Advisory Opinion to Meany (05-14-97)

May 14, 1997

David V. Meany, Esq. 
Michael Best & Friedrich 
100 East Wisconsin Avenue 
Milwaukee, Wisconsin 53202-4108

Dear Mr. Meany:

This letter responds to your request on behalf of Yellowstone Physicians, L.L.C. ("Yellowstone"), for an advisory opinion concerning its proposal to establish and operate a multispecialty physician network joint venture in the area of Billings, Montana. Based on our understanding of the facts as explained in your letter of February 12, 1997, and in subsequent communications from you, as well as other information available to us, Commission staff have no present intention to recommend a challenge to the formation and operation of Yellowstone as proposed.

BACKGROUND

As you are aware, the Commission recently issued a final consent order involving a group of approximately 115 physicians in Billings to settle FTC charges that the physicians, acting through Montana Associated Physicians, Inc. ("MAPI"), had concertedly resisted cost-containment efforts by third-party payers, including obstructing the entry of managed care plans into Billings and agreeing on prices they would accept from managed care plans.(1) According to the allegations of the complaint, MAPI orchestrated boycotts and agreements among those physicians, who did not integrate their practices in any significant way, to negotiate collectively the terms and conditions of dealing with third-party payers, to refuse to contract on terms other than those endorsed by MAPI, and to resist cost-containment measures of third-party payers. The complaint alleges further that the purpose and effect of MAPI was to impede the entry of managed care and other forms of alternative health care financing in the Billings market, and to maintain physician fee levels. This background, as well as our knowledge of the Billings market derived from that investigation, has informed our analysis of the issues raised by your request.(2)

As your letter acknowledges, managed care penetration in Billings is relatively low. Two HMOs currently operate in the Billings area, one owned by Blue Cross and Blue Shield of Montana, Inc.,(3) and one owned by Saint Vincent Hospital and Health Center ("Saint Vincent") in Billings.(4) Yellowstone anticipates that it will seek provider contracts with both HMOs. A number of preferred provider organizations also operate in Billings. In addition, your letter states that the Montana Association of Health Care Purchasers, an employer-based purchasing cooperative, is organizing an effort to contract with provider-organized networks on behalf of both private and public sector employee groups. As far as you are aware, no provider group in the Billings area has accepted risk-based contracts.

Payers, however, report that the Billings area has become significantly more competitive in recent years, following the FTC investigation that resulted in the recent order. Both HMOs and several PPOs began to operate during this period, and physician charges have not increased at the rate of some other areas of Montana.

DESCRIPTION

As we understand the facts based on the information you have supplied, Yellowstone will be a for-profit limited liability company owned by its physician members, who also will be participants on Yellowstone's provider panel. It has not yet been determined how many physicians will become Yellowstone members. However, you have provided a list of the physicians that Yellowstone hopes to include as members, and have stated that membership will not include more physicians than those shown on your submission. Each member will make a capital contribution of up to $10,000, and may be required to make further contributions in the future.(5)

The organization of Yellowstone is being directed by approximately 60 physicians who are members of the "Organizing Group." Each of these physicians contributed $2,000 and has participated in the effort to develop appropriate structures for establishing a physician-owned managed care organization.

Yellowstone's principal function will be to enter into managed care provider contracts on behalf of its physician members with third-party payers including insurance companies, health maintenance organizations, and employer groups. Yellowstone plans to enter into contracts under which Yellowstone's participating physicians will share substantial financial risk, either through the use of capitated rates or through fee-for-service contracts with substantial risk withholds.

With respect to capitation contracts, Yellowstone will receive a per member per month payment for medical services and an additional per member per month payment for administrative services. Participating physicians will be paid by Yellowstone for providing medical services based on a discounted internal fee schedule. Part of any surplus in the medical services funds at the end of an accounting period will be allocated to primary care physicians in recognition of their role as "gatekeepers"; the balance of any surplus will be distributed to physician providers based on their individual "merit rating" scores.(6) These scores will reflect each physician's performance on certain predetermined criteria related to Yellowstone's quality assurance and cost-containment goals. To the extent that there are deficits in the medical service funds, Yellowstone may prospectively reduce providers' fee-for-service payments; alternatively, it may withhold funds from the fee-for-service payments as a reserve against potential deficits.

Yellowstone also may enter into contracts providing for discounted fee-for-service payments with a risk withhold. As described in your letter of March 7, 1997, these contracts will involve negotiation by Yellowstone of a discounted fee-for-service fee schedule; some portion of the payments to physicians under the fee schedule will be withheld by the payer, to be paid to Yellowstone at a later time based on the overall success of Yellowstone providers in meeting quality assurance and cost-containment goals agreed to in advance with the payer.(7) Any withheld funds paid to Yellowstone will be distributed to participating providers based on the "merit rating" scores discussed above, or used for Yellowstone's operating costs and reserves.(8)

In order to manage the risk that it will assume under its contracts with payers, Yellowstone intends to implement medical management procedures, including utilization review, quality assurance activities, and credentialing standards and procedures. Yellowstone's Steering Committee and a consultant have developed initial medical management standards and processes and practice parameters. After Yellowstone becomes operational, a medical management committee will be responsible for developing and recommending medical management programs and standards, and practice parameters. According to your submission, this committee will monitor credentialing, utilization and quality data; provide feedback to physician providers; and ensure compliance with medical management standards and practice parameters through education and retraining. The committee will begin by identifying a limited number of diagnostic categories frequently identified by managed care programs as having a significant impact on cost and quality of medical care. The committee will benchmark care protocols for these categories and will conduct in-practice studies of current participating providers' practice patterns against these studies. Yellowstone will implement an educational program regarding these protocols, and will measure providers' progress toward meeting care guidelines for those diagnostic categories. This will begin immediately, even before Yellowstone has entered into any contracts.

The Medical Management Committee will work with Yellowstone's medical director to enforce its medical management policies in accordance with a policy to be approved by the Membership Committee. It also will work with the medical director of each payer to analyze problem cases. Ultimately, Yellowstone intends to acquire and develop a medical management information system to track utilization data and monitor compliance with its standards and practice parameters. This system is expected to produce periodic physician profiles, to identify patterns of over-utilization, and to permit identification of inappropriate utilizers and efforts to modify providers' practice patterns. In the meantime, Yellowstone intends to purchase these services from an independent third party. Yellowstone expects to retain control over utilization review, quality assurance monitoring, and sanctioning of participating providers in accordance with the standards and procedures discussed in your submission. However, the details are subject to negotiation with each payer, and you state that some payers may wish to retain responsibility for providing these services.

Yellowstone will be governed by a Membership Committee consisting of eight physicians. Three of these members are required to be general internists or family practitioners, one must practice pediatrics, one must practice obstetrics/gynecology, and the remaining three members will practice in other specialty fields. Among other functions, the Membership Committee will enter into contracts with payers and providers.

You have identified approximately 363 physicians actively practicing in and around Billings.(9) Yellowstone hopes to have up to 141, or about 39%, of these physicians as participating providers;(10) 36% of the doctors in this area are affiliated with Billings Clinic and have not been invited to the participate.

One of the benefits of the operation of Yellowstone, you assert, will be to present more effective competition to the Billings Clinic for managed care contracts. Billings Clinic is a large multispecialty physician practice employing approximately 137 physicians in Billings and neighboring counties. It is under common control with Deaconess Medical Center, one of two hospitals located in Billings.

Yellowstone will not restrict the ability of its participating providers to participate in other managed care plans or provider networks. You assert that the proposed members of Yellowstone currently participate in other managed care plans, including PPOs and HMOs, and that there are no present indications of significant withdrawals of physicians from managed care plans as a result of the formation of Yellowstone.

At present, Yellowstone does not anticipate that it will conduct a survey of the current fees charged by its participating providers. Instead, it intends to use commercially-available data on fees in the Billings area to construct internal fee schedules and prices for Yellowstone's products. Fee schedules developed for external use will be made available only to members of Yellowstone's Membership Committee, management staff, and consultants, not to participating providers in general. If a fee survey becomes necessary, it will be conducted by an independent consultant, and the information will not be made available to individual participating providers.

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). Yellowstone will be composed of independent physicians and groups of physicians, many of whom are in competition with one another; and Yellowstone, 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 financial integration among Yellowstone's physicians. Thus, in accordance with the analytical framework discussed in the Policy Statements, we have evaluated the likely competitive effects of the formation and operation of Yellowstone under the rule of reason.

If Yellowstone operates in the manner described in your proposal, its members will share substantial financial risk through the offering of contractual arrangements based on capitation or discounted fee-for-service with a risk withhold. Yellowstone intends to provide services on a capitated basis, under which it will be obligated to provide the full range of covered services to a defined patient population in exchange for a set per member per month premium. In addition, Yellowstone anticipates entering into contracts where a substantial portion of the fees due to Yellowstone participating physicians will be withheld by the payer, with the withhold to be returned to Yellowstone only if the members of Yellowstone as a group achieve certain quality and utilization criteria agreed to in advance with each payer. As you have described these mechanisms in your letter, they appear to meet the Policy Statement's definition of risk-sharing.(11)

Yellowstone also has developed detailed and specific plans for medical management mechanisms to support the assumption of risk, and will implement internal financial incentives for members to achieve Yellowstone's quality and cost-containment goals. Since Yellowstone participants will be financially integrated, we need not address whether these activities, standing alone, would constitute non-financial integration sufficient to bring Yellowstone's pricing arrangements under the rule of reason. However, these programs evidence the network's intention that the risk-sharing mechanisms will provide significant incentives for its providers to cooperate in controlling costs and improving quality of services delivered by the physicians.

Rule of Reason Analysis

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

Geographic/Product Market

In defining product markets, we first identify the relevant services provided by the network. In general, we have adopted the approach taken in your letter of analyzing the likely effects of the venture with respect to each medical specialty provided by Yellowstone 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 geographic market, you assert that physicians in the communities of Absarokee, Columbus, Crow Agency, Glendive, Hardin, Laurel, Miles City, Red Lodge, and Shepherd, Montana routinely admit patients to the two Billings area hospitals and should be considered as competing in the relevant market. Most of these communities are within approximately 60-mile drives from Billings, and many are serviced by outreach clinics run by Billings physicians. Miles City and Glendive, however, are approximately 140 and 220 miles from Billings, respectively.

We have not conducted a comprehensive market analysis in order to determine the geographic market for each specialty represented in Yellowstone. Most of the physicians you have identified as being in the market are located in Billings itself. Detailed inquiry into the boundaries of specific geographic markets would not affect the conclusions reached in this letter; consequently, we have, for the most part, accepted your representations concerning the definition of the market. However, for purposes of our analysis, we have not included physicians practicing in Glendive and Miles City in the market. While residents of these communities no doubt travel into Billings for services not available locally, it is not clear the extent to which the physicians practicing in these communities should be considered as being in the relevant market for most specialties. The information you have provided indicates that the Billings Clinic has an office in Miles City where six doctors are employed. On the other hand, none of the proposed members of Yellowstone practice in Miles City or Glendive; in fact, all Yellowstone proposed participating providers are located in Billings itself, with the exception of four family practitioners practicing in Laurel (about 15 miles from Billings) and one family practitioner in Red Lodge (about 60 miles from Billings).

Competitive Effects

In a market including Billings and surrounding communities, but excluding Miles City and Glendive, Yellowstone proposes to contract with 141 doctors, who are 39% of the physicians you have identified as being in active practice in the area. Within this same area, Billings Clinic employs 131 doctors, or another 36% of the total. With respect to primary care specialties, Yellowstone proposes to include 16 family practitioners, 12 internists, and 5 pediatricians; these doctors constitute 33% of the practitioners in each of these fields.(12) In light of the facts known to us, affiliation with Yellowstone of this percentage of physicians in each of the primary care fields, on a non-exclusive basis, does not appear likely to cause competitive harm.(13) This is of particular importance to some payers that consider primary care physicians to be most important in the formation of physician panels for managed care plans.

However, in a number of specialty fields Yellowstone's proposed panel has a higher proportion of physicians.(14) In some fields there are only a few physicians or a few physician group practices, so that enrolling one physician or one major group practice in the panel inevitably gives Yellowstone a high percentage of the available doctors in that specialty.(15) As Yellowstone points out, it is not practicable to include fewer than all members of a group practice on the panel; 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 a few areas of practice, Yellowstone would have a substantial proportion of specialists who are not all members of one group practice. Yellowstone would like to have 64% (nine of 14) of general surgeons as participants. These doctors are in three separate practice groups having three, four, and two doctors, respectively. Yellowstone argues that participation of all three groups is necessary to ensure adequate surgical coverage of the two Billings hospitals. In addition, Yellowstone asserts that each of the groups contains one or more highly qualified surgeons, that inclusion of each of these doctors is necessary to provide Yellowstone enrollees with a level of quality commensurate with that provided by its competitors,(16) and that it would be impractical (if not impossible) to offer participation to fewer than all members of an integrated group practice.

Yellowstone also proposes to have as participants 53% (eight of fifteen) of obstetricians/gynecologists in the area, including members of two integrated group practices and one additional solo practitioner. Billings Clinic has five obstetricians/gynecologists, and there are two other solo practitioners located in Billings. Yellowstone asserts that inclusion of all these physicians is necessary to make the panel attractive to payers and to enrollees.(17)

The scope of physician participation in Yellowstone is cause for concern. As was the case with the MAPI matter, discussed above, the proposed members of Yellowstone constitute such a high proportion of non-Billings Clinic specialist physicians in the Billings area that third-party payers seeking to contract with a Billings physician panel having a broad range of physicians' services would have to contract either with the Billings Clinic or with many members of Yellowstone. This raises a significant potential danger to competition if Yellowstone physician participants either refuse to participate in other managed care plans, or if they will agree to participate only on terms comparable to those offered by Yellowstone. Moreover, in light of the limited presence of managed care plans currently operating in Billings, it is possible that Yellowstone members collectively could resist market pressure to participate with managed care plans on competitive terms.

Based on our assessment of the proposal in light of the specific context of the Billings market, however, we have determined not to recommend a challenge based on the size and composition of Yellowstone's proposed provider panel. Yellowstone has asserted plausible business reasons for inclusion of the physicians that it proposes to have as participating providers. In addition, we are relying on your representation that physicians who participate in Yellowstone will be available to contract with payers or other networks independently. Other panels of physicians are available to payers, including the Billings Clinic doctors. Finally, none of the payers to whom we spoke expressed concern that formation and operation of Yellowstone as proposed was likely to impede competition by managed care plans, as long as it operates as a non-exclusive network in fact. Payers observed that the Billings market had become more competitive following the recent FTC investigation, with new entry of several managed care plans offering different combinations of physicians; and that the FTC investigation, complaint, and order had made physicians in Billings more sensitive to the requirements of the antitrust laws.

Potential Efficiencies

We have weighed the significant potential procompetitive benefits that could result from Yellowstone's operation against the potential dangers to competition it poses. Yellowstone intends to accept risk, and to manage the medical care delivered by participating physicians in order to do so. Thus, Yellowstone should inject into the market a type of competition that has not existed before. As a consequence, operation of Yellowstone as proposed may stimulate a comparable competitive response from the Billings Clinic. Information from payers suggests that the Clinic has responded to independent physicians' participation in managed care plans by becoming participants in those plans and others, and by becoming more price competitive. Thus, operation of Yellowstone holds the potential for promoting competition in the Billings market to a greater extent than exists currently.

Collateral Agreements

No anticompetitive collateral agreements among Yellowstone participants appear on the face of the proposal. Yellowstone asserts that it taken precautions to minimize potentially anticompetitive spill-over that could result from the sharing of price information among participating providers. The venture purports to be non-exclusive, and Yellowstone asserts that it intends the network to be non-exclusive in substance as well as form.

CONCLUSION

In light of Billings' current market structure and the history of prior anticompetitive conduct, as discussed above, there are potential dangers in the operation of a physician-controlled joint venture with a high proportion of available physicians in a number of specialties. At the same time, however, the procompetitive potential of an organization that will bear risk, where none now exists, is significant. Therefore, we would not recommend a challenge to the formation and operation of Yellowstone as described above. However, unless participation in Yellowstone is non-exclusive in fact, there is considerable danger that it will restrain competition substantially. In evaluating the future impact of Yellowstone's operation on the market, we would look not only at the extent to which participating providers deal with managed care plans, but whether they do so on independently determined terms. If there is evidence that Yellowstone in operation has anticompetitive effects, we will take appropriate action.

For the reasons discussed above, Commission staff has no present intention to recommend a challenge to the proposed operation of Yellowstone. 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 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. Montana Associated Physicians, Inc., No. C-3704, 62 Fed.Reg. 11,201 (March 11, 1997). The complaint and order also run against the Billing Physician Hospital Alliance, Inc. ("BPHA"), a physician-hospital organization which includes most members of MAPI. The complaint alleges that BPHA acted as a vehicle through which MAPI continued its illegal conduct.

2. You have advised us that some of the proposed members of Yellowstone, including some members of the Organizing Group and Steering Committee, were or still are members of MAPI. However, you state that Yellowstone intends to operate wholly apart from MAPI and BPHA, which you understand continue to operate and to solicit managed care contracts.

3. A recent published report indicated that HMO Montana, the Blue Cross/Blue Shield plan, serves approximately 21,000 covered lives statewide, and that only about 3% of Montana's population is enrolled in HMOs. Failed Alliance Fractures Medical Community, American Medical News 3 (Jan. 20, 1997).

4. The Saint Vincent-owned plan, Yellowstone Community Health Plan, is reported to have approximately 5,500 covered lives. Id. This HMO also has been selected to participate in a Medicare demonstration project that permits Medicare beneficiaries to enroll in provider-sponsored networks and other managed care plans other than traditional HMOs. HCFA Expands Medicare "Choices" Demonstration, HHS News (Feb. 28, 1997).

5. The actual amount of the capital contribution has not been established, and will depend on Yellowstone's needs and the number of owners. Further capital contributions must be approved by 50% of the physician members.

6. Some portion of the medical services payment may be allocated to operating costs and reserves.

7. Specific fee levels and withhold rates will be determined in negotiations with individual payers. In order to protect Yellowstone's competitive interests, you have asked that Yellowstone's current expectations regarding fee levels and withholds not be disclosed to the public.

8. Yellowstone also will attempt to negotiate agreements whereby Yellowstone will share in a portion of any savings in payers' allocated funds for hospital charges in arrangements where Yellowstone has assumed risk for physician services. Yellowstone expects that it will negotiate an agreement with Saint Vincent Hospital and Health Center under which a portion of such savings allocated to Yellowstone will be shared with the hospital. However, Saint Vincent will not participate in ownership or operation of Yellowstone.

9. Most of these physicians are located in Billings, but some practice in Absarokee, Columbus, Crow Agency, Hardin, Laurel, Red Lodge, and Shepherd, Montana. Our assumptions about the relevant geographic market in which to evaluate Yellowstone's operations are discussed below.

10. Some of the physicians that Yellowstone has listed as potential participating providers had not expressed interest in becoming such providers as of the date of your submission.

11. A staff opinion letter issued in 1994 considered a proposed Montana PPO that intended to contract only on a fee-for-service basis at the 88th percentile of fees regularly charged by participating providers, with the PPO retaining 15% of allowable charges in a risk pool to be distributed to participating physicians if cost targets agreed to with particular payers were achieved. ACMG, Letter to Paul W. McVay (July 5, 1994). The staff stated that while the withhold arrangement was of the type that could constitute substantial risk-sharing, the staff was unable to determine whether the proposed compensation arrangement, taken as a whole, was "likely to provide participating physicians with a direct interest in the competitive success of the group as a whole, thus providing incentives for each physician to modify his or her behavior in accordance with the established cost-containment goals and to assure cost-effective behavior by the other physicians in the program." Because almost all participating physicians would have their charges allowed in full, and because it was likely that many physicians would have only a small number of PPO patients in their practice, it was not clear that the 15% withhold would be enough to affect each physician's incentive to increase the number of services provided to enrolled patients. With respect to Yellowstone's proposal, in contrast, allowable fees in fee-for-service contracts are anticipated to be significantly below current market charges; and a substantial withhold is anticipated. Yellowstone plans to enter into capitation contracts as well, and it has proposed to take specific steps to manage care delivered by participating providers so as to achieve the cost and quality goals of the organization. Under these circumstances, the proposed risk-withhold system appears to entail sharing of substantial financial among the physicians. Of course, this conclusion is conditioned on Yellowstone contracts actually being structured as represented in your submission.

12. These three fields, along with general practice, are defined as primary care fields in Yellowstone's proposed Physician Services Agreement. Your listing of physicians does not include any general practitioners.

13. The 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. In a number of specialty areas as well, including anesthesia, cardiology, geriatrics, neurology, occupational medicine, ophthalmology, physiatry, psychiatry, pulmonology, rheumatology, and urology, Yellowstone's percentage of participants is no greater than 33% of providers in the assumed market, and does not appear to raise competitive concerns.

14. We understand that the numbers discussed here represent the maximum potential participation in Yellowstone, and that some of the physicians identified may not join Yellowstone.

15. For example, Yellowstone proposes to have as participating physicians 50% of allergists (one of two in the market); 50% of cardiovascular surgeons (Yellowstone will have three doctors who practice in one group); 40% of dermatologists (four in one group); 44% of emergency medicine physicians (eight in one group); 100% of endocrinologists (only one in the area); 37% of gastroenterologists (three in one group); 100% of immunologists (only one in the area); 50% of nephrologists (two in one group); 44% of hematologists (four in one group); 50% of pathologists (four in one group); 38% of diagnostic radiologists (six in one group); 67% of radiation oncologists (two in one group); and 100% of sleep medicine physicians (only one in the area). In allergy, cardiovascular surgery, and nephrology, all of the non-Yellowstone physicians are employees of Billings Clinic; in dermatology, emergency medicine, gastroenterology, hematology/oncology, pathology and radiation oncology, there are only one or two physicians in the area affiliated with neither the single group that is in Yellowstone nor the Billings Clinic. In diagnostic radiology, there are four independent practitioners who will not participate in Yellowstone; in this field the group practice expected to participate in Yellowstone has 38% of the doctors in the market.

16. The other five general surgeons are employees of Billings Clinic.

17. In addition, Yellowstone proposes to enroll the only three plastic surgeons in Billings (two oral-maxillofacial surgeons will not be included) and 37% of the orthopedic surgeons, including a group practice with six doctors and one solo practitioner. Five orthopedists employed by the Billings Clinic and a seven-member group practice will not be included on the panel. The participation of these providers on a non-exclusive basis does not appear likely to create a significant barrier to operation of competing plans.