Advisory Opinion to Nash (9-28-95)

September 28, 1995

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

Dear Mr. Nash:

This letter responds to your request for an advisory opinion on the legality under the antitrust laws of a method of operation proposed to be undertaken by your client, Eastern Ohio Physicians Organization, Inc. ("EOPO"). EOPO is a multispecialty physician organization established to contract on behalf of its participating physicians with third-party payers in the northeastern Ohio/northwestern Pennsylvania area.(1) As is explained more fully below, it does not appear that operation of EOPO as proposed is likely to violate any law enforced by the Federal Trade Commission.

EOPO is a for-profit corporation headquartered in Youngstown, Ohio. It intends to offer shares of stock to physicians licensed in Ohio who have executed a participation agreement with EOPO.(2) Each physician shareholder will make an initial capital contribution of between $2,500 and $4,000 and will be required to guarantee a pro rata share of a bank debt of $750,000.

EOPO intends to contract initially with approximately 400 physicians who have offices primarily in Mahoning, Trumbull and Columbiana Counties, Ohio. It will contract on behalf of these physicians with employers and other sponsors of health plans having enrollees in Mahoning, Trumbull, Columbiana, Portage, Stark and Ashtabula Counties in Ohio, and Lawrence and Mercer Counties in Pennsylvania. EOPO believes that the area defined above is the area within which non-EOPO physicians practice who would be considered by payers as potential substitutes for EOPO physicians. Within this area, EOPO projects that it will contract with 31.39% of the primary care physicians(3) and 23.29% of specialty physicians.(4) It expects that participating physicians initially will devote between 20% and 40% of their time to EOPO patients, and will continue to compete actively outside the network.

EOPO intends to contract with payers primarily on a capitated basis, but it also will enter into some discounted fee-for-service contracts that will incorporate a "Performance Plan" with a risk withhold.

EOPO's primary care doctors will be organized into "partnerships of doctors" or "PODs." Each POD will be composed of 5 to 7 or more primary care doctors who will act as gatekeepers. Under capitation contracts, each POD will receive a subcapitation, and will pay its member doctors on a fee-for-service basis. The primary care physicians will be responsible for management of patient care and referrals to specialists. In addition, members of the POD will provide coverage for one another and engage in peer review.

Specialists will be available to patients only through referral from a primary care physician. Initially, specialists will be paid by EOPO on a fee-for-service basis, but the organization expects to move to capitation of specialists as sufficient information on the amount and cost of specialty care becomes available.

EOPO will use its "Performance Plan" in both capitated and fee-for-service contracts. Approximately 30% of the applicable fee schedule amount(5) payable to participating physicians for a given services will be withheld by EOPO in three set-aside pools: up to 5% for administrative expenses; 10-15% in a risk pool; and 10-15% in a performance pool.

Under capitation contracts, the risk set-aside will be used to cover medical costs that exceed budgeted amounts. If total physician payments are within budget, the set-aside will be distributed to physicians. Losses that exceed the set-aside will be the responsibility of EOPO. Under discounted fee-for-service contracts, the payers and EOPO will agree on "performance standards" to be met by the group as a whole. These performance standards may include measures of quality of care and service as well as utilization levels. The risk set-aside will be forfeited to the payer or expended for some community benefit, such as indigent care, if the performance standards are not met. If the standards are met, funds in the risk set-aside will be distributed to the participating physicians or added to the performance set-aside.

The performance set-aside will apply to both capitated and discounted fee-for-service contracts. These funds will be used for incentive payments based on an individual physician's performance in the areas of economic efficiency, quality of service, and quality of care.(6) The measurement of performance on economic criteria will based on EOPO's mean statistics, so that the system will discourage by potential loss of the performance withhold both over- and under-utilization compared with the average.

EOPO will also offer to payers physician credentialing, quality assurance, utilization management, peer review, and physician and patient education services.

Physicians will participate in EOPO on a non-exclusive basis. Physicians will be free to contract with payers outside EOPO or to participate in other integrated networks.(7)

Within EOPO's proposed service area, three hospital/physician networks have been established, and another is being formed. These groups will compete with EOPO for contracts with payers.

Participating physicians will not have access to information about fees charged by other participating doctors. EOPO's fee schedule for payments to participating physicians will be developed by a consultant, subject to approval by the EOPO Board of Directors. A committee of the Board will negotiate the capitation or fee-for-service rates to be paid by payers.

Based on your description of the proposed operation of EOPO as summarized above, it appears that the proposed course of action is unlikely to violate the antitrust laws. Under Statement 8 of the Statements of Antitrust Enforcement Policy and Analytical Principles Relating to Health Care and Antitrust jointly issued by the Commission and the Department of Justice, 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."(8) Physician network joint ventures that do not fall within the safety zone will be reviewed under a rule-of-reason analysis if the physicians in the venture share substantial financial risk or if the venture enables them to offer a new product producing substantial efficiencies. The rule-of-reason analysis evaluates "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."(9) While the proposed operation of EOPO, as described above, does not in all respects fall within the terms of the safety zone, it does not appear to pose a significant danger to competition in the relevant market.

The proposed operation of EOPO appears to involve substantial risk sharing among the participants to the venture. The Statement identifies two examples of substantial financial risk sharing:

(1) when the venture agrees to provide services to a health benefit plan at a "capitated" rate; or

(2) when 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 them, with distribution of that amount to members only if the cost-containment goals are met.(10)

Through such arrangements, the risk of loss from higher-than-expected use of services is borne at least in part by the physician group. The risk-sharing mechanism must be designed to provide participating physicians with sufficient incentives to modify their behavior in accordance with the established cost-containment goals, and to assure cost-effective behavior by the other physicians in the venture.

The risk-sharing features of the EOPO proposal appear to be designed to provide such incentives. Members of the group will share substantial financial risk by providing services on a capitated basis, or based on discounted fee-for-service subject to a risk withhold. In its fee-for-service contracts, EOPO intends to use a 10-15% risk withhold in conjunction with a fee schedule that already provides for substantial discounts from prevailing fees in the community. This payment system appears to provide the necessary incentives for members to assure that the group as a whole meets the established efficiency goals.(11) In addition, the performance plan, while not an element of risk-sharing, will provide further incentives for each individual physician to achieve the group's quality and efficiency objectives.

It appears that EOPO 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 its member physicians to also participate in other provider organizations or to provide services through their own independent practices.(12) EOPO's limited restraint on officers and directors simultaneously holding offices in other networks that provide physician services on a risk-sharing basis does not significantly restrict the ability of participating providers to contract with payers other than through EOPO.(13)

EOPO's share of providers practicing in the market slightly exceeds the safety zone's 30% criterion with respect to family practitioners and pediatricians, and exceeds the criterion to a greater extent with respect to a limited number of subspecialty fields. EOPO states that this number and distribution of participating physicians is necessary to provide adequate services to payers. Evaluating the venture as a whole, EOPO's non-exclusive contracts with the number of physicians proposed does not appear likely to confer on the network the power to raise prices above the competitive level or to impede the development of competing physician networks. Consequently, the proposal is unlikely to pose a threat to competition. Indeed, the proposed provision of comprehensive physician services to payers on a risk-assuming basis holds the potential for creating significant efficiencies.

For these reasons, the formation and operation of the EOPO 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) In the future, EOPO may enter into alliances or other contractual arrangements with local hospitals and other health care providers. Your letter does not contain a specific discussion of these possible arrangements, and they are not addressed in this opinion.

(2) If desirable in order to make its services attractive to payers, EOPO may also contract with non-shareholder health care providers who execute the participation agreement.

(3) EOPO intends to contract with 38.25% of general/family practitioners, 22.75% of internists, and 33.73% of pediatricians.

(4) Based on a market analysis it conducted, EOPO believes that this number and mix of physicians is necessary to offer a full range of basic health services to enrollees within its service area and to ensure adequate cross-coverage for participating physicians. Once it has reached the levels of physician participation projected in the advisory opinion request, EOPO intends to deny participation to additional physicians in any specialty in which, at the time of the physicians' application, EOPO has a "market share in such specialty that raises significant issues under the antitrust laws." Letter at 6. In some physicians subspecialties that have only a few physicians in the area, EOPO intends to contract with more than 30% of the available physicians. For example, EOPO proposes to contract with 2 of the 4 colon and rectal surgeons in the market, 6 of 15 dermatologists, 2 of 3 endocrinologists, 6 of 16 oncologists, and 2 of 6 rheumatologists. Exhibit G.

(5) A consultant for EOPO has developed proposed fee schedules for presentation to the EOPO Board of Directors after receipt of a favorable staff opinion letter. The proposed PPO fee schedule, to be used in fee-for-service contracts, represents on an aggregate basis a discount of approximately 27% as compared to prevailing indemnity fee levels, and the HMO fee schedule represents a discount of approximately 35% from those levels.

(6) The EOPO participation agreement defines performance standards as "criteria adopted by the Company for measuring clinical quality, performance in resource utilization and cost effectiveness with regard to the delivery of Covered Services." § 1.13.

(7) Officers and directors of EOPO may not simultaneously serve as an officer, committee member or director of a competing plan that offers capitated or other risk-assuming contracts. Currently, EOPO has 20 physician directors, and all physician officers are members of the Board. At least 60% of the directors must be primary care physicians. EOPO Code of Regulations, Art. 5.1.

(8) 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"). 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.

(9) Id. at 71.

(10) Id. at 70.

(11) In unusual circumstances, a risk withhold of 10-15% might not establish sharing of substantial risk by members of the venture. See FTC Staff Opinion Letter from Mark J. Horoschak to Paul W. McVay (ACMG), July 5, 1994 (staff could not determine whether a 15% withhold from a fee schedule based on the 88th percentile of regular charges of participating physicians, in a PPO open to all members of the state medical society, would sufficiently affect physicians' incentives to constitute sharing of financial risk). In this instance, on the other hand, the totality of facts presented points to effective risk sharing among EOPO's participating physicians.

(12) 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.

(13) EOPO's participation agreement states that the physician may not become an employee of a "'staff model' or closed panel HMO." You have stated that this provision was inserted inadvertently, and that EOPO does not intend to enforce it. This opinion letter is based on the understanding that EOPO will notify physicians who have signed the participation agreement that the provision is not binding, and will omit it from future contracts.