Advisory Opinion to Barnes (09-23-94)

September 23, 1994

Scott Y. Barnes, Esquire
Holmes & Thomson
200 Meeting Street
Suite 202
Post Office Box 858
Charleston, South Carolina 29402-0858

Dear Mr. Barnes:

This letter responds to your request for a staff advisory opinion on behalf of the Palmetto Dental Alliance ("Palmetto”). Palmetto intends to establish and operate an exclusive provider organization (“EPO”) of dentists to provide services to beneficiaries of health benefits plans with which Palmetto intends to contract. As is explained more fully below, it does not appear that the formation or operation of Palmetto as proposed is likely to violate any law enforced by the Federal Trade Commission.

Palmetto is a non-membership, not-for-profit corporation. It is governed by a self-perpetuating board of directors, all of whose members must be dentists participating in Palmetto's EPO. Palmetto intends to enter into contracts with third-party payers, such as insurance companies and self-insured employers, under which its panel of participating providers will provide dental care to persons covered under the health care benefits plans of such payers. Contracts with payers will provide for payment to be made to participating providers in accordance with a schedule of allowances to be agreed upon with each payer. Through a third-party administrator, Palmetto has developed a proposed schedule of allowances that is based on published data and is set at approximately the 50th percentile of prevailing charges in the counties of Charleston, Dorchester, and Berkeley, South Carolina ("the Tri-County Area"). Each participating provider will be required to accept, as payment in full, the schedule of allowances contained in Palmetto's contract with each payer. The participation agreement can be terminated by the provider on thirty-day's notice.

Palmetto will withhold 15% of the allowable charges of each participating provider in a risk fund for each payer. This withhold will be paid to participating providers only if aggregate claims under the plan do not exceed a predetermined target to be negotiated with each payer. If aggregate claims are less than the target amount, the participating providers will receive a bonus.

Palmetto will require participating dentists to comply with a peer review program. In particular, Palmetto will review the practice patterns and billing practices of participating providers, and will require prior approval of any treatment plan that costs in excess of $400. All participating dentists will serve, on a rotating basis, on the peer review committee

Palmetto has contracted with an independent firm to administer and process all claims filed by participating providers, and to market the EPO to employers and insurers. This firm has developed the proposed schedule of allowances, and will conduct negotiations with payers.

Palmetto proposes to operate within the Tri-County Area. Within this area there currently are 315 general dentists, ten oral surgeons, and 20 orthodontists. Palmetto has invited 62 dentists, three oral surgeons, and two orthodontists to participate. Palmetto intends, where possible, to have fewer than 20% of all dentists, oral surgeons, or orthodontists in the Tri-County Area as participating providers. However, three of the ten oral surgeons in the area have been invited to participate in order to provide suitable geographic coverage. I understand that two of the three oral surgeons practice as partners of one another. Participating providers are free to participate in other dental networks and to contract with payers individually.

You have asked two questions:

(1)whether negotiation of prices with payers by Palmetto's agent will violate the antitrust laws; and

(2)whether the exclusion of certain dental providers from the EPO constitutes concerted action in violation of the antitrust laws.

Based on our understanding of the facts as summarized above, it appears that the proposed formation and operation of Palmetto is unlikely to violate the antitrust laws. With respect to your first question, Palmetto's agreement with third-party payers on prices to be paid to its participating providers would appear to involve an agreement on prices among otherwise competing dentists. The existence of a horizontal price agreement is not negated by Palmetto's use of an agent to negotiate with insurers (rather than its negotiating directly), or by its allowing dentists to withdraw from participating in Palmetto if they disapprove of the terms of a contract entered into by Palmetto. Where, as here, an organization or its agent enters into an agreement with payers on the terms of payment to a group of providers that they represent, a horizontal price agreement is present.

However, horizontal agreements on price may be permissible under the antitrust laws if they are ancillary to a significant economic integration among the parties to the agreement. 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."' The statement further explains that physician network joint ventures that fall outside the safety zone will not be deemed inherently illegal, but instead will be reviewed under a rule-of-reason analysis if the physician members share substantial financial risk or if the combining of the physicians into a joint venture provides substantial efficiencies that enable them to offer a new product. Under the rule of reason, the enforcement agencies evaluate all the characteristics of a joint venture and of the market in which it operates so as to determine whether the venture may have a substantial anticompetitive effect, and, if so, whether that potential effect is outweighed by any procompetitive efficiencies that are likely to result from the venture. All of these general principles apply as readily to an evaluation of a network of dentists as they do to an analysis of a network of physicians.

The proposed operation of Palmetto appears to fall substantially within the terms of the antitrust safety zone established by the statement. First, Palmetto appears to involve substantial risk sharing among the participants of the venture. The enforcement policy 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 provider 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, an interest that vitiates 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 providers with sufficient incentives to modify their behavior in accordance with the established cost-containment goals, and to assure cost effective behavior by the other participants in the program.

The risk-sharing features of the Palmetto proposal appear to be designed to provide such incentives. Palmetto intends to use a 15% risk withhold in conjunction with a fee schedule that already provides for substantial discounts from prevailing fees in the community. Although the discounted fee schedule by itself does not establish risk-sharing among-the participating dentists, the payment system as a whole appears to provide the necessary risk-sharing. Dentists who already have agreed to a substantial discount from their regular fees are likely to have a significant incentive to recover the withheld funds. Thus, it appears that members of Palmetto would have a strong incentive to meet the cost targets in the contracts.

For the most part, Palmetto also meets the safety zone's criteria of having 20% or fewer of the providers overall or in a particular specialty. According to the information you have supplied, fewer than 20% of the dentists and orthodontists practicing in the area will be participating providers in Palmetto. However, because of the limited number of oral surgeons in the area and the need for making services available in the entire Tri-County Area, three of the ten oral surgeons practicing in the area will be included in the organization.

The size of Palmetto's provider panel would not appear to pose a significant threat to competition. "Market power" is generally defined as "the power to control prices or exclude competition." United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956). Market power may be exercised either unilaterally or in combination with others. The most likely way that a provider network could attain market power would be if:

(1)it included a high percentage of providers in the market; and

(2)those providers -- or a sufficient number of other providers (either currently in the market or new entrants) -- were not available either to form competing arrangements to offer services to payers, or to individually offer their services to payers. This situation could occur, for example, if the network had a high percentage of providers in a market and expressly required its members to market their services to payers exclusively through the network. Similarly, a network could have market power if it had a high percentage of providers in a market, and its members tacitly agreed to deal only through the network or only on the terms that the network offers, or concluded that it would not be in their financial interest to support the development of other plans by participating in them. In each of these cases, payers would be compelled to deal with the network and its providers on terms dictated collectively by the providers. The reduction of competition in the market for providers' services also might enable the network to reduce output and raise prices to consumers in the market for health care services and, indirectly, in the market for prepaid health care plans.

Based on the facts described above, there does not appear to be a significant danger that Palmetto will attain market power. Palmetto's provider panel will comprise a relatively small proportion of dentists available in the community, and those dentists are free to contract with payers outside the EPO. Thus, other plans will not be foreclosed from access to a sufficient number of dentists to compete effectively. While Palmetto will have one third of all oral surgeons on its provider panel, the available information provides no reason to believe that their participation in Palmetto will effectively preclude or impede entry or operation of other plans.

You also have asked whether the exclusion of some dentists from the network would violate the antitrust laws. You state that dentists were selected to participate in Palmetto based solely on their professional competence and geographic location. Since formation and operation of Palmetto would not appear either to create market power or to prevent or discourage the formation of other dental organizations in the Tri-County Area, Palmetto's policy of limiting the number of dentist participants in order to further the legitimate business goals and interests of the joint venture would not constitute an unlawful boycott. To the contrary, excluding dentists from participation in Palmetto for such reasons as the failure to meet quality standards or the failure to abide by utilization control and cost containment measures, would appear to be justified as furthering Palmetto's goal of offering high quality services at lower prices. Such exclusion of dentists may be procompetitive, insofar as it helps Palmetto establish and maintain a favorable reputation, and thus helps to distinguish Palmetto and its dentists from other, lower quality , or more costly dentists or networks competing in the market.3

In summary, the proposed establishment and operation of Palmetto, as described above, would not appear to violate the Federal Trade Commission Act or any provision of the antitrust laws that the Commission enforces. 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,

Mark J. Horoschak
Assistant Director

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1 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) ¶ 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).

2 Nor does there appear to be any basis for concern about coordinated interaction between Palmetto and other networks.

3 Similarly, a decision by Palmetto to limit the number of participating dentists for various other reasons, even if not directly related to quality and service cost concerns, could further Palmetto's legitimate business interests and not be likely to raise any antitrust concerns. Thus, for example, by limiting its panel of dentists, Palmetto might reduce its administrative costs or the costs and difficulty of effectively monitoring utilization of services by its dentists. Likewise, Palmetto might limit its dentists in order to help channel more patients to each dentist, thereby enhancing the incentive for dentists to offer lower fees and submit to rigorous cost and utilization controls.