Bureau
of Competition
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Jeffrey W. Brennan
Assistant Director
Health Care Services & Products
Direct Dial
(202) 326-3688 |
UNITED
STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580 |
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September
23, 2003 |
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Martin J. Thompson
Manatt, Phelps & Phillips, LLP
650 Town Center Drive
Suite 1250
Costa Mesa, California 92626
Dear Mr. Thompson:
This letter responds to your request for
an advisory opinion concerning a proposed physician network
in the San Francisco Bay area of Northern California. According
to your letter, six Bay Area county medical societies propose
to establish a common "messenger" arrangement to minimize
the costs associated with their members contracting with health
plans and other third-party payers. The arrangement you describe
does not appear intrinsically to involve price-fixing or other
anticompetitive agreements among competing physicians. Accordingly,
Commission staff does not presently intend to recommend law
enforcement action against the network's establishment and
operation. If the network in practice orchestrates or facilitates
anticompetitive agreements among its competing physician members
on price or other terms of dealing with payers, however, then
the staff will recommend to the Commission that it take appropriate
law enforcement action.
Description of Proposed Conduct
You informed us that six county medical
societies located in seven adjacent counties in the San Francisco
Bay area propose to form a nonprofit mutual benefit corporation
to be known as Bay Area Preferred Physicians ("BAPP").(1)
BAPP proposes to develop a physician network to help create
new contracting opportunities between medical society physician
members who choose to participate in the network and third-party
payers in Northern California.
Each BAPP participant must be a medical
society member. Physician members will fund BAPP through application
fees and periodic assessments, as necessary to cover operational
costs. BAPP will operate as a non-exclusive network, allowing
its member physicians to participate in other physician networks
and contract directly with payers, including payers who enter
into contracts with BAPP. Each medical society will appoint
two representatives to serve on BAPP's board of directors.
You advised us that 10,349 physicians actively
practice medicine in the seven-county area that the medical
societies cover, and that approximately one-half (i.e.,
5,357) of these physicians belong to one of the medical societies.
You anticipate that fewer than 25% (i.e., 1,332)
of the medical society members will join BAPP, which corresponds
to about 13% of the total number of practicing physicians
in the seven-county area,(2)
and that the expected members primarily will be practitioners
in solo or small group practices. The medical societies do
not expect any individual medical specialty to have representation
in BAPP substantially different from this 13% level.
A non-physician employee of BAPP will act
as a "messenger" to convey payer offers to physician members
and to communicate to payers which BAPP physician members
will accept the payer's offer. The messenger will not negotiate
price or price-related terms on behalf of physician members.
In addition, the messenger will not coordinate or facilitate
horizontal agreements among the physicians in responding to
the payer's offer.(3)
Under the proposed arrangement, BAPP will
collect from each physician individually the minimum payment
level that member would accept for his or her most common
medical procedures. It will collect this information in a
way that does not suggest the price level that the doctor
should select. BAPP will maintain this information in a confidential
database, accessible only to non-physician BAPP employees
involved in communicating with payers. BAPP will prohibit
these employees from disclosing physician price information
to any BAPP physicians - including board members and medical
societies.
BAPP will be authorized to contract with
any payer on behalf of physicians whose minimum payment requirements
are at or below the payer's offer. The BAPP messenger also
will notify those physicians whose minimum payment demand
exceeds the offer that they have one opportunity to "opt in"
to a contract containing the payer's offer. This notice will
not reveal the number or percentage of BAPP physicians whose
payment levels met or were below the payer's offer. BAPP also
might provide objective information to its members to help
them understand the contract terms. You have represented that
BAPP and its messenger will not recommend that the physicians
accept or reject an offer, opine on the appropriateness of
price or other competitive terms, present contract information
that suggests an opinion on whether the physicians should
accept a particular contract term, or otherwise attempt to
facilitate any coordination among the physicians on such terms.
After receiving responses from the physicians
who were offered the opportunity to opt in to a contract,
BAPP will determine the percentage of all BAPP physicians
willing to accept the payer's offer. If this percentage is
50% or higher, then BAPP will have the authority to sign a
contract on behalf of the willing participants. BAPP will
enter into a contract with the payer on behalf of those willing
physicians if the payer decides that it has a sufficient number
of physicians for its network.
Moreover, you informed us that the medical
societies do not want BAPP to bear the cost of managing a
contract in which a minority of its members participate. Accordingly,
if fewer than 50% of the physicians accepts an offer, then
BAPP will inform the payer of this fact and advise it that
BAPP will enter into a contract on behalf of the accepting
physicians only if the payer bears contract administration
costs. BAPP has not yet determined what these likely costs
will be, but represents that any fee that it assesses to a
payer for this purpose will be reasonably related to BAPP's
costs in administering the contract. BAPP will not disclose
to its members the number of physicians who accept a contract
or whether a payer is being assessed a fee to cover contract
administration costs.
In lieu of this cost-sharing option, a
payer also may elect to approach the physicians directly to
negotiate individual contracts. (Indeed, since BAPP will operate
non-exclusively, this option always will be available to payers.)
BAPP will provide the payer with the names of the physicians
whose minimum payment levels fell within the payer's offer
or who decided to opt in to a contract. BAPP will not at any
point in its dealings with payers directly or indirectly advise,
instruct, or recommend that its members refuse to contract
individually with any payer.
BAPP will also provide administrative services
in connection with payer contracts. This will include the
credentialing of physician members in accordance with National
Committee on Quality Assurance standards, assisting in investigating
and resolving contractual disputes, and transmitting information
between payers and physician members.
Legal Analysis
Network Joint Ventures Using a "Messenger"
Some use the term "messenger model" as
a shorthand designation for arrangements that physician organizations(4)
have created to facilitate payer contracting. Physician organizations
(sometimes referred to as "networks") that have not established
significant, efficiency-enhancing, financial or other integration
among their members (to which a price agreement is reasonably
necessary) may not lawfully set prices collectively in dealing
with payers. Each individual member physician (or physician
group practice) unilaterally must decide the price at which
to contract with any particular payer. As discussed in Statement
9 of the Statements of Antitrust Enforcement Policy in Health
Care jointly issued by the Commission and Department of Justice
in August, 1996,(5) a "messenger"
arrangement can minimize the costs of its members' contracting
with payers while avoiding price-fixing agreements among its
competing members. To avoid price-fixing and attendant antitrust
liability, a messenger-type physician network must operate
in a way that neither creates nor facilitates agreements among
members on the prices to accept from payers.
A messenger's involvement in contracting
with payers also could create or facilitate agreements among
competing physicians on topics other than price. Agreements
on non-price related contract terms do not constitute price-fixing,
but they could be anticompetitive and, in some circumstances,
be so likely to cause significant competitive harm that they
could be condemned without an elaborate market analysis.
Network arrangements that do not create
or facilitate price-fixing or other anticompetitive agreements
will not increase the physicians' pricing leverage with payers
by aggregating the power of the individual members. The principal
efficiency in messenger arrangements is a reduction in the
transaction costs of payer-physician contracting. At less
cost, payers can both learn about physicians' willingness
to contract at particular prices and engage in the contracting
process itself. Also at less cost, physicians can market themselves
to payers and - if the network provides standardized information
about various payer offers - assess contract opportunities.
If the network plays a role in implementing physician-payer
contracts, then both sides can realize lower costs in providing
and receiving information and addressing contract disputes.
Many physicians and physician networks
that label themselves "messenger models" have created or facilitated
agreements among members of the network not to compete with
one another on price terms. Some networks, for example, have
aggressively negotiated for higher prices, and transmitted
payer offers to the physicians only after achieving a price
offer that the organization's agent or committee deemed acceptable.
Others have transmitted only offers that meet a predetermined
price. In such situations, network members sometimes have
agreed in advance to demand that price, many times with the
assistance of an agent to help forge consensus. Other times,
an agent has solicited member physicians' individual price
demands, then used an average or other calculation from the
submitted information to determine a collective price to demand
from payers.
In other instances, networks have prompted
coordinated pricing by encouraging physician members to deal
with payers only through the organization, thereby bolstering
the physicians' collective leverage. Some networks have prohibited
members from contracting independently - either permanently
or for some period while the network negotiates with the payer,
or while a network contract with that payer is in effect.
Other networks have acted as their member physicians' agent,
by collectively terminating the physicians' existing individual
payer contracts, or have exhorted members to terminate such
contracts on a coordinated basis and to contract only through
the network. The Commission has brought numerous law enforcement
actions involving allegations of these kinds of anticompetitive
abuses of the messenger concept.(6)
Neither use of an agent to negotiate prices,
nor requiring a physician individually to "opt in" to a contract
that the network negotiated, legitimizes the conduct for antitrust
purposes. Such conduct constitutes an unlawful horizontal
agreement among the participating physicians not to compete
on price. An illegal price-fixing agreement need not take
the form of an explicit agreement on common fees among the
competitors personally. An agreement among competitors to
appoint a common agent to determine fees, or to bargain for
the best price that the physicians collectively can command,
is also a horizontal agreement not to compete on price, and
constitutes price-fixing. Such conduct is no less unlawful
merely because an individual competitor is not bound by the
price obtained through the collective action until he or she
individually "opts" to accept it.
Substance, not form, matters for antitrust
purposes. An organization cannot achieve antitrust compliance
merely by calling itself a "messenger model," adopting a particular
"messenger" framework, or following a given set of procedures.
The central competitive question is whether the organization,
in practice, creates or facilitates price-related agreements
or other anticompetitive conduct among its members. Not only
the organization's conduct, but also that of individual members
- sometimes in response to the organization's actions - bears
on this question. In some circumstances, physicians may find
it relatively easy to coordinate behavior to restrain competition.
In other circumstances, physicians may have strong market
incentives to act unilaterally or find it difficult to collude
effectively. Thus, organizations with similar structures and
activities may have different competitive effects, depending
on the market environment in which they operate. It is not
always possible for an antitrust agency to determine prospectively
whether any particular planned messenger structure will, in
practice, prompt unlawful conduct. In an advisory opinion
context, the staff evaluates whether a particular structure
appears to be intended, or is inherently likely, to create
a prohibited agreement or be used for anticompetitive purposes.
BAPP's "Messenger" Arrangement
Your proposal does not expressly contemplate
the foregoing types of unlawful practices. BAPP states that
it intends to use a messenger to convey payer offers to its
physician members, communicate to payers the identity of physician
members willing to accept the offers, and enter contracts
on behalf of physicians who unilaterally decided to accept.
It further states that BAPP will not negotiate prices, express
or suggest an opinion to members on the desirability of any
offer or contract term, share member price terms with other
members, or require or persuade members not to deal with any
payer.(7) Nothing in your proposal
on its face appears to constitute an unlawful price agreement
or be purposely designed to engender anticompetitive collective
action.
You asserted that the medical societies
forming BAPP do not wish to fund the servicing of contracts
in which only a minority of BAPP members participate, because
it would "impose an excessive cost" on the non-participants,
and that this is a rational, cost-based business decision.
The staff offers no view on the commercial or economic reasonableness
of this decision, or on whether a participation threshold
of 50% or less is a justifiable demarcation for determining
whether to service a payer contract. Assuming that the policy
is based on legitimate business considerations, it nonetheless
has potential competitive implications that could pose some
antitrust risk, of which BAPP should be aware.
The "50% rule" could constitute an information-sharing
device that could facilitate tacit agreements to demand higher
prices. BAPP's failure to enter into, and administer, a contract
that it previously had "messengered" would inform the physicians
that more than half of them had demanded a higher price than
the payer had offered. Over time, this practice could effectively
constitute an exchange of information about the price decisions
of a majority of group members and, in turn, lead members
to reject price offers that they might otherwise have accepted,
knowing that most of the other member physicians are likely
to act similarly.
You advised us that BAPP will mitigate
any such risk by executing and administering contracts on
behalf of fewer than 50% of member physicians, so long as
the payer remits a fee to cover contract administration costs.
BAPP will not disclose to the members how many of them have
accepted the contract or the fact that the payer is bearing
administration costs. If the payer agrees to this practice,
then it is less likely that any member could determine the
minimum price level demanded by the majority. If, in operation,
BAPP assesses fees or imposes conditions on payers that are
not reasonably related to the costs of administering a contract,
then there may be substantial grounds to infer that BAPP is
attempting to send a pricing signal or to prevent payers from
signing contracts with the minority of BAPP members who would
accept their prices.
Furthermore, if the payer chooses not to
share contract costs with BAPP and desires instead to enter
into individual contracts with the minority of BAPP members
whose price demands the payer meets, then BAPP will provide
the payer with those physicians' names to facilitate such
individual contracting. So long as payers have an effective
opportunity to contract with physicians individually - that
is, BAPP's members do not explicitly or tacitly agree not
to deal with payers with whom BAPP has not contracted - BAPP's
refusal to administer contracts to which fewer than half its
members subscribe is less likely to have anticompetitive effects.
Of course, if a payer approaches them directly
after BAPP had "messengered" that payer's offer, then the
physicians presumably would know that fewer than half of BAPP's
members had agreed to the offer (because otherwise BAPP, not
the payer directly, would be involved). This could cause at
least some among the minority whose price demands the payer
had met to change their minds, hoping that the payer finds
it necessary to raise its offer to obtain contracts with a
sufficient number of physicians. On the other hand, the physicians
also might accept the payer's offer, to gain access to the
payer's insured population and seek competitive advantage
over those physicians who elect not to sign a contract with
that payer.
It is not possible to predict with certainty
how, in actual operation, BAPP's "50% rule" will affect the
contracting process and competitive interaction among its
members. In the context of BAPP's entire proposed operation
as you described it to us and as we analyze it above, it appears
unlikely that the rule's implementation would reveal information
that could be used strategically for anticompetitive purposes.
Furthermore, BAPP's probable membership size - some 1,300
physicians, mostly in small or solo practices - would make
it more difficult for the members to use whatever information-sharing
characteristics the rule may have to collude tacitly on price.
Anticompetitive effects are also less likely if BAPP's membership
collectively has a relatively small share of any relevant
market.
BAPP produced a few documents to staff,
however, suggesting that some members saw BAPP as a way to
reject contracts to which 50% of the physicians do not agree
and thereby to raise prices. You told us that these physicians
misunderstood BAPP's procedures (including being unaware of
BAPP's methods to facilitate contracting with a minority of
members), that you corrected them, and that you advised the
physicians on the unlawfulness of using BAPP as a device to
fix prices. Nonetheless, this justifies some concern that
the 50% rule could be used anticompetitively. If, in practice,
BAPP facilitates price agreements among its members or otherwise
restrains competition unreasonably, then the staff would recommend
that the Commission commence an appropriate law enforcement
action.(8)
You also told us that BAPP may develop
standard non-price contract terms. Even if member physicians
do not agree explicitly to deal only on such standard terms,
this raises the risk that an agreement on standard terms,
even as a point to compare contract offers, could facilitate
agreements not to deal on other terms. BAPP has not developed
standard contract terms and you have not provided any specific
information about them. We have no basis for determining prospectively
the extent to which BAPP's development and use of standard
non-price contract terms would raise antitrust concerns, therefore,
and we express no opinion regarding that issue.
Conclusion
For the foregoing reasons, Commission staff
do not presently intend to recommend that the Commission initiate
an enforcement action if BAPP undertakes the proposed activities
in the manner you have described. If BAPP orchestrates or
facilitates anticompetitive agreements among its competing
physician members on price or other terms of dealing with
payers, however, then the staff will, for the foregoing reasons,
recommend that the Commission take appropriate law enforcement
action. This letter expresses Bureau of Competition staff
views. By Commission Rule § 1.3(c), 16 C.F.R. § 1.3(c), the
Commission is not bound by this letter and reserves the right
to rescind it. The staff 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 physician network results in substantial anticompetitive
effects, if the physician network is used for improper purposes,
if facts change significantly, or if it otherwise would be
in the public interest to do so.
Sincerely yours,
Jeffrey W. Brennan
Assistant Director
Endnotes:
1. The county medical
societies are: Alameda-Contra Costa Medical Association, San
Mateo County Medical Association, San Francisco Medical Society,
Sonoma County Medical Association, Napa County Medical Association,
and Solano County Medical Society. Your letter indicates that
a seventh society, Santa Clara County Medical Association,
has not yet determined whether it will participate in BAPP.
2. Participation of Santa
Clara County Medical Association in BAPP would not significantly
change the above physician participation percentages.
3. Some of the materials
you submitted suggest that BAPP would like to develop standard
non-price contract terms to offer as an alternative to a payer's
standard contract. In addition, you suggested that BAPP might
be authorized to accept a payer offer on a physician's behalf
only if (as discussed infra) the offered price meets
or exceeds the physician's minimum price level and if the
contract terms do not substantially differ from BAPP's standard
terms. You have not provided enough information for us to
evaluate these aspects of the proposal, however, and, as discussed
below, we express no opinion on it.
4. This discussion focuses
on physician organizations because your proposal involves
physicians. The same principles also apply to other health
care provider networks.
5. The Statements are
available at www.ftc.gov/reports/hlth3s.htm#8.
6. See, e.g., North
Texas Specialty Physicians, No. D-9312; Physician
Network Consulting, L.L.C., No. C-4094; SPA
Health Organization, No. C-4088; Carlsbad Physician
Association, Inc., No. C-4081; System Health Providers,
Inc., and Genesis Physicians Group, Inc., No. C-4064;
Professions in Women's Care, No. C-4063; Professional
Integrated Services of Denver, No. C-4054; and Aurora
Associated Primary Care Physicians, No. C-4055.
7. The members of BAPP's
board of directors likely will be practicing physicians in
a competitive relationship with at least some other BAPP members.
These physicians are individually subject to the antitrust
laws, and should not use information that they acquire in
serving on the board to facilitate anticompetitive agreements
among BAPP members.
8. The Commission's recent
complaint in North Texas Specialty Physicians, No.
D-9312 ("NTSP"), provides an illustrative contrast
regarding messenger arrangements. According to that complaint,
NTSP engaged in numerous practices that facilitated or constituted
unlawful collective behavior and agreements among its participating
physicians - including negotiating payer contracts on the
physicians' collective behalf, collecting the physicians'
price requirements and using their averages as a floor in
negotiating contracts, reporting the group's prospective price
information back to the physicians, organizing collective
refusals to deal with payers to extract higher prices, and
other acts. In such circumstances, the staff would view the
messenger's refusal to administer contracts to which half
the members do not agree as a device for furthering anticompetitive
goals. |