Advisory Opinion to Morgan (11-17-93)

November 17, 1993

J. Bert Morgan, Esquire
Morgan, Miller & Blair
1676 North California Boulevard
Suite 200
Walnut Creek, California 94596-4137

Dear Mr. Morgan:

This is in response to your request for an advisory opinion from the Federal Trade Commission staff on the legality under the federal antitrust laws of the method of operation proposed to be undertaken by your client, California Managed Imaging Medical Group, Inc. (“CMI”), a professional corporation organized under the laws of California. According to the materials submitted with your request for an advisory opinion, as modified by your letters of June 21, July 8, and October 29, 1993, CMI intends to operate as a preferred provider organization ("PPO") comprised solely of radiologists to provide thp professional component of medical diagnostic imaging services.1 It intends to establish a network of radiologists who can provide services to payors on a regional or statewide basis.

The professional component of medical diagnostic imaging services includes the review and interpretation of diagnostic images, which are obtained through the technical component of diagnostic imaging, involving the use of diagnostic imaging equipment and facilities. Because some types of diagnostic imaging equipment and facilities are quite expensive,2 these often are established and owned by hospitals, other large health care enterprises, or investment entities, such as corporations or limited partnerships, that are able to provide the necessary capital to finance the ventures. However, under California law, such separately owned imaging facilities cannot provide the professional component of diagnostic imaging services, and thus

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1 As used in your request, "diagnostic imaging services" includes such services as plain film x-ray, MRI (magnetic resonance imaging) and CT (computed tomography) scans, mammography, barium enema, fluoroscopy, sonography, etc.

2 For example, you have stated that the cost of an MRI scanner can exceed $2,000,000, and the cost of a CT scanner can exceed $1,000,000.

generally contract with a physician, physician group, or professional corporation to provide the professional services.

You have explained that, in order to contain costs of diagnostic imaging services, many large third-party payors of health care services in California have contracted with networks of providers that include both imaging facilities and, directly or indirectly, professional providers.3 While the professional providers and the imaging facilities usually are located in the same geographic area, images can be transmitted by electronic means (known as "teleradiology") or by overnight courier and interpreted by radiologists located in other areas. At least one existing radiology network already uses teleradiology to provide contract coverage in some areas, and most use overnight courier services to forward scans to their designated radiologists.

The majority of diagnostic imaging services currently are provided on a fee-for-service basis. However, payors increasingly are demanding capitation arrangements, whereby financial risk for use of services is shifted from the payors to the providers. Large payors who operate on a regional or statewide basis also are demanding uniform prices throughout the area in which they operate.

Arrangements between payors and providers of diagnostic imaging services in California commonly are facilitated by brokers, who arrange networks of providers with whom the payors can contract for provision of these services throughout a geographic area served by the payor. Brokers obtain agreements from providers, who offer discounts from their usual fees in exchange for anticipated increases in patient business if the network obtains a contract with a payor. In addition to assembling the provider network and obtaining fee discounts, a broker also may help reduce a payor's administrative costs, for example by consolidating billing for services provided by members of the network or by assuming other administrative functions for the payor. You have told us that such broker networks are common and are favored by many large payors in California, some of whom have declared that they will contract for diagnostic imaging services only through broker networks or similar systems that can provide services through a fixed-fee schedule on a regional or statewide basis.

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3 Exhibit A of the materials submitted with your request for an advisory opinion identified 19 broker networks for diagnostic imaging services in a "partial list" of such networks doing business in California. However, Exhibit D notes (at p.1) that "[m]ost HMOs and PPOs (in California] contract directly with radiology providers, rather than through a network. The HMOs and PPOs consume about 30% to 35% of the radiology market share in California on average."

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You state that, because of their inability or unwillingness to become participants in existing regional or statewide broker networks, many physicians currently are unable to provide imaging services for persons covered by large payors.4 Consequently, CMI was established and incorporated in November of 1992 in order to permit these providers to compete for the business of large payors. CMI is a California professional corporation, all of whose shareholders are and will be physicians licensed in California and "board-qualified"6 in radiology. CMI also may contract with additional radiologists who are not shareholders in CMI. Physician participation in CMI will be non-exclusive; CMI physicians will be free to participate in non-CMI programs and to deal with payors either individually or through other PPOs or provider organizations. Similarly, contracts with payors will be non-exclusive; payors will remain free to contract with other physician networks or individual physicians and imaging facilities.

CMI intends to contract with third party payors only on a regional or statewide basis. It does not intend to enter into contracts on behalf of an individual provider or within a local market where only direct competitors would be providing services under the contract. It intends to offer a uniform price for all providers covered under a regional or statewide contract.

After it has accumulated sufficient utilization and cost information to permit it to do so,, CMI intends to develop a capitated fee structure for diagnostic imaging services to be offered to payors. Initially, however, CMI will be reimbursing its physicians on a fee-for-service basis. During this period, CMI's agent will accept offers of proposed contracts and fee schedules from payors, and transmit these to the individual members of CMI for their consideration. CMI member physicians will decide individually whether or not they wish to participate in the proposed contract on the proposed terms offered by the

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4 However, Exhibit D accompanying your submission notes (at p. 10) that "[m]ost of the potential CMI providers currently contract with at least one other radiology network."

5 Shares in CMI initially will be offered for $2000 per share, with the number of shares issued equal to the number of investing physicians (either participating individually, or as part of a "practice group," ie., a fully-integrated physician practice involving more than one physician). Shareholders in CMI will have exclusive voting rights over various CMI corporate decisions, including selecting the Board of Directors. Profits of CMI will be allocated among the shareholders on a pro rata basis.

6 Presumably meaning board-certified or board-eligible.

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payor. Acceptance of a contract will require an affirmative response from the individual physician; if a physician fails to respond to a proposed contract, he or she will be presumed to have rejected it. The payor also may subsequently accept or reject the proposed contract, depending on whether the affirmative responses by CMI physicians are considered adequate (in terms of both total number of physicians and geographic dispersion) to provide services to the payor's subscribers. CMI's agent also may collect and provide to payors historical fee and other data concerning CMI physicians, in order to assist payors in Formulating their proposed contracts and fee schedules.

CMI believes that it will be able to offer its network of radiologists and diagnostic imaging facilities to large payors at reduced costs compared to the broker networks currently available in California. CMI also proposes to effectuate cost containment through strict utilization management, as well as its eventual use of a capitated fee structure, which is likely to provide a strong financial incentive for CMI and its physicians not to use costly services unnecessarily or inappropriately.

CMI asserts that it will not have market power in any market in which it proposes to operate. According to your submission, no broker network in California currently has more than a 1.5% market share of all diagnostic imaging services in the State, and you project that a 2% statewide market share for CMI would be "extremely optimistic." You project this upper limit of market share because: 1) CMI's target group -- large, statewide payors -- represents only a small share of the total diagnostic imaging services market; 2) CMI will continue to face competition even for this limited market segment from existing broker networks and other competitors; 3) referring primary care physicians will be free to refer patients to other providers of imaging services; and 4) other networks similar to CMI may form and compete with CMI.8

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7 You have emphasized in your request that, in order to assure that pricing information is not shared among potential competitors, information concerning fees charged by CMI's physicians will not be made available or disclosed to CMI physicians.

8 With regard to the individual counties in which CMI proposes to operate, you note that CMI's consultant's analysis concluded that CMI would not significantly increase market concentration among providers of radiology services in most submarkets. Exhibit D, William M. Mercer, Incorporated, California Managed Imaging Network: A Report on Potential Market Impact (April 21, 1993). Because the operation of CMI, as proposed, is

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You have given us a list of radiology practices located in 17 California counties with which CMI presently intends to contract. While, for the most part, there appears to be significant geographic overlap among the primary service areas of these practices only in large urban areas where none of the practices has a large market share, we do not have the information necessary to define the geographic markets in which the practices operate or to assess the market position of the practices within those areas. In addition, you state that other providers will be added in counties already served or in other counties as necessary to meet payors, demand for full and complete coverage. For these reasons, we are not able to assess the power possessed by CMI's participating radiology practices in their local markets. However, because CMI intends to contract with payors only on a regional or statewide basis, and fees will be standard for all providers providing services under a contract, it does not appear that the formation or operation of CMI will allow individual radiology practices to attain, increase, or exercise market power in their local markets. Accordingly, this opinion focuses on the likely affect of CMI on competition for regional or statewide contracts.9

Based on the available information, it appears that the establishment of CMI by radiologists, some of whom compete with one another, for the purpose of jointly marketing their services, creates a legitimate joint venture that is likely to be procompetitive. Through the joint venture, CMI's radiologists will be able to offer regional or statewide coverage and prices and therefore will be better situated to compete for contracts with large payors and offer an alternative to existing broker networks of radiologists in California. Antitrust issues would be raised if formation of CMI by its members could either preclude the formation or operation of other physician networks, or prevent payors who wish to deal with radiologists individually, rather than through CMI, from being able to enter and operate in the market. However, as mentioned above, physician participation in CMI is non-exclusive, and most physicians who will participate in CMI currently participate in

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not likely to have a significant effect on competition in local markets, we have not relied on the study in reaching the opinions stated in this letter.

9 of course, collusion among CMI participants relating to business not conducted through CMI would raise antitrust issues that are beyond the scope of this opinion.

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at least one other network.10 Consequently, the formation of CMI does not appear to violate or raise concerns under the antitrust laws. However, care should be taken by CMI to assure that its member physicians do not enter into any tacit or explicit agreements to withdraw from, or otherwise not participate in, other networks or programs besides CMI, particularly in areas where there are insufficient other, non-CMI, radiologists available to provide services to these other programs.

CMI's proposed method of operation also raises antitrust issues beyond its formation and structure -- particularly concerning its methods of determining the prices to be charged for the services of its radiologists. Joint decisions made by otherwise competing physicians through such joint marketing arrangements (e.g., PPOs) and concerning prices, discounts, or other terms of doing business, may raise serious antitrust concerns or even amount to per se illegal price fixing if the physicians have not substantially integrated their medical practices or do not share substantial financial risk through the joint venture. See Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982). By contrast, physicians who do substantially integrate through such joint ventures normally will not have their joint decisions concerning prices or other related terms of doing business through the joint venture subject to per se condemnation. Rather, these determinations will be subject to rule-of-reason analysis, balancing their procompetitive and anticompetitive impact. See, e.g., Hassan v. Independent Practice Associates, P.C., 698 F. Supp. 679, 689-691 (E.D. Mich. 1988). Such decisions, when made by an integrated joint venture, will ordinarily be lawful where the joint venture does not possess market power.11

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10 Antitrust issues also would arise if the formation of CMI were likely to lead to a substantial possibility of coordinated interaction between it and competing radiology networks. Here, however, the available information suggests that the market is not concentrated, and thus the possibility of such interaction would appear to be remote.

11 Cf,., United States Department of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy in the Health Care Area at 33-46 (September 15, 1993) (establishing "safety zone* for physician network joint ventures that involve substantial financial integration of the physicians through the joint venture and do not have more than 20% of the area physicians in any specialty with active hospital privileges, and explaining how such joint ventures that do not fall within the safety zone will be analyzed by the antitrust enforcement agencies). Because CMI's initial form of operation will not

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CMI's proposed course of doing business involves two types of pricing mechanisms for determining the fees to be paid to CMI's member physicians under contracts with payors. As described above, initially, CMI's physicians will not share substantial financial risk or otherwise integrate their practices through CMI's operations. During this period, CMI will use what sometimes has been termed a "messenger" approach12 for providing payors with price and other information about CMI's physicians, and transmitting proposed contracts from payors, including fee schedules to be used under such contracts, to CMI's physicians for their individual consideration.

This type of mechanism, under which each CMI physician individually decides whether or not to accept the proposed contract offered by a payor, does not appear to involve any horizontal agreement by competitors on terms of doing business, including price. It therefore does not appear to raise concerns under the antitrust laws. However, CMI must take care to ensure that the decisions by the physicians on whether or not to accept the proposed contracts in fact are made individually, and do not involve any tacit or explicit agreement among the physicians not to deal, or to deal only on certain jointly agreed upon terms. Similarly, care should be taken in transmitting information to payors through CMI's agent to assure that payors understand that such information is merely to help the payors to formulate their proposals to CMI's radiologists; that the payors are free to propose whatever contractual terms and offers they wish to those CMI physicians; that payors remain free to deal individually with some or all of CMI's physician members and are not required to deal through CMI; and that CMI's agent has no power or authority to make offers, negotiate, agree for, or bind, CMI's members.

After CMI has developed sufficient utilization data, which it expects to do within two years after it commences operations, CMI proposes to begin pricing its diagnostic imaging services

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involve substantial financial integration among CMI's physicians, and because it is not clear from the information provided that CMI will have no more than 20% of the radiologists with active hospital privileges practicing in each geographic market in which CMI will operate, CMI's proposed formation and operation would not fall within the safety zone for physician network joint ventures.

12 See e.g., Health Care Committee, Section of Antitrust Law, American Bar Association, Managed Care and Antitrust: The PPO Experience at 27-28 (1990); Lerner and Narrow, "PPO Programs and the Antitrust Laws" at 858, in The New Healthcare Market: A Guide to PPOs for Purchasers, Pavors and Providers (P. Boland ed. 1985).

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using a capitated fee structure. Assuming that this capitation structure is one in which all CMI physicians in fact together share the risk of having to provide services without reimbursement if utilization and costs exceed projected levels, then joint agreement through CMI by its member physicians on terms of dealing, including price terms, would not be considered per se illegal; rather, it would be analyzed for its procompetitve benefits and anticompetitive effects under the Rule of Reason. Under such an analysis, CMI's determination of a capitation rate to be charged to payors for the services of CMI's radiologists would not raise competitive concerns or be unlawful unless CMI had market power.15 If CMI had market power, it could raise or fix the prices of radiology services, avoid competitive pressure to discount prices, control utilization of services or otherwise practice vigorous cost containment measures, and effectively preclude managed care

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13 Under some joint venture arrangements, rather than sharing risk, physicians are individually capitated for patients under their care. This puts them on a fixed budget with regard to their own patients, and provides incentives for them to control their own costs and utilization of services. However, such individual capitation does not create a direct financial incentive for the physician to assure that other physicians in the joint venture control their costs and utilization, since another physician's cost overruns will not result in any financial penalty to any other physician in the joint venture. Individual capitation systems, particularly in conjunction with other controls or incentives to assure cost-effective behavior by physicians in the joint venture, may well provide sufficient evidence of financial integration to bring ancillary restrictions within the rule of reason. However, this needs to be explored in detail in specific factual contexts. For purposes of the present advisory opinion, we presume that the capitation structure proposed is the more common form whereby all physician members of CMI jointly share the risk of financial loss from the entire group's exceeding utilization and cost goals.

14 See generally Federal Trade Commission, Statement of Enforcement Policy with Respect to Physician Agreements to Control Medical Prepayment Plans, 46 Fed. Reg. 48982 (1981). ("Commission Enforcement Policy Statement").

15 "Market power" is generally defined as "the power to control prices [or restrict output] or exclude competition." United States v. E.I. du Pont de Memours & Co., 351 U.S. 377, 391 (1956). Power can be exercised either individually or in combination with others. As is discussed above, there does not appear to be cause for concern that CMI can achieve or exercise market power through coordinated interaction with other networks.

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systems from entering into markets where CMI had, and chose to exercise, its market power.

The most likely way that CMI could attain market power would be if: (1) CMI included a high percentage of radiologists in any market in which it proposes to do business; and (2) those radiologists -- or a sufficient number of other radiologists (either currently in the market, or new entrants) -- were not available either to form competing arrangements to offer radiology services to payors, or to individually offer their services to payors. This situation could occur, for example, if CMI had a high percentage of radiologists in a market and expressly required its members to market their services to payors exclusively through CMI. Similarly, CMI could have market power if it had a high percentage of the radiologists in a market, and its physician members tacitly agreed to deal only through CMI or not to participate in other physician panels or payor programs that did not deal with CMI. These two factors -- high percentage of radiologists in a market, coupled with either exclusivity or a refusal to deal other than through CMI -- could have anticompetitive effects: (1) by effectively precluding entry to the market by payors that did not wish to deal with CMI, due to the payors, inability to otherwise obtain needed radiology services; or (2) by requiring those payors to deal with CMI and its radiologists on terms dictated by the radiologists. The reduction of competition in the market for radiologists' services also could permit CMI to raise prices to consumers or reduce output in the market for radiology services and, in turn, in the market for prepaid healthcare plans.

Based on the information available to us, CMI does not appear likely to attain market power in the market for regional or statewide contracts. On a statewide or regional basis, it does not appear that CMI intends to obtain participation agreements with a significant proportion of the radiologists available to competing radiology networks, and CMI estimates that it will not obtain a significant share of the total radiology business. Moreover, CMI's arrangement with its physicians is non-exclusive.16 Those physicians will remain free to join other PPOs or similar physician organizations that compete for contracts with payors, or to individually contract with such payors where possible. In addition, it generally does not appear that there are significant regulatory barriers to new entry by radiologists who may wish to practice in areas where CMI proposes

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16 In Hassan, the district court observed that “[i]f there was exclusive affiliation (of physicians with the IPA] there would be a barrier to entry." Id. at 695 n.50.

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to operate.17 On the contrary, the development of methods for images from the place where they are taken to remote for interpretation increases the potential options plans for obtaining radiology services.

Because it does not appear likely that CMI will attain through exclusionary or coercive means, the joint establishment of a capitation fee schedule by CMI's physicians is not likely to be anticompetitive or unlawful. However, if CMI should attain market power in any market in which it operates, then our opinion of the legality of its operations might no longer obtain. CMI therefore should exercise care to assure that its members do not otherwise agree among themselves, either explicitly or tacitly, to offer their services to payors solely through CMI, thereby negating CMI's non-exclusive physician participation provision.18 In addition, CMI could help assure that it does not attain market power-by limiting participation by providers to those necessary to make its network attractive to payors and to provide services to persons covered by the payors with whom CMI has contracts. Extending participation to many more radiologists than are necessary to achieve these legitimate business goals could raise questions as to whether CMI is being used as a vehicle to preclude or discourage entry by managed care programs.

You also have asked whether CMI's proposed method of operation would involve any unlawful group boycott. We previously stated that, in our opinion, CMI appears to be a legitimate and probably procompetitive joint venture to market the services of its physicians. We also have expressed the view that CMI does not appear to create a likelihood of market power and does not appear likely to prevent or discourage the formation of other PPOs or physician organizations involving radiologists

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17 Nonetheless, we are mindful that in some local markets specialist physicians, such as radiologists, may face difficulty establishing practices due to their primary reliance on referrals for business, and the need therefore to change existing referral patterns among physicians already in the market. See, e.g., United States Department of Justice Business Review Letter No. 87-20, from Charles F. Rule, Assistant Attorney General, Antitrust Division, to William L. Trombetta, Esquire, on behalf of Surgical Associates of Western Connecticut, P.C., and Danbury Surgical Associates, P.C. (Aug. 28, 1987). In addition, unlawful concerted activity by existing competitors to exclude new entry could be a significant barrier to physicians establishing practices in an area.

18 CMI's member physicians remain free to individually decide with whom they will deal and on what terms, without violating the antitrust laws.

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in the areas where it proposes to do business. Under these circumstances, decisions by CMI to exclude physicians, particularly if taken to further the legitimate business goals and interests of the joint venture, would not, in our opinion, constitute an unlawful boycott. To the contrary, excluding physicians from participation in CMI, for example, for such reasons as failure to meet hospital credentialing, board certification, or other quality control standards, or failure to abide by CMI's utilization control and cost containment measures, would appear to be clearly justified as furthering CMI's legitimate goal of offering high quality services at lower prices. Such exclusion of physicians in fact appears likely to be procompetitive, by helping CMI to establish and maintain a reputation as a truly "preferred" provider network, and thus distinguishing CMI and its physicians from other, lower quality, or more costly physicians and networks competing in the market.19

Presumably to reduce the potential antitrust risk of being charged with a boycott by radiologists excluded from CMI, you have stated that “CMI intends to exclude physicians only to the extent necessary to increase CMI's efficiencies and competitiveness," and "as a practical matter, it will not be competitive for CMI to unduly restrict [physician] participation . . . “It is not clear how this standard will operate in practice. In some areas where CMI proposes to operate, CMI may need to have a large percentage of local radiologists in order to offer services that are convenient to payors, subscribers. In other areas, however, there may be far more radiologists than are reasonably necessary for CMI to offer an attractive product to payors. In the latter areas, overinclusiveness by CMI -- which could reduce the incentives for radiologists to form their own alternative networks to compete with CMI and broker networks --

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19 Similarly, a decision by CMI to limit the number of participating physicians for various other reasons, even if unrelated to direct quality and service cost concerns, could further CMI’s legitimate business interests and not be likely to raise any antitrust concerns. Thus, for example, by limiting its panel of physicians, CMI might reduce its administrative costs or the costs and difficulty of effectively monitoring utilization of services by its physicians. Likewise, CMI might limit its physicians in order to help channel more patients to each physician, which is a major reason that physicians agree to offer lower fees and submit to rigorous cost and utilization controls in many PPO programs.

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in our opinion raises far more substantial competitive concerns and antitrust risk than does exclusion of providers by CMI.20

In summary, in our view, CMI's formation appears likely to be procompetitive, and its proposed methods for arriving at price terms to be used in its contracts with payors, as described above, would not violate the Federal Trade Commission Act or Any provision of the antitrust laws that the Commission enforces.21 This letter sets out the views of the staff of the Bureau of Competition, as authorized by the Commission's Rules. It has not been reviewed or approved by the Commission. As the Commission's Rules ({1.3(c)) explain, the staff's advice is rendered "without prejudice to the right of the Commission later to rescind the

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But the potential anticompetitive effects of physician controlled medical prepayment plans that have a high percentage of local area physicians or physicians in any significant medical specialty. The Commission has observed that

[w]hen so many physicians control or participate in a plan, their combination in the plan could effectively eliminate the only pool of physicians from which another new plan could recruit a competitive medical panel. If such a large percentage of area physicians is involved, and if there is additional evidence that potential new entrants are effectively precluded from recruiting a competitive physician panel -- either because the plan is designed to accomplish that objective or because there are ancillary agreement or other plan features that inhibit new entry -then Commission enforcement action may be warranted.

Commission Enforcement Policy Statement at 48991.

21 This opinion is limited to the proposed conduct described in your request, as summarized in this letter. Therefore, it does not constitute approval for actions that are different from those described, or those not specified, in your request. In particular, a decision by CMI to engage in local contracting with payors would raise issues that are not discussed in this opinion. Nor does this opinion conclude or imply that to avoid illegality under the antitrust laws a PPO or other physician network joint venture must operate in every respect like CMI's proposed program.

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advice and, where appropriate, to commence an enforcement proceeding."

Sincerely,

Mark J. Horoschak

Assistant Director