Advisory Opinion to Ayervais (09-23-94)

September 23, 1994


Neil E. Ayervais, Esquire
Lohf, Shaiman & Jacobs, P.C.
900 Cherry Tower
950 South Cherry Street
Denver, Colorado 80222

Dear Mr. Ayervais:

This letter responds to your request for a staff advisory opinion on behalf of Rocky Mountain Cardiovascular Affiliates, L.L.C. (“RMCA”).1 RMCA is a Colorado limited liability company whose members are physician cardiovascular services practices located in Colorado, primarily in the Denver metropolitan area. RMCA will negotiate and enter into contracts with third-party payers under which its members will provide cardiovascular services to beneficiaries of those payers, health plans. As is explained more fully below, it does not appear that the formation and operation of RMCA as proposed is likely to violate any law enforced by the Federal Trade Commission.

RMCA was established to offer the services of selected cardiovascular practices to health insurance plans and other purchasers at a capitated rate, and to establish a utilization review program and other mechanisms to guard against the provision of unnecessary care under RMCA contracts. Membership is limited to Colorado physicians who are qualified to perform cardiovascular services and meet written minimum practice guidelines. Members must submit their professional practices and procedures to review by RMCA's quality improvement and credentials committee, and must agree to comply with quality guidelines, procedures, and protocols established by that committee.

RMCA is managed by a board of three managers, elected by the members, who must be either members or physicians employed by member practices. This board intends to negotiate and execute contracts with managed care organizations, including health maintenance organizations and other payers. These contracts will provide for payment to RMCA on a capitation basis.2 Thus, RMCA will receive a specified payment per month for each member of a payer's group, and will be obligated to provide specified services for all members of the group during the term of the contract. Services in each individual case will be provided by an RMCA member of the appropriate subspecialty and geographic location. Members of RMCA will be paid by RMCA, pursuant to a mechanism that imposes penalties for overutilization and provides rewards for cost- effective treatment.

In an effort to reduce the practice costs of its members, RMCA will analyze the office practices of individual members to determine ways in which overhead and operating costs may be reduced, services and equipment integrated to avoid duplication, and management and benefits centralized to reduce administrative costs. RMCA may develop or contract for practice management services for its members to increase operating efficiencies and achieve economies of scale. RMCA members will not exchange price information.

Under Colorado law, admission of new members to a limited liability company requires the unanimous approval of existing members. Eleven independent practice groups comprising 42 practicing physicians were pre-approved for membership in RMCA. RMCA members will continue to offer services outside RMCA, and will not agree on prices to be charged for such services. RMCA members are free to contract with payers individually or through networks other than RMCA.

With the exception of one physician located in Durango, all members of RMCA have their principal offices in the Denver metropolitan area. Some of the members operate clinics and have referral sources in small towns throughout Colorado, western Kansas, and western Nebraska.

RCMA members compete with each other, although each RMCA member practice does not offer identical cardiovascular services. However, in the aggregate, members provide an extensive range of cardiology services, including cardiac diagnosis and treatment, nuclear cardiology, echocardiography, ambulatory monitoring, stress testing, cardiac rehabilitation, electrophysiology, cardiac catheterization, and angioplasty.

Based on your description of the proposed operation of RMCA, as summarized above, it appears that the proposed course of action is unlikely to violate the antitrust laws. Under the Statements of Antitrust Enforcement Policy in the Health Care Area which were jointly issued by the Commission and the Department of Justice last September, the federal antitrust enforcement agencies will not challenge, absent extraordinary circumstances, "a physician network Joint venture comprised of 20 percent or less of the physicians in each physician specialty with active hospital staff privileges who practice in the relevant geographic market and share substantial risk.”3 The proposed operation of RMCA appears to comply, in large part, with the terms of the antitrust safety zone established by the Statement, and does not appear to create any significant risk of competitive harm.

First, RMCA appears to involve substantial risk sharing among the participants to the venture. The statement identifies two examples of substantial financial risk sharing:

when there is an agreement to provide services to a health insurance, plan at a "capitated" (or per subscriber) rate; or

provision by a [network] of financial incentives for its members to achieve cost-containment goals, such as withholding a substantial amount of the compensation due to its members, with distribution of that amount to members only if cost-containment goals are met.

(p.35). Through such arrangements, the risk of loss from higher-than-expected use of services is borne at least in part by the physician group. This helps to ensure that each member of the group has a direct interest in the competitive success of the group as a whole, thus vitiating the incentive of each member to maximize his or her income by increasing the number of services provided to enrolled patients. The risk-sharing mechanism must be designed to provide participating physicians with sufficient incentives to modify their behavior in accordance with the established cost-containment goals, and to assure cost-effective behavior by the other physicians in the program. The risksharing features of the RMCA proposal appear to be designed to provide such incentives, since the group will be paid on a capitation basis.

RMCA appears to exceed slightly the antitrust safety zone's 20% limit on membership of physicians in a particular medical specialty. According to the information you have supplied, RMCA members constitute about 22% of physicians in the Denver area who provide cardiovascular services.3 However, you assert that patients are willing to travel significant distances to obtain cardiology services, and that the members of RMCA attract patients from throughout Colorado as well as from adjoining states. Based on this information, you assert that the relevant market for cardiology services is at least as large as the State of Colorado.

The information you have provided, however, is not sufficient to demonstrate the existence of a statewide market, since no information is available on the extent to which residents of Denver would, in response to a significant price increase, look to providers of cardiovascular services located outside Denver as substitutes for those located in the Denver area. However, it is not necessary to resolve this issue in order to conclude that the proposal does not appear to raise significant competitive problems. Even if Denver is considered the relevant market, RMCA's non-exclusive contracts with 22% of available cardiologists is not likely to confer the power to raise prices above the competitive level or impede the development of competing physician networks. Consequently, the proposal does not appear to pose a threat to competition.

For these reasons, the formation and operation of the RMCA as proposed would not appear to violate any law enforced by the Federal Trade Commission. This letter sets out the views of the staff of the Bureau of Competition, as authorized by the commission's Rules of Practice. Under Commission Rule § 1-3(c), 16 C.F.R. § 1.3(c) (1994), the Commission is not bound by this staff opinion and reserves the right to rescind it at a later time. In addition, this office retains the right to reconsider the questions involved and, with notice to the requesting party, to rescind or revoke the opinion if implementation of the proposed program results in substantial anticompetitive effects, if the program is used for improper purposes, or if it would be in the public interest to do so.

Sincerely yours,

Mark J. Horoschak
Assistant Director

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  1. By letter dated May 13, 1994, you requested a business review letter from the Department of Justice. In accordance with established procedures under the FTC/DOJ liaison agreement, the matter was transferred to the Commission staff.
     
  2. At some point in the future, RMCA may offer global pricing for physician and hospital costs through inpatient or outpatient facilities owned by RMCA members. However, this proposal has yet to be fully developed, and this letter does not address the legality of such conduct.
     
  3. United States Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in the Health Care Area at 34 (September 15, 1993), reprinted in 4 Trade Reg. Rep. (CCH) 1 13,150 (1993). The Statement defines a physician network joint venture as "a physician-controlled venture that jointly markets the services of its member physicians." (p. 33, n.17).
     
  4. The list of competitors was compiled from the American College of Cardiology membership list for 1993, the 1993 Colorado Medical Physician Directory, yellow pages listings, University of Colorado data, and information obtained by Dr. Dennis Battock, one of RMCA's managers. RMCA believes that the services provided by all these cardiac service providers are reasonably interchangeable with those offered by RMCA members, and that all or most of those physicians have hospital privileges.
     
  5. The network also contains one of three cardiologists practicing in Durango, Colorado. In Durango, RMCA's inclusion of one of three cardiologists falls within the terms of the safety zone as it applies to markets with fewer than five physicians in a particular specialty. Statements of Antitrust Enforcement Policy at 34.