Advisory Opinion to Norton (08-13-98)

August 13, 1998

Robert C. Norton
Rodi, Pollock, Pettker, Galbraith & Cahill
801 South Grand Avenue
Suite 400
Los Angeles, California 90017-4623

Dear Mr. Norton:

This letter responds to your request for a staff advisory opinion letter on behalf of eleven neurologists practicing in the Los Angeles area who propose to establish an independent provider association ("IPA") to be known as Associates in Neurology ("AIN"). Based on our understanding of the facts as explained in your letters dated December 10, 1997, February 4, 1998, and May 11, 1998, as well as other information available to us, Commission staff have no present intention to recommend a challenge to the formation and operation of AIN as proposed.

DESCRIPTION

As we understand the facts based on the information you have supplied, AIN will be a single-specialty IPA composed of 11 independent neurologists who currently practice in various communities in north Los Angeles County.(1) AIN was developed in order to permit the neurologists to contract with managed care organizations, including full-service IPAs, HMOs, and other medical groups, to provide neurology services on a capitated basis. Each doctor will contribute $500 to the joint venture.

Contracts will be negotiated by AIN through its medical director, who is one of the participating neurologists. Contracts approved by the payer and by AIN’s medical director will be submitted to each member for approval. If the contract is approved by a majority of the members, all AIN members will be required to participate.

AIN anticipates that the capitation agreement likely will cover office and hospital visits and in-office testing. These services generally will be provided on referral by a primary care physician with the HMO or IPA with which AIN has a contract. Diagnostic testing that is not available in the neurologist’s office, including CT scans and MRIs, would not be included in the capitation payment.

AIN will be responsible for maintaining records, billing payers, and dealing with payers concerning any quality or efficiency issues that arise. In addition, AIN will have a Utilization Review and Quality Assurance Committee to monitor the performance of members to insure efficiency in the delivery of services. The committee will approve follow-up tests, procedures or, surgery, and requests for second opinions, and will establish guidelines for referrals.

AIN states that members are free to contract with health plans individually on a fee-for- service or other non-capitated basis, or to contract on a capitated basis when AIN has declined a contract. AIN will have a right of first refusal to enter into contracts on behalf of all members for services to be provided on a capitated basis.

AIN’s "target geographic market" includes central Los Angeles and the northern part of Los Angeles County. AIN has been unable to compile a comprehensive listing of all neurologists practicing in this area. It has submitted a list, obtained from the Los Angeles County Medical Association ("LACMA"), showing 62 neurologists practicing in the target geographic area.(2) However, LACMA’s members include only 47% of all physicians practicing in the Los Angeles area. Indeed, 6 of AIN’s 11 members are not included in the LACMA listing. AIN has submitted the names of 27 additional physicians listed as neurologists in telephone books covering Alhambra, San Fernando Valley East, San Fernando Valley West, and Greater Los Angeles.

ANALYSIS

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. Those statements provide for a "safety zone" for physician network joint ventures in which physician participants share substantial risk and constitute 20 percent or less (in the case of exclusive ventures) or 30 percent or less (in the case of nonexclusive joint ventures) of the physicians in the relevant specialty with active staff privileges who practice in the relevant geographic market. Ventures falling within a safety zone will not, absent extraordinary circumstances, be challenged by the FTC or Department of Justice.

AIN will be a physician network joint venture within the meaning of the Statements. It will be composed of independent physicians who are in competition with one another; and AIN, acting by and on behalf of its members, will establish the prices at which members sell their professional services through the network.

AIN appears to fall within the safety zone for physician network joint ventures. First, AIN members will share financial risk through the acceptance of capitated contracts. Under the policy statements, agreement by a venture to provide services to a health plan at a capitated rate is deemed to entail the sharing of substantial financial risk among members of the venture.(3) Second, within the area that AIN has identified as the market, AIN members constitute 11 of the 95 neurologists that have been identified, or about 12% of the total.(4)

You have characterized AIN as a nonexclusive network. In fact, however, while AIN members are free to contract individually on a non-capitated basis, the network has a right of first refusal to enter into contracts on behalf of all members for services to be provided on a capitated basis. If AIN decides not to enter into a particular contract, one or more members may do so. It appears, therefore, that AIN members may not be able to participate in other capitated physician networks, or in capitation arrangements organized by a payer, unless AIN has been offered an opportunity to contract on behalf of all AIN members and has declined to do so. For purposes of the safety zones, a network is "exclusive" if participants are "restricted in their ability to, or do not in practice, individually contract with other network joint ventures or health plans."(5) As is explicitly noted in the policy statements, restrictions that fall short of a commitment to full exclusivity, if they significantly restrict the ability or willingness of physicians to join other networks, will render a network "exclusive" for purposes of the safety zone.(6) AIN’s right of first refusal may have this effect. But because AIN qualifies for the safety zone for exclusive networks, we have not examined the potential effects of AIN’s first refusal right in detail.

CONCLUSION

For the reasons discussed above, Commission staff has no present intention to recommend a challenge to the proposed operation of AIN. This letter sets out the views of the staff of the Bureau of Competition, as authorized by the Commission’s Rules of Practice. Under Commission Rule § 1.3(c), 16 C.F.R. § 1.3(c), the Commission is not bound by this staff opinion and reserves the right to the rescind it at a later time. In addition, this office retains the right to reconsider the questions involved and, with notice to the requesting party, to rescind or revoke the opinion if implementation of the proposed program results in substantial anticompetitive effects, if the program is used for improper purposes, if facts change significantly, or if it would be in the public interest to do so.

Sincerely yours,

Robert F. Leibenluft
Assistant Director

Endnotes

(1) The neurologists maintain offices in Pasadena, San Dimas, Glendale, Glendora, and Arcadia, California.

(2) LACMA divides Los Angeles County into 17 districts. The target market includes Districts 1 (Metropolitan), 2 (Pasadena), 4 (Glendale), 6 (West San Fernando Valley -- Santa Clarita Valley), 12 (San Gabriel Valley), 13 (Foothill), 14 (Pomona), and 17 (East San Fernando Valley).

(3) U.S. Department of Justice and Federal Trade Commission Statements of Antitrust Enforcement Policy in Health Care 68 (Aug. 1996) ("Statements").

(4) We assume, for purposes of this opinion, that the area identified by AIN constitutes the relevant market in this instance. The payers with whom we spoke did not express concerns that the operation of the network as proposed would be likely to restraint competition significantly in any smaller area.

(5Statements at 64.

(6Id. at 67.