Advisory Opinion to Cook (03-28-95)

March 28, 1995

John A. Cook, Esq.
Cook, Goetz & Rogers, P.C.
Attorneys and Counselors
1400 Woodward Avenue
Suite 101
Bloomfield Hills, Michigan 48304-3983

Dear Mr. Cook:

This letter responds to your request for a staff advisory opinion on behalf of Oakland Physician Network, L.L.C. (“OPN”). According to your letter of September 23, 1994 to Donald S. Clark, Secretary of the Federal Trade Commission, as supplemented by your letter of December 23, 1994 to Judith A. Moreland, Esq., OPN is a limited liability company, and was recently established to operate a physician network joint venture. The joint venture is to market primary and specialty physician services to health benefit plans in the Detroit metropolitan area ("Tri-County area").1 OPN will negotiate and enter into contracts with these plans, under which OPN members will provide services to the beneficiaries of health plans. As is explained more fully below, it does not appear that the formation or operation of OPN 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 letters; we have not conducted an independent investigation, and our assessment could change if the facts or our understanding of them change significantly.

OPN currently has approximately 280 physician members divided into two classes: (1) primary care, consisting of physicians whose practices are concentrated in internal medicine, family practice, and pediatrics; and (2) specialty care, consisting of physicians whose main areas of concentration are all other areas of medical practice. Most of the members of OPN have staff privileges at two or more hospitals that serve the Tri-County area.

OPN is a for-profit corporation governed by a Managing Board. The Board is controlled by the primary care members, who also control three of the five standing committees of OPN (Credentialing, Membership, and Management), and have a substantial minority in the other two (Finance and Quality Assurance/Utilization Management). OPN will provide physicians, services to payers under two models. Under the first model, referred to in this letter as the "joint pricing model," OPN will negotiate service contracts under which its members will provide services to members of employee groups in exchange for a capitation fee paid to OPN. This fee will cover all physician services rendered under the contract. OPN primary care members will act as "gatekeepers" to specialty medical services, monitoring and assessing the need for specialty care in an effort to provide specialty care on an efficient and cost-effective basis. Thus, the participating physicians will share the risk that costs for an employee group will exceed the capitation payment. OPN will attempt to minimize this risk through effective utilization and cost controls. By maintaining effective utilization review and quality assessment programs, OPN expects to provide medical care for less than the payments it negotiates with, and receives from, managed care payers.

OPN will also market the services of its member physicians under a "messenger" model. In this model, OPN will approach managed care entities and solicit business for its primary and specialist physicians. Each managed care entity will set its own prices and make payments directly to each participating physician. OPN will advise its members of the opportunity to participate in such contracts and of the fees the managed care entity will pay. Each member physician will make an independent decision whether to participate in each contract. Under a typical contract, each individual primary care doctor would receive a monthly capitation fee, and specialty care physicians would be paid on a fee-for- service basis, as determined by the payer. Under the individual capitation arrangement, each primary care doctor will assume risk for providing services to his or her patients, but the risk will not be shared among the physicians in the network.

OPN members will provide their services on a non-exclusive basis. Although members may not participate as a director, officer, manager, committee member, or advisor to any organization that competes with OPN, they may provide medical services to any competing entity. Members may also continue to provide medical services as part of their own independent practices. OPN members are not required to participate in all contracts negotiated by OPN, nor in all messenger model contracts, but may choose to participate in any contract for which they are found to be qualified by the Credentialing Committee. Members are required to conform to OPN’s central billing and information processing systems.

Each member will make a capital contribution to OPN of $500. The Managing Board is authorized to make additional yearly capital calls, up to $500, on each member. Profits and losses of each member are calculated as a percentage of total OPN profit or losses, based on each member's capital contribution.

Most participating physicians practice in Pontiac, Michigan, located in Oakland County. OPN will solicit contracts with payers located in the Tri-County area. Your letters indicate that the Tri-County area is the relevant geographic market, based on the assumption that employers would consider all physicians located within 30 minutes driving time of their employees' homes to be good substitutes for the physicians participating in the plan. OPN’s primary care physicians account for fewer than 3% of the primary care physicians in the Tri-County area, and fewer than 10% of the primary care physicians practicing in Oakland County. OPN’s share of specialists varies widely by specialty, but in only one area does it exceed 10% of Tri-County Area physicians or 25% of Oakland County specialists in that specialty.4

Based on your description of the proposed operation of OPN as summarized above, it appears that the proposed course of action is unlikely to violate the antitrust laws. The organization and operation of OPN have significant procompetitive potential. The proposal does not appear to involve any prohibited horizontal price agreements. Under the messenger model, OPN's physicians will make individual decisions on prices to accept.5 Under the joint pricing model, OPN’s agreement with third-party payers would appear to involve an agreement on prices among otherwise competing physicians. However, horizontal agreements on price may be permissible under the antitrust laws if they are ancillary to a significant economic integration among the parties to the agreement. Under the Statements of Antitrust Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust, which were jointly issued by the Commission and the Department of Justice last September, 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.”6 The proposed operation of OPN, as described above, appears to comply in substantial part with the terms of the antitrust safety zone established by the Statement.

OPN's joint pricing contracts appear to involve substantial risk sharing among the participants in the venture. The Statement identifies acceptance of capitation contracts by a group as one example of substantial financial risk sharing.7 Since OPN's joint pricing contracts will be based on capitation of the entire group, this criteria of the safety zone is satisfied.

The other criteria of the safety zone is that the network include no more than 30% of the physicians in each medical specialty practicing in the geographic market. It is not clear from the information you have provided whether the Tri-County area or some smaller area is the relevant geographic market for physician services. However, it is not necessary to determine the precise extent of the market in this instance, since OPN's share of participating physicians is less than 30% both in the Tri-County Area and in Oakland County.8

For these reasons, the formation and operation of the OPN as proposed 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 The Tri-County Area includes Wayne, Oakland, and Macomb Counties, Michigan.

2 According to your letter of December 23, 1994, twenty nine physicians may join OPN in 1995. This advisory opinion is based on the assumption that those physicians have joined OPN.

3 OPN also will sell administrative services, including quality assurance and utilization review, to health care entities.

4 OPN members include 25% of the specialists in colon/rectal surgery in the Tri-County area, and 44%- of the colon/rectal surgeons in Oakland County.

5 OPN must take care to ensure that the decisions by the physicians on whether or not to accept the proposed contracts in fact are made individually, and do not involve any tacit or explicit agreement among the physicians not to deal, or to deal only on certain jointly agreed-upon terms. Similarly, care should be taken in transmitting information to payers to assure that payers understand that such information is merely to help the payers to formulate their proposals to OPN’s members; that the payers are free to propose whatever contractual terms and offers they wish to those physicians; that payers remain free to deal individually with some or all of OPN's physician members and are not required to deal through OPN; and that OPN has no power or authority to make offers, negotiate, agree for, or bind, OPN's members with respect to contracts that do not involve shared financial risk.

6 United States Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust at 68-69 (September 27, 1994), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,150 (1994). The Statement defines a physician network joint venture as "a physician-controlled venture in which the member physicians collectively agree on prices or other significant terms of competition and jointly market their services." Id. at 66.

7 Id. at 70.

8 The single exception of colon and rectal surgeons does not appear to pose any significant danger of harm to competition.