Office of the Secretary

April 25, 2001

Michael Haugen, J.D., M.B.A.
Executive Director
Alaska Physicians & Surgeons, Inc.
4120 Laurel Street
Suite 206
Anchorage, Alaska 99508

Re: Alaska Healthcare Network, Inc., File No. 991-0103, Docket No. C-4007

Dear Mr. Haugen:

Thank you for your letter on behalf of Alaska Physicians & Surgeons, Inc. commenting on the consent order provisionally accepted by the Commission in this proceeding. Your letter was placed on the public record pursuant to  2.34 of the Commission's Rules of Practice. The Commission gave careful consideration to the views expressed in your letter as well as the other comments filed in this matter. On April 25, 2001, the Commission voted to make the consent order final without change.

The consent agreement settles charges that Alaska Healthcare Network (AHN) unlawfully restrained competition by facilitating and implementing agreements among its physician members to fix prices and to refuse to deal with health plans except on collectively-determined terms. Specifically, the complaint charges that AHN negotiated price and other contract terms with health plans on behalf of its member physicians and that the members regarded the organization de facto as their exclusive bargaining agent, so that most health plans that sought to enter the market were unable to contract with a sufficient number of physicians. Further, the complaint alleges that AHN did not engage in any activities that might justify collective agreements on the prices its members would accept for their services, and that its actions restrained price and other competition among Fairbanks physicians and thereby harmed consumers.

Because of the high proportion of Fairbanks area physicians who are members of AHN and the relatively limited number of doctors in the community, there appears to be a significant danger that, without some form of structural relief, AHN members could successfully perpetuate the effects of AHN's unlawful conduct by colluding on a tacit basis with respect to their dealings with health plans. As a consequence, the order imposes certain limits (for a period of five years) on the proportion of Fairbanks physicians practicing in five specialty fields who may be members of AHN if it decides to offer the services of its physicians to health plans (either through a qualified risk-sharing or clinically integrated joint venture or through another type of arrangement such as a messenger model network).

The Commission carefully considered whether the temporary caps on AHN's membership that are contained in the order pose any risk of competitive harm in Fairbanks, including whether the order might discourage efficient mergers among physician practices or inhibit entry into the market by new physicians. It found no reason to modify the terms of the consent order. The order does not prohibit mergers among physician practices, and it is unlikely to discourage the formation of more efficient medical practices. Given the distribution of Fairbanks physicians in the affected five specialty areas, most of the potential mergers among physicians in each specialty who were members of AHN at the time of the investigation would produce practices that did not exceed the market share caps, unless the single largest physician group in Fairbanks were involved.

With respect to the possible effects of the structural relief on entry by new physicians, the order permits AHN member practices to expand by entry from outside the market without limitation by the market share caps. Furthermore, it does not appear likely that non-members of AHN would be placed at a competitive disadvantage that might discourage new physicians from entering independently or joining physician practices that are not members of AHN during the five years the market share caps are in place. It is unlikely that exclusion from a messenger model operated by AHN would place any doctor at a competitive disadvantage, because there should not be any significant impediment to the non-AHN doctors establishing their own messenger organization, if desired. Should AHN establish an integrated venture during the five year period that its size is limited, it is unlikely that any such venture would be the sole provider panel for any health plan. Most health plans, particularly in recent years, have tried to recruit broad physician networks in order to meet consumer demand for choice among physicians. As a result, any AHN integrated venture likely would be only one part of a payer's provider network, leaving ample competitive opportunities for physicians outside the venture.

Your letter suggests that the market share limitations contained in the order may be applied more generally to physician groups throughout Alaska. The order's market share limitations, however, apply only to AHN (for a period of 5 years). As is explained in the Analysis to Aid Public Comment that was published with the consent order in this matter, the market share limitations do not mean that physician networks with more inclusive memberships are inherently or presumptively unlawful. The five-year limitation on the proportion of doctors in the five specialties in Fairbanks who may contract through AHN is a "fencing-in provision," designed to remedy the effects of illegal conduct, and it does not reflect a judgment by the Commission that arrangements that fall outside these temporary fencing-in limits are in themselves illegal. Thus, physicians in Alaska will not be subject to investigation or prosecution by the Commission simply because their memberships are more inclusive than is permitted under the fencing-in provision of this order.

You also stated that the so-called "grandfather" proviso, which permits AHN to include any single pre-existing physician group practice in its membership without regard to the percentage limitations contained in the order, defeats the primary purpose of the structural remedy, and that the need for such a provision shows that the remedy is "not a good fit" for markets the size of Fairbanks. The proviso accommodates the general practice of members of a medical practice to contract with payers as a group rather than individually, and the fact that in Fairbanks some of the specialties are already highly concentrated. Because members of an integrated group practice do not compete with one another, the inclusion in the network of such a group, no matter how large, does not eliminate existing competition among the members of the group, and thus does not create the danger to competition that the order was designed to eliminate. The grandfather proviso, therefore, will not perpetuate unlawful conduct or effects thereof.

By direction of the Commission, with the five Commissioners voting in the affirmative, but with Commissioner Swindle and Commissioner Leary dissenting as to a structural component of the relief prescribed by the Decision and Order.

Donald S. Clark