UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Bureau of Competition
June 14, 1995
William G. Kopit, Esquire
Clifford E. Barnes, Esquire
Epstein Becker & Green, P.C.
1227 25th Street, N.W.
Washington, D.C. 20037-1156
Dear Messrs. Kopit and Barnes:
On behalf of your client, California All Health ("CAH"), you
have requested an advisory opinion as to the legality under the
federal antitrust laws of CAH's formation and proposal to bid for
certain contracts to provide comprehensive medical services to
beneficiaries of California's Medicaid program, Medi-Cal. CAH
is a joint venture of six health maintenance organizations
("HMOs") doing business in California -- CIGNA, United Health
Plan, Kaiser, FHP Healthcare, Blue Cross of California, and Blue
Shield of California. As is explained more fully below, it does
not appear that the formation and operation of CAH, as proposed,
is likely to violate any law enforced by the Federal Trade
Commission.
On September 30, 1994, the California Department of Health
Services ("DHS") issued a Request for Application ("RFA"),
amended December 14, 1994, inviting applicants to submit
proposals to act as prepaid health plans under the Medi-Cal
program in twelve California counties. Applicants were free to
apply for the contract in any one or more of the counties. In
each county, if possible, Medi-Cal will provide services through
only two plans: the "mainstream plan" operated by a private
managed care entity awarded a contract under the RFA, and the
"local initiative," organized by the county government in each
region.
All applicant prepaid health plans are required to be
managed health care organizations licensed and regulated under
the State's Knox-Keene Act, Cal. Health & Safety Code 1340 et
seq. The RFA specifically provides that existing Knox-Keene
plans may form joint ventures to apply to be chosen as a
"mainstream plan," provided that the joint venture itself becomes
a certified plan under the Knox-Keene Act. CAH is such a joint
venture. It is a nonprofit mutual benefit corporation that has
applied to be independently licensed as a health plan under the
Knox-Keene Act, and will be subject to state regulation under
that Act. In addition, each of CAH's six participants is
individually licensed as a Knox-Keene plan in order to offer an
HMO product in California.
CAH has submitted an application, in response to the RFA, to
become the "mainstream plan" in four counties -- Los Angeles, San
Bernardino, Riverside, and Kern. As I understand it, the
application does not include a price term; the level of payment
will be determined unilaterally by DHS. Your letter states that
CAH was developed to allocate over several HMOs the costs and
risks associated with providing services to Medi-Cal patients.
According to your letter, HMOs participating in CAH are not
willing or able individually to absorb the Medi-Cal population in
the four counties where CAH intends to operate; the joint venture
was established to ensure sufficient capacity to serve the
county-wide populations. While some of the CAH participating
HMOs have prior experience in Medi-Cal contracting, others have
not had such experience, and would not participate in the
mainstream option bid without the ability to share risk of loss
and Medi-Cal experience through the joint venture. Each
participating HMO decided individually on the counties in which
it would participate in the CAH bid, and the geographic areas in
each county in which it could provide services.
According to your letter, the reasons for participation in
the joint venture vary to some extent among the member HMOs.
Some HMOs lack sufficient provider capacity to absorb entire
county Medi-Cal enrollments, or would be unwilling to participate
in the program if they were required to take on the entire
eligible population. Some HMOs are concerned about the
unpredictability of California's financial situation, and most
believe that participation in the Medi-Cal program would require
them to operate at a loss or would be only marginally
profitable. Each plan has stipulated the maximum number of
Medi-Cal recipients it will accept in each county.
Participation in CAH is non-exclusive. The participating
HMOs are free to join other consortia, contract directly with any
county under the "local initiative," or bid to contract directly
with DHS as the "mainstream plan." Individual HMOs in CAH have
expressed an interest in contracting with competing local
initiatives. Moveover, except for Kaiser and CIGNA, whose staff
physicians are plan employees, each of the HMO participants in
CAH contracts with its participating providers on a non-exclusive
basis. Thus, these participating providers are free to join
competing plans in the counties in which CAH proposes to
operate.
Each participating HMO has made a capital contribution to
CAH of $187,500. If the joint venture is awarded a contract, the
participating plans will fund start-up expenses through
subordinated debt. Each plan also is obligated to pay special
assessments imposed by the CAH Board of Directors to cover
operating losses.
CAH will assume the financial risk of providing covered
services to Medi-Cal enrollees in exchange for a fixed capitation
payment established unilaterally by DHS. The bulk of this risk
will be passed through to the participating HMOs through
subcapitation agreements. Each HMO will agree to accept the
subcapitation as payment in full for covered services rendered to
CAH enrollees who have selected that HMO. However, the State has
required CAH to be a separately licensed entity under the Knox-
Keene Act, accept the full financial risk for the program,
operate an independent quality assurance program, provide
centralized enrollment and grievance procedures, and demonstrate
the ability to handle the enrolled population in the event one or
more of the member HMOs is terminated from the program.
According to your letter, CAH's member HMOs will not share
any information on costs, sales, profitability, price, marketing
or distribution of services unless the exchange of information is
reasonably necessary to conduct the activities of the joint
venture. Where collection of competitively sensitive information
is necessary to the operation of CAH, such information will be
shared among member HMOs in aggregated form that does not reveal
the identity of any member HMO. Procedures have been developed
to assure that confidential HMO-specific information will not be
accessible to any HMO other than the one that supplied it.
Based on the information summarized above, it does not
appear likely that the formation and proposed operation of CAH
would violate the antitrust laws. CAH's activities are subject
to the antitrust analysis outlined in the Statement of Department
of Justice and Federal Trade Commission Analytical Principles
Relating to Multiprovider Networks. As is explained below, it
does not appear that the joint venture involves agreements that
are per se illegal, or that the venture's overall impact on
competition is likely to be harmful.
CAH participants appear to be economically integrated;
consequently, any potentially anticompetitive agreements among
them concerning provision of services to Medi-Cal beneficiaries
that are ancillary to that integration are subject to the rule of
reason rather than per se condemnation. Under the policy
statement, acceptance by the network of a capitated rate as
payment for health services is recognized as an example of
financial risk sharing that evidences significant economic
integration among the network participants. CAH will accept
such a capitation rate as payment in full for all contract
services provided to Medi-Cal beneficiaries.
CAH will shift a large proportion of the economic risk
inherent in the capitation arrangement to the individual HMOs
through subcapitation agreements. Thus, each individual HMO will
largely be responsible for managing utilization for Medi-Cal
patients enrolled in that plan, and each HMO will bear the bulk
of the risk that its subcapitation payment will be inadequate to
compensate for the service needs of its enrollees. In some
respects, however, it appears that the operation of CAH itself
would entail substantial risk sharing among its HMO participants.
CAH as an entity is responsible for providing contract services
to beneficiaries, and must provide assurances satisfactory to the
State that it can do so. Moreover, the individual HMO
participants bear the risk of having to provide services to
enrollees of another plan in the event of default by one or more
of the member HMOs. This is not a case where the joint venture
is simply a vehicle for passing payments to competing providers,
each of which bears individual economic risk; in that instance a
different analysis would apply.
It does not appear that operation of CAH as proposed is
likely to significantly impair competition in any market. We
would be concerned if it appeared likely that CAH would limit
significantly the number of bidders for the Medi-Cal contract in
any of the counties in which it proposes to operate. Based on
the available information, this does not appear to be the case.
There are 38 licensed Knox-Keene plans in California. Of these,
19 notified DHS of their intent to submit Medi-Cal applications.
Ten plans were interested in serving one or more of the counties
in which CAH proposes to operate. You were unable to obtain
precise information about the capacity of other HMO's operating
in California to serve Medi-Cal beneficiaries, or on the number
of bids that had been received. However, you identified a large
number of licensed HMOs that operate in each of the four counties
where CAH proposes to submit a bid. In order to obtain a
license to operate as a Knox-Keene plan, each of these HMOs was
required to demonstrate its ability to provide accessible and
continuous care in its service areas. Moreover, except for the
two plans with employed physicians, none of CAH's member HMOs
prohibit participating providers from joining other HMOs;
consequently, CAH members appear to have no ability to prevent
other HMOs from obtaining adequate provider panels. Indeed, we
understand that bids for the Medi-Cal "mainstream plan" contract
were received from organizations other than CAH in each of the
four counties in which CAH submitted a bid for the contract.
Based on all this information, it does not appear that operation
of CAH would significantly limit competition among HMOs for the
Medi-Cal contract.
At the same time, cooperation of the HMOs through CAH
appears likely to produce significant efficiencies. According to
your letter, the HMOs participating in the joint bidding through
CAH are unable or unwilling to assume the risks associated with
bidding independently for the contract. As a result, the joint
venture enables an additional bidder to compete for the contract,
while preserving competition among CAH member plans for the
patronage of Medi-Cal patients, who would be able to choose among
participating HMOs (subject to their enrollment limitations and
defined service areas). Moreover, the joint venture permits the
participating plans to share the costs of bidding on, and
administering, the contract, and to share knowledge and
experience concerning Medi-Cal services.
Finally, your letter states that CAH has taken steps to
prevent any anticompetitive "spillover" effects that might
otherwise flow from the sharing of sensitive commercial
information among the member plans. Consequently, the
participation of the member HMOs in CAH does not appear to
threaten competition in this respect.
For these reasons, the formation and operation of CAH 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