Advisory Opinion to Wiant (06-19-97)

June 19, 1997

James L. Wiant
Rinke-Noonan
Suite 700
Northwest Center
Box 1497
St. Cloud, MN 56302

Dear Mr. Wiant:

This letter responds to your request for an advisory opinion concerning a proposal by 16 optical firms to establish and operate an optical and vision services network through First Look, L.L.C. ("First Look"). Based on our understanding of the facts as explained in your letters and in telephone conversations, Commission staff have no present intention to recommend an antitrust challenge to the formation and operation of First Look as proposed.

INDUSTRY BACKGROUND

For purposes of this letter, "optical and vision services" refers to a bundle of goods and services including eye examinations, corrective prescriptions, fittings of corrective lenses and contact lenses, and the sale of related eye care products such as frames. Over 150 million Americans wear some form of corrective lenses. Annual sales of retail optical goods exceed $12 billion, and eye examinations account for an additional $3 billion in sales.(1)

Optical and vision goods and services are provided by a number of types of providers, including national and regional optical chains, optical departments at large retail firms, optical dispensaries of some health maintenance organizations, independent ophthalmologists and optometrists (who are licensed to perform eye examinations and write prescriptions and may also dispense corrective lenses), and independent opticians (who are licensed only to dispense corrective lenses but who may employ or contract with eye care professionals who can write prescriptions). One source estimates that, on a national basis, the shares of sales of the various types of providers are approximately 34% for national chains, 18% for independent opticians, and 48% for independent optometrists, dispensing ophthalmologists, hospitals, and managed care organizations.(2) The information available to us suggests that the optical and vision services market generally is extremely competitive, and that the level of competition continues to increase.

Optical and vision care services increasingly are provided through managed care plans. Published information submitted by First Look estimates that 40 million people had vision care benefits through such plans as of September 1995, and that managed care plans covered 30% of retail eye wear sales in 1995.(3) One survey of independent ophthalmologists and optometrists showed that 40% of the patient base of these practitioners was covered by third-party plans.(4) At least 61 third-party managed vision care programs operated in 1995, in areas ranging from a few states to nationwide. Plans include publicly-held and privately-owned networks, provider-owned networks, and plans owned by chain optical firms. Twelve of these plans had more than 1 million covered lives; the largest, Vision Services Plan, had 8.5 million members and 22,000 providers.(5)

In light of the growing importance of managed care organizations in the optical services industry, many optical retailers have begun to develop and market their own third-party plans and provider networks directly to HMOs, preferred provider organizations, insurance companies, and employers. This marketing shift is occurring on both a national and regional level. Independent opticians, in particular, have an incentive to develop their own plans because they have been excluded from serving on the provider panels of many managed vision care plans. For example, independent opticians are precluded from serving on the provider panels of Vision Service Plan, the largest vision care plan in the nation.(6)

You assert that employers and managed care plans desire single source contracting with firms or networks of firms having outlets that provide convenient access points to serve all covered employees. Since these characteristics are available from a large number of vision care plans, independent optical firms feel that they must provide these characteristics as well in order to compete for contracts.

DESCRIPTION OF THE PROPOSAL

First Look will be a network of optical firms (and of local optical firm networks developed by individual members of First Look) organized to respond to requests for proposals ("RFPs") for employer contracts for optical and vision care services to be rendered to covered individuals living in an area larger than that served by any one provider. The request letter asserts that buyers increasingly are using RFPs to solicit bids for employee health benefits contracts. Many First Look members already are responding to RFPs in instances where all the covered employees live in the area served by that member. However, you assert that individual optical firms are unable to respond to RFPs involving employees located in parts of the country not served by the individual firm. According to the letter, First Look members feel that they will be closed out of a growing segment of the market if they are not part of a nationwide network. There are a number of national networks of eye care providers, and many First Look members have been excluded from them because they do not meet certain requirements (i.e., not being owned by an optometrist or ophthalmologist).

Sixteen optical firms currently are "Master Network Members" ("MNMs") of First Look. With one exception, these firms provide services in different geographic areas from one another.(7) All members provide both eye exams and optical goods, either through ownership by licensed optometrists or through employment or contractual arrangements with optometrists. It is anticipated that other MNMs will be added to First Look in the future, in order to give the network nation-wide coverage, and that these additional members will be located in different areas of the country from other First Look members, although there may be small overlaps among members’ service areas.

Unlike many other provider networks that collectively negotiate contracts with payers, First Look is structured so that individual MNMs negotiate specific payer contracts. The MNMs will agree among themselves on a Reimbursement Schedule of discounted prices for exams, frames, and lenses, according to which they will pay other MNMs for services rendered pursuant to contracts between any MNM and an employer. Individual MNMs will then attempt to negotiate contracts with employers located in their area (but also covering employees located in other areas). The contracting MNM will bill employers and pay providers for all services rendered under a particular contract. The contracting MNM will be paid for all services rendered by First Look participating providers at the contract price (that may be higher or lower than the agreed-upon Reimbursement Schedule), and it will pay other MNMs at the Reimbursement Schedule price, plus a 10% administrative fee.

First Look itself is primarily a structure for organizing the relationships among MNMs; it will perform few ongoing functions. It will have committees that consider credentialing and quality standards, but will not contract or engage in much network administration. The MNMs are sharing organizational expenses, but they do not anticipate significant ongoing operational expenses for First Look as an entity.

You state that some of the MNMs are licensed as insurers but others are not, so the network as an entity cannot offer capitation contracts. However, individual MNMs licensed to do so may offer capitation contracts; and it is anticipated that some will choose to do so, and pay other network providers at the Reimbursement Schedule price.

Each MNM also will establish a local network of providers within its assigned area of responsibility. These local network providers will contract individually with the single MNM that covers the area, and will be paid at the Reimbursement Schedule rate. There will be no collective agreements among local network members and no negotiation about price: local network members will be given an opportunity to contract only at the Reimbursement Schedule price. Each local network will be subject to quality and service standards established by the MNMs, to a peer review program for monitoring "costs, utilization, and quality" of service, and to a patient grievance resolution procedure.

Each MNM will determine the size and composition of its local network, depending on the number of providers needed to provide adequate coverage to enrollees under any particular contract. It may be necessary to increase the size of a network in order to respond to a particular RFP. Each MNM will develop its own local network contract, which must incorporate the common standards agreed to among the MNMs, and the Reimbursement Schedule.

The MNMs will agree among themselves on the geographic areas within which each will be responsible for developing a local network. You have stated that the definition of network areas does not limit the ability of any MNM to solicit contracts with employers located outside that member’s network area.

All affiliations with the network will be nonexclusive. MNMs will continue to respond individually to RFPs that they can serve independently. MNMs also will use the local networks as necessary to serve contracts covering only that MNM’s assigned area.

According to your submission, the use of a single Reimbursement Schedule for all services of providers other than the contracting MNM is central to First Look’s strategy for entering the market. In order to prepare a bid, a contracting MNM having to pay different prices to different service providers would need to be able to estimate the number of employees likely to seek services from each MNM and local network provider. Without the common Reimbursement Schedule, First Look believes, it would be necessary for the network to make a substantial capital investment in information processing systems in order to track the demographic characteristics of each employee group covered by a contract on which an MNM proposed to bid. The expense of developing a system to provide that information, First Look believes, would raise the network’s costs to a level that would make its product uncompetitive.

In sum, we understand, based on the information you have submitted, that First Look is intended to operate as follows.(8) An MNM operating in certain cities in Wisconsin, for example, may wish to provide optical services to employees of a company headquartered in Madison but having employees throughout Wisconsin and also in Texas and Alabama. The Wisconsin MNM could bid on a contract covering all those employees, offering a price that exceeded the First Look Reimbursement Schedule by 15%. Texas and Alabama MNMs might also bid for the same contract. If the Wisconsin MNM were successful in obtaining the contract, employees could obtain services from that MNM, from firms in the Wisconsin MNM’s local network (that might be located in Wisconsin cities where the MNM does not have outlets), and from First Look MNMs (and their local networks) located in Texas and Alabama. Only the Wisconsin MNM would be a signatory to the contract with the employer, and all claims would be submitted by, and paid to, the Wisconsin MNM. The other First Look MNMs would bill the Wisconsin MNM for all services rendered by them or members of their local networks to employees under the contract; and they would be paid the Reimbursement Schedule amount plus a 10% administrative fee by the Wisconsin MNM. The Wisconsin MNM would pay members of its local network directly based on the Reimbursement Schedule; and it would retain the difference between the contract amount and the amounts paid to other participants in the First Look network.

We do not have complete information on the markets in which First Look providers compete or their market shares. However, information provided for 13 of the MNMs shows estimated shares of sales ranging from 1.2% to 28% in the total area within which each does business; most of the firms have estimated shares between 5% and 15%.

ANALYSIS
Agreements Among Master Network Members

We have analyzed under the rule of reason the agreement among the MNMs on the Reimbursement Schedule. MNMs will not agree among themselves on the prices at which they will sell to managed care plans, but only on the prices at which they will be reimbursed by one another for services rendered pursuant to contracts negotiated by any MNM. An MNM could not prepare a bid on a multi-area contract without knowing what it will have to pay for services rendered by other providers. Thus, any incidental competitive effect of the agreement is reasonably necessary in order for the participants to be able to compete for the business of multi- area employers. The agreement appears to be no broader than necessary to accomplish that result; there are no anticompetitive collateral agreements and payers remain free to deal with network providers individually if they prefer to do so.

Moreover, MNMs are not (with one exception) competitors of one another for services to patients, because they operate in different geographic markets.(9) Consequently, the agreement on the Reimbursement Schedule does not eliminate any competition among them with respect to services delivered to patients. With respect to competition for network contracts, in many cases only one MNM will be in a position to negotiate with a payer. To the extent that one or more could compete for the same contract (for example, where an employer had a significant number of employees living in more than one MNM’s area), nothing in the agreement prohibits them from doing so; and the structure of the arrangement appears to preserve their incentive to do so, since the contracting MNM keeps the difference, if any, between the contract price and the Reimbursement Schedule amount. That prices for services by other providers are uniform affects, but does not eliminate, this competition.

Nor does the arrangement appear to establish a market allocation agreement among First Look MNMs. You have stated that the network areas defined in the agreement only determine the areas within which an MNM is responsible for establishing a local area network. Any MNM may solicit contracts with employers located in any MNM’s area.

The information available to us does not permit us to analyze in any detail the likely competitive effect of the network in particular markets. However, the arrangement among MNMs as proposed does not appear likely to permit members to coordinate their actions in ways that would result in higher prices to buyers in any market. It does not substantially limit competition in local markets, because members generally are not competitors.(10) Neither does the arrangement appear to endanger competition at the network level. There are many other vision care plans in operation, including some affiliated with national chains; and there are many other firms in each area where MNMs do business. Therefore, buyers should have ample choices of suppliers.

Local Network Agreements

We also have evaluated the local network agreements under the rule of reason. There will be no collective agreements among members of local area networks; instead there will be bilateral agreements between the MNM and each local network member. In many cases, those local members will be competitors of the MNM. Thus, we regard the agreement as one among horizontal competitors on prices at which network members will be paid by the MNM for services rendered under the MNM’s contracts. As proposed, those agreements appear to be reasonably necessary to create the national network First Look seeks to establish. Moreover, the agreement appears to be no broader than reasonably necessary to effectuate that purpose. The structure appears to preserve incentives for an MNM to provide all services under a contract whenever it can do so, and for local network members and other MNMs to compete with one another for contracts, since they will not directly profit from any increase in contract price above the Reimbursement Schedule amount that is negotiated by the contracting MNM. The Reimbursement Schedule amount will be the national price among all members for all contracts; thus, it should not reflect any aggregation of power in local markets. Moreover, there will be no exchange among members of local area networks or among MNMs of information concerning selling prices other than the Reimbursement Schedule, thus minimizing the risk of spill-over collusion among network members.

Because you have not provided any information about the identity or competitive significance of members of local networks, or about the local optical services markets in which network providers compete, we have not been able to analyze the likely competitive effect of the local area networks. It is, of course, possible that this structure could, if network members had power in local markets, be used to restrict competition. For example, local network members might profit indirectly if the MNM used the power of the local network to keep market prices high by refusing to discount to any managed care payers. If a local network has anticompetitive effects in any market, we reserve the right to bring an enforcement action.(11)

CONCLUSION

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

Sincerely yours,

Robert F. Leibenluft
Assistant Director

(1) 1 Disser, Paul J., Sharpening the Focus on Vision Care Benefits, LIMRA’s MarketFacts, Vol. 15, No. 5 at 7-8 (Sept.-Oct. 1996).

(2) 2 Freeman, Paul, It’s No Optical Illusion, Eye Care Competition Intense, Puget Sound Business Journal, Vol. 15, No. 44 at 22 (March 17, 1995).

(3) The Optical Industry’s New Environmentin U.S. Optical Industry Handbook ?96 at 101, 103 (1996) [hereinafter U.S. Handbook].

(4) 4 20/20 Market Pulse—Managed Vision Care Survey of Independents (1995 and 1996), cited in U.S. Handbook, supra note 3, at 103. This survey did not include HMO or chain plans. Some HMO’s also have optical dispensaries.

(5) U.S. Handbook, supra note 3, at 115-127.

(6) 6 Barber, Mary Beth, Small Opticians See Big Obstacles in Insurers and Huge Rivals, Business Journal Serving Greater Sacramento, Vol. 12, No. 13, at 22 (June 19, 1995).

(7) Two MNMs are located in Ohio. According to the information you have provided, one firm has 41 outlets across the state, more than half of them located in the major population centers of Toledo, Cleveland, and Columbus. The other firm’s 20 outlets are located primarily in smaller cities. The two compete in 7 local areas, and have outlets within a 30-minute drive of one another in six areas. You have stated that on a statewide basis, those firms’ combined share of sales is approximately 10%, and that in each overlap area there are numerous other optical outlets.

(8) This is a hypothetical example designed purely for purposes of illustration.

(9) We understand that any MNMs added to First Look in the future will not be competitors to any significant extent with existing MNMs.

(10) In any instances where members do compete in local markets, the analysis concerning local networks, below, applies.

(11) In the context of financially integrated, non-exclusive, physician-controlled networks, the federal antitrust enforcement agencies have presumed that networks comprising 30% or fewer of competitors in a market are not likely to have anticompetitive effects. See Department of Justice/Federal Trade Commission, Statements of Antitrust Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust (1996). Evaluation of the competitive effects of larger networks requires case-by-case analysis of a number of factors.