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The "1996 Conference on Practice Management" Presented by the American Society of Anesthesiologists
New Orleans, Louisiana
Roscoe B. Starek, III, Former Commissioner

Good afternoon. It is a pleasure to be here today to discuss the antitrust analysis of physician networks and other integrated delivery systems. As always, I must remind you that my remarks today reflect only my own views and are not necessarily those of the Commission or of any other Commissioner.

Everyone in this room knows that we are experiencing a time of rapid and far-reaching change in health care markets. Payers are exerting intense pressure for more effective, efficient, and accountable health care services; provider and insurance markets are undergoing unprecedented integration and consolidation; and new structures for delivering and financing health care services are being established very rapidly. These developments are independent of legislative proposals to restructure the health care system, and they appear likely to continue for some time to come.

These changes present challenges to physicians and other health care professionals. I urge you to bear in mind that a health care system based on competition -- where systems for the delivery of health care, designed to promote quality services while containing costs, can compete for consumer acceptance -- appears to be far preferable to comprehensive government regulation of the delivery of health care services, including regulation of price and output. And antitrust enforcement is an essential component of any competition-based system.

The purpose of the antitrust laws -- and of the Commission's enforcement of those laws in the health care sector -- is to ensure that competitive forces will be allowed to stimulate the development of products and services desired by consumers. In assessing possible restraints on health care competition, the Commission seeks to determine whether the actions in question will promote or hinder consumers' interest in being able to choose among a variety of service and price options according to their own needs.

Let me make it clear that the Commission does not favor one type of health care delivery system over another. Rather, we work to keep markets open to new and existing competition so that consumers and providers can make their economic decisions without the distortions or altered incentives that can arise from anticompetitive practices. The Commission seeks to ensure that delivery systems may develop and grow if they meet the preferences and needs of consumers, and that anticompetitive behavior does not impede the development of health care alternatives. We have taken action to protect the development of health maintenance organizations ("HMOs"), for example, not because we believe those organizations are necessarily superior to other methods of providing health care services, but because, all other things being equal, HMOs and other managed care alternatives should be permitted to stand or fall on their relative merits as judged by their customers.

But let there be no mistake about one fundamental point: markets work when consumers are able to exercise choice. It is bedrock antitrust doctrine that physicians and other sellers of services -- no matter how good their intentions -- may not impose their choices on unwilling consumers. As the Supreme Court has noted, the antitrust laws reflect a fundamental judgment that consumer choice, rather than the collective judgment of sellers, should determine the range and prices of goods and services that are available. Thus, the courts have refused to permit private groups of competitors to "pre-empt the working of the market" by deciding for themselves what their customers need, rather than allowing the market to respond to what consumers demand.

Antitrust enforcement decisions can require a fact-intensive analysis, and many health care markets have distinctive characteristics that must be factored into the competitive analysis. When we add to these ingredients the rapid changes now occurring in many markets -- including the development of types of collaborative arrangements not seen before -- it is perhaps not surprising that there has been some confusion and uncertainty about the applicability of antitrust law in particular situations. This is why the FTC and the Department of Justice issued Enforcement Policy Statements that explain the agencies' analysis of several types of collaborative activities among physicians, hospitals, and other health care providers. We also made a commitment to respond promptly to requests for advisory opinions or business review letters and took steps to make our opinion letters more easily accessible to the public. We also take advantage of opportunities such as this to explain to market participants our thinking on the antitrust issues raised by new types of collaboration.

I have been invited here to discuss an issue that attracts a great deal of attention among doctors -- the application of antitrust law to integrated delivery systems. Two of the Enforcement Policy Statements address these organizations. Statement 8 discusses "physician network joint ventures," defined as physician-controlled ventures in which the member physicians agree among themselves on prices (or other significant terms of competition) and jointly market their services. Statement 9 discusses multiprovider networks, such as hospital/physician organizations.

As Statement 8 recognizes, physician network joint ventures, such as individual practice associations ("IPAs") and preferred provider organizations ("PPOs"), can benefit consumers by providing quality services at reduced cost. Nonetheless, the antitrust enforcement agencies are concerned about two major problems arising from the operation of networks of doctors and other health care providers:

  1. the elimination of competition among the participants in the venture, and
  2. impediments to effective competition among different networks or health plans operating in the same market. The first concern focuses on agreements among members of joint ventures on the prices or other terms on which they will sell their services. The second looks at whether a given joint venture includes so many of the physicians or other providers in a market that too few remain to form competing networks or to contract directly with health benefit plans.

Enforcement Policy Statement 8 establishes an antitrust "safety zone" for certain physician network joint ventures in which members share substantial financial risk. The safety zone applies to nonexclusive networks comprising 30 percent or fewer of the doctors in each medical specialty with active hospital privileges in a market, and to exclusive networks comprising 20 percent or fewer of the doctors in each medical specialty with active hospital privileges in a market. In other words, absent extraordinary circumstances, the Commission will not challenge a network that meets these criteria. Based on our experience, networks within the safety zone are not likely to pose competitive problems.

The safety zones describe areas in which antitrust issues are extremely unlikely to arise; accordingly, they define conduct that ordinarily will not be subject to challenge by the enforcement agencies. At the same time, bear in mind that "[t]he inclusion of certain conduct within the antitrust safety zone does not imply that conduct falling outside the safety zones is likely to be challenged." We have not challenged, and will not challenge, physician networks simply because they exceed the size limits of the safety zone; indeed, as I will explain later, the Commission's staff has issued favorable opinion letters involving conduct that was not within the safety zones. We use the analytical framework set forth in the Enforcement Policy Statements to evaluate conduct falling outside the safety zones.

At the same time, it is important to understand that the safety zones, of necessity, are general guidelines that may not be directly applicable to all situations. The existence of the safety zones does not eliminate the need to evaluate specific conduct in light of the commercial realities of particular markets. For this reason, I urge you to contact the Commission or the Department of Justice to discuss any proposed action that is likely to have a significant impact on the market. FTC and Justice Department staff are available for informal consultation, and both agencies offer doctors the opportunity to obtain a prior opinion about the legality of proposed conduct.

Much of the concern about the impact of antitrust law on physician network joint ventures relates to the legality of joint pricing decisions by members of the networks. Let me explain the Commission's analysis of this issue, and how it developed.

Agreements among competing sellers concerning the prices they will charge, standing alone, are problematic under the antitrust laws because they are likely to restrict competition and harm consumers. Generally speaking, such a "horizontal" price agreement among actual or potential competitors violates the antitrust laws. We need not inquire into the economic power of the parties to the agreement, unless it is an integral part of some significant economic integration that may have net procompetitive effects. When an agreement that restricts competition among competitors -- such as a price agreement -- is claimed to be integrally related to a joint venture or other economic integration, we determine the legality of the agreement by assessing whether the practice in question is likely to create or increase competition between the joint venture and others, and whether it is reasonably necessary to the attainment of the procompetitive objectives of the joint venture.

The Supreme Court applied these principles to an early form of physician network joint venture in Arizona v. Maricopa County Medical Society, which considered the legality of an arrangement under which a group of competing physicians agreed, through a foundation for medical care, on maximum prices at which they would sell their services to subscribers of health insurance programs approved by the foundation. The foundation also performed utilization review and acted as an administrator for the insurance companies.

The Court held that the arrangement constituted an illegal price-fixing agreement. It rejected on two bases the claim that the price restraint was procompetitive because it was necessary for the creation of a new product -- insurance coverage that would pay physicians' charges in full. First, the Court found that no new product had been created, because the participating physicians were simply selling their individual services at fixed prices. The doctors were competitors who had not meaningfully integrated their practices through a pooling of capital or a sharing of risk of loss. Second, the Court held that it was not necessary for the physicians to agree among themselves on prices in order for the arrangement to succeed. Instead, the insurance companies could have reached agreements with individual doctors about the prices to be charged.

The Commission's experience in health care antitrust enforcement bears out the wisdom of the law's prohibition of price agreements among competitors who are not economically integrated. An agreement among competing health care providers on common terms of dealing with third-party payers interferes with competition among the providers on the terms of their contracts with payers. The Commission believes that competition among providers to enter into contracts with managed care plans benefits consumers through lower costs; conversely, agreements on common bargaining terms can hurt consumers.

The harm is clearly illustrated by the Commission's case against the Michigan State Medical Society, in which the Commission found that members of the Society had collectively threatened to withdraw from participation in Michigan Blue Cross/Blue Shield insurance programs if their collective fee demands were not met. To satisfy consumers, the Blue Shield plan needed to have contracts with a large number of physicians who would agree to accept the plan's payment as full compensation. The plan relied on competition among physicians to obtain the right number and mix of physicians for the plan, but the doctors agreed among themselves that they would not compete with respect to the terms of their contracts with Blue Shield. Instead, many physicians agreed that they would refuse to participate in the plan unless the demands of the Medical Society were met. The Commission issued an order prohibiting the Society from "collectively" bargaining with payers on behalf of its members and from orchestrating or facilitating members' concerted departicipation from the plan. The Commission has investigated, and entered into consent agreements with, a number of other groups of economically unintegrated physicians that negotiated jointly with insurers or boycotted (or threatened to boycott) insurers in order to force adherence to the doctors' demands about price or other contract terms.

In a related vein, the Commission and the Department of Justice issued joint letters in opposition to a provision in the House Medicare reform bill (H.R. 2425) that would have required application of the antitrust rule of reason -- rather than per se condemnation -- to collective price negotiation between Medicare provider sponsored organizations ("PSOs") and groups of doctors who did not share financial risk. The letters pointed out that the proposal would make it harder for the government to prosecute agreements by groups of competing health care providers to determine collectively the prices they would demand from a PSO, to bargain collectively with the PSO, and to threaten a boycott if the PSO did not accept the providers' terms. Meanwhile, the PSOs contemplated by the House Medicare reform plan would be obligated to provide all covered services to enrolled beneficiaries in exchange for a predetermined capitation payment. The provision in the House bill was not in the Senate bill and was not included in the final version.

The enforcement agencies' opposition to this aspect of the Medicare legislation, however, does not imply that groups of providers should be barred from establishing or participating in health care financing and delivery organizations. The proposed PSO organizations can operate, develop fee schedules, and set up provider panels in ways fully consistent with the antitrust laws. For example, physicians may establish and operate plans that are directly competitive with insurance companies, including companies similar to traditional Blue Shield plans or IPA-type health maintenance organizations. The Commission and its staff have made this clear on a number of occasions over the years. In fact, fourteen years ago the Commission stated that agreements among members of a physician group to operate medical prepayment plans are not inherently illegal. Rather, antitrust problems are likely to arise only if a plan is formed for an anticompetitive purpose; if a plan's formation eliminates, or is likely to eliminate, substantial potential competition from other plans; or if a plan is operated in a way that, on balance, has significant anticompetitive effects. And in 1984, the Commission's staff stated in an advisory opinion that in light of their assumption of risk, the members of an IPA-type HMO could collectively negotiate the capitation rate they accepted from the HMO, as well as agree among themselves on the fee schedule used to distribute the capitation payment among IPA members.

A critical consideration in situations such as the one presented in the 1984 staff opinion is that the physician members of the health plans assumed substantial financial risk in connection with the plans' operation, through some type of commitment to provide specified medical care to a covered population in exchange for a fixed monthly payment. In other words, the organizations assumed some or all of the risk usually borne by an insurance company or self-insured employer. Assumption of such risk is one of the features of the safety zone for physician network joint ventures.

The Enforcement Policy Statements contain two examples of substantial risk-sharing:

  1. when the venture accepts capitation contracts; and
  2. "when the venture creates significant financial incentives for its members as a group to achieve specified cost-containment goals," such as a "risk withhold" -- i.e., "withholding from all members a substantial amount of the compensation due to them, with distribution of that amount to the members only if the cost-containment goals are met."

Other forms of economic integration may also constitute substantial risk-sharing. When members of a physician group bear a substantial risk of loss if the group cannot compete successfully with other health plans, each member of the group has a direct stake in the success of the group as a whole and therefore has an incentive to assure that all physicians practice high-quality medicine and avoid unnecessary utilization of services. Just last month, we announced that we would gather information through February about possible new types of arrangements that may offer efficiency benefits to be taken into account in our antitrust analysis. We will look at whether types of integration among participants in health care provider networks, other than capitation and similar risk sharing arrangements, are likely to produce efficiencies that should trigger rule of reason analysis. Specifically, the staff seeks information "about the needs of buyers, how well these needs are being met by existing types of networks, and the potential benefits and costs of other types of arrangements." I look forward to examining the information that arrives in response to this initiative.

Even if physicians choose not to bear any insurance or other substantial financial risk, they may still participate actively in managed care plans. Physician-controlled PPOs can successfully operate absent an agreement among the members of the organization on the prices they will charge for medical services in their individual practices. For instance, an organization can use a variation of the "messenger" approach to price formation, under which an agent of the physician group gives price and other information about the group's physicians to individual payers, and transmits proposed contract terms -- including proposed fee schedules to be used under such contracts -- to physicians for their individual consideration. So long as the decisions on whether to accept a particular contract are in fact made independently by each member of the group, such arrangements do not involve an agreement on price among the participating physicians, thus avoiding the antitrust exposure that flows from such agreements.

Another major antitrust issue is whether a physician network joint venture is likely to attain market power -- that is, the power to raise prices above the competitive level or to impede the development of competing networks. In evaluating the likelihood that a plan will be able to exercise market power to the detriment of consumers, we look principally at such factors as the proportion of physicians practicing in the relevant market who are participants in the network, any restrictions on the ability of participating doctors to take part in other networks or to contract individually with payers, and the extent to which participants are likely to have incentives to contract with payers outside the network. As I noted earlier, in establishing the safety zones, the Commission and the Justice Department have stated that a network is unlikely to have market power if it contracts with fewer than 20 percent of doctors in each specialty on an exclusive basis or with fewer than 30 percent of doctors in each specialty on a nonexclusive basis.

The Commission's staff more fully explained its analysis of physician network joint ventures in a number of staff opinion letters issued in the past two years. The staff issued favorable opinions to groups with limited provider panels that intended to offer capitation contracts, or that proposed to operate on a fee- for-service basis with the fees below prevailing levels and a significant risk withhold payable to the providers only if predetermined aggregate cost targets were met. The staff also responded approvingly to a number of PPOs that proposed to operate by means of the messenger model that I mentioned a few moments ago.

In a number of instances the staff issued favorable opinion letters regarding conduct that fell outside the safety zone. In one situation, the staff approved a network intended to operate primarily on a capitation basis, but initially offering some services on a fee-for-service basis pending the development of cost and utilization data needed to allow the group to fold those services into the capitation rate. In addition, the staff approved plans with provider panels that exceeded the 30 percent criterion of the safety zone with respect to some categories of health professionals.

In only one instance was the staff unable to approve a proposed physician joint venture. In that matter, a proposed PPO sponsored by a medical society in Montana intended to use a 15 percent risk withhold, with the amounts withheld payable to the doctors if a predetermined savings target from the prior year's claims for each payer group was met. All members of the medical society were eligible to participate in the PPO, and it was anticipated that more that half of the doctors in the state would participate. The plan proposed to pay doctors at the eighty-eighth percentile of fees regularly charged by the participating doctors. According to the information submitted with the request, the PPO would face little competition from other managed care plans in the state.

Based on the particular facts involved in that situation, the staff was not confident that the risk-sharing features of the proposed program would achieve their intended purpose. The staff letter pointed out that most physicians would have their normal charges allowed in full and that, given the large number of physicians expected to participate in the PPO, many physicians were likely to have only a small number of PPO patients in their practices. Thus, the possible loss of the risk withhold might not be enough to affect a physician's incentive to maximize income by increasing the number of services provided. Moreover, because of the large percentage of doctors participating in the PPO and their apparent lack of incentive to form alternate arrangements, there was a substantial possibility that the PPO would preclude the development of competing plans. Among other things, the staff determined that physicians may have little incentive to participate in other plans, or to discount their fees, when the medical society plan would allow most doctors their full regular fees. Consequently, the operation of the PPO as proposed could significantly impair the development of competing plans in the state. For all those reasons, taken together, the Commission staff could not conclude that the venture was unlikely to violate the antitrust laws.

The staff opinion letters indicate that capitation is not the only way that provider network joint ventures can operate within the antitrust laws, and that networks outside the antitrust safety zone are not necessarily subject to antitrust challenge. In assessing a physician network joint venture, the staff looks for evidence that the plan is likely to be a competitive force in the market or, alternatively, that it may serve as a vehicle for collective resistance to market forces. This distinction is the touchstone of sound antitrust enforcement. It means that as health care markets evolve, antitrust analysis must keep pace. As we have done in the past, the Commission will continue to refine its antitrust analysis in the light of changing economic realities.