Advisory Opinion to Rhodes (08-15-95)

August 15, 1995

Thomas W. Rhodes, Esquire
Smith, Gambrell & Russell
Suite 3100, Promenade II
1230 Peachtree Street, N.E.
Atlanta, Georgia 30309-3592

Re: Otolaryngology Specialty Providers of Georgia ("OSPOG")

Dear Mr. Rhodes:

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, Otolaryngology Specialty Providers of Georgia ("OSPOG"), a corporation organized under the laws of the State of Georgia.(1) According to the information submitted with your request for an advisory opinion, OSPOG was formed to provide otolaryngologists access to managed care plans. As is explained more fully below, it does not appear that the operation of OSPOG is likely to violate any law enforced by the Federal Trade Commission. This opinion is based on our understanding of the facts as explained in your letter; we have not conducted an independent investigation, and our assessment could change if the facts change significantly.

According to OSPOG's submissions, OSPOG is a Georgia corporation, all of whose shareholders(2) practice otolaryngology in Atlanta or Rome, Georgia. Physician participation in OSPOG is non-exclusive; OSPOG physicians have the ability to join other networks and to market their practices outside of OSPOG.

OSPOG's proposed course of doing business involves two phases of operation. Initially, OSPOG will adopt a "messenger model." During this phase, OSPOG will solicit insurance companies and managed care companies that may be interested in including OSPOG's physicians in their plans. Each insurance/managed care company will propose its own prices, and OSPOG will forward that proposal to each OSPOG physician, who will unilaterally inform OSPOG whether he or she wishes to accept the insurance/managed care company's offer. OSPOG's messenger will not negotiate fees on behalf of the physician-providers, and will not disclose to participating providers information about fees or contracting decisions of other participating providers. OSPOG physicians will not use OSPOG's messenger to communicate among themselves about fees, discounts, or acceptance or rejection of any insurance/managed care company offers.(3)

In its second phase of operation, OSPOG intends to contract with insurance/managed care companies on a "capitated" basis. If successful in this endeavor, OSPOG physicians will be paid a flat rate based on the number of persons enrolled in the payor's plan. Thus, OSPOG physicians will collectively bear the risk that the cost of services provided will exceed the capitation payments.

Currently, 33 of the 34 members of OSPOG practice in Atlanta, Georgia; the remaining member practices in Rome, Georgia, which is approximately 66 miles northwest of Atlanta. Your letter indicates that for the Atlanta-based OSPOG members, the Atlanta Metropolitan Statistical Area, as defined by the Department of Commerce, is the relevant geographic market. OSPOG's members account for fewer than 29% of the otolaryngologists in this area.(4) In Rome, only one of the five practicing otolaryngologists is an OSPOG member.

Based on your description of the proposed operation of OSPOG as summarized above, it appears that the proposed structuring of OSPOG's operation is unlikely to violate the antitrust laws.

The approach contemplated by OSPOG in its initial phase of operation appears to conform to the messenger model described in Statement 9 of the Health Care Statements, which were jointly issued by the Commission and the Department of Justice last September. The messenger model, if properly implemented, avoids a horizontal agreement on price, and thus does not raise concerns about price fixing among the participating physicians through the network joint venture.(5) Networks using the messenger model need not be economically integrated.(6)

It is our understanding that during the messenger model phase, OSPOG's physicians will make individual determinations on whether or not to accept the prices offered by the insurance/managed care companies.(7) OSPOG's plan indicates that OSPOG will simply be a messenger between the insurance/managed care companies and the OSPOG physicians. OSPOG will provide the insurance/managed care company's proposal to OSPOG physicians, but will not negotiate fees on behalf of the physicians.

Under capitated coverage, OSPOG's operations appear to fall within the "safety zone" for physician network joint ventures. Statement 8 of the Health Care Statements states that the federal antitrust enforcement agencies will not challenge, absent extraordinary circumstances, "a non-exclusive physician network joint venture comprising 30 percent or less of the physicians in each physician specialty with active hospital staff privileges who practice in the relevant geographic market and share substantial risk."(8)

The second phase of OSPOG's operation, involving capitated contracts, appears to involve substantial risk sharing among the physicians participating in OSPOG. Statement 8 indicates that acceptance of capitated contracts by a group evidences substantial financial risk sharing.(9) Because OSPOG's capitation structure is one in which all OSPOG physicians would share the risk of having to provide services without reimbursement if utilization exceeded expectations, this criterion of the safety zone is satisfied.

The other criterion of the safety zone is that the non-exclusive network include no more than 30% of the physicians in each medical specialty practicing in the geographic market. As mentioned above, OSPOG's arrangement with its physicians is non-exclusive.(10) You claim that the Atlanta Metropolitan Statistical Area is a relevant geographic market for physician services, and that Rome, Georgia is a separate geographic market. While we have not conducted an investigation to confirm these market definitions, the areas described in your letter appear to be reasonable approximations of the relevant geographic markets and are accepted as such for purposes of this opinion. Under this definition of geographic markets, the market share criterion of the safety zone is satisfied since OSPOG's membership represents less than 30% of practicing otolaryngologists, both in the Atlanta Metropolitan Statistical Areas and Rome, Georgia. Thus, OSPOG would appear to qualify for "safety zone" treatment.

For these reasons, the formation and operation of OSPOG as proposed in your June 5, 1995 letter would not appear to violate any law enforced by the Federal Trade Commission. 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) (1994), 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 effect, 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,

Mark J. Horoschak
Assistant Director

  1. OSPOG was formed in 1993. We understand that OSPOG is restructuring its operations and adopting a new provider contract in light of Statement 8 of the Enforcement Policy Relating to Health Care and Antitrust: Physician Network Joint Ventures, in United States Department of Justice and Federal Trade Commission, Statements of Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust (September 27, 1994), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,150 (1994) ("Health Care Statements").
     
  2. Shares in OSPOG are offered for $1.00 per share. OSPOG is authorized to issue two classes of stock: Class A Voting Common Stock and Class B Non-Voting Common Stock. The aggregate number of shares of each type is 10,000 shares. All of the voting rights of OSPOG are invested in the holders of Class A stock. Except for the voting rights, the rights of holders of Class A Voting Common Stock and Class B Non-Voting Common Stock are identical in all respects.
     
  3. June 5, 1995 Letter at 2; Proposed Contract ¶¶ 7.1, 7.2.
     
  4. The 29% market share is based upon your representation that there are 112 otolaryngologists who are members of the American Academy of Otolaryngology -- Head and Neck Surgery (which confines its membership to board-certified otolaryngologists) in the Atlanta Metropolitan Statistical Area. Were we to include the other otolaryngologists in the Atlanta area who are neither board-certified nor members of that Academy in our calculation, the market share of Atlanta-based OSPOG members would be less than 29%. Additionally, you state that a high proportion of otolaryngologists' services overlap with services provided by other specialties (e.g., family-practice physicians and internists (ear infection); allergists/immunologists (sinus problems); plastic surgeons (plastic surgery on head and neck); and dermatologists (cancer surgery on head and neck).
     
  5. Health Care Statements, supra note 1, at 89.
     
  6. Id. at 94.
     
  7. OSPOG must take care to ensure that the decisions by OSPOG members on whether or not to accept the proposed contracts in fact are made individually, and do not involve any tacit agreement among physicians not to deal, or to deal only upon certain agreed-upon terms. Similarly, care should be taken in conveying information to payors to assure that payors understand that such information is simply to help the payors formulate their proposals to OSPOG's members; that the payors are free to propose whatever contractual terms and offers they wish to those physicians; that payors remain free to deal individually with some or all of OSPOG's physician members and are not required to deal through OSPOG; and that OSPOG has no power or authority to make offers, negotiate, agree for, or bind OSPOG members. See Health Care Statements at 94-96.
     
  8. Id. at 68-69.
     
  9. Id. at 70.
     
  10. In fact, many OSPOG members are also members of multispecialty networks.