UNITED STATES OF
AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Bureau of Competition
Robert F. Leibenluft
Assistant Director
Health Care Division
Direct Dial
(202) 326-3688
June 19, 1997
James L. Wiant
Rinke-Noonan
Suite 700
Northwest Center
Box 1497
St. Cloud, MN 56302
Dear Mr. Wiant:
This letter responds to your request for an advisory
opinion concerning a proposal by 16 optical firms to
establish and operate an optical and vision services
network through First Look, L.L.C. ("First
Look"). Based on our understanding of the facts as
explained in your letters and in telephone conversations,
Commission staff have no present intention to recommend
an antitrust challenge to the formation and operation of
First Look as proposed.
INDUSTRY BACKGROUND
For purposes of this letter, "optical and vision
services" refers to a bundle of goods and services
including eye examinations, corrective prescriptions,
fittings of corrective lenses and contact lenses, and the
sale of related eye care products such as frames. Over
150 million Americans wear some form of corrective
lenses. Annual sales of retail optical goods exceed $12
billion, and eye examinations account for an additional
$3 billion in sales.(1)
Optical and vision goods and services are provided by
a number of types of providers, including national and
regional optical chains, optical departments at large
retail firms, optical dispensaries of some health
maintenance organizations, independent ophthalmologists
and optometrists (who are licensed to perform eye
examinations and write prescriptions and may also
dispense corrective lenses), and independent opticians
(who are licensed only to dispense corrective lenses but
who may employ or contract with eye care professionals
who can write prescriptions). One source estimates that,
on a national basis, the shares of sales of the various
types of providers are approximately 34% for national
chains, 18% for independent opticians, and 48% for
independent optometrists, dispensing ophthalmologists,
hospitals, and managed care organizations.(2)
The information available to us suggests that the optical
and vision services market generally is extremely
competitive, and that the level of competition continues
to increase.
Optical and vision care services increasingly are
provided through managed care plans. Published
information submitted by First Look estimates that 40
million people had vision care benefits through such
plans as of September 1995, and that managed care plans
covered 30% of retail eye wear sales in 1995.(3) One survey of independent
ophthalmologists and optometrists showed that 40% of the
patient base of these practitioners was covered by
third-party plans.(4) At least 61
third-party managed vision care programs operated in
1995, in areas ranging from a few states to nationwide.
Plans include publicly-held and privately-owned networks,
provider-owned networks, and plans owned by chain optical
firms. Twelve of these plans had more than 1 million
covered lives; the largest, Vision Services Plan, had 8.5
million members and 22,000 providers.(5)
In light of the growing importance of managed care
organizations in the optical services industry, many
optical retailers have begun to develop and market their
own third-party plans and provider networks directly to
HMOs, preferred provider organizations, insurance
companies, and employers. This marketing shift is
occurring on both a national and regional level.
Independent opticians, in particular, have an incentive
to develop their own plans because they have been
excluded from serving on the provider panels of many
managed vision care plans. For example, independent
opticians are precluded from serving on the provider
panels of Vision Service Plan, the largest vision care
plan in the nation.(6)
You assert that employers and managed care plans
desire single source contracting with firms or networks
of firms having outlets that provide convenient access
points to serve all covered employees. Since these
characteristics are available from a large number of
vision care plans, independent optical firms feel that
they must provide these characteristics as well in order
to compete for contracts.
DESCRIPTION OF THE PROPOSAL
First Look will be a network of optical firms (and of
local optical firm networks developed by individual
members of First Look) organized to respond to requests
for proposals ("RFPs") for employer contracts
for optical and vision care services to be rendered to
covered individuals living in an area larger than that
served by any one provider. The request letter asserts
that buyers increasingly are using RFPs to solicit bids
for employee health benefits contracts. Many First Look
members already are responding to RFPs in instances where
all the covered employees live in the area served by that
member. However, you assert that individual optical firms
are unable to respond to RFPs involving employees located
in parts of the country not served by the individual
firm. According to the letter, First Look members feel
that they will be closed out of a growing segment of the
market if they are not part of a nationwide network.
There are a number of national networks of eye care
providers, and many First Look members have been excluded
from them because they do not meet certain requirements
(i.e., not being owned by an optometrist or
ophthalmologist).
Sixteen optical firms currently are "Master
Network Members" ("MNMs") of First Look.
With one exception, these firms provide services in
different geographic areas from one another.(7) All members provide both eye
exams and optical goods, either through ownership by
licensed optometrists or through employment or
contractual arrangements with optometrists. It is
anticipated that other MNMs will be added to First Look
in the future, in order to give the network nation-wide
coverage, and that these additional members will be
located in different areas of the country from other
First Look members, although there may be small overlaps
among members service areas.
Unlike many other provider networks that collectively
negotiate contracts with payers, First Look is structured
so that individual MNMs negotiate specific payer
contracts. The MNMs will agree among themselves on a
Reimbursement Schedule of discounted prices for exams,
frames, and lenses, according to which they will pay
other MNMs for services rendered pursuant to contracts
between any MNM and an employer. Individual MNMs will
then attempt to negotiate contracts with employers
located in their area (but also covering employees
located in other areas). The contracting MNM will bill
employers and pay providers for all services rendered
under a particular contract. The contracting MNM will be
paid for all services rendered by First Look
participating providers at the contract price (that may
be higher or lower than the agreed-upon Reimbursement
Schedule), and it will pay other MNMs at the
Reimbursement Schedule price, plus a 10% administrative
fee.
First Look itself is primarily a structure for
organizing the relationships among MNMs; it will perform
few ongoing functions. It will have committees that
consider credentialing and quality standards, but will
not contract or engage in much network administration.
The MNMs are sharing organizational expenses, but they do
not anticipate significant ongoing operational expenses
for First Look as an entity.
You state that some of the MNMs are licensed as
insurers but others are not, so the network as an entity
cannot offer capitation contracts. However, individual
MNMs licensed to do so may offer capitation contracts;
and it is anticipated that some will choose to do so, and
pay other network providers at the Reimbursement Schedule
price.
Each MNM also will establish a local network of
providers within its assigned area of responsibility.
These local network providers will contract individually
with the single MNM that covers the area, and will be
paid at the Reimbursement Schedule rate. There will be no
collective agreements among local network members and no
negotiation about price: local network members will be
given an opportunity to contract only at the
Reimbursement Schedule price. Each local network will be
subject to quality and service standards established by
the MNMs, to a peer review program for monitoring
"costs, utilization, and quality" of service,
and to a patient grievance resolution procedure.
Each MNM will determine the size and composition of
its local network, depending on the number of providers
needed to provide adequate coverage to enrollees under
any particular contract. It may be necessary to increase
the size of a network in order to respond to a particular
RFP. Each MNM will develop its own local network
contract, which must incorporate the common standards
agreed to among the MNMs, and the Reimbursement Schedule.
The MNMs will agree among themselves on the geographic
areas within which each will be responsible for
developing a local network. You have stated that the
definition of network areas does not limit the ability of
any MNM to solicit contracts with employers located
outside that members network area.
All affiliations with the network will be
nonexclusive. MNMs will continue to respond individually
to RFPs that they can serve independently. MNMs also will
use the local networks as necessary to serve contracts
covering only that MNMs assigned area.
According to your submission, the use of a single
Reimbursement Schedule for all services of providers
other than the contracting MNM is central to First
Looks strategy for entering the market. In order to
prepare a bid, a contracting MNM having to pay different
prices to different service providers would need to be
able to estimate the number of employees likely to seek
services from each MNM and local network provider.
Without the common Reimbursement Schedule, First Look
believes, it would be necessary for the network to make a
substantial capital investment in information processing
systems in order to track the demographic characteristics
of each employee group covered by a contract on which an
MNM proposed to bid. The expense of developing a system
to provide that information, First Look believes, would
raise the networks costs to a level that would make
its product uncompetitive.
In sum, we understand, based on the information you
have submitted, that First Look is intended to operate as
follows.(8) An MNM operating in
certain cities in Wisconsin, for example, may wish to
provide optical services to employees of a company
headquartered in Madison but having employees throughout
Wisconsin and also in Texas and Alabama. The Wisconsin
MNM could bid on a contract covering all those employees,
offering a price that exceeded the First Look
Reimbursement Schedule by 15%. Texas and Alabama MNMs
might also bid for the same contract. If the Wisconsin
MNM were successful in obtaining the contract, employees
could obtain services from that MNM, from firms in the
Wisconsin MNMs local network (that might be located
in Wisconsin cities where the MNM does not have outlets),
and from First Look MNMs (and their local networks)
located in Texas and Alabama. Only the Wisconsin MNM
would be a signatory to the contract with the employer,
and all claims would be submitted by, and paid to, the
Wisconsin MNM. The other First Look MNMs would bill the
Wisconsin MNM for all services rendered by them or
members of their local networks to employees under the
contract; and they would be paid the Reimbursement
Schedule amount plus a 10% administrative fee by the
Wisconsin MNM. The Wisconsin MNM would pay members of its
local network directly based on the Reimbursement
Schedule; and it would retain the difference between the
contract amount and the amounts paid to other
participants in the First Look network.
We do not have complete information on the markets in
which First Look providers compete or their market
shares. However, information provided for 13 of the MNMs
shows estimated shares of sales ranging from 1.2% to 28%
in the total area within which each does business; most
of the firms have estimated shares between 5% and 15%.
ANALYSIS
Agreements Among Master Network Members
We have analyzed under the rule of reason the
agreement among the MNMs on the Reimbursement Schedule.
MNMs will not agree among themselves on the prices at
which they will sell to managed care plans, but only on
the prices at which they will be reimbursed by one
another for services rendered pursuant to contracts
negotiated by any MNM. An MNM could not prepare a bid on
a multi-area contract without knowing what it will have
to pay for services rendered by other providers. Thus,
any incidental competitive effect of the agreement is
reasonably necessary in order for the participants to be
able to compete for the business of multi- area
employers. The agreement appears to be no broader than
necessary to accomplish that result; there are no
anticompetitive collateral agreements and payers remain
free to deal with network providers individually if they
prefer to do so.
Moreover, MNMs are not (with one exception)
competitors of one another for services to patients,
because they operate in different geographic markets.(9) Consequently, the agreement on the
Reimbursement Schedule does not eliminate any competition
among them with respect to services delivered to
patients. With respect to competition for network
contracts, in many cases only one MNM will be in a
position to negotiate with a payer. To the extent that
one or more could compete for the same contract (for
example, where an employer had a significant number of
employees living in more than one MNMs area),
nothing in the agreement prohibits them from doing so;
and the structure of the arrangement appears to preserve
their incentive to do so, since the contracting MNM keeps
the difference, if any, between the contract price and
the Reimbursement Schedule amount. That prices for
services by other providers are uniform affects, but does
not eliminate, this competition.
Nor does the arrangement appear to establish a market
allocation agreement among First Look MNMs. You have
stated that the network areas defined in the agreement
only determine the areas within which an MNM is
responsible for establishing a local area network. Any
MNM may solicit contracts with employers located in any
MNMs area.
The information available to us does not permit us to
analyze in any detail the likely competitive effect of
the network in particular markets. However, the
arrangement among MNMs as proposed does not appear likely
to permit members to coordinate their actions in ways
that would result in higher prices to buyers in any
market. It does not substantially limit competition in
local markets, because members generally are not
competitors.(10) Neither does the
arrangement appear to endanger competition at the network
level. There are many other vision care plans in
operation, including some affiliated with national
chains; and there are many other firms in each area where
MNMs do business. Therefore, buyers should have ample
choices of suppliers.
Local Network Agreements
We also have evaluated the local network agreements
under the rule of reason. There will be no collective
agreements among members of local area networks; instead
there will be bilateral agreements between the MNM and
each local network member. In many cases, those local
members will be competitors of the MNM. Thus, we regard
the agreement as one among horizontal competitors on
prices at which network members will be paid by the MNM
for services rendered under the MNMs contracts. As
proposed, those agreements appear to be reasonably
necessary to create the national network First Look seeks
to establish. Moreover, the agreement appears to be no
broader than reasonably necessary to effectuate that
purpose. The structure appears to preserve incentives for
an MNM to provide all services under a contract whenever
it can do so, and for local network members and other
MNMs to compete with one another for contracts, since
they will not directly profit from any increase in
contract price above the Reimbursement Schedule amount
that is negotiated by the contracting MNM. The
Reimbursement Schedule amount will be the national price
among all members for all contracts; thus, it should not
reflect any aggregation of power in local markets.
Moreover, there will be no exchange among members of
local area networks or among MNMs of information
concerning selling prices other than the Reimbursement
Schedule, thus minimizing the risk of spill-over
collusion among network members.
Because you have not provided any information about
the identity or competitive significance of members of
local networks, or about the local optical services
markets in which network providers compete, we have not
been able to analyze the likely competitive effect of the
local area networks. It is, of course, possible that this
structure could, if network members had power in local
markets, be used to restrict competition. For example,
local network members might profit indirectly if the MNM
used the power of the local network to keep market prices
high by refusing to discount to any managed care payers.
If a local network has anticompetitive effects in any
market, we reserve the right to bring an enforcement
action.(11)
CONCLUSION
For the reasons discussed above, Commission staff has
no present intention to recommend a challenge to the
formation and operation of First Look as proposed. 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), 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, if facts change significantly, or if
it would be in the public interest to do so.
Sincerely yours,
Robert F. Leibenluft
Assistant Director
(1) 1 Disser, Paul J., Sharpening the Focus on
Vision Care Benefits, LIMRAs MarketFacts, Vol.
15, No. 5 at 7-8 (Sept.-Oct. 1996).
(2) 2 Freeman, Paul, Its No Optical
Illusion, Eye Care Competition Intense, Puget Sound
Business Journal, Vol. 15, No. 44 at 22 (March 17, 1995).
(3) The Optical Industrys New Environment,
in U.S. Optical Industry Handbook ?96 at 101, 103
(1996) [hereinafter U.S. Handbook].
(4) 4 20/20 Market PulseManaged Vision
Care Survey of Independents (1995 and 1996), cited
in U.S. Handbook, supra note 3, at 103. This
survey did not include HMO or chain plans. Some
HMOs also have optical dispensaries.
(5) U.S. Handbook, supra note 3, at 115-127.
(6) 6 Barber, Mary Beth, Small Opticians See Big
Obstacles in Insurers and Huge Rivals, Business
Journal Serving Greater Sacramento, Vol. 12, No. 13, at
22 (June 19, 1995).
(7) Two MNMs are located in Ohio. According to the
information you have provided, one firm has 41 outlets
across the state, more than half of them located in the
major population centers of Toledo, Cleveland, and
Columbus. The other firms 20 outlets are located
primarily in smaller cities. The two compete in 7 local
areas, and have outlets within a 30-minute drive of one
another in six areas. You have stated that on a statewide
basis, those firms combined share of sales is
approximately 10%, and that in each overlap area there
are numerous other optical outlets.
(8) This is a hypothetical example designed purely
for purposes of illustration.
(9) We understand that any MNMs added to First Look
in the future will not be competitors to any significant
extent with existing MNMs.
(10) In any instances where members do compete in
local markets, the analysis concerning local networks,
below, applies.
(11) In the context of financially integrated,
non-exclusive, physician-controlled networks, the federal
antitrust enforcement agencies have presumed that
networks comprising 30% or fewer of competitors in a
market are not likely to have anticompetitive effects.
See Department of Justice/Federal Trade Commission, Statements
of Antitrust Enforcement Policy and Analytical Principles
Relating to Health Care and Antitrust (1996).
Evaluation of the competitive effects of larger networks
requires case-by-case analysis of a number of factors.
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