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Third party messenger antitrust problems

By Daniel B. Vukmer, Esq.

On August 12, 1998, the United States Department of Justice (DOJ) and a host of other federal authorities brought suit against the Federation of Physicians and Dentists, Inc. The lawsuit claims that the Federation became a “hub of conspiracy” to fight reduced payment levels from Blue Cross and Blue Shield in Delaware. The crux of the case is that orthopedic surgeons allegedly joined forces with each other through the Federation to gain bargaining power and, in the process, violated federal antitrust law by “conspiring to restrain trade.” However, the government’s theory of the case is somewhat more complicated and warrants analysis as a prime example of how one should not collectively negotiate with payers.

The DOJ recognizes that some forms of physician collaboration are acceptable under antitrust law when negotiating with payers. However, the structures and processes of the permissible collaborations must be adhered to in practice and not just on paper. The Federation lawsuit alleges that the Federation physicians “cloaked” their illegal activity as being within the acceptable processes when, according to the complaint, the physicians had jointly predetermined their terms thus misusing an otherwise acceptable model.

If the government’s allegations are true, then the Federation case may become a classic example of “lawyering” the paperwork and then ignoring it. This lawsuit becomes significant not because it involves antitrust law and physicians but because it underscores the government’s intention to analyze the substance rather than the form of these transactions. It is another example of the vulnerability of circumvention schemes that appear to be legal “on paper” but may violate the law in practice.

As a general rule, competing physicians who are not “financially integrated” (the definition of which warrants an article in and of itself) may not agree on the fees that they will charge any particular payer, nor may they act in concert to affect payer rates (such as a boycott). According to the DOJ, such agreements constitute a “conspiracy in unreasonable restraint of interstate trade” in violation of the Sherman Act. The theory being that when competitors agree to work together, then competition is stifled thus restraining trade by affecting our competition-based economy and, ultimately, reducing consumer choice.

The classic violation is for two or more physician groups to meet and determine what fees they will charge so as to undercut other competition. However, a personal meeting is not required. The law may also prohibit, for example, two or more competing physician groups from using a third party to negotiate payer contracts on behalf of the collective groups. The resulting contracts with the payer would be the product of an agreement between the groups, via the third party negotiator, to fix the fees for that payer or to possibly boycott the payer’s product. This is essentially what the government alleges to have occurred in the Federation case.

However, a third party negotiator can be used by competing groups so long as the negotiator does not share financial information among the groups and is negotiating on behalf of each group separately. This is known as the “Messenger Model,” which qualifies for protection under antitrust law and, parenthetically, is what Federation claims that it was doing on behalf of its physicians.

A discussion of the Messenger Model was published as part of a joint statement by the DOJ and the Federal Trade Commission in 1996 and provides some level of guidance when structuring a network or other collaboration of health care providers. A thorough discussion of the Messenger Model, not considering the related nuances of antitrust law, would require many pages of print; however, this article will briefly address the Messenger Model as a means of avoiding antitrust violations because of its current popularity and its applicability to the Federation case.

Under a Messenger Model, a third party collects price and other offering terms from network members individually. The members do not know about the terms that other members have offered. The “messenger” conveys the information to purchasers who can then make contract offers to members through the messenger. Each member makes a unilateral decision to accept the contract conveyed by the messenger. So long as the members do not coordinate their actions, antitrust problems should not arise. The DOJ has explained that “the key issue in any messenger model arrangement is whether the arrangement creates or facilitates an agreement among competitors on prices or price-related terms.”

Messenger arrangements may take a number of forms. In the most simple, the messenger, who may be an employee of the network or an independent third party, merely receives offers from payers and “messengers” these to each network provider individually. Each provider makes a unilateral decision whether to accept or reject the contract. Permissible activities of a messenger also include acceptance of contract offers on behalf of a provider and explaining the contract offer to the providers by giving them objective or empirical information about the offer.

Another model is for the messenger to obtain a schedule of fees from each provider and a fee schedule from the payer. The messenger compares the providers’ schedules with the payer’s schedules and determines, on an individual provider basis, whether to enter into a contract based upon previous instructions of the provider. For example, a provider may authorize the messenger to enter into a contract if more than 80 percent of the payer’s CPT Code fees are equal to or greater than the provider’s corresponding fees.

Regardless of which model is used, the messenger is prohibited from providing an opinion on the terms of the offer and the messenger may not make an independent determination as to whether a contract offer should be presented to the providers based on the messenger’s assessment of the offer. The government has warned that arrangements may amount to a per se illegal price-fixing agreement if the messenger coordinates the providers’ responses, disseminates to network providers the views or intentions of other providers, or expresses an opinion on the terms offered.

Great care must be taken if fee schedules are to be used by the messenger. This is especially true if the fee schedule has been prepared by an outside party. Third party fee schedules sometimes arise when a network creates a fee schedule and delivers it to each provider in the network for their review and “approval.” The network, as messenger, would then take the fee schedule to the payers as an offer or to be used in negotiating a deal. This clearly raises concerns similar to the allegations in the Federation’s case, namely, that the providers are “cloaking” their concerted activity by making the negotiations appear to be within the messenger model when, in fact, the “approval” process was merely a rubber stamp used to circumvent antitrust law.

The fate of the Federation case is not clear but it provides an important lesson to those who are not prepared for the subtleties of antitrust law or who intend to circumvent the law through creative documents. With an increase in network participation and coincident fee reductions by payers, we will see a corresponding rise in antitrust investigations and litigation. Providers should seek counsel experienced in payer contracting and antitrust law before entering into a provider network or attempting to coordinate payer negotiations with other providers.

Daniel B. Vukmer, Esq., is an attorney with Houston Harbaugh, P.C. in Pittsburgh, specializing in corporate transactions and health care regulatory compliance.

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