Advisory Opinion to Cook (01-30-97)

January 30, 1997

John A. Cook, Esq., 
Cook, Goetz, Rogers & Lukey, P.C. 
1400 Woodward Avenue 
Suite 101 
Bloomfield Hills, MI 48304-3983

Dear Mr. Cook:

This letter responds to your request for a staff advisory opinion on behalf of Mobile Health Resources, L.L.C. ("MHR"). MHR proposes to establish a network of ambulance companies to provide medically-related transportation services on a regional or statewide basis to health care plans, health maintenance organizations, and other large purchasers in Michigan.

Based on our understanding of the facts as explained in your correspondence and during a meeting and subsequent telephone conversations between MHR representatives and Health Care Division staff, Commission staff have no present intention to recommend a challenge to the formation and operation of MHR as proposed. We have not conducted an independent investigation, and our conclusion could change if our understanding of the facts were to change significantly.

Background

Seven private ambulance companies (the "seven companies" or "participating providers") propose to form and operate MHR. For the most part, the seven companies currently operate in different geographic areas in Michigan. The seven companies are: Battle Creek Area Ambulance,(1) which currently operates in Branch, Calhoun, Kalamazoo, and Barry counties; Huron Valley Ambulance, Inc., which currently operates in Livingston, Washtenaw, Monroe, Oakland, Wayne, Lenawee, and Jackson counties; Life EMS, Inc.,(2) which currently operates in Kent, Ottawa, Ionia and Kalamazoo counties; Medstar Inc., which currently operates in Macomb, St. Clair, and Wayne counties; Mobile Medical Response, Inc.,(3) which currently operates in Iosco, Arenac, Gratiot, Saginaw, and Tuscota counties; Professional Med Team, Inc., which currently operates in Muskegon County; and Tri-Hospital Emergency Medical Services Corporation, which currently operates in St. Clair County.

Each of the seven companies is licensed by the State of Michigan as an advanced life support company, and individually provides traditional, medically-related transportation services including: "911" emergency services, contracted emergency and non-emergency transportation services, long distance transportation service, and miscellaneous services such as "standing by" at sporting events.(4)The seven companies provide services on a fee schedule or fee-for-service basis, and do not currently contract with payers on a capitated or other risk-sharing basis.

According to your letter, no medically-related transportation provider, or network of providers, currently offers services throughout more than a few counties or across multiple metropolitan service areas in Michigan. Therefore, most health care plans or other large payers that require medically-related transportation services on a broad regional or statewide basis must contract with multiple providers. You also have stated that no medically-related transportation provider, or network of providers, currently offers in Michigan the "triage" services, described below, that the network intends to provide.

Description

MHR proposes as a network to offer medically-related transportation services throughout the lower half of Michigan's lower peninsula, in an area that encompasses fifty counties and six Health Service Areas ("HSAs").(5) This proposed service area encompasses the twenty-one counties in which only one of the seven companies currently provides medically-related transportation services, the three counties in which two of the seven companies currently operate,(6) and twenty-six counties that are not currently served by any of the seven companies.

MHR proposes to offer a system of "integrated mobile health care services" under which participating providers will operate interdependently and cooperatively in order to manage the volume and quality of transportation services delivered by the network as a whole. The network proposes to use triage services and protocols (also known as "advanced pathway management") to ensure the provision of cost-effective, medically appropriate transportation services to beneficiaries of health plans or other large purchasers that contract with the network.(7) As described in your submission, triage services involve the use of "a sophisticated methodology for determining the lowest level of transport, equipment, trained personnel and destination actually required by the patient."(8) The goal is to assure delivery of medically appropriate services at each stage of responding to, evaluating, or treating a person who may require medically-related transportation services. MHR expects that the services provided by the network can reduce both direct transportation costs and overall medical care costs. According to the information you have supplied, transportation services will be provided more efficiently by, for example, avoiding providing critical care ambulance services to patients who require only wheelchair or shuttle van transportation services, or by taking patients in appropriate cases to a closer urgent care center rather than to a more distant hospital emergency room. In addition, MHR anticipates that its services will reduce payers' overall health care costs by reducing or eliminating unnecessary use of specialized or high-cost care such as emergency rooms, and by facilitating transportation of subscribers to facilities with which a managed care plan has a contract.

As part of the triage service, MHR intends to offer a statewide, 24-hour per day telephone service, from which covered individuals will be able to obtain assistance or information. Trained personnel using predetermined protocols will direct patients to the least intensive medically appropriate treatment setting. In addition, MHR will offer on-site response, evaluation and treatment by paramedics based on medically approved protocols. To support and administer these triage services, MHR will hire a medical director, who will develop and implement the medical pathways and the education and training programs concerning the use of the pathways in which participating providers will be required to participate. In addition, the network intends to develop and refine, in light of experience, protocols governing the types of equipment and number of personnel that need to be dispatched in response to particular types of calls. MHR will implement a management information system ("MIS") as a tool for monitoring provider compliance with protocols, for collecting data necessary to evaluate the efficacy of protocols, and for evaluating any need to modify particular protocols.

MHR also intends to coordinate scheduling and dispatching of participating providers on behalf of health plan beneficiaries. MHR anticipates that this will enable the network to ensure that each beneficiary receives services from the network provider or providers located in closest proximity to the beneficiary or her end destination, or otherwise able to provide the necessary services in the most timely, efficient manner. For example, participating providers will be expected to report long-distance transports to the network, so that any return transports of enrollees or other patients can be coordinated and duplicative travel by network members minimized.

MHR also intends to use its MIS system for patient identification, so that the network can ensure that each beneficiary is transported to a hospital, treatment center, or other provider facility that belongs to the network of the beneficiary's health plan, unless the patient's medical condition indicates a need to transport the beneficiary to a closer facility. In this way, health plans may be able to reduce payments to out-of-plan providers, and the need for subsequent transport of patients to participating facilities may be reduced.

The network also intends to implement utilization review and quality assurance programs. The network proposes to assess, on a quarterly basis, participating providers' compliance with specific performance review standards in providing medically-related transportation services under the terms of network contracts with health plans and other large payers. In addition, the network intends to ensure that each participating provider achieves accreditation by the Commission on Accreditation of Ambulance Services within two years of network formation.

MHR also proposes to centralize, through its MIS system, the contracting, billing, claims processing, and reporting mechanisms of the seven companies in order to facilitate the administration of network contracts. The network also intends to coordinate intra-network communications among the seven companies. Finally, MHR intends to arrange for joint purchasing of equipment, supplies, and insurance; education and training programs; and vehicle maintenance and repair.

According to your submission, these services are not presently offered by the members individually. Development and implementation of the systems to support these functions will cost approximately $1 million during 1996 and 1997. Each of the seven companies has made an initial capital investment of over $50,000 and a commitment to provide an additional capital investment of over $90,000 in 1997. Each will share equally in MHR's profits, losses, and distributions.

MHR proposes to contract with third-party payers primarily on a capitated basis. Under most contracts, the network intends to bear the full risk that the cost of covered services rendered to a beneficiary will exceed the capitated rate.(9) MHR also proposes to negotiate a "shared risk corridor" with certain third-party payers, such that the network will bear sufficient risk to satisfy the payer that MHR has a strong incentive to reduce costs while maintaining quality and patient satisfaction, and the payer will bear the residual risk that costs of services rendered will exceed the targeted amount. On occasion, MHR intends to negotiate fee schedule or fee-for-service contracts, subject to a risk-withhold, in accordance with payer preferences. Under such contracts the network will distribute the amounts withheld only if the participating providers collectively achieve predetermined goals relating to the appropriate performance of on-site triage, on-time service, submission of appropriately documented claims, customer satisfaction, and participation in MHR's group purchasing. In the event of failure collectively to achieve such goals, MHR will forfeit a substantial portion of withheld amounts, as negotiated with the payer, and intends to invest any residual withheld amounts in network training and education to promote future attainment of those goals. The participating providers will be reimbursed for providing medically-related transportation services to beneficiaries of MHR contracts with third-party payers either by subcapitation or according to a fee schedule, subject to a risk-withhold.(10)

The seven member companies will continue to provide traditional, medically-related transportation services independently, and they may join other multiprovider networks. They may not compete with MHR for "Company Business," i.e., integrated, medically-related transportation services across broad geographic regions, with respect to payers already under contract or in negotiation with MHR. You have represented that this provision would not prohibit participating providers from contracting individually with payers who seek to establish their own regional or statewide ambulance networks, and this opinion is based on our understanding that this is the case.

MHR represents that it is not possible to calculate precise market shares for the participating companies, or market concentration in the areas they serve, because there is no centralized collection of industry data such as the number and type of medically-related transports, revenues, or contracts of individual ambulance companies. Based upon the calculations of a consultant hired by the network, MHR estimates that the proposed network would have a market share of approximately 20% of traditional, medically-related transportation services provided in the fifty county area in which the network proposes to operate. There are a number of other providers of ambulance services throughout the proposed service area.(11) Although the network intends to contract with additional medically-related transportation providers as specific needs arise, MHR does not anticipate that its overall market share will increase significantly as a result of such contracting.

Analysis

The general antitrust analysis applicable to multiprovider network joint ventures is described in Statement 9 of the Department of Justice/Federal Trade Commission 1996 Statements of Antitrust Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust ("Health Care Statements"). As discussed in the Statements, "naked agreements" among competitors that fix prices are per se illegal under the antitrust laws. However, the rule of reason applies to price-related agreements that are reasonably necessary to achieve the procompetitive benefits of a joint venture involving significant economic integration among competitors. Economic integration warranting rule of reason analysis of accompanying price-related agreements can be evidenced by an agreement to share substantial financial risk for services provided through the network, as well as by other types of integration that provide efficiency benefits. Under a rule of reason analysis, any potential anticompetitive effects of the proposed venture are weighed against the procompetitive efficiencies that are likely to be produced by the venture. The rule of reason analysis takes into account characteristics of the particular multiprovider network and the competitive environment in which it operates, to determine the network's likely effect on competition.

As proposed, the formation and operation of MHR will involve direct agreement among the participating providers concerning the prices to be charged for medically-related transportation services. The information provided suggests that while the seven companies proposing to operate MHR currently do not compete to a significant extent with one another, they may be considered potential competitors for contracts with large payers who seek medically-related transportation services over increasingly broad service areas. Accordingly, we analyze the price agreement as one among competitors. However, the proposed network merits rule of reason analysis because the proposed price-related agreements appear to be reasonably necessary to the achievement of the efficiencies that may flow from the integrated provision of services by the network.

As proposed, MHR appears to involve both economic and functional integration among its participating providers. The network anticipates contracting primarily on a capitated basis. As the Health Care Statements recognize, this type of contractual arrangement involves shared financial risk by participating providers and can provide significant incentives for them to cooperate in order to achieve quality and cost containment goals. In other instances, MHR will contract on either a "shared risk corridor" or a fee-for-services basis with a negotiated risk withhold. The details of these arrangements have not been finalized, and we cannot determine whether these arrangements, by themselves, involve the sharing of substantial financial risk by participating providers. However, it appears that MHR will involve substantial service integration among participating providers that offers the potential for generating significant procompetitive benefits for consumers. The network intends to offer to covered patients "integrated mobile health care services," using protocols and triage methods to provide cost-effective and medically appropriate services and centralized coordination of transportation services throughout its service area. The members will invest significant capital in the staff, computer systems, and programs necessary to offer these services, and the network will use a risk withhold arrangement to provide additional incentives for the participating providers to achieve the network's goals. By using these systems, MHR anticipates that it can provide higher quality services and reduce payers' costs. According to MHR, the seven companies individually have neither the resources nor the volume of transports necessary to support development, implementation and refinement of these systems. In the circumstances described here, the joint pricing of the services delivered through the network appears to be subordinate to and reasonably necessary for the venture to achieve its potentially procompetitive goals.

MHR has not provided sufficient information to enable us define the relevant geographic markets in which the network or its participating providers operate, or to confirm their approximate market shares. Thus, we cannot offer a definitive opinion that the venture would be found to be permissible after a full rule of reason analysis. The information that is available, however, does not suggest that the proposed network is likely to substantially reduce competition in any relevant geographic market.(12) First, formation of the network is not likely to affect significantly competition among network members for non-network business. Each of the seven companies currently operates in a fairly distinct geographic area, separate from the other participating providers. There appears to be minimal overlap among the service areas in which the seven companies currently offer medically-related transportation services, with overlaps between two providers only in portions of three counties. While we are unable to determine relevant geographic markets in this instance, MHR's estimates of the current shares of individual participating providers in particular counties indicate that, in each of the three counties, the smaller of the two participating providers currently provides a small fraction of transports and likely is not a significant competitor to the larger participating provider in that area. Moreover, there do not appear to be agreements concerning prices to be charged for services provided outside the network, or reasons for concern that providers intend to use the venture to coordinate their activities outside the venture.(13) Consequently, operation of the network as proposed does not appear likely to restrain competition significantly among providers in any local transportation services market.

To the extent that the seven companies may be potential competitors of one another for regional or statewide transportation services contracts, the seven companies collectively represent a relatively small percentage of available competitors (in terms of numbers of companies, and in terms of ambulances owned). Although MHR limits the ability of participating providers to compete for "Company Business," that limitation does not appear to have an unreasonable impact on competition in this instance. Competing networks should be able to form in the extended service area by contracting with the providers of medically-related transportation services that do not participate in MHR, and you represent that payers will be able to contract directly with MHR members should they desire to assemble their own networks.

Conclusion

For the reasons discussed above, Commission staff has no present intention to recommend a challenge to the proposed creation and operation of MHR. 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, if facts change significantly, or if it would be in the public interest to do so.

Sincerely yours,

Robert F. Leibenluft 
Assistant Director

1. Battle Creek Area Ambulance, d/b/a Lifecare Ambulance Service, includes a wholly-owned subsidiary, Southern Regional Ambulance Services.

2. Life EMS, Inc., includes two wholly-owned subsidiaries, Life EMS of Kalamazoo and Life EMS of Ionia.

3. Mobile Medical Response, Inc., includes a wholly-owned subsidiary, Mobile Medical Response of Gratiot.

4. Of each company's individual business, 911 services account for 45-60%; contracted emergency and non-emergency transportation services account for 35-40%; long distance transportation services account for about 3%; and miscellaneous services account for 2-7%.

5. The Michigan Department of Community Health has delineated twelve HSAs throughout the state for health planning purposes.

6. The overlap among participating providers' current service areas occurs between Battlecreek and Medstar in Wayne County; Battlecreek and Life EMS in Kalamazoo County; and Medstar and Tri Hospital in St. Clair County.

7. A consultant employed by MHR defines advanced pathway management services as:

the skilled application of medically sophisticated telephone interrogation algorithms, often by a specially trained nurse or paramedic. Unlike conventional telephone triage (e.g., Emergency Medical Dispatch Protocols), advance pathway management protocols do not end when it is determined that the patient is not experiencing a potentially like-threatening emergency. Instead, the algorithm extends to further assess the patient's problem and suggest a safe and cost-effective "pathway" to resolving that problem.

Letter from Jack L. Stout to John A. Cook at 1 (undated).

8. Letter from John A. Cook to Christine White at 2 (December 10, 1996).

9. Under Michigan law, a company that is not licensed under the Michigan Insurance Code may provide health care services under a capitated contract only to entities that are licensed or otherwise authorized to assume risk. Until MHR obtains such a license, it will negotiate capitation contracts only with entities that are so licensed or authorized.

10. The network has not yet determined reimbursement rates. MHR asserts that in the context of ambulance services, a risk-withhold of at least 12% would provide participating providers with significant financial incentives to achieve the efficiency goals of the network. If the goals enumerated in the contracts are met, MHR proposes to distribute withheld amounts according to the ratio between the total dollar amount withheld from each provider and the total dollar amount available for distribution. As discussed below, we do not determine whether the participating providers would share substantial financial risk through the proposed "shared risk corridor" and risk-withhold arrangements.

11. MHR states that Michigan does not limit the number or type of licenses issued or the ability of a licensed company to expand the number of its vehicles or the geographic area of its operation.

12. This advisory opinion is limited to network operations as currently proposed by the seven companies that will initially participate in the network, and does not address any future expansion of the network to include additional providers.

13. Such activities would, of course, raise serious antitrust concerns.