Advisory Opinion to McVay (07-05-94)

July 5, 1994

Paul W. McVay
ACMG, Inc.
2570 Technical Drive
Miamisburg, Ohio 45342-6100

Dear Mr. McVay:

This is in response to your letter requesting an advisory opinion from the Federal Trade Commission staff on the legality under the federal antitrust laws of a proposed method of operation to be undertaken by ACMG, Inc. According to the information contained in your letter, ACMG is involved in the development and management of health maintenance organizations, preferred provider organizations, physician-hospital organizations, and other managed health care programs. Since 1984, ACMG has worked with groups of health care providers in establishing managed care programs. ACMG is not owned or controlled by providers of health care services.

ACMG intends to propose to a state medical society a program for establishing a statewide PPO in Montana. The PPO will be sponsored by the medical association, and operated pursuant to a contract between ACMG and the association. Physicians licensed to practice within the state who are members of the medical society will be eligible to participate. Participating physicians are free to participate in other PPOs.

Under the proposed program, the physician organization would agree, as a condition of contracting for ACMG's services, to adopt all the elements of the program, including its fee compensation plan. ACMG determines the maximum payment for each service, which is set at the 88th percentile of the fees regularly charged by the participating physicians. Each physician who elects to participate in the plan submits current fees for review by ACMG personnel, who notify the doctor of any fees that exceed the maximum allowable charge. The physician is obligated to accept ACMG's allowance as payment in full for covered patients. In addition, the physician must agree that the PPO will retain 15% of the allowable charge in a "risk pool” for each payer in the program.

ACMG will market the PPO only to employers who self-fund their health benefits programs. ACMG will review each employer's past claims experience, and actuarially determine expected health care posts for the coming year based on the employer's current benefit design without the PPO option. Certain costs above that amount will be insured through a stop-loss carrier. The employer and ACMG will then establish a target amount from the projected claims expense that the employer can expect to save through use of the PPO. The amount of the expected savings will be based in part on the employer's willingness to establish financial incentives for employees to use the PPO network for health care services.

The physician risk pool for each payer is distributed to the providers in proportion to their contributions to the pool if that payer's annual health plan costs, adjusted for any stop-loss recoveries, do not exceed the targeted cost for that year. If costs do exceed the target, all or a portion of the risk pool is used to defray those costs. If costs are less than the target amount, a portion of the surplus is shared with the network providers.

Financial penalties are also imposed on health plan beneficiaries for inappropriate use of medical facilities, such as use of emergency rooms for non-emergency services. ACMG recommends that employers adopt an incentive arrangement that shares with employees any savings greater than the targeted amount.

a utilization review program in which all participating physicians and hospitals must agree to participate. The program includes sanctions for providers who do not adhere to established utilization criteria, procedures and protocols. Individual providers are at risk for all costs attributable to services which are determined to be medically unnecessary or inappropriate.

ACMG had not yet negotiated contracts with hospitals. It does not intend to limit the number of hospitals that participate in the program.

You have informed us that there currently is only one managed care program operating in Montana, a full-risk HMO. The medical organization does not intend to offer an HMO or any managed care product other than the PPO that is the subject of this advisory opinion. Since the PPO will be marketed only to employers with self-funded health benefit plans, ACMG does not anticipate that the PPO will compete directly with the HMO for the same payers.

Based on my understanding of ACMG’s proposal, as summarized above, I believe that the establishment of a PPO sponsored by a state medical society, under the conditions that ACMG contemplates, poses a substantial risk of violating the federal antitrust laws. As is explained in more detail below, the structure proposed by ACMG appears to involve a horizontal agreement on price among competing physicians, and it is not clear that the agreement can be justified as ancillary to a partial integration of the participating physicians, practices. Moreover, there appears to be a substantial possibility that the PPO would attain market power that could be exercised to the detriment of consumers.

Agreements on price and other terms of sale, made by otherwise competing physicians through joint marketing arrangements such as PPOs, 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. County Medical Society, 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. The PPO arrangement described in your letter does not involve an explicit agreement among participating physicians on the prices to be charged to patients covered by the plan, since fees are determined by ACMG and each physician will decide unilaterally whether to join the PPO. Your letter makes it clear, however, that the sponsoring medical association must agree in advance to accept the price parameters that ACMG establishes: that is, that fees will be set at the 88th percentile of charges and that the withhold will be set at 15%. While this does not necessarily establish an agreement among the medical society's members not to deal with payers on other price terms, it does constitute an agreement among at least some of the members that they will deal collectively on those particular terms.

Physicians who do substantially integrate their practices or financial arrangements normally do not have their agreements concerning prices or other related 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 Practice Associates, P.C., 698 F. Supp. 679, 689-691 (E.D. Mich. 1988). Price agreements among the participating providers in a PPO or other physician network joint venture are permitted if the group has adopted significant economic incentives for the members to compete as a group with other physicians or groups of physicians, and it appears that the group as a whole is at least potentially subject to sufficient competition from other providers or managed care plans that they will be forced by the market to behave competitively, with respect to both price and utilization.

The FTC and the Department of Justice have jointly issued an enforcement policy statement that establishes an antitrust "safety zone" for physician network joint ventures, such as PPOs, that involve substantial financial integration of the physicians, practices through the joint venture and do not include as participants more than 20% of the area physicians in any specialty with active hospital privileges.1 The statement also explains how joint ventures that do not fall within the safety zone will be analyzed by the antitrust enforcement agencies. Such physician network joint ventures will not be deemed inherently illegal, but instead will be reviewed under a rule-of-reason analysis if the physician members share substantial financial risk or if the combining of the physicians into a joint venture provides substantial efficiencies that enables them to offer a new product. The analysis will seek to determine, considering all the characteristics of the joint venture and of the market in which it operates, whether the venture may have a substantial anticompetitive effect and, if so, whether that potential effect is outweighed by any procompetitive efficiencies resulting from the joint venture.

The PPO described in your letter does not fall within the antitrust safety zone for two reasons. First, there is no commitment that the participating physicians will constitute no more that 20% of the physicians overall or in any particular specialty with active hospital privileges in any geographic market. On the contrary, participation in the PPO will be open to all physicians who are members of the state medical society. You state that approximately 65% of physicians practicing in the state are state medical society members, and that you anticipate that approximately 80% of that membership would elect to participate. This would amount to more than 50% of all physicians practicing in the state. In local markets, of course, the proportion of participating physicians could be higher or lower. In addition, the PPO could have as participants a substantial proportion of practitioners in particular specialties, either within local markets or statewide.

Second, it is not clear from the information you have provided that the participants in the PPO will share substantial financial risk. The enforcement policy statement identifies as one example of sharing substantial financial risk the provision by a [PPO] of financial incentives for its members to achieve cost-containment goals, such as withholding a substantial amount of the compensation due to its members, with distribution of that amount to members only if cost-containment goals are met.

(p.35). Accordingly, the withhold arrangement that your proposal contemplates is of the type that could constitute substantial risk sharing within the terms of the policy statement. We cannot determine from the information currently available, however, whether the compensation arrangement in your proposal, taken as a whole, is likely to provide participating physicians with a direct interest in the competitive success of the group as a whole, thus providing incentives for each physician to modify his or her behavior in accordance with the established cost-containment goals and to assure cost-effective behavior by the other physicians in the program.

Under the proposal described in your letter, fees paid to the PPO's members would be based on the 88th percentile of regular charges of the participating physicians. Thus, almost all participating physicians would have their charges allowed in full. Moreover, given the large number of physicians who are likely to participate in the PPO, it is likely that many physicians will have only a small number of PPO patients in their practices. Under these circumstances, a 15% withhold from charges may not be enough to affect each physician's normal incentive to maximize his or her income by increasing the number of services provided to enrolled patients.2 In that case, the withhold would not be a sufficient form of risk sharing to render a price agreement among PPO members permissible under the antitrust laws.

Even if the physician compensation arrangement were deemed, on fuller review, to constitute significant sharing of risk among the most likely way that a PPO could attain market power would be if: (1) it included a high percentage of physicians in the market; and (2) those physicians -- or a sufficient number of other physicians (either currently in the market, or new entrants) -- were not available either to form competing arrangements to offer services to payers, or to individually offer their services to payers. This situation could occur, for example, if the PPO had a high percentage of physicians in a market and expressly required its members to market their services to payers exclusively through the PPO. Similarly, a PPO could have market power if it had a high percentage of physicians in a market, and its physician members tacitly agreed to deal only through the PPO or only on the terms offered by the PPO. This situation could have anticompetitive effects by requiring payers to deal with the PPO and its physicians on terms dictated by the physicians. The reduction of competition in the market for physicians, services could permit the PPO to raise prices to consumers or reduce output in the market for physician services and, in turn, in the market for prepaid health care plans.

PPOs sponsored by state medical associations or other organizations with highly inclusive physician membership often have as participants a very high percentage of physicians practicing in the area served by the PPO. ACMG anticipates a high level of physician participation in this instance. Moreover, the PPO here would have the official sponsorship of the medical society, and would face little competition from other managed care plans. In such circumstances, there is a significant possibility that the plan will attain market power.3

Anticompetitive effects are less likely to flow from the operation of a PPO if participating physicians are free to, and do, participate in competing PPOs or other managed care plans. I understand that ACMG does not contemplate prohibiting physicians from participating in other managed care plans. Nonetheless, if a PPO has a very inclusive membership, particularly where it has the sanction of the state medical society, there may be little incentive for participating physicians to market their services to other plans. Instead, physicians may tacitly agree among themselves to offer their services to payers only through that PPO, or to decide independently that it is not in their financial interest to support the development of other plans by participating in them. Where, as here, the medical society plan pays to most participating physicians their full charges, physicians have even less incentive to discount their fees and join other plans. Under these circumstances, the non-exclusive physician participation provision could effectively be negated, and the market could be deprived of competition that otherwise would be offered by other plans.

For the reasons discussed above, the proposal presented in your letter appears to raise serious questions under the antitrust laws. This does not, of course, mean that this office has concluded that the operation of a PPO established in the manner described would violate the antitrust laws. It does, however, mean that we cannot assure you in advance that the operation of such an organization would not violate the law.

The concerns we have identified flow from the agreement between ACMG and the medical society on the basis on which physicians will be paid for their services. Another approach might accomplish your objectives without presenting the same antitrust risk. For example, ACMG might wish to consider offering a PPO without prior agreement with physicians collectively on price terms, or operating as an independent intermediary between a physician-organized PPO and payers. In either case, ACMG could provide payers with price and other information about participating physicians, and transmit proposed contracts from payers, including fee schedules to be used under such contracts, directly to individual physicians for their independent consideration.

This approach would avoid an agreement between ACMG and the medical society or its members collectively on terms of doing business, including price, and therefore would not appear to raise price-fixing concerns under the antitrust laws. Of course, the organization 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 they understand that such information is merely to help the payers to formulate their proposals; 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 the PPO's physician members and are not required to deal through the PPO; and that the PPO's agent has no power or authority to make offers, negotiate, agree for, or bind, members. Under this approach, ACMG would still be able to contract with the physician organization for participation in a utilization review system, if it chose to do so.

This letter sets out the views of the staff of the Bureau of Competition, as authorized by the Commission's Rules. Under the Commission's Rules of Practice §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, or if it would be in the public interest to do so.

Sincerely yours,

Mark J. Horoschak
Assistant Director


  1. United States Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in the Health Care Area at 33-46 (September 15, 1993), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,150 (1993).
  2. See e.g., Milstein, Bergthold & Selbovitz, In Pursuit of Value: American Utilization Management at the Fifteen-Year Mark at 374, in Making Managed Healthcare Work: A Practical Guide to Strategies and Solutions (P. Boland ed. 1991) (a 10% withhold applicable to only a small number of patients was not enough to change physician behavior); Gordon & Herman, Appropriate Reimbursement Methodologies for Managed Care Systems at 337-39, in Making Managed Healthcare Work: A Practical Guide to Strategies and Solutions (P. Boland ed. 1991) (if physicians do not expect a return of the withhold, they may view it as a discount and increase the volume of services in order to increase total reimbursement); Hillman, Pauly, & Kerstein, How Do Financial Incentives Affect Physician's Clinical Decision and the Financial Performance of Health Maintenance Organizations?, 321 N. Eng. J. Med. 86, 90 (1989) (presence of a higher proportion of HMO patients in a physician's practice may increase his or her awareness of the HMO's imperatives); Does the Primary-Care Gatekeeper Control the Costs of Health Care?, 309 N. Eng. J. Med. 1400 (1983) (a small financial incentive, especially if applied to a small proportion of total charges, is ineffective to change physicians, behavior). the participating physicians, there still appears to be a significant possibility that the PPO could attain and exercise market power. "Market power" is generally defined as "the power to control prices for restrict output] or exclude competition." United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956). Market power may be exercised either unilaterally or in combination with others. If a PPO attains market power, a price agreement among its members will not survive antitrust scrutiny under the rule of reason.
  3. In a different context, it was found that the UCR reimbursement limits on fees paid by Blue Shield plans to physicians were significantly higher where the Blue Shield plan's board includes members who have been nominated, elected, or approved by a local medical society or other organized group of physicians. Kass, David I. and Paul A. Pautler. "Physician and Medical Society Influence on Blue Shield Plans: Effects on Physician Reimbursement." in A New Approach to the Economics of Health Care, edited by Mancur Olson. American Enterprise for Public Policy Research. Washington, D.C. 1981. p. 321-338.
  4. See, e.g., Health Care Committee, Section of Antitrust Law, American Bar Association, Managed Care and Antitrust: The PPO Experience at 27-28 (1990); Lerner and Narrow, PPO Programs and the Antitrust Laws at 858, in The New Healthcare Market: A Guide to PPOs for Purchasers, Payers and Providers (P. Boland ed. 1985); Health Care Management Associates, 101 F.T.C. 1014 (1983) (advisory opinion); Letter from Mark J. Horoschak to J. Bert Morgan (Nov. 17, 1993) (advisory opinion).