Advisory Opinion to Miles (02-19-02)

February 19, 2002

John J. Miles
Ober, Kaler, Grimes & Shriver
1401 H Street, N.W.
Washington, D.C. 20005-3324

Dear Mr. Miles:

You have requested an advisory opinion relating to the proposal of MedSouth, Inc., a physician independent practice association located in Denver, Colorado, to integrate partially its member physicians' practices in the ways discussed below, and to enter into contracts with third-party payers for the sale of those physicians' services on a fee-for-service basis. Specifically, you request a statement whether the Commission staff would recommend a challenge to the proposed activities as a violation of Section 5 of the Federal Trade Commission Act.

Based on the information you provided as well as our independent inquiry, we have concluded that per se analysis would not be appropriate in evaluating MedSouth's proposed course of conduct, including its proposed joint negotiation of payer contracts. The program you have described appears to involve partial integration among MedSouth physicians that has the potential to increase the quality and reduce the cost of medical care that the physicians provide to patients. In addition, we have concluded that the joint contracting appears to be sufficiently related to, and reasonably necessary for, the achievement of the potential benefits to be regarded as ancillary to the operation of the venture.

In the context of an advisory opinion, which by definition involves prospective analysis of proposed conduct, we do not have the kind of evidence on the magnitude of the efficiencies that will be produced, or on the extent to which competition in the market will be restrained, that is necessary to reach a conclusion about the overall competitive effect of the venture. We cannot predict at this juncture to what extent the program -- which is still being developed -- actually will achieve the efficiencies that MedSouth anticipates. There is evidence that MedSouth's current physician members may collectively possess the ability to exercise significant market power. We do not know, however, how many members MedSouth will have when the joint negotiation is undertaken,(1) or to what extent MedSouth members would attempt to coordinate their contracting behavior outside the IPA or otherwise engage in practices that impair competition unreasonably. For purposes of this advisory opinion, we accept your representation that MedSouth will operate as a non-exclusive network, so that its participating physicians will be available to contract with payers individually. On balance, therefore, we have concluded that we would not recommend at this time that the Commission bring an enforcement action against MedSouth if it engages in the proposed conduct. As long as MedSouth's physician members actually are available and willing to contract individually with payers who prefer not to contract with the network, at prices that do not reflect the aggregate power of the group, or its membership is at a level where the network physicians are unable to exercise significant market power, implementation of the arrangement is not likely to endanger competition unreasonably. We will, however, closely monitor MedSouth's activities, and will recommend that the Commission take appropriate action if the proposed conduct appears to result in actual anticompetitive effects.

Description

MedSouth

MedSouth is an independent practice association (IPA) that includes competing primary care and specialist physicians who practice in the "South Denver/Arapahoe County" area of Denver, Colorado.(2) It is a for-profit corporation owned by the physician practices of its members. All MedSouth physicians have a practice location in South Denver, and staff privileges at one of the three hospitals located in that area.(3)

As we understand the facts based on the information you have submitted, MedSouth currently includes approximately 432 physicians in 216 practices. One hundred one of the physicians are primary care practitioners (PCPs) (family practitioners, general internists, and pediatricians); and 331 are specialists in 39 specialties and subspecialties. In general, the specialists in MedSouth are those to whom MedSouth PCPs most frequently refer. Until the year 2000, MedSouth had capitated risk contracts with payers that required most referrals to be made to other physicians in MedSouth. The referral patterns established under those contracts largely have continued. MedSouth estimates that its PCPs make 90% to 95% of their referrals to specialty physicians in MedSouth. MedSouth's specialists, however, also receive a large number of referrals from doctors outside the IPA.

MedSouth expects that a number of its current members will terminate their membership in the organization before it fully implements the proposed program and attempts to negotiate contracts, so that it will represent fewer physicians in negotiations with payers than currently are members. The IPA is not currently accepting new member practices, and it does not intend to do so in the future, except perhaps in practice areas where it has no or few members and has a definite need for the services in question. It does permit physicians who join practices whose members already are MedSouth participants to become participating physicians, but few practices have taken on new members recently.

Contractual relationships between physicians and payers in the Denver area have undergone significant change in the past several years. Beginning in 1998 or 1999, Denver physicians established a number of financially-integrated IPAs that entered into capitated contracts with local HMOs. Many of these groups experienced significant financial difficulties under those contracts, and a number of the organizations declared bankruptcy. In the wake of this experience, payers and most physician groups, including MedSouth, terminated their capitated contracts.(4) Some MedSouth physicians, however, wish to continue to practice on a partially-integrated basis with other members of the IPA.

The Proposed Integration Program

MedSouth proposes to implement a program that it believes will result in lower costs, higher quality, and more efficient delivery of its members' services. MedSouth has not yet placed the program into operation, or engaged in negotiation or contracting with insurance plans concerning the provision of physician services under the program. The essential features of the program, however, have been determined, and MedSouth has developed or is in the process of developing its various components. According to your letter, the proposed program has three major goals:

1. to integrate the provision of primary and specialty services so they are delivered in a coordinated fashion;(5)   2. to integrate these coordinated physician services with a clinical resource management program that involves sharing of patient clinical information, development and implementation of practice protocols, and oversight and reporting of physicians' performance relative to preestablished benchmarks, so as to improve patient outcomes, decrease use of physician resources, and provide MedSouth with a competitive advantage with respect to other physician practices in the area; and   3. to offer payers a network in which all physicians have agreed to participate and in which the physicians will work together to improve care and to compete with other physicians and physician groups.

MedSouth's physicians and its consultants, in conjunction with a health care information technology service provider and a national clinical laboratory company, have worked for over a year to develop the proposed program. It will have two major parts: (1) a web-based electronic clinical data record system that will permit MedSouth physicians to access and share clinical information relating to their patients; and (2) the adoption and implementation of clinical practice guidelines and performance goals relating to the quality and appropriate use of services provided by MedSouth physicians. All physicians contracting through MedSouth will be required to participate in these activities. With these systems, MedSouth believes it will be able to improve and standardize members' treatment of specific diagnoses and their fulfillment of standards of care; reduce medical errors and improve patient care outcomes; permit its members to provide their services more efficiently and to reduce the aggregate long-term cost of physician services; and demonstrate to payers, employers, and others that the integrated and coordinated delivery of services by primary care and specialist physicians can improve the quality and delivery of physician services.

The web-based clinical data record system is intended to permit MedSouth members rapidly to access and exchange clinical information relating to patients, including lab and radiological reports, transcribed patient records and office visit information, treatment plans, and prescription information. The doctors will be able to order prescriptions on-line, and at a future time will be able to determine whether the patient filled the prescription. The system can aggregate data from multiple doctors to show, for example, the trend of results on tests done at different  times and places. In the future, data relating to hospital discharges and procedures also may be included. MedSouth expects this system to reduce duplicative testing and procedures, speed up treatment, decrease medical errors and adverse drug interactions, and facilitate communication and coordination of services among referring and referral physicians. Each practice will acquire the hardware necessary to use the system.

You stated that MedSouth also is developing: (1) clinical protocols covering the majority of MedSouth physicians' patient population; and (2) measurable performance goals relating to the quality and appropriate utilization of services that are linked to those protocols. The IPA proposes to secure members' commitment to adhere to those protocols in their office and hospital practices; review the performance of MedSouth physicians individually and collectively with respect to those goals; assist members in meeting the goals; and, if necessary, expel physicians who cannot or will not meet the goals. The physician participation agreement will specify the physicians' commitment to participate in all the network's programs; to adhere to the IPA's standards and protocols; and to implement the technology that permits MedSouth to report performance information to members and to third parties.

According to your letter, the clinical protocols were selected based on a review of available local and national guidelines and an assessment of the diagnoses encountered by MedSouth physicians where performance improvement would have the greatest positive effect on utilization and patient outcomes. Each protocol is reviewed and adapted as necessary by a "physician champion," by MedSouth's Clinical Integration Committee, and by a sub-specialist in the relevant area, and then adopted by the Board of Directors as a formal and enforceable "MedSouth Network Protocol." Each protocol will be reviewed periodically to insure that it remains valid in light of new learning or technology. At least 48 guidelines are under development and a total of about 100-150 are contemplated. MedSouth estimates that the guidelines will cover 80-90% of the diagnoses that are prevalent in its physicians' practices. All MedSouth physicians will receive training on the implementation of guidelines relevant to their practices, and on the reporting requirements for each one.

Network utilization and quality goals or benchmarks are being developed based on the clinical protocols. Working in conjunction with its consultants, MedSouth is developing a computer-based infrastructure that will permit a committee to collect and analyze information on individual physicians' performance, and on the performance of the network as a whole, relative to the benchmarks. Much of the necessary information will be available on the electronic clinical information system. This data will be supplemented by chart reviews as necessary. MedSouth has a Medical Director and will employ additional staff as necessary to implement the program. Its Clinical Integration Committee will prepare performance reports that will be provided to the board of directors and to MedSouth's customers.

The Medical Director and Clinical Integration Committee will meet with any physician whose performance is deficient with reference to the established benchmarks, and develop a correction plan that the physician must agree to implement. The plan will identify the barriers to the physician's compliance, specify the training or information that is needed to overcome those barriers, and establish time frames for improvement. The physician's compliance with the plan will be monitored, and a physician who cannot or will not fully participate in the program or adhere to its standards will be subject to expulsion from the network upon recommendation of the Medical Director and Clinical Integration Committee to the Board of Directors. The Committee will review each protocol annually to determine whether it actually modified physician behavior, whether it substantially assisted the network in reaching its performance goals, whether patient-care outcomes improved, and whether the protocol should be modified. In addition, the Committee will examine the overall program to determine whether the components just discussed could be improved to assist the network in meeting the performance benchmarks.

Negotiation of Contracts

MedSouth proposes to offer the medical services of its participating members pursuant to this program to commercial third-party payers, and to negotiate and execute contracts under which MedSouth members would provide services to health plan enrollees. Thus, the IPA will seek to negotiate price and other contract terms on behalf of physician members of the network. It will retain a consultant to develop fee proposals for use in contract negotiations and, if necessary, to gather information from MedSouth physicians. The consultant will not disclose competitively sensitive information received from MedSouth physicians to other physicians in the network. Physician services will be paid for on a fee-for service basis. In addition, MedSouth intends to charge a network access fee to payers purchasing the package of services, that will support its operating and administrative costs. MedSouth will not be involved in claims processing or payment. Claims will be submitted by the physicians directly to the payers, and payment will be made directly to the physician providing the service. All MedSouth members will be required to provide services under those contracts, and to participate fully in MedSouth activities. MedSouth will not negotiate or execute such contracts on behalf of its members until all parts of the program are operational.

While MedSouth seeks to offer its members' services to payers as a package, you represent that it is intended to be, and will actually be, a non-exclusive network. The MedSouth Physician Participation Agreement will specifically state that physicians are not precluded from participating in other physician contracting organizations, or from contracting with payers independently. You have represented that customers not wishing to purchase the network services will be able to negotiate and contract with MedSouth physicians individually, and that MedSouth members will be advised by counsel that they may not reach agreements or understandings with competing physicians in the IPA to contract only through MedSouth, or exchange information about their prices or contracting strategies other than as they relate to MedSouth. In addition, you represent that MedSouth will be advised that it cannot state or suggest to payers that unless the payer reaches agreement with the IPA, its physicians will not participate in a payer's plan.

Analysis

Form of Analysis

The first question to be addressed is how MedSouth's proposed negotiation of fee-for-service contracts on behalf of its participating physicians should be analyzed. The information sharing and guidelines activities that MedSouth proposes to undertake, by themselves, are not inherently anticompetitive. Agreement by a group of physicians jointly to adopt an electronic patient record system that permits them more easily to communicate and share information about their patients, or to adopt and promote adherence to recognized, evidence-based practice guidelines or clinical protocols, would not normally raise serious concerns about anticompetitive effects.

Standing alone, however, joint negotiation of price terms by non-integrated, competing physicians would constitute an agreement among the physicians not to compete on price, and would be illegal per se. Per se treatment is inappropriate, however, and more elaborate analysis under the rule of reason is warranted, when the joint negotiation of price is reasonably related to an efficiency-enhancing integration of the participants' economic activity and is reasonably necessary to achieve the procompetitive benefits of that integration.(6) How detailed that analysis should be depends, of course, on the circumstances. As the Supreme Court has ruled, truncated analysis under the rule of reason may be appropriate in some cases.(7)

Efficiency-enhancing integration typically involves joint performance of one or more business functions of the participants in a way that potentially benefits consumers by expanding output, reducing price, or enhancing quality, service or innovation, and that could not reasonably be achieved by the participants individually. The integration must likely generate procompetitive benefits that enhance the participants' ability or incentives to compete, and thus offset any anticompetitive tendencies of the arrangement. Joint negotiation of prices is not "reasonably necessary" if the participants could achieve an equivalent or comparable efficiency-enhancing integration through practical means that provide significantly less restriction on competition.(8)

We conclude that MedSouth's overall proposed course of conduct, as described in the information you have supplied, should not be accorded per se treatment. The program in which MedSouth proposes to engage appears to be capable of creating substantial partial integration of the participating physicians' practices, and to have the potential to produce efficiencies in the form of higher quality or reduced costs for patient care services rendered by network physicians. More elaborate analysis under the rule of reason, therefore, is warranted.

Integration and Likely Efficiencies

Taken as whole, the proposed program is designed to facilitate and increase communication and cooperation among MedSouth physicians, both in the treatment of individual patients and in modifying the regular practice patterns of members of the IPA. The collective development and implementation of the protocols and benchmarks has the potential to create significant integration and interdependence among the physicians in their rendering of medical services. The physicians have pooled their resources and expertise to identify common standards of care. Through their agreement to abide by those standards, the physicians have subjected themselves, to some extent, to the collective judgment of the group with respect to their patterns of practice; and they have agreed to make themselves individually and collectively accountable for their performance by making information about their achievement of goals, which are linked to those standards, available to customers.

Wide-spread attention has been given to the prospect that greater adherence to practice guidelines based on solid evidence can improve the quality, and in many cases reduce the cost, of medical care.(9) Rigorous and effective implementation of the program proposed by MedSouth appears to have the potential to help the doctors render more appropriate, high-quality, and cost-effective care. Individual physicians acting independently do not appear capable of creating comparable efficiencies. A group of physicians who practice in different specialty areas is better able than would be an individual physician to select and implement practice protocols that are broadly applicable to a wide range of patient conditions. It would be much more costly for individual doctors to research protocols and to identify other doctors who would agree to abide by the same standards with whom to collaborate. The common adoption of these standards by doctors who refer patients to one another creates a pool of physicians offering a wide range of services who have undertaken to abide by disclosed standards, and who are accountable for their performance with respect to predetermined measures. The establishment of such a group to compete for patients and for health plan contracts should, in principle, stimulate competition with other physicians and physician groups.

The computer system facilitates both dissemination and implementation of these common standards and communications among MedSouth doctors relating to the care of particular patients. The system is intended thereby to reduce duplicative tests and procedures, promote better coordination of treatment, and speed up provision of referral services. Computerized prescribing and other data entry systems have the potential to reduce errors and adverse events. While any physician could achieve some of these benefits by investing in his/her own information system, adoption of the same system by a group of physicians who maintain referral relationships with one another can provide a number of additional benefits. Having compatible systems permits physicians in different practices who are caring for the same patients to communicate and share clinical information more easily. The cost of developing the system is spread over a larger number of practices, and those physicians who are less knowledgeable about information technology can benefit from the experience and interest of those who are more conversant with it.(10) The existence of the system is likely to further cement referral relationships within the network and lead to closer working relationships among network physicians in the future, thus amplifying the benefits that result from the physicians' participation in the program. We note, however, that mere adoption of a common clinical information system by itself, without the other programs that MedSouth intends to implement, would not suffice to establish that otherwise competing members of a physician network have integrated their practices in a manner or to an extent that joint negotiation of prices could be deemed ancillary to an efficiency-enhancing joint venture.

The Relationship of Joint Contracting to the Production of Efficiencies

The extent to which collective negotiation of prices is ancillary to this integration is a crucial question. Generally speaking, an agreement is ancillary to a competitor collaboration to the extent that it is subordinate to and reasonably necessary to accomplish the goals of the integration, unless the parties could have achieved similar efficiencies by practical, significantly less restrictive means.(11) It may be possible to develop an arrangement, apart from payment for the professional services of the network physicians, under which those physicians could be appropriately compensated for the costs entailed in providing programs of the type MedSouth intends to undertake. In this instance, however, we conclude that the price agreement embodied in joint negotiation of contracts for services to be provided subject to the entire proposed program appears to be reasonably related to the integration among MedSouth members, and reasonably necessary for MedSouth to achieve the procompetitive benefits it seeks.

In order to establish and maintain the on-going collaboration and interdependence among physicians from which the projected efficiencies flow, the doctors need to be able to rely on the participation of other members of the group in the network and its activities on a continuing basis. This does not appear to be possible if contracting for the sale of services is done individually. The price for professional services rendered under health plan contracts needs to be established, and if it is done through individual negotiation and contracting, then no one can count on the full participation of the group's members. Whatever value the program has for consumers, beyond what would result from individual doctors computerizing their records and determining to follow particular guidelines, is significantly dependent on the doctors being able to function as a group within which patients are commonly referred.(12) In the absence of the group being able to assure continuing participation of its members in its contracts, some of the benefits are likely to go unrealized.

In addition, joint contracting may permit the network to allocate the returns among members of the network in a way that creates incentives for the physicians to make appropriate investments of time and effort in setting up and implementing the proposed program. According to your letter, it is important for MedSouth to be able to assure that the rewards from the program flow to the doctors in an equitable manner, so that some are not able to charge disproportionately high prices relative to other members, and thereby capture an excessive proportion of the value of the network's programs.

It is unclear whether the proposed arrangement creates a level of interdependence and integration among each and every physician who currently is a member of MedSouth so as to make joint negotiation of their fees ancillary to operation of the venture. For example, MedSouth contains certain subspecialists who may or may not have enough patients referred by other MedSouth members to cause them either to be significantly involved in the design or implementation of protocols, or to have their practice patterns significantly affected by them. Because it is not clear at present how many of these physicians will remain members of the network when the program is fully operational, however, we have not attempted in this opinion to delineate more precisely which physician practices are integrated through the proposed program. Both MedSouth and the affected physicians would face significant antitrust risk if MedSouth negotiated prices of behalf of physicians who are not sufficiently integrated with the venture through their participation in the activities that are expected to give rise to the efficiencies.

Competitive Effects

The fundamental concern of antitrust analysis is whether a given arrangement may have a substantial anticompetitive effect and, if so, whether that potential effect is offset by any procompetitive efficiencies resulting from the conduct.(13) The central question is whether, taking into account both potential procompetitive and anticompetitive effects, the arrangement is likely to harm competition by increasing the ability or incentive of the participants to raise price above -- or reduce output, quality, service, or innovation below - the level that likely would prevail in the absence of the agreement.(14) The ability and incentive of the participants to compete individually with one another and with their joint undertaking is an important part of the analysis.(15)

Because the proposed program is yet to be implemented, it appears to be impossible at this point to predict the magnitude of anticompetitive or procompetitive effects that will flow from its actual operation. You were not able to obtain reliable information that would allow us to determine with any precision the relevant geographic markets for the services to be delivered through the network. However, the information available to us indicates that the MedSouth membership as presently constituted likely would be able to exercise significant market power, and thus to extract higher prices, if the doctors coordinate their actions outside the integrated group.

MedSouth currently has a large number of participating doctors who are concentrated in a distinct area of the city. In a number of specialties, they constitute half or more of the physicians with admitting privileges at the three hospitals in south Denver. Of particular significance with respect to the needs of local health plans that contract for physician services, MedSouth contains a substantial proportion of the internists and family practitioners in the south Denver area. For example, MedSouth's current members are 51% of the internists and 33% of the family practitioners at Swedish Hospital, and from 50% to 100% of the specialists in 19 other practice areas at that hospital (allergy/immunology, cardiology, endocrinology, hematology/oncology, infectious disease, nephrology, neurology, oncology, pulmonary medicine, radiology, rheumatology, hand surgery, neurosurgery, pathology, podiatric surgery, urology, vascular surgery, pediatric cardiology, and pediatric neurology). They are 44% of the family practice physicians and 48% of the internists at the two Adventist hospitals, and from 50% to 100% of the specialists in 2l other fields at those two hospitals (allergy, cardiology, cardiovascular surgery, endocrinology, gastroenterology, gynecology. infectious diseases, nephrology, neurology, neurosurgery, oncology, otolaryngology, otology, pathology, podiatry, pulmonology, radiation oncology, radiology, rheumatology, hand surgery, and urology). As noted above, however, we do not know how many of these physicians will remain members of MedSouth after the venture is launched. A significant decrease in the number of MedSouth participating physicians would lessen the risk of anticompetitive harm.

It appears that access to some significant number of MedSouth doctors is necessary for health plans to have adequate networks to support a marketable product and to have enough conveniently located doctors to care for their current enrollees. The area south of Denver is undergoing rapid population growth. The number of physicians in the Denver area is not growing and may have declined, and existing physicians have not relocated their practices into the area where the most rapid population growth is occurring. Consequently, there may be a shortage of doctors in that area. The doctors in the south Denver area where MedSouth members have their offices are the closest to this area of rapid population growth. As a result, as MedSouth representatives confirmed, many practices in that area are full and some are closed to new patients. We have heard some evidence that waiting times for doctor appointments can be long and that it can be hard to find a doctor, particularly a primary care doctor. To date, however, in spite of that shortage, there appears to have been little new entry by physicians.

Doctors in other areas of the city do not appear to be realistic alternatives to many of the doctors located in south Denver, especially the PCPs. Many patients already travel a long way to reach the offices of the south Denver doctors, and are not willing to travel further north into the city. Traffic patterns and congestion make travel to other areas of Denver slow and difficult. Moreover, health plans need contracts with a sufficient number of doctors at each of the South Denver hospitals, because many patients are admitted through the emergency room, and then must be treated in that hospital. Consequently, individual contracts with MedSouth members appear to be a principal alternative to a contract with the group as a whole. Health plans appear to be vulnerable to a threat by the group's members not to contract outside the group unless the plans pay higher than prevailing fees. Our experience in a number of markets suggests that actions of even relatively small groups of doctors can sometimes produce significant anticompetitive effects and consumer injury in the form of higher prices, fewer services, or reduced access to care.(16)

In spite of MedSouth's explicit policy of "nonexclusivity," MedSouth members may have the incentive and the ability to agree not to contract independently of the venture. They have incentives to seek higher fees to recoup their investments in developing and implementing the proposed program. Negotiation of fee-for-service rates for the group will involve identification of price levels that could become the focal point for collusion on individual contracts. To the extent that the program creates greater communication and interdependence among the doctors, the easier it likely would be for them to coordinate their activities. Particularly in light of the doctors' existing referral arrangements, MedSouth members may be able to discipline members of the IPA who might be inclined to break ranks and contract independently. We cannot conclude with certainty that MedSouth's physicians actually will contract outside the IPA; nor can we conclude, at this early stage, that MedSouth's operation will restrict competition unreasonably. MedSouth plans to take steps to ensure that its physicians will in fact be available to contract independently with health plans. We recognize, further, that MedSouth physicians apparently did contract with health plans individually at prevailing market prices when the IPA's capitated contracts were terminated. We assume for purposes of this advisory opinion that your representations regarding the availability of MedSouth members to contract individually with health plans at competitive rates is accurate and will be borne out by the members' actual conduct.

In addition, we cannot now determine the extent to which the group will achieve the efficiencies that it expects. We are aware, however, that electronic record keeping and prescribing, and the application of evidence-based practice guidelines to regular clinical practice, are widely seen as potentially effective ways to increase the quality and efficiency of medical care. These practices may reduce errors, reduce the use of ineffective or counterproductive treatments, and increase the use of interventions that have been shown to be effective. We recognize the intention of MedSouth's leadership to achieve the goals they have established for the network, and the potential value of the means they have chosen to employ.

The information we have obtained in analyzing physician markets suggests that, in actual practice, it is often difficult to change physicians' established patterns of practice. Doing so does not result simply from the adoption of guidelines and benchmarks. Rather, the effectiveness of such programs depends upon a number of intangible factors, including the degree of commitment to the process by the members of the group and the effectiveness of its leadership. To change practice patterns requires an ongoing commitment of time, effort, and expertise, and it can be difficult to accomplish even when there are significant external incentives to do so. The experience of other physician groups indicates that it is harder to achieve implementation of this type of program in a large group, in the absence of direct financial risk relating to achievement of network goals, or where the physicians are not already closely connected to one another, and that each physician needs to have a significant number of patients subject to the system before it has an actual impact on his or her practice patterns.

The ultimate conclusion we draw in this advisory opinion turns in substantial measure on your representations concerning MedSouth's determination and ability to overcome these challenges. MedSouth has established efficiency goals and developed concrete plans to achieve them. We think a conclusion at this stage that MedSouth is unlikely to achieve the efficiencies it seeks is unwarranted. Nonetheless, the extent to which efficiencies actually are achieved would be an important factor in assessing the overall competitive effects of the proposed conduct.

Conclusions

We conclude, on balance, that the proposed program appears to have the potential to improve the quality and effectiveness of health care services that are delivered to patients, and thus to provide important benefits to consumers. Given the prospective nature of the analysis inherent in an advisory opinion, we do not have any direct evidence of either efficiencies or competitive effects. Based on all the factors discussed above, we have concluded that we would not recommend a challenge to MedSouth fully implementing the program and then offering it to payers on a collective basis. As long as doctors are, in fact, willing to deal individually on competitive terms with payers who do not want the package product, as you represent will be the case, significant anticompetitive effects appear unlikely. If final physician participation in the group is significantly smaller than MedSouth's current membership, significant anticompetitive effects, likewise, may be unlikely. If, however, MedSouth's member physicians are able to use collective power to force payers to contract with the network or to pay higher prices, then absent evidence that substantial efficiency benefits outweighed likely anticompetitive effects, we likely would recommend that the Commission bring an enforcement action. As your letter recognizes, members of the network face an increased antitrust risk to the extent that they do not actually agree to contract with health plans independent of the network and at competitive prices, either when a payer prefers as an initial matter not to purchase the group product or when it has done so and then desires to return to individual contracting. Of course, concerted refusal by some or all of MedSouth's members to deal with payers outside of the IPA would appear to be unrelated to the joint venture presented in your request, and, thus, to be illegal per se. This office will monitor MedSouth's operations and the behavior of its physician members for indications that the proposed conduct is resulting in significant anticompetitive effects.

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 otherwise would be in the public interest to do so.

Sincerely yours,

Jeffrey W. Brennan
Assistant Director

Endnotes:

1. MedSouth anticipates that a number of its current members will terminate their membership in the organization before it fully implements the proposed program and attempts to negotiate contracts.

2. Your letter defines this area as those parts of the Denver MSA located south of Alameda Avenue, but excluding Aurora.

3. These hospitals are Swedish Medical Center, Porter Adventist Hospital, and Littleton Adventist Hospital.

4. Our understanding is that when these capitated contracts were terminated, MedSouth members were in fact willing to contract with payers on an individual basis at prevailing market prices.

5. MedSouth's operating philosophy is that the quality and efficiency of patient care are maximized when the services of primary care and specialist physicians are integrated so that patients are cared for in a coordinated manner. In accordance with this outlook, primary and specialty care physicians are equally represented on MedSouth's Board of Directors. Also, two of MedSouth's four officers must be primary care doctors, while the other two must be specialists.

6. U.S. Department of Justice and Federal Trade Commission, Statements of Enforcement Policy in Health Care 71-2 (1996) (Health Care Statements); Federal Trade Commission and U.S. Department of Justice, Antitrust Guidelines for Collaborations Among Competitors § 3.2 (Competitor Collaboration Guidelines).

7. See, e.g., California Dental Association v. F.T.C., 526 U.S. 756 (1999).

8. Competitor Collaboration Guidelines § 3.2.

9. See, e.g., Institute of Medicine, Crossing the Quality Chasm: A New Health System for the 21st Century (2001).

10. In this instance, much of the cost of developing the system is being borne by MedSouth's partners -- the system vendor and a clinical laboratory company.

11. Health Care Statements at 71, 80; Competitor Collaboration Guidelines at § 3.36(b). See also Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d 210, 224 (D.C.Cir. 1986), cert. denied 479 U.S. 1033 (1987) ("The ancillary restraint is subordinate and collateral in the sense that it serves to make the main transaction more effective in accomplishing its purpose. . . . [T]he restraint imposed must be related to the efficiency sought to be achieved."); General Leaseways, Inc. v. National Truck Leasing Association, 744 F.2d 588, 595 (7th Cir. 1984) (There must be an "organic connection between the restraint and the cooperative needs of the enterprise that would allow us to call the restraint a merely ancillary one . . . .").

12. The situation here differs from that in Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982), where the decision of each doctor whether to accept the "maximum fee" as payment in full was essentially unrelated (except to the extent that the common agreement on prices eliminated competition among the participating doctors) to the decision of any other physician to do the same thing. While the organization performed some "peer review" of the necessity and appropriateness of care rendered to patients, it made no claim that the challenged agreement on prices was reasonably necessary to the efficient functioning of the review process. Brief for the United States as Amicus Curiae on Writ of Certiorari at 26. Moreover, it is highly unlikely that the type of peer review performed by the foundations for medical care in Maricopa created any significant interdependence or on-going cooperation among foundation members with respect to their clinical practices. The foundations for medical care of that era were community-wide organizations sponsored by local medical societies and designed to have broadly inclusive memberships. The peer review they performed was claims-based, retrospective review in order to determine whether the claim should be paid, reduced, or denied; the standards they used generally were designed simply to detect deviations from local community norms of practice. See, e.g., Egdahl, "Foundation for Medical Care," 288 New England J. Med. 491 (1973).

13. See Competitor Collaboration Guidelines § 3.37. In general, procompetitive effects include lower costs, greater value to consumers, faster market entry, enabling participants to make better use of existing assets, or providing incentives for participants to invest in things that will increase output. Id. § 2.1. Anticompetitive harms include increasing the participants' ability or incentive to raise prices or reduce output, service, quality, or innovation, or facilitating explicit or tacit collusion through exchange of competitively sensitive information or through increased market concentration. Id. § 2.2.

14. Competitor Collaboration Guidelines §  3.3.

15. Id. at § 3.34.

16. See, e.g., Trauma Associates of North Broward, Inc., 118 F.T.C. 1130 (1994) (consent order); Southbank IPA, 114 F.T.C. 783 (1991) (consent order).