Advisory Opinion to Harvey (05-19-98)

May 19, 1998


William T. Harvey
Tucker Arensberg, P.C.
1500 One PPG Place
Pittsburgh, PA 15222

Dear Mr. Harvey:

This letter responds to your request on behalf of the Phoenix Medical Network, Inc. ("Phoenix"), for an advisory opinion concerning its proposal to establish and operate a physician network in the Erie, Pennsylvania, area. Based on our understanding of the facts as explained in your letter dated March 27, 1997, and in subsequent communications including your letters of December 31, 1997, March 30, 1998, and April 14, 1998, as well as other information available to us, Commission staff have no present intention to recommend a challenge to the formation and operation of Phoenix as proposed.

DESCRIPTION

As we understand the facts based on the information you have supplied, Phoenix will be a for-profit professional corporation owned by physician shareholders, most of whom also will be participants on Phoenix’s provider panel. Membership in Phoenix is limited to licensed Medical Doctors or Doctors of Osteopathy engaged in the practice of medicine in a ten-county area (the "Primary Service Area") of northwestern Pennsylvania(1). Phoenix will be governed by a 15-member board of directors, elected by the Class A shareholders. Ten of the 15 board members must be primary care doctors,(2) and 13 of the 15 must be Class A shareholders.

Shares of stock in Phoenix were sold at $1,000 per share; each shareholder holds one share. There are two classes of shareholders: Class A common stock is available to independent physicians, defined as those who obtain the majority of their professional income from self- employment or employment by a physician-owned entity. Class B common stock is available to non-independent physicians -- those who are employed by hospitals or other nonprofessional groups. According to the Bylaws, Class B shareholders are not entitled to vote for members of the board of directors, or on other matters except as required by law.(3)

Phoenix’s purposes are to preserve individual providers’ practices by strategically aligning the providers in a manner that enhances their ability to obtain health care contracts, to establish a vehicle for the providers to accept risk-sharing arrangements, and to enhance efficiencies and maintain quality assurance in the provision of comprehensive multi-disciplinary health care. According to the information supplied in your letter of December 31, 1997, Phoenix has 218 shareholders, and has stopped admitting new shareholders. It has not yet been determined how many shareholders will sign participation agreements and actually provide services pursuant to Phoenix contracts. However, in accordance with your request, we have based this letter on the assumption that all shareholders also will be participating providers. In addition, you state that Phoenix may seek to enter into participation agreements with non- shareholders in order to offer comprehensive medical services. Those physicians would not participate in Phoenix on an equity basis, but would participate, along with shareholders, in risk pools established by Phoenix.(4)

Phoenix plans to enter into contracts with third-party payers under which its participating physicians will share substantial financial risk by agreeing to provide all medically necessary services to their enrollees for a percentage of the insurance premiums collected by the payers. You state that Phoenix will pay its primary care physicians on a capitated basis for primary care services. Specialty physicians will be paid by Phoenix on a fee-for-service basis, subject to a 15- 20% withhold to be placed into a risk pool. On an annual basis, funds withheld in the risk pool may be distributed to primary care physicians and specialists upon their meeting or exceeding certain utilization and quality levels.

In order to manage the financial risk that it will assume under contracts with payers, Phoenix intends to implement medical management procedures including utilization management, retrospective review, development of standard practice parameters, and sharing of professional expertise. All participating providers will participate in ongoing utilization management review, quality assurance programs, and credentialing programs undertaken by Phoenix. Phoenix intends to employ a paid medical director and a utilization review nurse. Thus far, Phoenix has relied on Penmed Member Services Company ("PMSCO"), a for-profit arm of the Pennsylvania Medical Society, to assist it in developing the capabilities necessary to accept risk contracts.

You have identified 553 physicians actively practicing in Erie County in the specialties that will be represented in the network, and 1188 such physicians practicing in the ten-county Primary Service Area. Phoenix has 218 shareholders, who are approximately 40% of all the physicians in the represented specialties in Erie County, and approximately 18% of such physicians in the Primary Service Area. As is discussed below, the proportion of participation varies widely by specialty.

Phoenix will assume the risk of providing both primary and specialty physician services to those patients who have designated a Phoenix participating physician as their primary care doctor. Phoenix does not intend to attempt to contract to be the sole physician network of any health plan. Rather, Phoenix envisions that payers will continue to contract with other provider networks, or with physicians individually, in order to provide services to patients whose primary care physician is not a participant in Phoenix.

Participation in Phoenix is nonexclusive. Phoenix states that it will not impose any restrictions on the ability of network providers to provide medical services independently or through other organizations, including other physician networks. Many Phoenix shareholders currently contract to provide services through the two major third-party payers operating in the Erie area -- Highmark Blue Cross Blue Shield and Alliance Health Network, an HMO owned by hospitals in Erie and the surrounding areas.

According to the information you have submitted, there are four significant general acute care hospitals in Erie County: Hamot Medical Center ("Hamot"), Saint Vincent Heath Center ("Saint Vincent"), Metro Health Center, and Millcreek Community Hospital. Hamot and St. Vincent are large tertiary care facilities, and offer a much broader array of services than the other hospitals.(5) You state that Hamot employs 20 to 30 primary care physicians, and Saint Vincent employs 98 providers, including physicians and other practitioners, of whom 63 are in primary care. According to your submission, the doctors employed by these two hospitals account for about 12% of primary care doctors in the primary service area and about 25% of primary care doctors in Erie County. Some physician practices also are owned by the two smaller hospitals and by Highmark. A planned merger between Hamot Medical Center and Saint Vincent Health Center has been announced.

Phoenix has adopted policies designed to ensure that information relating to individual physicians’ fees or other information used to construct fee schedules relating to managed care contracts is not disseminated to individual participating physicians, and to discourage shareholders from using Phoenix as a vehicle for reaching anticompetitive agreements affecting non-network business. Phoenix has designated PMSCO as its sole agent to collect and process pricing information relating to physician services. Any data provided to PMSCO must be at least 90 days old and will not be revealed to individual members of Phoenix. In addition, Phoenix prohibits discussions among shareholders regarding the creation of exclusive territories for the delivery of health care, joint refusals to deal by participants with a person or entity, or price- setting or pricing information except in the course of Phoenix’s negotiations with managed care companies or physician subcontractors.

ANALYSIS
Integration

The analytical framework used by the Federal Trade Commission in assessing physician network joint ventures is set forth in the U.S. Department of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy in Health Care (Aug. 1996). Phoenix will be composed of independent physicians and groups of physicians, many of whom are in competition with one another; and Phoenix, acting by and on behalf of its members, will establish the prices at which members sell their professional services through the network. However, it appears that these price-related agreements are integral to the financial integration of Phoenix’s physicians. If Phoenix operates in the manner described, its members will share substantial financial risk through contracts with third-party payers to provide medically necessary services to certain of their enrollees for a percentage of the premiums collected. Thus, we have evaluated the likely competitive effects of the formation and operation of Phoenix under the rule of reason.

Rule of Reason Analysis

A rule of reason analysis determines whether the formation and operation of a network may have substantial anticompetitive effects and, if so, whether those potential effects are outweighed by any procompetitive efficiencies resulting from the joint venture. In general, the analysis involves the definition of the relevant markets within which the entity operates, and evaluation of the likely competitive effects of the venture, procompetitive efficiencies likely to be engendered by the venture, and any anticompetitive collateral agreements among participants or spillover effects outside the joint arrangement.

Geographic/Product Market

For the purposes of this opinion, we have considered Phoenix’s share of the available physicians with respect to each medical specialty practiced by Phoenix members. We recognize, of course, that there may be some overlap in services provided by physicians in different specialties. However, we consider the specialty approach to be adequate for purposes of this opinion.

With respect to the geographic market, you describe a 10-county Primary Service Area; however, you assert that in some specialties, physicians compete for patients in an even larger area. However, for each specialty group, you provided us with data on practicing physicians in the specialty both in the Primary Service Area ("PSA") and for Erie County (and in some cases a larger area).(6) We have not attempted to determine the precise geographic market for each specialty represented in Phoenix. In this instance, it appears that our conclusions about the questions presented would be the same under any reasonable geographic market definition.

Competitive Effects

Primary Care Physician Services. With respect to primary care physicians, Phoenix includes as shareholders 41 family practitioners, 15 internists, and 6 pediatricians. These physicians constitute 33% of the family practitioners in Erie County (plus 1 of 8 in Venango County and 1 of 28 in Crawford County); 28% of the internists in Erie County (plus 2 of 10 in Crawford County); and 35% of the pediatricians in Erie County.(7) Even assuming that for these physicians the geographic market is no broader than Erie county, affiliation with Phoenix of this percentage of primary care physicians, on a non-exclusive basis, does not appear likely to present a significant risk of competitive harm.(8) Many other primary care physicians are available for contracting with payers. Moreover, several of the hospitals in Erie employ a number of primary care physicians.(9) St. Vincent and Hamot, in particular, employ a large number of primary care physicians who are highly regarded in the community and who have large patient loads. The hospitals’ physician panels appear to be capable of providing significant competition to Phoenix.(10)

Specialty Physician Services. In some specialty areas, Phoenix’s percentage of participants does not appear likely to raise significant competitive concerns. Phoenix has as participating physicians the following proportion of practicing physicians in Erie County and the Primary Service Area ("PSA"):

Specialty In Erie County In PSA
Anesthesiology 29% 11%
Pathology 36% 18%
Dermatology 33% 20%
Emergency
Medicine
0 3%
General Surgery 31% 14%
Neurosurgery 22% 9%
Ob-Gyn 30% 13%
Orthopedic
Surgery
28% 11%
Plastic Surgery 33% 22%
Psychiatry 11% 4%
Radiology 36% 18%

However, Phoenix’s proposed panel has a higher portion of physicians in other specialty areas. You assert that high percentages of specialists and subspecialists is necessary for the success of the network. In some specialty fields there are only a few physicians or a few physician group practices, so that enrolling one physician or one major group practice in a panel inevitably gives Phoenix a high percentage of the available doctors in that specialty.(11) As you have pointed out, it generally is not practicable to include fewer than all members of a group practice on the panel for reasons including cross-coverage responsibilities; and having all of them does not reduce competition among those group members, since they are not competitors of one another in any event. Nonetheless, the limited number of substitutes available to other provider panels in these fields is cause for some concern.

In other specialty areas, Phoenix proposes to include a high percentage of specialists who are not all members of one group practice. For example, Phoenix has as shareholders the following percentages of physicians:

Specialty In Erie County In PSA
Cardiovascular Disease(12)
19 doctors in 2 groups
83% 66%
Cardiovascular/
Thoracic Surgery(13)
9 doctors in 2 groups
69% 69%
Colon and Rectal Surgery
3 doctors in 2 groups
100% 100%
Gastroenterology
7 doctors in 3 groups
100% 50%
Infectious Diseases(14)
4 doctors in 3 groups
80% 67%
Nephrology
6 doctors in two groups
86% 43%
Urology(15)
7 doctors in three groups
55% 40%

In these cases, you have stated that inclusion of a large number of physicians was necessary for the network to offer coverage at both Hamot and St. Vincent (and in some cases, at Metro Health Center);(16) and that coverage at all hospitals is necessary because many patients have a strong preference for one or the other of the hospitals, so that a network offering access to only one hospital is not effectively marketable. Because Phoenix will provide all covered services to patients who select a Phoenix participant as their primary care doctor, the network needs to be able to provide specialty services at the hospital selected by the patient or the primary care doctor.

The scope of the participation of these physicians in Phoenix is cause for concern. The physicians participating in Phoenix constitute such a high percentage of providers in these specialties in Erie County and the Primary Service Area that third-party payers seeking to contract with a multi-speciality physician panel in Erie County would likely have to contract with many members of Phoenix. This raises a significant potential danger to competition if Phoenix participating physicians refuse to participate in other managed care plans, if they agree to participate only on terms comparable to those offered by Phoenix, or if they otherwise use Phoenix as a vehicle to coordinate their pricing behavior.

Based on our assessment of the proposal in light of the specific context of the Erie market, however, we have determined not to recommend a challenge to the formation of Phoenix based on the size and composition of its proposed provider panel; as discussed below, however, we reserve the right to take appropriate action if Phoenix does not operate in fact as a nonexclusive network, or if its operation facilitates collusion among network members or otherwise leads to anticompetitive spillover effects.

As noted, the participation of primary care doctors in Phoenix does not appear to present a significant risk of competitive harm. With respect to specialties where it has a high representation of area doctors, Phoenix has asserted plausible business reasons for inclusion of the physicians that it proposes to have as participating providers. You have represented that physicians who participate in Phoenix will be available to contract with payers or other networks independently, and the structure of Phoenix, as described above, makes it unlikely that the physician participants could, as a result of their participation, refuse to contract with other plans. Phoenix will only contract with health plans to provide services to patients who have selected one of Phoenix’s doctors as their primary care physician. Because Phoenix includes only about one-third of the primary care doctors in Erie, there is an inherent limit on the volume of patients that will flow to specialists through the network; it appears unlikely that most specialists could maintain their practice with only Phoenix patients. Highmark, the local Blue Cross plan, has a very substantial enrollment in the Erie area. It appears, therefore, that as a practical matter, specialists will find it necessary to continue to contract with other health plans. Moreover, the health plans to whom we spoke did not express concern that the formation and operation of Phoenix as proposed was likely to directly impede competition by managed care plans, as long as it operates as a non-exclusive network in fact and does not facilitate collusion or lead to anticompetitive spillover.

Finally, the fact that a majority of the members of Phoenix’s board of directors must be primary care doctors (who also will control the flow of patients to specialists) may place some constraints on the ability of groups of specialists to charge supracompetitive prices through the venture. Since, according to your proposal, all Phoenix providers will receive compensation from a predetermined percentage of the premium collected by contracting payers, the other physicians should have strong incentives to pay those specialists at competitive levels.

Nevertheless, there is a substantial concern that Phoenix participants could use their participation in the network as a vehicle for collusion, in order to covertly agree with one another on the prices they would accept from payers other than through Phoenix. We recognize that Phoenix has taken steps to reduce the likelihood that members will use Phoenix to limit competition outside the venture. But operation of Phoenix could alter the opportunity or incentives of certain groups of physicians to act in concert to restrict competition among them. Particularly given the very high representation in some specialties, such conduct could have very serious anticompetitive effects. Indeed, the payers to whom we spoke expressed some concern about this possibility. If participants refuse to contract with other plans independently on competitive terms, or Phoenix becomes a vehicle for collusion with the hospitals’ panels of physicians, very serious issues would be raised, and we would not hesitate to take appropriate action. We do not, however, consider this possibility sufficient reason for recommending a challenge at this time to the formation of Phoenix.

Potential Efficiencies

We have weighed the significant potential procompetitive benefits that could result from Phoenix’s operation against the potential dangers to the competition it poses. Phoenix intends to accept risk, and to manage the medical care delivered by participating physicians in order to do so. Thus, Phoenix has the potential to inject into the market a type of competition that has not existed before. Moreover, Phoenix may present payers with an alternative to the panels of physicians employed by the two major Erie hospitals.

CONCLUSION

For the reasons discussed above, Commission staff has no present intention to recommend a challenge to the proposed operation of Phoenix. 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), the Commission is not bound by this staff opinion and reserves the right to the 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,(17) or if it would be in the public interest to do so.

Sincerely yours,

Robert F. Leibenluft
Assistant Director

Endnotes

(1) The 10-county Primary Service Area consists of Erie County and the surrounding counties of Cameron, Crawford, Elk, Forest, McKean, Mercer, Potter, Venango and Warren. You state this area was defined based on hospital admissions data and referral patterns to the specialist physicians who formed Phoenix; that substantially all of their referrals are from within the Primary Service Area, and a substantial number of referrals were received from each of the counties. However, almost all Phoenix shareholders have their primary offices within Erie County.

(2) Phoenix considers family practitioners, general internal medicine practitioners, and pediatricians to be primary care physicians.

(3) However, one director currently is a Class B shareholder (and another may be appointed to fill a vacancy), and the Board has committed that in the future, Class B shareholders will be permitted to vote for any board positions (not to exceed two) that are designated for non- independent physicians.

(4) You have not provided any specific information on the terms of such contracts with non-shareholders or the doctors who would be involved, and this letter expresses no opinion on the possible implications of those contracts.

(5) According to the 1997-98 AHA Guide to the Health Care Field, St. Vincent has 477 beds, Hamot has 366 beds, Metro Health Center has 112 beds, and Millcreek Community Hospital has 101 beds.

(6) Our analysis is based on the data contained in your December 31, 1997, letter.

(7) Phoenix shareholders constitute 16% of the family practitioners, 11% of the internists, and 19% of the pediatricians in the 10-county Primary Service Area. In addition, there are 21 general practitioners in Erie County, and 45 in the primary service area, who are not Phoenix members.

(8) The Health Care Enforcement Policy Statements establish a safety zone for non- exclusive physician networks whose physician participants share substantial financial risk and constitute 30% or less of the physicians in each physician specialty in the relevant market.

(9) As a matter of convenience, we refer to as "employed physicians" those physicians who are employed by, those whose practices are owned and managed by, and those with similar financial arrangements with, the hospitals. We understand that all of these physicians are Class B shareholders.

(10) The information you have submitted shows that 21 physicians employed by the hospitals (16 of them in primary care fields) are shareholders in Phoenix; however, it is not clear that all will become participating providers. You state that Phoenix’s intention is to preserve control of the organization by the Class A shareholders ("independent physicians"), and that they must hold 13 of the 15 directors’ seats. However, two of the board seats are effectively designated for employed physicians ("non-independent" Class B shareholders), and next year these doctors will be permitted to vote for those directors. Since the primary business loyalty of employed doctors is likely to lie with the employer rather than with Phoenix, the participation of these doctors in Phoenix is not likely to impair the potential of the hospital doctors to provide strong competition to the network. However, there is a real danger that the presence of employed doctors on Phoenix’s board of directors will facilitate collusion between the network and the hospitals in their capacity as employers of those physicians, or lead to the exchange of competitively significant information. Phoenix’s board of directors has adopted policies requiring board members to disclose conflicts of interest, and prohibiting use of confidential information acquired from Phoenix for the advantage of any entity with which the director is affiliated or employed. Nonetheless, the presence on Phoenix’s board of directors of physicians who are employed by hospitals having a large number of employed physicians presents a potential danger to competition between Phoenix and the hospitals’ panels of doctors. Activities tending to limit competition between Phoenix and the hospitals’ physicians as a group would raise serious antitrust issues.

(11) Phoenix shareholders include two allergists who are 67% of that specialty in Erie County and 40% in the PSA; three endocrinologists who are 60% of that specialty in Erie County and 42% in the PSA; and seven otolaryngologists who are 78% of that specialty in Erie County and 21% in the PSA. In each case, the specialists are all members of a single practice group. In addition, Phoenix includes the only pain management specialist in Erie County or the PSA, and one geriatric specialist who comprises 50% of the doctors in that specialty in Erie County and 25% percent of those in the PSA.

(12) One of the doctors in this specialty who practices in Erie County and is not a Phoenix shareholder is associated in a group practice with Phoenix shareholders, and thus cannot be expected to provide competition to his partners who do participate in Phoenix. The other non- Phoenix cardiologists in Erie County and in the PSA do not provide the same range of services, including invasive procedures, that are provided by the Phoenix shareholders. However, you indicate that some high level cardiology services for patients within the PSA are performed by doctors in Pittsburgh, Cleveland, and Buffalo.

(13) The four cardiovascular surgeons who are not Phoenix shareholders are members of group practices with surgeons who are Phoenix shareholders. The four vascular surgeons in Erie County do not perform the same range of surgery as the Phoenix shareholders, and you have not included them as competitors in the specialty.

(14) One of these doctors is an administrator at one of the hospitals and does not have a substantial practice.

(15) One urologist is located in Crawford County, where there is one other urologist.

(16) The cardiology, cardiovascular surgery, and colon and rectal surgery groups practice exclusively at St. Vincent or at Hamot, while the infectious disease, nephrology, and urology groups confine almost all of their practices to one hospital or the other. Each of the three gastroenterology groups practices predominantly at Hamot, St. Vincent, or Metro Health Center. Consequently, the participation of each of the groups is necessary for Phoenix effectively to offer services at each of those hospitals. We note, however, that under some circumstances the merger of Hamot and St. Vincent, if it takes place, could reduce the need for inclusion of practice groups having privileges at both hospitals.

(17) For example, the merger of Saint Vincent and Hamot, if it is consummated, may have impacts on competitive dynamics in the market that cannot be anticipated at this point.