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New antitrust rule encourages physician networks

By David J. Lowe, Esq.

On August 28, 1996, the Federal Trade Commission (FTC) and the U.S. Justice Department took a significant step toward encouraging the formation of physician networks and joint ventures. In an effort to promote competition and efficiencies in the health care market, these agencies revised their antitrust enforcement policies regarding physician networks, which are defined as a physician-controlled venture in which the network’s physician collectively agree on prices or price-related terms and jointly market their services.

Robert Pitofsy, the chairman of the FTC, recently said that as health care markets undergo rapid change, federal antitrust officials must assure consumers they will receive the benefits of new innovative arrangements, while continuing to be protected from anticompetitive activity.
The revised guidelines should make it easier for physicians to compete with health maintenance organizations and insurance companies for control of the healthcare dollar.


‘Physicians may now band together and agree on pricing of their services without having to engage in financial risk sharing.’

Physicians may now band together and agree on pricing of their services without having to engage in financial risk sharing. The new guidelines will permit arrangements in which physicians agree upon price, if the overall arrangement is likely to benefit customers by producing significant efficiencies and the agreement on prices is reasonably necessary to produce such benefits.
U.S. antitrust law has long stated that an agreement among competitors to fix prices is so anti-competitive that it should be automatically illegal, regardless of the purpose of the agreement. In previous policy statements, the FTC and Justice Department established “antitrust safety zones” for certain physician networks. The safety zones describe a set of provider arrangements that the FTC and the Justice Department are unlikely to challenge under antitrust laws.
The agencies historically viewed financial risk sharing as an essential element of a network agreeing on prices because of the incentives it provides for the network physicians to cooperate in controlling costs and improving quality. Examples of substantial financial risk sharing include:

  • Agreement by the network to provide services at a flat per-person (capitated) rate.
  • Agreement to provide services for a predetermined percentage of premium or revenue from a health plan.
  • Use of financial incentives, such as withholds, bonuses or penalties, for physician participants to achieve cost containment goals.
  • Agreement to provide a course of treatment by physicians in different specialties for a fixed, predetermined payment.
The FTC and Justice Department recognized that joint ventures that fall outside the antitrust safety zones do not necessarily raise significant antitrust concerns. According to the new guidelines, these agencies will apply rule of reason analysis in their antitrust review of such joint ventures. Rule of reason analysis examines whether a particular network arrangement may have anticompetitive effects that outweigh any procompetitive benefits. In its rule of reason analysis, the agencies will:

  • Define the relevant market.
  • Evaluate the competitive effects of the venture.
  • Evaluate the impact of procompetitive efficiencies.
  • Evaluate collateral agreements.

‘The FTC and Justice Department will allow a non-risk sharing network to exist if it is likely to produce significant benefits for customers and if the price agreements are needed to realize those benefits.’

New Physician Groups Not Sharing Financial Risk
Under the new guidelines, a physician network that fixes its prices but does not share substantial financial risk will not be considered automatically illegal. To be legal, however, it must produce significant benefit to consumers through increased efficiency and improved service. The FTC and Justice Department will allow a non-risk sharing network to exist if it is likely to produce significant benefits for customers and if the price agreements are needed to realize those benefits.
A non-risk sharing network must demonstrate a level of integration likely to produce significant efficiencies. FTC guidelines indicate such integration can be shown by:

  • Using cost control and quality review programs.
  • Hiring physicians likely to further the network’s efficiency.
  • Committing personnel and capital for development of a more efficient network.
In its new guidelines, the FTC offered examples of non-risk sharing joint ventures to illustrate arrangements which are not in a safety zone, but are unlikely to cause antitrust concern.
The first example is a highly integrated individual practice association (IPA). The IPA develops standards and protocols to govern treatment and use of services; makes a substantial investment in information systems to gather, measure and monitor physician and network performance and establishes procedures to ensure that physicians adhere to network standards and protocols and are subject to remedial action when they do not. Under the new guidelines, this IPA is unlikely to be challenged on antitrust grounds.
A second example is a physician hospital organization (PHO). The PHO develops standards and protocols to govern treatment and use of services. Information systems measure and monitor the performance of the hospital and the physicians, and procedures are established to modify hospital and physician activity to assure adherence to network standards and protocol. The high degree of cooperation among participants produces greater efficiency. The agencies would not challenge this PHO under the rule of reason analysis.
The guidelines offer examples of other physician network joint ventures that would not ordinarily be challenged under antitrust law. They include:

  • IPA with both capitated and fee-for-service contracts.
  • PHO providing services on a per case basis.
  • PHO encompassing all the physicians in a small, rural county.
  • PHO that does not use horizontal agreements on price.
The new guidelines provide one example of a non-risk sharing network formed merely as a vehicle for physicians to fix prices and negotiate with health plans and other healthcare consumers. This network is formed for the primary purpose of increasing the bargaining power of its member physicians, with no real effort to integrate the physicians, financially or otherwise. Under the new guidelines, this network is likely to be challenged as illegal.
In addition to these guidelines regarding the nature of the cooperation within a network, the Justice Department and FTC also examine the percentage of physicians covered by the network in a given market and in a given specialty. While there is no hard and fast rule regarding what constitutes an uncompetitive arrangement, 20 percent seems to be the threshold at which the agencies begin to scrutinize more carefully.
Intended Effect of New Guidelines
The FTC and Justice Department hope that these new relaxed guidelines will result in the formation of non-risk sharing networks that compete with health plans and other provider networks. Antitrust regulators want to improve service to customers and lower overall costs through increased competition. Federal Trade Commissioner Christine A. Varney commended the new guidelines which “reflect greater receptiveness to new and innovative forms of provider arrangements that do not necessarily involve financial risk sharing.”
But since the trend is toward increased risk sharing among all providers, these revised guidelines may fall short of achieving the goals of the FTC and the Justice Department.
Physicians who are considering forming a physician network joint venture and are unsure of the legality of the network under the antitrust laws can use the Department of Justice’s expedited business review procedure or the FTC’s advisory opinion procedure. These agencies will respond to a business review or advisory opinion request within 90 days of receiving the necessary information.David J. Lowe, Esq., is a director of Cohen & Grigsby, a national law firm headquartered in Pittsburgh.

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