Advisory Opinion to Evans (07-05-94)

July 5, 1994

George Q. Evans, Esquire
Wise Carter Child & Caraway
Post Office Box 651
Jackson, Miss. 39205

Dear Mr. Evans:

This is in response to your request for an advisory opinion on the legality under the antitrust laws of a method of operation proposed to be undertaken by your clients, Southeast Managed Care, Inc. (“SEMCO”) and Jackson Medical Cooperative, Inc. ("JMC”). SEMCO is a predominantly physician-owned, for-profit corporation that will operate managed care plans serving a three-county area around Jackson, Mississippi. JMC is composed of physicians who will provide the medical services to enrollees and beneficiaries of SEMCO's managed care plans. As is explained more fully below, it does not appear that operation of SEMCO and JMC, as proposed, is likely to violate any law enforced by the Federal Trade Commission.

Semco is a for-profit stock corporation that will operate managed care plans in Hinds, Madison and Rankin Counties, Mississippi (the "Tri-County area').1 It is intended to be a "physician-directed" organization, and stock was offered first to physicians practicing in the Tri-County area. Any unpurchased stock will be offered to area employers and third-party payers and to the public. SEMCO anticipates that approximately 60 doctors practicing in the area have or will purchase stock. Five of the six members of its board of directors are physicians.

SEMCO intends to market to local employers and to third-party payers a package of alternative managed care products that will include a health maintenance organization, a point of service plan, and a preferred provider organization. SEMCO will receive from the payer an administrative fee per employee. In addition, it will share in cost savings realized by the payer pursuant to the risk-sharing arrangement discussed below. SEMCO will contract with JMC for physician services and with hospitals and other ancillary service providers at specified fees and rates for services to be rendered under contracts entered into between SEMCO and each payer.

JMC is a nonprofit membership corporation consisting of primary care and specialist physicians who will provide medical services pursuant to SEMCO's managed care contracts. JMC has at least 174 members, and a number of other Physicians in the community have expressed an interest in joining. JMC expects the number of members to reach approximately 270, at which point JMC intends to limit membership.2 JMC as an entity will be required to contract exclusively with SEMCO. Individual members of JMC, however, will be free to join other physician network joint ventures, to contract individually with health insurance plans, and to continue to see non-plan patients on a fee-for-service basis.3 Each JMC member is required to pay an initial membership fee of $185.

JMC is authorized to enter into contracts with SEMCO that will bind JMC members, subject to a limited right of the physicians to opt out of particular contracts. SEMCO is authorized to market the services of JMC members to payers and to enter into binding contracts with purchasers on terms that have been approved by JMC’s board of directors.

Under SEMCO's HMO plan, JMC will be paid a capitated rate per enrollee. For the PPO product, JMC members will be paid on a discounted fee-for-service basis, with the fee withhold described below. SEMCO will use a fee schedule based on the McGraw-Hill Relative Value Units, and the multiplier has been set so that fees are approximately at the 50th percentile of national rates as determined by Medical Research Data, and about the 60th percentile for prevailing fees in the Tri-County area.

Under PPO contracts, SEMCO will withhold 15% of the amount due each physician for a risk pool. The amounts withheld will paid at the end of the contract year if a predetermined targeted cost saving from the previous year is met . In addition, a payer will be able, if it so desires, to negotiate a second cost savings target, with the resulting savings, if realized, to be divided between the purchaser and SEMCO/JMC. JMC also will use utilization management techniques, including preadmission certification, concurrent hospital review, retrospective review, and individual case management.

There are seven general acute care hospitals within the TriCounty area. SEMCO has contracts in place or under negotiation with four of these hospitals, and does not presently intend to contract with the others.

A number of competing managed care plans are operating or are being developed in the Tri-County area. These include a physician-hospital organization, another PPO, and a Blue Cross-Blue Shield PPO that operates statewide. A number of JMC members currently participate in one or more of these plans.

Based on the description of the proposed operation of SEMCO and JMC that you have provided, and is summarized above, it appears that the proposed course of action is unlikely to violate the antitrust laws. While the proposal clearly involves a horizontal agreement on price and the other terms of dealing among members of JMC, this agreement is ancillary to the partial integration of the members, practices through JMC. Accordingly, the arrangement will be evaluated under the rule of reason. It does not appear that the venture is likely to be able to attain or exercise market poker. Thus, the proposed operation of SEMCO and JMC does not appear likely to restrain competition unreasonably.

Agreements on price and other terms of sale, made by otherwise competing physicians through joint marketing arrangements such as PPOs, raise serious antitrust issues and may amount to per se illegal price fixing where the physicians have not substantially integrated their medical practices or do not share substantial financial risk through the joint venture. See Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982). By contrast, physicians who do substantially integrate their practices or financial arrangements normally will not have their agreements on prices or other related terms of doing business through the joint venture subject to per se condemnation. Rather, these determinations will be subject to rule- of-reason analysis, which weighs their procompetitive and anticompetitive impact. See, e.g., Hassan v. Independent Practice Associates. P.C., 698 F. Supp. 679, 689-691 (E.D. Mich. 1988).

The FTC and the Department of Justice recently jointly issued an enforcement policy statement that establishes an antitrust “safety zone” for physician network joint ventures, such an PPOs, that involve the sharing of substantial financial risk and do not include an participants more than 20% of the area physicians in any specialty with active hospital privileges.5

The statement also explains how joint ventures that do not fall within the safety zone will be analyzed by the antitrust enforcement agencies. Such physician network joint ventures 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. The analysis will seek to determine, considering all the characteristics of the joint venture and of the market in which it operates, whether the venture may have a substantial anticompetitive effect and, if so, whether that potential effect is outweighed by any procompetitive efficiencies resulting from the joint venture.

The SEMCO/JMC arrangement satisfies most but not all of the requirements of the safety zone. First, it appears to involve substantial risk sharing among the participants to 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 [PPO] 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 lose 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 that vitiates the normal incentive of each member to maximize his or her income by increasing the number of services provided to enrolled patients. Thus, 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 risk-sharing features of the SEMCO-JMC proposal appear to be designed to provide such incentives. Under HMO contracts, JMC will accept capitation payment. For PPO contracts, SEMO 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 members of JMC, the payment system as a whole appears to provide the necessary risk- sharing. While some physicians might consider a 15% withhold from their regular fees simply to be a discount or cost of doing business and disregard it,6 physicians who already have agreed to a substantial discount from their regular fees are likely to have a greater incentive to recover the withheld funds. Thus, it appears that physician members of JMC would have a strong incentive to meet the cost targets in the contracts.7

In terms of its overall membership, JMC also falls within the 20% parameter of the safety zone. It does not fully meet the safety zone requirements, however, because in several important medical specialties its membership exceeds the 20% limit.8 In the context of the facts presented to us, however, the size of the provider panel does not appear to pose a significant threat to competition.

“Market power" is generally defined as "the power to control prices (or restrict output) 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 PPO could attain market power would be if: (1) it included a high percentage of physicians in the market; and (2) those physicians -- or a sufficient number of other physicians (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 PPO had a high percentage of physicians in a market and expressly required its members to market their services to payers exclusively through the PPO. Similarly, a PPO could have market power if it had a high percentage of physicians in a market, and its physician members tacitly agreed to deal only through the PPO or only on the terms that the PPO offers. This situation could have anticompetitive effects by requiring those payers to deal with the PPO and its physicians on terms dictated by the physicians. The reduction of competition in the market for physicians, services also could permit the PPO to raise prices to consumers or reduce output in the market for physician services and, in turn, in the market for prepaid health care plans.

Based on the facts described above, there does not appear to be a significant danger that SEMCO/JMC will attain market power through coercive or exclusionary means.9 The provider panel as a whole is only a small proportion of doctors available in the community, so other plans should not be foreclosed from access to sufficient doctors to compete effectively. While JHC has a higher proportion of members in some specialties, the available information provides no reason to believe that these members will be able to impede entry or operation of other plans. A number of other managed care plans are already in operation in the Tri County area, and others are in the planning stage. Of course, if the high representation of some specialties in JMC did in fact impede the ability of other plans to compete effectively, an antitrust concern would arise.

On balance, the development of SEMO/JMC appears to be designed to further rather than to restrict competition. JMC's provider panel as a whole will not be overinclusive; the physicians appear to be bearing genuine risk, both through the fee withhold in the PPO plan and through capitation in the HMO plan; and local market forces are prompting the development of other physician groups with which JMC will be in competition.

For these reasons, the formation and operation of the plan 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. Under the Commission's Rules of Practice §1.3(c), 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

_____________

1 According to the submission, this three-county area is a single market for physician and hospital services.

2 There were approximately 1400 non-federal physicians practicing in the Tri-County area in 1993. Thus, JMC's membership will not exceed 20% of the physicians in practice in the area.

3 However, JMC members are not permitted, during the term of their mem bership in JMC or for one year thereafter, to solicit any person covered by a SEMCO contract to enroll in a competing managed care organization.

4 SEMCO anticipates that with a gatekeeper system, a payer can realize a 10-15% savings the first year.

5 United States Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in the Health Care Area at 33-46 (September 15, 1993), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,150 (1993).

6 See, e.g., Milstein, Bergthold & Selbovitz, In Pursuit of Value: American Utilization Management at the Fifteen-Year Mark at 374, in Making Managed Healthcare Work: A Practical Guide to Strategies and Solutions (P. Boland ed. 1991) (a 10% withhold applicable to only a small number of patients was not enough to change physician behavior); Gordon & Herman, Appropriate Reimbursement Methodologies for Managed Care Systems at 337-39, in Making Managed Healthcare Work: A Practical Guide to Strategies and Solutions (P. Boland ed. 1991) (if physicians do not expect a return of the withhold, they may view it as a discount and increase the volume of services in order to increase total reimbursement).

7 Because JMC will have a limited provider panel, it is more likely that JMC members will have a significant number of patients in their practices who are covered by SEMCO contracts. This factor may also increase the effectiveness of JMC's cost-containment efforts. See Hillman, Pauly, & Kerstein, How Do Financial Incentives Affect Physician's Clinical Decision and the Financial Performance of Health Maintenance Organizations?, 321 N. Eng. J. Med. 86, 90 (1989) (presence of a higher proportion of HMO patients in a physician's practice may increase his or her awareness of the HMO's imperatives).

8 For example, JMC members include 45% of obstetrician-gynecologists and about half of the pediatricians in the market. A number of the pediatricians, however, appear to be subspecialists who may be the only practitioner of that kind in the area. JMC also includes all of the nephrologists in the area. Since all these doctors are in one practice, their participation in JMC does not add to whatever power they may already possess in the market. However, serious antitrust questions would be raised if this group or another sole practitioner in a particular specialty affiliated on an exclusive basis with JMC or SEMCO.

9 Nor does there appear to be any basis for concern about coordinated interaction between SEMCO/JMC and other physician networks.