing arrangements discussed in the Statements normally are a clear indicator that the network using them involves significant cooperation and integration among its participants, and that the joining together of the physicians in the network has the potential to create efficiencies in the delivery of care that may benefit consumers. Moreover, the setting of price on a collective basis is integral to the use of these kinds of risk-sharing arrangements. Thus, the price agreement is considered ancillary to the overall agreement to operate the venture, and is evaluated under the rule of reason.
The first two types of risk sharing discussed in the Policy Statements are arrangements under which the network agrees to provide a defined set of services to covered persons in exchange for a capitated rate or a percentage of health plan premium or revenue. Both of these arrangements require the venture to provide covered services within a predetermined budget.
A third type of risk-sharing arrangement discussed in the Policy Statements involves "use by the venture of significant financial incentives for its physician participants, as a group, to achieve specified cost-containment goals."(7) These arrangements usually involve an agreement that participating providers will be paid by the third-party payer on a fee-for-service basis. Two common ways of implementing this kind of incentive are the risk withhold, and the bonus or penalty based on the network's success in meeting predetermined cost or utilization targets. The latter type of arrangement involves negotiation with the payer of overall cost or utilization targets, with the group paying a penalty or receiving a bonus to the extent that it meets the target or fails to do so.
The fourth category of risk sharing discussed in the Policy Statements includes certain kinds of "global fees" or "all-inclusive case rates." Included are agreements by a network:
This provision contemplates situations where the venture has significant incentives for its members to cooperate in order to use the most cost-effective mix of resources in each case, and where the venture spreads among its members the risk of loss and possibility of gain on any particular case. Such arrangements have many of the features of capitation, except that the provider is not at risk for the patient's health care status because payment is received for each patient requiring treatment of certain types of conditions, rather than for each patient enrolled in a health plan.
These four categories of risk-sharing arrangements are simply examples. As the Policy Statements explicitly note, we recognize that other types of risk-sharing mechanisms may exist, and we will consider other types of arrangements through which network participants may share substantial financial risk.
The Policy Statements also make clear that integrated provider arrangements that do not include financial risk sharing, but that offer the potential for creating significant efficiencies for consumers, will be evaluated under the rule of reason. The Statements discuss one example of such arrangements: "clinical integration," whereby a network implements "active and ongoing systems to evaluate and modify practice patterns by network participants that create a high degree of interdependence and cooperation among the providers to control costs and assure quality."(9) We will consider other types of efficiencies as well. For example, networks involving non-physician health professionals or ancillary service providers may use different kinds of mechanisms or strive for different kinds of efficiencies than are likely to be common in many physician networks. We will consider the particular nature of the services provided by the network, and the demands of its prospective customers, in assessing its potential to produce efficiencies.(10)
The Statements also provide two "antitrust safety zones" for certain physician networks. The agencies will not normally challenge a physician network where the participants share substantial financial risk and constitute 20% or less (in the case of exclusive networks) or 30% or less (in the case of nonexclusive networks) of the physicians in each specialty practicing in the geographic market. An exclusive network is one where the participants are restricted in their ability to, or do not in practice, contract with payers individually or affiliate with other networks or health plans.
The Statements describe the general principles that underlie our analysis of networks and other provider joint ventures, and make clear that we focus not on the form that networks take, but on their potential for providing real efficiencies in the particular market context in which they operate, and on the relationship of any price agreement among competing providers to the production of those efficiencies. It is important to understand the limited role of the safety zones. Because they need to be simple to apply, are based on very rough approximations of market share, and do not entail the detailed analysis of the specific conduct and market characteristics that often is necessary to assess the impact of an arrangement on competition, the safety zones apply in only limited circumstances. Many arrangements that are not within a safety zone will be procompetitive and legal. It should be very clear that organizations outside the safety zones are neither necessarily illegal nor automatically subject to suspicion or intensive investigation. The safety zones do not indicate the limit of what federal enforcement will tolerate; rather, they indicate a potential starting point for a close, thoughtful inquiry. We want to encourage providers to focus on developing innovative ways to serve consumers better, rather than on the safety zones, so that the market -- that is to say, consumer demand -- governs how delivery systems are structured.(11)
In addition to the Policy Statements, other types of guidance are available from the agencies. The advisory opinion and business review letter processes permit ventures to receive an opinion of the agencies' enforcement intentions with respect to specific proposals within 90 to 120 days of when they receive all necessary information. The FTC advisory opinions and DOJ business review letters contain many examples of our analysis of specific networks. Copies of these letters are available on the agencies' Internet home pages.(12) In addition, agency staff are available for more informal consultation with providers.
I should point out that while most of the issues I have discussed relate to networks that involve competing providers, some antitrust issues can arise concerning actions of a single firm. An example of a single hospital cooperating with the members of its medical staff to impede the development of managed care will be discussed in a moment. Another area of potential concern, that I can only allude to, arises when a monopoly hospital, for example, conditions the sale of inpatient services, for which it does not face competition, on the purchase of other services, such as outpatient, home health, or DME services, in which it does face competition in the local area. I will not discuss these issues today, because such conduct is not central to the operation of most networks, and the law in this area is still developing. However, it is an area of which you should be aware.
ISSUES OF PARTICULAR RELEVANCE IN EVALUATING JOINT CONTRACTING BY RURAL NETWORKS
Analysis of rural markets and rural provider networks illustrates the importance of particularized analysis of specific fact patterns. Rural health care markets vary tremendously in their demographic and geographic characteristics, and in the structure of their provider markets. Rural provider networks vary greatly in their structure, the nature of the participants, the range of activities undertaken, and their potential competitive effects. It should also be kept in mind that rural providers are not necessarily small or unsophisticated; consider, for example, the Marshfield Clinic and other very large multispecialty group clinics, many of which are located in rural areas.
Nonetheless, we are aware of a number of characteristics shared by most rural health care service markets, including
As will be explained, we do take these factors into consideration in our evaluation of rural networks.
The first questions to be asked in evaluating networks that engage in joint negotiation and contracting by network members, is whether the participants have integrated their operations in ways likely to produce significant efficiencies; and whether restrictions on competition among network members are reasonably necessary to effective creation of that product. I have already discussed risk-sharing arrangements and clinical integration, which may establish that kind of integration. As I said earlier, we are open to consideration of other types of integration that may develop.
Assuming a network does not involve any agreements that are per se illegal, the focus of the analysis is the likely overall impact of the network on competition. One starting point for this analysis, but by no means the only factor we take into account, is the size of the network, or more precisely, the proportion of providers in the market who are participants. Clearly, the existence in a market of numerous networks and health plans, each with an adequate panel of providers, coupled with the ability of payers and plans desiring to enter the market to recruit their own provider panels, does much to allay any potential concerns about the competitive impact of the participation in a network of any particular group of providers. However, as we all recognize, this may not be possible in some rural areas. Thus, in evaluating a network, we would necessarily consider factors such as the supply of providers in the area and the network's need to be inclusive in order to have adequate services and coverage, the difficulty of excluding only a few providers, and the feasibility of having competing, adequately-sized networks.
Whether the network has exclusive arrangements with its participants, or instead whether they contract, or are available to contract, with other plans, is a very important consideration. Exclusivity can be an explicit term of participation, may be based on unspoken agreement among the members, or may flow from the actual refusal of network members to contract with other networks or individually with payers or health plans.(13) Antitrust law has no general objection to exclusive arrangements; on the contrary, we recognize that such arrangements may often be beneficial to both parties and can stimulate healthy competition in a number of ways. For example, health plans might choose to compete, as staff model HMOs have, by assembling a panel of doctors and hospitals who provide services only through the HMO. But a problem arises if the exclusive arrangement forecloses competition by applying to such a large proportion of available providers that other networks or health plans cannot assemble a provider panel that permits them to offer a competing product. While large markets may be able to support a number of competing plans, each of which has providers who are affiliated only with it, most rural areas cannot. In rural areas, therefore, exclusive arrangements between a network and its providers may raise significant antitrust issues.
Even if formal or implicit exclusivity is not present, the participation of a substantial proportion of providers in a network can raise concerns. One is that the joining together of most or all providers in a market, as a practical matter, may make formation of other networks unlikely, in a situation where operation of competing networks might be feasible and beneficial to consumers. This can occur because cooperation of competitors in even a legitimate joint undertaking may dull the incentives of the participants to continue to compete vigorously with one another outside the joint venture. Another concern flows from the possibility that the venture may result in the exchange of competitively sensitive information that facilitates implicit collusion among the participants to limit competition outside the venture. The higher the proportion of available competitors represented in the joint venture, the greater is the potential impact of these effects on the market as a whole.
Against the possible negative effects of a highly inclusive network, we have to weigh both the efficiencies that the network might produce, and the feasibility of producing those efficiencies with a less inclusive network. If operation of a network promises significant potential benefits to consumers and, given the characteristics of a particular market, the network cannot operate efficiently without including a high proportion of providers, those factors will weigh heavily in our analysis. We would also consider whether, as a practical matter, the efficiencies could be achieved in a way that was significantly less restrictive of competition.
One important aspect of our analysis of networks is identification of the product and geographic markets in which network participants compete. As a convenient starting point, we usually consider each medical specialty and the services provided by each type of institutional provider (such as acute care hospitals or long-term care facilities) to be a separate product market. We recognize, of course, that there may be competition among these provider types for some services, and that some providers may offer services (such as tertiary care, for example) that are not supplied by other entities of the same type. We also understand that the extent of competition among types of specialists may vary depending on the region of the country. For example, consumers in some areas (but not in others) may consider family practitioners to be substitutes for pediatricians. This kind of rough-and-ready product market definition often is adequate for a preliminary or more informal analysis of a network. In close cases, a more detailed analysis of actual patterns of competition may be necessary.
Geographic market issues can be complicated in some cases. The question we ask is not just to which firms consumers do turn for services of the type under consideration, but where consumers could practicably turn if they were dissatisfied with the services offered by the firms they currently are using. Providers in rural areas may face significant actual or potential competition from other providers located outside the rural area, at least for some services and customers. To the extent that is the case, a hospital that is the only such facility in its primary service area, for example, may not be able to exercise market power, and we might conclude that the geographic market in which it operates is larger than the local area. In analyzing a rural network, then, we would consider the extent to which it was attempting to attract patients who otherwise would be lost to providers in adjoining areas, as well as the network's impact on local business.
Several examples in the Policy Statements illustrate how antitrust analysis of potential collaboration among providers in rural areas accommodates specific market factors. Because of the scarcity of many types of providers in most rural markets, efficient collaboration may require the participation of a proportion of competing providers that would raise serious questions in other geographic markets. We take account of competitive conditions such as the need for a certain level of provider participation in order for a joint venture to operate efficiently. For example, the Statements discuss a hypothetical nonexclusive PHO composed of the only hospital in a rural county and all of the doctors on its medical staff. The rural county had no managed care plans, and the rural providers had been unable to contract with plans in the neighboring city because too few lives were involved to justify payers undertaking the expense of establishing and managing a network in the county. The providers were losing patients to city providers, even for services available locally, because county residents who worked in the city were covered by managed care plans that used only city providers. The PHO proposed to contract with payers on a risk-sharing basis, not involving capitation or withholds, but using a discounted fee schedule with a potential for the physicians to receive a bonus of up to 20 percent of the payments made if the network succeeded in meeting utilization targets agreed to with the payers. In those circumstances, the analysis states that the agencies would not challenge the formation and operation of the PHO.(14)
I want to make it clear that the paramount goal of the antitrust laws is to protect consumer choice. Sellers' efforts to increase sales or market share by offering a product that better meets consumers' needs or desires are encouraged. Accordingly, providers' formation of a network for the purpose of competing with urban-based health plans, or to make themselves more attractive contracting partners with those plans, is not inherently cause for concern. Nor does the fact that city-based plans have not yet found it worth their while to move into rural areas necessarily suggest that formation of a local network is designed to impede entry by those plans. On the contrary, absence of payer-organized networks in an area may simply indicate that it is more efficient for local providers to establish a network, or that managed care has been slower in reaching that particular geographic market. It is crucial to understand, however, that such networks are procompetitive only to the extent that they add to the choices available to consumers, rather than limit them. Providers may not force their product on the market, even if they believe it is better than other alternatives; nor may they agree among themselves to deal with only one kind of health plan, even if doing so would be less costly and more convenient for them. Buyers have the right to decide, free of coercion from providers acting together, such things as whether they want to contact with providers individually or through a group, and what utilization management programs they want to use. In other words, while providers' establishment of a network may be procompetitive, any collective action by those providers to establish that network, or its administrative or management processes, as the only standard for the market, raises serious antitrust issues.
AGENCY ACTIONS CONCERNING NETWORKS
The agencies' views on what conduct is illegal also is reflected in the enforcement actions they have brought. The presence -- or absence -- of enforcement activity is a good indicator of where problems lie. The Commission has never challenged the activities of a network operating primarily in a very sparsely populated area. We have, however, brought a few cases in small cities that involve collective efforts by doctors to coerce other market participants to act in particular ways in order to limit new competition in their markets. These cases illustrate the types of conduct that are likely to attract our attention.
Physicians Group, Inc. This case involved a challenge to an agreement among doctors in Danville, Virginia, on the prices and other terms of dealing they would accept from payers, and to their joint refusal to contract with payers not meeting those terms. The complaint filed by the Commission in that case alleged that the group was formed to block entry of managed care into the Danville area, and that for a number of years in the late 1980s and early 1990s, it succeeded in doing so. The case was settled when the doctors agreed to entry of a consent order prohibiting, among other things, agreements among them on the price, utilization review, or other important terms on which they would contract with health plans, unless they did so as part of a risk-sharing joint venture. The state of Virginia also joined in the case, and collected money damages for harm done to its employee health plan.(15)
MAPI and BPHA. A consent order also resulted from settlement of charges filed by the FTC alleging that physicians acting through Montana Associated Physicians, Inc. (MAPI) and Billings Physician Hospital Alliance, Inc. (BPHA) had agreed on prices they would accept from payers and obstructed the entry of managed care into Billings, Montana. MAPI included 115 physicians in about 36 independent practices, who were over 80% of the Billings physicians who were not part of a large multispecialty clinic or employed by a hospital. The complaint charged that MAPI members were not economically integrated in any of the ways I have discussed, and that their joint conduct produced no efficiencies that would justify the price agreement. Instead, according to the complaint, MAPI was formed in 1987 in substantial part to be a vehicle for its members to deal collectively with managed care plans, in order to obtain greater bargaining power with payers and thereby to resist competitive pressures to discount fees or to accept reimbursement on other than a fee-for-service basis. In furtherance of this purpose, MAPI orchestrated boycotts and agreements among its physician members in order to fix the prices they would accept from payers and impede the entry of managed care and other forms of alternative health care financing.
BPHA was a physician-hospital organization, formed in 1991 and comprised of one of Billings' two hospitals and 126 members of its medical staff, most of whom were MAPI members. BPHA negotiated with payers on behalf of its physician members. The complaint charges that BPHA's structure and governance gave MAPI substantial control over BPHA's dealings with payers regarding physician contracting, so that MAPI was able to continue to exercise the collective power of its physicians in dealing with payers.
The consent order prohibits MAPI and BPHA from negotiating or refusing to deal with payers on behalf of physicians, determining the terms on which physicians deal with payers, or fixing the fees charged for physicians' services. However, they are permitted to operate or participate in joint ventures involving collective price setting by physicians if the physicians share substantial financial risk and are free to deal individually with payers, or if MAPI and BPHA receive prior approval of the Commission.(16)
It is important to understand that the MAPI case is about physician resistance to competition and managed care, and has only limited applicability to PHOs in general. The complaint states that BPHA was a vehicle through which MAPI carried on its illegal activities, and that the organization did not involve any meaningful integration among its members. The consent does not indicate how we would analyze PHOs that operate in other contexts.
Mesa County IPA. Finally, last year the Commission issued a complaint charging Mesa County Physicians Independent Practice Association, comprised of at least 85 percent of the doctors in private practice in and around Grand Junction, Colorado,(17) with fixing the prices and other significant terms on which its members would deal with some payers, and with collectively refusing to deal with other payers. The IPA was formed in 1987 and entered into a multi-year contract with a local HMO under which its members provided services to HMO enrollees. The complaint charges that the IPA took steps at least through 1995-96 to assure that its members, numbering over 180 doctors, would not deal with other health plans that could engender competition among physicians over fees, or would employ more aggressive utilization management programs. Instead, it urged its members to deal with plans only through the IPA, or on terms that it approved. As a result of this activity, the FTC charged, prices for physician services were higher than they otherwise would have been, and a number of payers who might have offered alternative health insurance programs to patients in the area were excluded, because they could not contract with an adequate physician panel in Mesa County.(18)
The Commission announced provisional acceptance of a consent agreement with the IPA yesterday.(19) The proposed order prohibits Mesa from engaging in certain kinds of activities, including bargaining on behalf of its members collectively, orchestrating collective refusals to deal, or acting as an exclusive bargaining agent for its members. However, Mesa is permitted under the order to contract on behalf of members in connection with a nonexclusive risk-sharing or clinically integrated network.(20) The order contains provisions designed to insure that Mesa operates nonexclusively in fact as well as in name. It also prohibits the IPA from exchanging or facilitating the exchange of information among physicians concerning the terms on which they are willing to contract with payers. The order does not require Mesa to reduce its share of primary care physicians in Mesa County. While such structural relief was included in the notice of contemplated relief issued with the complaint, the Commission determined that it was not necessary given changes that have occurred in the market since the Commission issued its complaint. It appears that significant numbers of IPA members are now contracting on competitive terms with health plans outside of the IPA, and that a number of health plans have been able to enter the market or expand their presence.
Mesa illustrates a problem I alluded to earlier. Some network members may have believed that their arrangement with one HMO presented the best deal for consumers, but our concern was that the doctors acted together to prevent the development of alternative products. The Commission did not challenge the agreement between the IPA and Rocky Mountain HMO, which involved sharing of financial risk by IPA members. The problem arose because the IPA members refused to deal individually with other plans, and the members were such a large share of the physicians in the area that other plans offering other types of arrangements or other terms were precluded from entering the market. As I have mentioned, physicians' belief in the superiority of their product, no matter how sincere, does not justify their concerted refusal to cooperate with other products that consumers might decide to purchase.
St. Joseph PHO. I also will mention one case brought by the Department of Justice involving a physician/hospital organization in St. Joseph, Missouri, because it involves a fact pattern that may occur in rural areas. The complaint charged that St. Joseph Physicians, Inc. (a physician organization with about 85% of the physicians practicing in the county), Heartland Health System, Inc. (operator of the only general acute care hospital in the county), and Health Choice of Northwest Missouri, Inc. (a PHO jointly owned by the hospital and the physician organization) acted together to keep managed care plans from operating in the county. Initially, according to the complaint, the physician organization negotiated price and other terms on which its members would contract with managed care plans, but for 3½ years it failed to reach agreement with any plan. The PHO was then established to offer its own managed care plan, and told payers that its participating members would contract only through the PHO, and only using its own provider panels, its own fee schedule, and its own utilization review systems. Because doctors refused to contract independently, the complaint charged, plans that wanted to offer lower reimbursement levels or different utilization review programs were prevented from operating in the county.(21)
The major antitrust issue in this case arose from the collective negotiation by the physicians, who were not economically integrated in ways likely to produce efficiencies beneficial to consumers. Normally, negotiations between a single hospital and payers do not raise antitrust issues. In this case, however, the hospital stood to benefit from joining with its doctors. Preventing or delaying the development of managed care plans in the area, by preventing them from being able to develop a physician panel, would also protect the hospital from pressure that such plans might be able to exert on hospital prices, as well as from possible reduction in the use of hospital services resulting from the plans' utilization management activities.
Yellowstone Physicians, L.L.C. A staff advisory opinion letter issued to a provider network in Billings, Montana, last year illustrates in more detail how we analyze provider networks.(22) Yellowstone Physicians, L.L.C. is a physician network organized to enter into managed care provider contracts with health plans on behalf of its members. Yellowstone proposed to enter into contracts under which its participating physicians would share substantial financial risk, either through the use of capitated rates or through fee-for-service contracts with substantial risk withholds. In order to manage the risk that it would assume under its contracts with payers, Yellowstone stated that it intended to implement medical management procedures, including utilization review, quality assurance activities, and credentialing standards and procedures.
The Billings market had a couple of unusual characteristics. First, many Billings doctors, some of whom also were members of Yellowstone, had been involved in the MAPI case discussed above. At the time that Yellowstone was formed, the consent order in that matter had been agreed to, but not finalized. Managed care penetration in Billings was still relatively low, although our inquiries suggested that competition among doctors had increased subsequent to the FTC investigation. Second, about 36% of all the doctors in the Billings area were employees of the Billings Clinic, a long-established multispecialty group practice. Thus, the Billings physician market was divided into two major camps -- the Clinic doctors and the independents (most of whom belonged to MAPI).
Yellowstone proposed to have as participants, on a nonexclusive basis, about 39% of the physicians actively practicing in and around Billings. In primary care fields, its proportion of area physicians was about 33%; not enough, by itself, to give rise to substantial concerns about anticompetitive effects. In a number of specialty fields, however, Yellowstone proposed to have as participants a much higher proportion of available physicians. In some cases this was due to the small number of practitioners in the field, or to the fact that a preexisting practice group already contained a large proportion of the doctors in the field. In other instances, however, Yellowstone's members included physicians from different practice groups who comprised more than half of the doctors in that specialty, and, indeed most of the doctors in that specialty who were not employees of the Billings Clinic. Yellowstone asserted that this level of participation was necessary to assure adequate coverage of both Billings hospitals, to provide a full range of high quality services, or to make the panel attractive to payers and enrollees.
As the staff opinion letter noted, the extent of physician participation in Yellowstone was cause for concern. The proposed members of Yellowstone constituted such a high proportion of non-Billings Clinic specialist physicians in the area that third-party payers seeking to contract with a Billings physician panel having a broad range of physicians' services would have to contract either with the Billings Clinic or with many members of Yellowstone. Together, the two groups comprised almost 80% of all Billings area doctors. This raised a significant potential danger to competition if Yellowstone physician members either refused to participate in other managed care plans, or if they agreed to participate only on terms comparable to those offered by Yellowstone. Moreover, in light of the limited presence of managed care plans operating in Billings, the letter noted, it was possible that Yellowstone members collectively could resist market pressure to participate with managed care plans on competitive terms.
Nonetheless, the letter stated that Commission staff did not intend to recommend a challenge to the formation of Yellowstone. The letter explained that Yellowstone had asserted plausible business reasons for inclusion of the physicians that it proposed to have as participating providers. In addition, the staff's conclusion was based on the understanding that physicians who participated in Yellowstone would be available to contract with payers or other networks independently. Other panels of physicians were available to payers, including the Billings Clinic doctors, and the payers to whom we spoke did not express concern that formation and operation of Yellowstone as proposed was likely to impede competition by managed care plans, as long as it operated as a non-exclusive network in fact. At the same time, the letter's conclusion gave weight to the significant procompetitive benefits that could result from Yellowstone's operation. Yellowstone intended to accept risk, and to manage the medical care delivered by participating physicians in order to do so. Yellowstone proposed to inject into the market a type of competition that had not existed there before, and which might stimulate a comparable competitive response from the Billings Clinic. Thus, establishment of the network had the potential to increase competition in the market as a whole. Of course, the letter reserved the Commission's right to take action if operation of Yellowstone proved to be anticompetitive in practice, particularly if Yellowstone participants refused to deal with health plans other than through Yellowstone, or would not contract on terms independently determined by each doctor.(23)
OTHER TYPES OF NETWORK ACTIVITIES
Provider networks also may engage in a number of types of activities other than joint negotiation and contacting with payers. I do not have time to discuss them in detail today, but I can highlight the types of issues that a couple of these activities can raise, and refer you to sources of additional information.
Many networks undertake joint purchasing of products or services on behalf of their members. Joint purchasing arrangements are not likely to raise antitrust concerns unless (1) the joint venture accounts for so much of the market-wide purchases of the product or service that it can exercise market power as a purchaser; or (2) the products or services purchased jointly account for such a large proportion of the cost of the products sold by the network participants who are competitors of one another that the arrangement may reduce competition among them as sellers. The antitrust Policy Statements contain a safety zone for joint purchasing arrangements where the joint purchases (1) account for less than 35% of the total sales in the market of the product or service in question, and (2) the cost of the jointly purchased products or services accounts for less than 20% of the total revenues from all products and services sold by each competing participant in the purchasing arrangement.(24)
We have issued one favorable staff advisory opinion letter concerning a proposed joint purchasing arrangement among two rural hospitals in Alabama. The two hospitals proposed to share clinical, administrative, and maintenance personnel that could not be profitably employed on a full-time basis at either hospital. Based on the information provided to us, we concluded that the arrangement fell within the joint purchasing safety zone.(25)
A number of networks also may want to organize joint ventures among their members to provide specialized clinical or other expensive health care services. The Policy Statements contain a specific discussion of such joint ventures.(26) As the Statements note, such ventures may create procompetitive efficiencies that benefit consumers. These efficiencies may include reducing the cost of providing a service, improving quality, or enabling hospitals to share the costs of developing a service, thereby permitting it to be offered at all. On the other hand, by their very nature these ventures often eliminate present or possible future competition between the participating hospitals, and must be scrutinized carefully under the antitrust laws. I spoke at some length on this subject to the American Hospital Association in October 1996. That speech is available on the FTC home page, and covers the subject in much more detail than I have time to do here.
The threshold inquiry with any shared services arrangement is whether the venture involves integration among the participants that is likely to produce significant efficiencies in the provision of the affected services. Thus, the first step in the analysis is to determine whether the venture involves real integration, or is simply an agreement to restrict competition and decrease output. Thus, as the Statements note, an agreement among two hospitals, each of which can profitably provide both open-heart surgery and a burn unit, that in the future open-heart surgery will be offered only at one hospital while the burn unit is offered only at the other, would, standing alone, be considered an illegal market allocation agreement.(27) On the other hand, an agreement among hospitals to jointly finance, build, and operate a new open-heart surgery or burn unit, where neither hospital had provided the service before, clearly involves significant integration among the parties.
As a general rule, the antitrust rule of reason is applied to integrated joint ventures. This analysis focuses on whether the joint venture may reduce competition substantially, and if it might, whether it is likely to produce procompetitive efficiencies that outweigh the anticompetitive potential.(28)
The Policy Statements also discuss hospital joint ventures involving high-technology or other expensive health care equipment.(29) The Statements provide a safety zone for joint ventures to purchase, operate, and market new or existing equipment if the venture includes only the number of hospitals whose participation is necessary to support the equipment; other hospitals that could not support the equipment individually or through formation of a competing joint venture also can be included. Ventures that do not fall within the safety zones will be analyzed under the rule of reason.
I appreciate this opportunity to discuss these issues that are of concern to all of us, and hope to be able to continue discussions about the particular circumstances and needs that rural providers face. We are aware of the challenges confronting you, and I am confident that the antitrust laws should not prevent you from adapting to changing market realities, or from developing ways to provide high quality, cost-effective health care. My staff and I are available to discuss these issues with you, either in general terms or in the context of a request for an advisory opinion relating to specific planned activity.
1. The views expressed here are my own, and do not necessarily represent the views of the Federal Trade Commission or of any individual Commissioner.
2. The new Medicare+Choices program is designed to encourage the development of provider-sponsored health plans that will provide services to Medicare beneficiaries, and some special provisions for rural plans were included in the legislation in recognition of the conditions that are present in rural markets.
3. Interestingly, a recent study of rural health networks reported that more than 75% of networks have obtained legal advice about antitrust issues, but fewer than 20% changed their plans based on the advice, and only about 5% sought government review of their plans. The study concluded that antitrust concerns do not affect the operations or plans of most networks. Rural Health Research Center, Division of Health Services Research and Policy, School of Public Health, University of Minnesota, "Rural Health Networks: Forms and Functions" 33, 41 (1997).
4. 15 U.S.C § 1.
5. Department of Justice and Federal Trade Commission, Statements of Enforcement Policy in Health Care (Aug. 1996) (hereinafter "Policy Statements").
6. The Statements also contain a "safety zone" for mergers involving certain small hospitals. Policy Statements at 8.
7. Id. at 69.
9. Id. at 72-73.
10. One option available to networks that do not, for whatever reason, integrate the practices of their participating providers to an extent that would justify joint contracting, is to use the messenger model to facilitate independent contracting by providers who are competitors of other network members. A messenger model network typically uses an agent to convey to prospective purchasers information about the prices that individual network providers are willing to accept, and to convey to those providers any contract offer made by payers. Each provider then makes an independent decision to accept or reject the contract offer. Though use of the messenger model may be less convenient in many respects than joint contracting, it does, if properly implemented, avoid the horizontal price agreements that give rise to the most serious antitrust concerns. In some instances, it may adequately fulfill the needs of the network, or be an interim step for networks that are working toward fuller integration.
11. In health care markets, of course, employers and other payers acting on their behalf generally contract for health care services for groups of health plan enrollees. We place considerable weight on payers' experiences and views in our efforts to assess the competitive impact of particular conduct.
12. Www. ftc.gov and www.usdoj.gov. Copies of the Policy Statements, enforcement actions, and speeches by agency personnel, as well as other useful information, also are available at these websites.
13. The Policy Statements list several indicia of network nonexclusivity: that viable competing networks or managed care plans with adequate physician participation exist in the market; that network physicians actually individually participate in other plans, or there is evidence of their willingness and incentive to do so; network physicians earn substantial revenue through other networks or plans; the absence of indications of significant departicipation by network members from other plans; and the absence of any indications of coordination among network physicians regarding terms of participation in other networks of plans. Policy Statements at 66-67.
14. Id. at 134-38.
15. Physicians Group, Inc., C-3610, 61 Fed. Reg. 10,349 (Mar. 13, 1996) (consent order).
16. Montana Associated Physicians, Inc./Billings Physician Hospital Alliance, Inc., C-3704, 62 Fed. Reg. 11201 (March 11, 1997) (consent order).
17. Mesa County has a population of over 100,000.
18. Mesa County Physicians Independent Practice Association, Inc., D. 9284 (complaint issued May 13, 1997).
19. Provisional acceptance of consent order February 19, 1998 (available on the FTC website and forthcoming in the Federal Register).
20. Mesa is required to provide the Commission with prior notice of its intention to establish a clinically integrated arrangement. The order also contains provisions that will, for a period of five years, govern Mesa's activities when it chooses to operate as a messenger model network.
21. United States v. Health Choice of Northwest Missouri, Inc., Case No. 95-6171-CV-S.J.-6 (W.D. Mo. filed Sept. 13, 1995). DOJ has also brought two cases involving similar issues against PHOs in urban areas. See United States v. Healthcare Partners, Inc., 395-CV-01946RNC (D. Conn. 1995); United States v. Woman's Hospital Foundation, et al., 96-389-BM2 (M.D. La. 1996).
22. Letter to David V. Meany, May 14, 1997 (Yellowstone Physicians, L.L.C.).
23. The Department of Justice has issued several favorable business review letters involving rural networks or providers. See Letter to Michael S. Weiden, November 12, 1996 (RWHC Network, Inc.) (network member hospitals were not competitors of one another); Letter to
Robert M. Langer, July 30, 1997 (Vermont Physicians Clinic) (physician network with up to 100% of area physicians in some specialties, where the network was formed to compete with a managed care panel formed by the only hospital in the area); Letter to James W. Teevans,
August 15, 1996 (Sierra Commcare, Inc.) and Letter to Scott Withrow, March 5, 1996
(Southern Health Corporation) (rural PHOs using a messenger model for physician contracting); Letter to James S. Matthews, March 19, 1996 (Grand Rapids Medical Associates) (physician practice merger); Letter to John F. Fischer, January 17, 1996 (Oklahoma Physicians Network) (statewide IPA).
24. Policy Statements at 53.
25. Letter to Derrell O. Fancher, June 20, 1995 (Elmore Community Hospital).
26. Policy Statements at 12.
27. Policy Statements at 32, n.9.
28. Commission staff have issued two opinion letters involving hospital joint ventures. One involved a proposed joint venture between two hospitals in Chattanooga, Tennessee, to build and operate a new hospital specializing in obstetrical and related gynecological services. Letter to Carlos C. Smith, May 31, 1995 (Erlanger Medical Center/Women's East Inc.). The other involved cooperation between a hospital and a rural primary care clinic in Colorado. Letter to Richard J. Sahli, November 8, 1995 (Columbine Family Health Center).
29. Policy Statements at 12.