Letter from Jeffrey W. Brennan to Martin J. Thompson, dated September 23, 2003

Martin J. Thompson
Manatt, Phelps & Phillips, LLP
650 Town Center Drive
Suite 1250
Costa Mesa, California 92626

Dear Mr. Thompson:

This letter responds to your request for an advisory opinion concerning a proposed physician network in the San Francisco Bay area of Northern California. According to your letter, six Bay Area county medical societies propose to establish a common "messenger" arrangement to minimize the costs associated with their members contracting with health plans and other third-party payers. The arrangement you describe does not appear intrinsically to involve price-fixing or other anticompetitive agreements among competing physicians. Accordingly, Commission staff does not presently intend to recommend law enforcement action against the network's establishment and operation. If the network in practice orchestrates or facilitates anticompetitive agreements among its competing physician members on price or other terms of dealing with payers, however, then the staff will recommend to the Commission that it take appropriate law enforcement action.

Description of Proposed Conduct

You informed us that six county medical societies located in seven adjacent counties in the San Francisco Bay area propose to form a nonprofit mutual benefit corporation to be known as Bay Area Preferred Physicians ("BAPP").(1) BAPP proposes to develop a physician network to help create new contracting opportunities between medical society physician members who choose to participate in the network and third-party payers in Northern California.

Each BAPP participant must be a medical society member. Physician members will fund BAPP through application fees and periodic assessments, as necessary to cover operational costs. BAPP will operate as a non-exclusive network, allowing its member physicians to participate in other physician networks and contract directly with payers, including payers who enter into contracts with BAPP. Each medical society will appoint two representatives to serve on BAPP's board of directors.

You advised us that 10,349 physicians actively practice medicine in the seven-county area that the medical societies cover, and that approximately one-half (i.e., 5,357) of these physicians belong to one of the medical societies. You anticipate that fewer than 25% (i.e., 1,332) of the medical society members will join BAPP, which corresponds to about 13% of the total number of practicing physicians in the seven-county area,(2) and that the expected members primarily will be practitioners in solo or small group practices. The medical societies do not expect any individual medical specialty to have representation in BAPP substantially different from this 13% level.

A non-physician employee of BAPP will act as a "messenger" to convey payer offers to physician members and to communicate to payers which BAPP physician members will accept the payer's offer. The messenger will not negotiate price or price-related terms on behalf of physician members. In addition, the messenger will not coordinate or facilitate horizontal agreements among the physicians in responding to the payer's offer.(3)

Under the proposed arrangement, BAPP will collect from each physician individually the minimum payment level that member would accept for his or her most common medical procedures. It will collect this information in a way that does not suggest the price level that the doctor should select. BAPP will maintain this information in a confidential database, accessible only to non-physician BAPP employees involved in communicating with payers. BAPP will prohibit these employees from disclosing physician price information to any BAPP physicians - including board members and medical societies.

BAPP will be authorized to contract with any payer on behalf of physicians whose minimum payment requirements are at or below the payer's offer. The BAPP messenger also will notify those physicians whose minimum payment demand exceeds the offer that they have one opportunity to "opt in" to a contract containing the payer's offer. This notice will not reveal the number or percentage of BAPP physicians whose payment levels met or were below the payer's offer. BAPP also might provide objective information to its members to help them understand the contract terms. You have represented that BAPP and its messenger will not recommend that the physicians accept or reject an offer, opine on the appropriateness of price or other competitive terms, present contract information that suggests an opinion on whether the physicians should accept a particular contract term, or otherwise attempt to facilitate any coordination among the physicians on such terms.

After receiving responses from the physicians who were offered the opportunity to opt in to a contract, BAPP will determine the percentage of all BAPP physicians willing to accept the payer's offer. If this percentage is 50% or higher, then BAPP will have the authority to sign a contract on behalf of the willing participants. BAPP will enter into a contract with the payer on behalf of those willing physicians if the payer decides that it has a sufficient number of physicians for its network.

Moreover, you informed us that the medical societies do not want BAPP to bear the cost of managing a contract in which a minority of its members participate. Accordingly, if fewer than 50% of the physicians accepts an offer, then BAPP will inform the payer of this fact and advise it that BAPP will enter into a contract on behalf of the accepting physicians only if the payer bears contract administration costs. BAPP has not yet determined what these likely costs will be, but represents that any fee that it assesses to a payer for this purpose will be reasonably related to BAPP's costs in administering the contract. BAPP will not disclose to its members the number of physicians who accept a contract or whether a payer is being assessed a fee to cover contract administration costs.

In lieu of this cost-sharing option, a payer also may elect to approach the physicians directly to negotiate individual contracts. (Indeed, since BAPP will operate non-exclusively, this option always will be available to payers.) BAPP will provide the payer with the names of the physicians whose minimum payment levels fell within the payer's offer or who decided to opt in to a contract. BAPP will not at any point in its dealings with payers directly or indirectly advise, instruct, or recommend that its members refuse to contract individually with any payer.

BAPP will also provide administrative services in connection with payer contracts. This will include the credentialing of physician members in accordance with National Committee on Quality Assurance standards, assisting in investigating and resolving contractual disputes, and transmitting information between payers and physician members.

Legal Analysis

Network Joint Ventures Using a "Messenger"

Some use the term "messenger model" as a shorthand designation for arrangements that physician organizations(4) have created to facilitate payer contracting. Physician organizations (sometimes referred to as "networks") that have not established significant, efficiency-enhancing, financial or other integration among their members (to which a price agreement is reasonably necessary) may not lawfully set prices collectively in dealing with payers. Each individual member physician (or physician group practice) unilaterally must decide the price at which to contract with any particular payer. As discussed in Statement 9 of the Statements of Antitrust Enforcement Policy in Health Care jointly issued by the Commission and Department of Justice in August, 1996,(5) a "messenger" arrangement can minimize the costs of its members' contracting with payers while avoiding price-fixing agreements among its competing members. To avoid price-fixing and attendant antitrust liability, a messenger-type physician network must operate in a way that neither creates nor facilitates agreements among members on the prices to accept from payers.

A messenger's involvement in contracting with payers also could create or facilitate agreements among competing physicians on topics other than price. Agreements on non-price related contract terms do not constitute price-fixing, but they could be anticompetitive and, in some circumstances, be so likely to cause significant competitive harm that they could be condemned without an elaborate market analysis.

Network arrangements that do not create or facilitate price-fixing or other anticompetitive agreements will not increase the physicians' pricing leverage with payers by aggregating the power of the individual members. The principal efficiency in messenger arrangements is a reduction in the transaction costs of payer-physician contracting. At less cost, payers can both learn about physicians' willingness to contract at particular prices and engage in the contracting process itself. Also at less cost, physicians can market themselves to payers and - if the network provides standardized information about various payer offers - assess contract opportunities. If the network plays a role in implementing physician-payer contracts, then both sides can realize lower costs in providing and receiving information and addressing contract disputes.

Many physicians and physician networks that label themselves "messenger models" have created or facilitated agreements among members of the network not to compete with one another on price terms. Some networks, for example, have aggressively negotiated for higher prices, and transmitted payer offers to the physicians only after achieving a price offer that the organization's agent or committee deemed acceptable. Others have transmitted only offers that meet a predetermined price. In such situations, network members sometimes have agreed in advance to demand that price, many times with the assistance of an agent to help forge consensus. Other times, an agent has solicited member physicians' individual price demands, then used an average or other calculation from the submitted information to determine a collective price to demand from payers.

In other instances, networks have prompted coordinated pricing by encouraging physician members to deal with payers only through the organization, thereby bolstering the physicians' collective leverage. Some networks have prohibited members from contracting independently - either permanently or for some period while the network negotiates with the payer, or while a network contract with that payer is in effect. Other networks have acted as their member physicians' agent, by collectively terminating the physicians' existing individual payer contracts, or have exhorted members to terminate such contracts on a coordinated basis and to contract only through the network. The Commission has brought numerous law enforcement actions involving allegations of these kinds of anticompetitive abuses of the messenger concept.(6)

Neither use of an agent to negotiate prices, nor requiring a physician individually to "opt in" to a contract that the network negotiated, legitimizes the conduct for antitrust purposes. Such conduct constitutes an unlawful horizontal agreement among the participating physicians not to compete on price. An illegal price-fixing agreement need not take the form of an explicit agreement on common fees among the competitors personally. An agreement among competitors to appoint a common agent to determine fees, or to bargain for the best price that the physicians collectively can command, is also a horizontal agreement not to compete on price, and constitutes price-fixing. Such conduct is no less unlawful merely because an individual competitor is not bound by the price obtained through the collective action until he or she individually "opts" to accept it.

Substance, not form, matters for antitrust purposes. An organization cannot achieve antitrust compliance merely by calling itself a "messenger model," adopting a particular "messenger" framework, or following a given set of procedures. The central competitive question is whether the organization, in practice, creates or facilitates price-related agreements or other anticompetitive conduct among its members. Not only the organization's conduct, but also that of individual members - sometimes in response to the organization's actions - bears on this question. In some circumstances, physicians may find it relatively easy to coordinate behavior to restrain competition. In other circumstances, physicians may have strong market incentives to act unilaterally or find it difficult to collude effectively. Thus, organizations with similar structures and activities may have different competitive effects, depending on the market environment in which they operate. It is not always possible for an antitrust agency to determine prospectively whether any particular planned messenger structure will, in practice, prompt unlawful conduct. In an advisory opinion context, the staff evaluates whether a particular structure appears to be intended, or is inherently likely, to create a prohibited agreement or be used for anticompetitive purposes.

BAPP's "Messenger" Arrangement

Your proposal does not expressly contemplate the foregoing types of unlawful practices. BAPP states that it intends to use a messenger to convey payer offers to its physician members, communicate to payers the identity of physician members willing to accept the offers, and enter contracts on behalf of physicians who unilaterally decided to accept. It further states that BAPP will not negotiate prices, express or suggest an opinion to members on the desirability of any offer or contract term, share member price terms with other members, or require or persuade members not to deal with any payer.(7) Nothing in your proposal on its face appears to constitute an unlawful price agreement or be purposely designed to engender anticompetitive collective action.

You asserted that the medical societies forming BAPP do not wish to fund the servicing of contracts in which only a minority of BAPP members participate, because it would "impose an excessive cost" on the non-participants, and that this is a rational, cost-based business decision. The staff offers no view on the commercial or economic reasonableness of this decision, or on whether a participation threshold of 50% or less is a justifiable demarcation for determining whether to service a payer contract. Assuming that the policy is based on legitimate business considerations, it nonetheless has potential competitive implications that could pose some antitrust risk, of which BAPP should be aware.

The "50% rule" could constitute an information-sharing device that could facilitate tacit agreements to demand higher prices. BAPP's failure to enter into, and administer, a contract that it previously had "messengered" would inform the physicians that more than half of them had demanded a higher price than the payer had offered. Over time, this practice could effectively constitute an exchange of information about the price decisions of a majority of group members and, in turn, lead members to reject price offers that they might otherwise have accepted, knowing that most of the other member physicians are likely to act similarly.

You advised us that BAPP will mitigate any such risk by executing and administering contracts on behalf of fewer than 50% of member physicians, so long as the payer remits a fee to cover contract administration costs. BAPP will not disclose to the members how many of them have accepted the contract or the fact that the payer is bearing administration costs. If the payer agrees to this practice, then it is less likely that any member could determine the minimum price level demanded by the majority. If, in operation, BAPP assesses fees or imposes conditions on payers that are not reasonably related to the costs of administering a contract, then there may be substantial grounds to infer that BAPP is attempting to send a pricing signal or to prevent payers from signing contracts with the minority of BAPP members who would accept their prices.

Furthermore, if the payer chooses not to share contract costs with BAPP and desires instead to enter into individual contracts with the minority of BAPP members whose price demands the payer meets, then BAPP will provide the payer with those physicians' names to facilitate such individual contracting. So long as payers have an effective opportunity to contract with physicians individually - that is, BAPP's members do not explicitly or tacitly agree not to deal with payers with whom BAPP has not contracted - BAPP's refusal to administer contracts to which fewer than half its members subscribe is less likely to have anticompetitive effects.

Of course, if a payer approaches them directly after BAPP had "messengered" that payer's offer, then the physicians presumably would know that fewer than half of BAPP's members had agreed to the offer (because otherwise BAPP, not the payer directly, would be involved). This could cause at least some among the minority whose price demands the payer had met to change their minds, hoping that the payer finds it necessary to raise its offer to obtain contracts with a sufficient number of physicians. On the other hand, the physicians also might accept the payer's offer, to gain access to the payer's insured population and seek competitive advantage over those physicians who elect not to sign a contract with that payer.

It is not possible to predict with certainty how, in actual operation, BAPP's "50% rule" will affect the contracting process and competitive interaction among its members. In the context of BAPP's entire proposed operation as you described it to us and as we analyze it above, it appears unlikely that the rule's implementation would reveal information that could be used strategically for anticompetitive purposes. Furthermore, BAPP's probable membership size - some 1,300 physicians, mostly in small or solo practices - would make it more difficult for the members to use whatever information-sharing characteristics the rule may have to collude tacitly on price. Anticompetitive effects are also less likely if BAPP's membership collectively has a relatively small share of any relevant market.

BAPP produced a few documents to staff, however, suggesting that some members saw BAPP as a way to reject contracts to which 50% of the physicians do not agree and thereby to raise prices. You told us that these physicians misunderstood BAPP's procedures (including being unaware of BAPP's methods to facilitate contracting with a minority of members), that you corrected them, and that you advised the physicians on the unlawfulness of using BAPP as a device to fix prices. Nonetheless, this justifies some concern that the 50% rule could be used anticompetitively. If, in practice, BAPP facilitates price agreements among its members or otherwise restrains competition unreasonably, then the staff would recommend that the Commission commence an appropriate law enforcement action.(8)

You also told us that BAPP may develop standard non-price contract terms. Even if member physicians do not agree explicitly to deal only on such standard terms, this raises the risk that an agreement on standard terms, even as a point to compare contract offers, could facilitate agreements not to deal on other terms. BAPP has not developed standard contract terms and you have not provided any specific information about them. We have no basis for determining prospectively the extent to which BAPP's development and use of standard non-price contract terms would raise antitrust concerns, therefore, and we express no opinion regarding that issue.

Conclusion

For the foregoing reasons, Commission staff do not presently intend to recommend that the Commission initiate an enforcement action if BAPP undertakes the proposed activities in the manner you have described. If BAPP orchestrates or facilitates anticompetitive agreements among its competing physician members on price or other terms of dealing with payers, however, then the staff will, for the foregoing reasons, recommend that the Commission take appropriate law enforcement action. This letter expresses Bureau of Competition staff views. By Commission Rule § 1.3(c), 16 C.F.R. § 1.3(c), the Commission is not bound by this letter and reserves the right to rescind it. The staff 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 physician network results in substantial anticompetitive effects, if the physician network 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. The county medical societies are: Alameda-Contra Costa Medical Association, San Mateo County Medical Association, San Francisco Medical Society, Sonoma County Medical Association, Napa County Medical Association, and Solano County Medical Society. Your letter indicates that a seventh society, Santa Clara County Medical Association, has not yet determined whether it will participate in BAPP.

2. Participation of Santa Clara County Medical Association in BAPP would not significantly change the above physician participation percentages.

3. Some of the materials you submitted suggest that BAPP would like to develop standard non-price contract terms to offer as an alternative to a payer's standard contract. In addition, you suggested that BAPP might be authorized to accept a payer offer on a physician's behalf only if (as discussed infra) the offered price meets or exceeds the physician's minimum price level and if the contract terms do not substantially differ from BAPP's standard terms. You have not provided enough information for us to evaluate these aspects of the proposal, however, and, as discussed below, we express no opinion on it.

4. This discussion focuses on physician organizations because your proposal involves physicians. The same principles also apply to other health care provider networks.

5. The Statements are available at www.ftc.gov/reports/hlth3s.htm#8.

6. See, e.g., North Texas Specialty Physicians, No. D-9312; Physician Network Consulting, L.L.C., No. C-4094; SPA Health Organization, No. C-4088; Carlsbad Physician Association, Inc., No. C-4081; System Health Providers, Inc., and Genesis Physicians Group, Inc., No. C-4064; Professions in Women's Care, No. C-4063; Professional Integrated Services of Denver, No. C-4054; and Aurora Associated Primary Care Physicians, No. C-4055.

7. The members of BAPP's board of directors likely will be practicing physicians in a competitive relationship with at least some other BAPP members. These physicians are individually subject to the antitrust laws, and should not use information that they acquire in serving on the board to facilitate anticompetitive agreements among BAPP members.

8. The Commission's recent complaint in North Texas Specialty Physicians, No. D-9312 ("NTSP"), provides an illustrative contrast regarding messenger arrangements. According to that complaint, NTSP engaged in numerous practices that facilitated or constituted unlawful collective behavior and agreements among its participating physicians - including negotiating payer contracts on the physicians' collective behalf, collecting the physicians' price requirements and using their averages as a floor in negotiating contracts, reporting the group's prospective price information back to the physicians, organizing collective refusals to deal with payers to extract higher prices, and other acts. In such circumstances, the staff would view the messenger's refusal to administer contracts to which half the members do not agree as a device for furthering anticompetitive goals.