Advisory Opinion to Cox (07-11-95)

July 11, 1995

Ms. Jacqueline C. Cox
Competitive Strategies, Inc.
100 West Grove
Suite 250
Reno, NV 89509

Re: Northwestern Nevada Orthopaedic Surgery Alliance;

Request for Advisory Opinion

Dear Ms. Cox:

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, Northwestern Nevada Orthopaedic Surgery Alliance ("NNOSA"), a corporation to be organized under the laws of the State of Nevada.(1) According to the information submitted with your request for an advisory opinion, as supplemented by your letters dated February 5, 1995, and April 17, 1995, NNOSA intends to operate as an Independent Physician Association ("IPA") composed of eight orthopedists who will constitute an orthopaedic provider network providing sub-specialty orthopaedic services through contracts with third-party payors in the northwestern Nevada area.(2)

Based on the information submitted in connection with your request for a staff advisory opinion, it appears that some aspects of NNOSA's proposed method of operation, as presently formulated, could raise substantial concerns under the antitrust laws. Please understand that this opinion is based solely on the information you have provided. We have not conducted an independent investigation, and our assessment may change if the facts, as set forth below, change substantially. Moreover, as is discussed below, NNOSA could operate as a messenger model network if some functions of the messenger-agent were changed or clarified.

NOSA's eight members are currently members of two separate orthopaedic group practices, and apparently will maintain their group practices.(3) NNOSA plans to provide its services within certain areas of Washoe County, Nevada.(4) According to NNOSA's submissions, there are currently 32 orthopaedic surgeons with hospital privileges in the geographic area in which NNOSA intends to provide services. The 32 orthopedists maintain hospital privileges at Washoe Medical Center and Saint Mary's Medical Center, both of which are located in Reno, Nevada.(5) You also state that NNOSA will be a non-exclusive venture, and that each NNOSA physician will have the ability to contract separately from NNOSA.

NNOSA believes that it will be able to offer its network of orthopedists to large payor groups at reduced cost.(6) It expects to achieve cost containment through utilization management and peer review. NNOSA's target group will include both group medical and industrial payors. NNOSA also intends to market directly to self-funded employers for both group medical and industrial orthopaedic care.

NNOSA's business plan contemplates two phases of operation. During the initial phase, which will last until NNOSA accumulates sufficient utilization and cost information to be able to offer a uniform group rate on a risk-sharing basis (expected to be 18-24 months), NNOSA intends to enter into discounted, fee-for-service contracts with third-party payors. NNOSA intends to use a "messenger approach" to contracting during this initial phase. It appears that NNOSA will employ an "independent agent" who will have two basic roles in this process. First, the agent will collect historical fee information and other data from NNOSA physicians and use this information in working with payors to formulate proposed fee schedules and services. The agent may share the historical fee information with payors but not with other NNOSA physicians. Second, the NNOSA agent will accept offers of proposed contracts and fee schedules from payors, and transmit them to individual members of NNOSA for their consideration. NNOSA physicians will decide individually whether they wish to participate in the proposed contract on the terms proposed by the payor. Acceptance of the contract will require an affirmative response from the individual physicians. The payor also may accept or reject the proposed contract, depending on whether the affirmative responses by the NNOSA physicians are adequate to provide services to the payor's subscribers.

After it has developed sufficient utilization data, NNOSA intends to "develop a case-rate system, particularly for high frequency procedures where a cost benefit could be realized through defined treatment protocols and case management."(7) Case rates may include radiology, anesthesia, physical therapy and hospital services, as well as orthopaedic care. Services not provided directly by a NNOSA physician will be subcontracted. NNOSA's initial submission states that it also intends to "have the ability to accept capitated contracts where [NNOSA providers] assume a large portion of the risk" for orthopaedic services. Under that plan, NNOSA expects to offer capitated fee structures that are expected to provide financial incentives for NNOSA's physicians not to use costly services unnecessarily or inappropriately.

In subsequent letters you have stated that both the case rate system and capitated rates were intended to be used as means of sharing risk among physicians,(8) but that at this time the State of Nevada does not allow IPA's to "take risk."(9) You state that according to the Nevada Department of Labor and Commerce, Division of Insurance, "IPA's are not recognized as 'risk bearing' entities and are prohibited to do so under Nevada Law."(10)

We will first describe the basic elements of antitrust law and policy that apply to NNOSA's situation. Agreements on price and other terms of sale, made by otherwise competing physicians through joint marketing arrangements such as physician network joint ventures, raise serious antitrust concerns and may amount to per se illegal price fixing where the physicians have not substantially integrated their medical practices or do not share substantial financial risk through the joint venture. See Arizona v. Maricopa County Medical Soc'y, 457 U.S. 332 (1982). The antitrust laws treat price agreements among competing sellers of a product or service as inherently suspect because of the significant danger that such agreements will injure consumers by raising prices above the competitive level.

Physicians who do substantially integrate their practices or financial arrangements normally do not have their agreements concerning prices or other terms of doing business through the joint venture subjected to per se condemnation. Rather, these determinations typically are subject to rule-of-reason analysis, which weighs the actual or potential procompetitive benefits of the agreement against its actual or potential anticompetitive effects. See, e.g., Hassan v. Independent Practices Associates, P.C., 698 F. Supp. 679, 689-691 (E.D. Mich. 1988). The Statements of Antitrust Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust (the "Health Care Statements"), jointly issued by the Commission and the Department of Justice in September 1994, describe the analysis that the federal antitrust enforcement agencies use in reviewing the actions of physician network joint ventures that involve substantial economic integration and financial risk sharing among the participants in the network.(11) Further, the Health Care Statements established antitrust "safety zones" whereby the federal antitrust enforcement agencies will not challenge, absent extraordinary circumstances, physician network joint ventures that meet certain criteria. A "non-exclusive" physician network joint venture qualifies for the safety zone if it comprises no more than 30 percent of the physicians in each physician specialty with active hospital staff privileges who practice in the relevant geographic market and share substantial risk. An exclusive physician network joint venture qualifies for the safety zone if it comprises no more than 20% of the physicians so described.

NNOSA does not meet the requirements of the safety zone, because its physicians will not share substantial financial risk. The Health Care Statements identify two examples of substantial financial risk sharing:

  1. the venture agrees to provide services to a health benefits plan at a "capitated" rate; and
  2. the venture creates significant financial incentives for its members as a group to achieve specified cost-containment goals, such as 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.(12)

Other forms of economic integration among network participants also may constitute substantial risk sharing.

NNOSA's second phase of operation initially contemplated two forms of group contracting: case rates (also called global pricing), and capitated contracts combined with a withhold system. Capitation is one of the methods recognized by the Health Care Statements as evidencing substantial financial risk sharing. You subsequently indicated, however, that NNOSA may be precluded from offering capitated contracts because of a Nevada law that apparently prohibits IPA's from engaging in risk sharing. Although you did not categorically rule out that part of the business plan that contemplates capitated rates combined with a withhold system, we will assume for purposes of this opinion that NNOSA will not be offering capitated rates. NNOSA therefore does not qualify for safety zone treatment on this basis.

Moreover, according to the information provided, NNOSA's ability to offer a case rate system on a risk-sharing basis also is in doubt because of state law. Based on the information you have provided, we cannot conclude that NNOSA's proposed use of a case rate system would provide the kind of risk sharing contemplated by the Health Care Statements. The case rate system would be targeted to certain high-volume procedures and would establish a single fixed price for all services included in the contract for such procedures. Your request did not provide a detailed description of any proposed case rate system, and it is not apparent in what way, if any, there would be risk sharing among NNOSA physicians as a group.

The initial phase of NNOSA's proposed operations, under which it will offer discounted fee-for-service contracts using a "messenger approach," would not involve risk sharing and, therefore, would not qualify for the antitrust safety zone. The messenger approach, however, if properly implemented, avoids a direct horizontal agreement on price, and thus does not raise concerns about an anticompetitive price agreement among the participating physicians.

The messenger model is described in Statement 9 of the Health Care Statements:

A messenger model typically involves an agent or third party conveying to purchasers information obtained individually from providers in the network about the prices the network participants are willing to accept,(13) and conveying to providers any contract offers made by purchasers. Each provider then makes an independent, unilateral decision to accept or reject each contract offer. . . .

The critical feature of a messenger model network is that individual providers make their own separate decisions about whether to accept or reject a purchaser's proposal, independent of whether other providers will accept the offer and independent of any influence or views of other providers or the agent or third party who is acting as the messenger.

Antitrust concerns can arise, however, even when a messenger model is employed. If the messenger coordinates individual providers' responses to a particular proposal, disseminates to members other providers' views or intentions as to the proposal, acts as an agent for collective negotiation and agreement by the providers, or otherwise serves to facilitate collusive behavior among network participants, network participants will run a serious antitrust risk. The critical antitrust issue is whether the arrangement creates or facilitates agreements that restrict price or other significant terms of competition among the provider members of the network.(14)

Health Care Statements at 94-96.

In a messenger model network, the agent has no power or authority to make offers, negotiate, agree for, or bind, the members of the group. Thus, in implementing a messenger model network, care must be taken to ensure that the decisions by the physicians on whether or not to accept a proposed contract 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 payors through the agent to ensure that payors understand that such information is merely to help the payors to formulate their proposals to the physicians; that the payors are free to propose whatever contractual terms and offers they wish to those physicians; and that payors remain free to deal individually with some or all of the physicians and are not required to deal through the physicians' organization.

Based on the information you have provided, the approach contemplated by NNOSA does not conform to the messenger model. It is our understanding that during the messenger model phase, NNOSA physicians will deal individually with payors through the messenger, and will accept individual contracts with payors if the physician accepts the fees and other terms of the contract offer. However, NNOSA's plan indicates that the intermediary between NNOSA physicians and payors will not be simply a conduit of information, but will participate substantively in the pricing process. NNOSA states that the agent will collect historical fee information from NNOSA physicians and may share this information in "working with" payors to formulate prospective fee schedules and services.(15) Subsequent information provided by NNOSA indicates that the agent will participate in the negotiation process.(16) The use by competitors of a common agent to formulate pricing proposals would raise serious antitrust concerns.

In conclusion, for the reasons stated above, we are unable to state that the formation and operation of NNOSA as described in your letters would not raise serious concerns under the antitrust laws. However, if the functions and activities of the agent were clarified in accordance with the principles described above, NNOSA could operate as a messenger model network without running afoul of the antitrust laws.

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, or if it would be in the public interest to do so.

Sincerely yours,

Mark J. Horoschak Assistant Director

  1. We understand that the formation of the corporation has been deferred pending the receipt of this advisory opinion. The intended incorporators of NNOSA are the eight orthopedists who will be members of the IPA. Each member will make an initial capital contribution of $5,000.
  2. NNOSA may later expand to a multi-specialty alliance, but does not intend to add any additional orthopedists. This advisory opinion is limited to the currently planned eight-person orthopaedic network and does not address any further expansion of NNOSA or any change in its operations in any manner.
  3. Two NNOSA members will be from a three-person orthopaedic group practice, and six NNOSA members will be from a twelve-person orthopaedic group practice. 
  4. NNOSA defines its intended service area by the following zip codes in Washoe County:
    89431 89436 89506 89512 89433 89502 89509 89520 89434 89503 89511 89523
  5. Thirty-one of the orthopedists, including all eight of NNOSA's members, have practice addresses in Reno, Nevada; one has a practice address in Sparks, Nevada.
  6. NNOSA does not intend to enter into contracts on behalf of individual physicians or their professional corporations.
  7. A case rate system is also referred to as "global pricing."
  8. April 17, 1995 Letter at 1.
  9. February 5, 1995 Letter at 1-2; April 17, 1995 Letter at 1-2. You indicate that the only health care entities permitted to take risk in Nevada are HMO's, specialty HMO's, and insurance companies. There are substantial requirements regarding reserves, surety and fidelity bonding. In addition, a professional corporation (i.e., a group practice) may take risk under capitated contracts, but groups of professional corporations may not form an entity for the purpose of contracting under risk-sharing arrangements.
  10. April 17, 1995 Letter at 2.
  11. 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 (Sept. 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.
  12. Id. at 70.
  13. Guidance about the antitrust standards applicable to collection and exchange of fee information can be found in the Policy Statements on Providers' Collective Provision of Fee-Related Information to Purchasers of Health Care Services (Statement 4) and on Provider Participation in Exchanges of Price and Cost Information (Statement 6).
  14. "Use of an intermediary or 'independent' third party to convey collective price offers to purchasers or to negotiate agreements with purchasers . . . does not negate the existence of a price agreement or eliminate antitrust concern." Health Care Statements at 96, n.40.
  15. NNOSA Business Plan, Section I, page 2.
  16. April 17, 1995 Letter at 1.