Advisory Opinion to Nash (09-21-95)

September 21, 1995

Stephen P. Nash, Esquire
Nash & Company
700 Westinghouse Building
Pittsburgh, Pennsylvania 15222

Dear Mr. Nash:

This letter responds to your request for a staff advisory opinion on behalf of Hematology/Oncology Care Specialists of Western Pennsylvania, P.C. ("HOCS"). HOCS is a for-profit corporation composed of physicians who are board-certified or board-eligible in hematology/medical oncology ("hematologist/ oncologists"). Established to develop and manage the provision of hematology/medical oncology ("hematology/oncology") services through a network of providers in the area surrounding Pittsburgh, Pennsylvania, HOCS will negotiate and enter into contracts with third-party payors under which its members ("participating physicians") will provide such services to the beneficiaries of those payors' health plans. As explained more fully below, neither the formation nor the operation of HOCS appears likely to violate any law enforced by the Federal Trade Commission.

HOCS will be managed by a board of five directors, three of whom will also serve as officers, who will serve one-year terms and may serve up to three consecutive terms. With the assistance of an independent contractor, HOCS will market its network services, primarily on a capitated basis, to third-party payors, including health maintenance organizations and possibly self-insured employers. Each payor's capitated payment will cover all physician services rendered to its beneficiaries under its contract, and participating physicians will share the risk that the cost of providing services to a payor group will exceed that payment. However, drug therapy, a critical aspect of the treatment of certain hematology/oncology patients, initially will be provided on a modified fee-for-service basis. HOCS estimates that drug therapy may account for approximately 30% of its volume of business, but has been unable to obtain data on utilization patterns or costs per patient for drug therapy. HOCS asserts that it lacks sufficient experience with protocols for drug therapy to establish capitated rates for it at this time.(1)

HOCS intends to develop and implement quality assurance and utilization review programs in order to ensure the provision of necessary and appropriate care and minimize the risk borne by participating physicians. For example, a "Continuous Quality Improvement" committee will develop and administer practice parameters. HOCS will monitor individual participating physicians' practice patterns through a medical management information system, and will provide training to assist physicians in fulfilling their responsibilities under the payor contracts. HOCS also intends to offer group purchasing benefits to participating physicians for billing services, insurance, medical equipment, and other supplies.

HOCS' Board of Directors will calculate a reimbursement formula for physician services based on McGraw Hill relative value scale standards. Each month, HOCS will set aside approximately 20% of the monthly capitated payments to pay expenses, management fees, and incentive compensation to physicians who meet certain cost-saving, utilization, and quality of care standards set by the Board. The company will distribute the remaining proceeds, on a pro rata basis, to participating physicians who provided services to beneficiaries during that month. HOCS also intends to set aside a minimum of 20% of the monthly fee-for-service payments, which will be disbursed to participating physicians on a pro rata basis if applicable performance standards, established during negotiations with third-party payors, are met. HOCS has not yet determined the details regarding forfeiture of withheld amounts.

HOCS will consist primarily of hematologist/oncologists from an eight county area in southwestern Pennsylvania, identified in your letter as HOCS' primary service area, that encompasses Allegheny, Beaver, Butler, Cambria, Fayette, Indiana, Washington and Westmoreland counties. It will also include physicians from an area, identified in your letters as HOCS' secondary service area, that encompasses Armstrong, Somerset, and Greene counties in Pennsylvania; Jefferson and Belmont counties in Ohio; and Brooke, Hancock, Marshall, and Ohio counties in West Virginia. There is currently one specialty hematology/oncology network, as well as health maintenance organizations and other managed care entities, providing hematology/oncology services in this area.

HOCS is owned by shareholder-physicians who are qualified to provide hematology/oncology services in Pennsylvania, meet specific practice guidelines, and agree to comply with HOCS' quality guidelines, procedures, and protocols. Participating physicians will make an initial capital investment of $2,000, contribute $100 towards the cost of a management information system, and execute a $3,000 demand promissory note. HOCS may also contract with non-shareholder hematologist/oncologists as necessary to provide full geographic coverage or to meet other payor demands.

Participating physicians will provide their services to HOCS on a non-exclusive basis. Participating physicians may not decline to participate in agreements negotiated by HOCS, but may participate in other provider organizations. The five directors are precluded only from simultaneously serving as officers or directors in other single-specialty networks that provide hematology/oncology services on a risk-sharing basis. This restriction is intended to protect against the possibility of disclosure of confidential information to competing, single-specialty hematology/oncology networks.

HOCS currently represents thirty-five participating physicians, accounting for fewer than 30% of the hematology/oncology specialists in the area in which it intends to operate. Participating physicians currently account for 27.34% of the hematology/oncology specialists in the area identified as HOCS' primary service area, and 25.93% of those in the area identified as its secondary service area. HOCS is currently accepting applications from additional physicians; however, the network will restrict additional participation to ensure that its current market share is not substantially increased.

Based upon your description of the proposed operation of HOCS, as summarized above, the proposed course of action does not appear likely to violate the antitrust laws. HOCS appears to fall within the definition of an antitrust "safety zone" for non-exclusive physician network joint ventures established in Statement 8 of the 1994 Statements of Antitrust Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust ("the Statement"). The safety zone applies to "non-exclusive physician network joint venture[s] 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."(2)

It appears that HOCS will operate as an economically integrated, non-exclusive physician network joint venture composed of fewer than 30% of hematologist/oncologists in the relevant market. The Statement identifies as a recognized form of economic integration the acceptance of capitation contracts.(3) HOCS will contract on a capitated basis for physician services and participating physicians will share substantial financial risk that costs for a payor group will exceed the capitation payment for the bulk of the services rendered.

HOCS has not yet determined important details surrounding the proposed use of a discounted fee schedule in conjunction with a 20% withhold for drug therapy, and it is not clear from the information currently available whether participating physicians will share substantial financial risk for the provision of drug therapy. Nonetheless, to the extent that participating physicians will collectively agree on the prices for drug therapy, such agreement appears to be ancillary to the main purpose of the joint venture, and subject to a rule-of-reason evaluation. Under the circumstances, including the present difficulties of including the cost of drug therapy in a capitated rate and the importance of providing drug therapy to certain hematology/oncology patients, the proposed use of a discounted fee schedule, for a transitional period as the network develops the requisite data to formulate capitated rates for this therapy, appears to be reasonably necessary to the joint venture's primary purpose of providing capitated physician services to hematology/ oncology patients. The price restraint appears to be of no broader scope than is reasonably necessary to further that purpose.(4) Furthermore, the network is not likely to give rise to market power in the provision of hematology/oncology services. In short, the fee-for-service component of the network appears to be ancillary to its primary purpose and justifiable under the rule of reason.

It also appears that HOCS will be composed of 30 percent or fewer of the hematologist/oncologists who practice in the relevant geographic market. Although it is not clear from the information that you have provided whether the relevant geographic market is the stated eight county primary service area or some smaller area, it does not appear critical to determine its precise limits: HOCS' share of participating physicians is less than 30% both in the area you define as the primary service area and in Allegheny County, the county in which the vast majority of hematologist/oncologists appear to practice.

Finally, it appears that HOCS will operate as a non-exclusive venture. The Statement defines a "non-exclusive" venture as one that does not impose any "significant explicit or implicit restriction" on the ability of participating physicians to also participate in other provider organizations or to contract with payors directly.(5) HOCS' limited restraint on officers and directors merely precludes them from simultaneously holding offices in other single-specialty networks that provide hematology/oncology services on a risk-sharing basis. It is a narrowly tailored provision that does not preclude officers or directors from participating in other types of provider organizations or from contracting with payors directly.

For these reasons, the formation and operation of HOCS, 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. HOCS intends to establish capitated rates for drug therapy as utilization and cost data becomes available.
  2. Id. at 68 - 70. 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 67.
  3. Id. at 70. The Statement also identifies as effective means of economic integration the use of a discounted fee schedule in conjunction with a substantial withhold payable to participating providers only if specified cost-containment goals are met. Id.
  4. It is important to note that HOCS proposes to contract on a capitation basis with all payors, carving out the costs of drug therapy for fee-for-service reimbursement pending development of the data necessary to allow these costs to be folded into the capitation payment. This is not a case in which a network proposes to contract for all services on a fee-for-service basis with some payors and on a capitation basis with other payors. See the Statement at 93, n.35 ("risk sharing in connection with joint pricing for multiprovider network patients covered under a capitation arrangement would not justify agreement among those same multiprovider network members on prices to be charged to non-capitated patients").
  5. Id. at 67. The Statement cautions that, because safety zones for exclusive and non-exclusive physician network joint ventures differ, a non-exclusive physician joint venture must be non-exclusive in fact and not just in name. Indicia of non-exclusivity include: the existence of viable competing networks or plans; the participation by network providers in other networks, or in individual contracts with health plans; evidence that network providers earn substantial revenue outside the network; the absence of any indication that network providers have withdrawn from other networks; and the absence of any indication that the providers in the network have coordinated with respect to price or related terms of participation in other networks or plans. Id. at 69.