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Physician messenger model under fire

By John W. Jones, Esq.

In an effort to increase their bargaining power in contract negotiations with health plans, physicians have organized physician networks, including preferred provider organizations (PPOs) and independent practice associations (IPAs). Although antitrust laws treat naked agreements among competing physicians that fix prices as per se illegal, whether certain conduct is permitted is not always clear. Recently, there has been a surge in Federal Trade Commission (FTC) enforcement actions with respect to physician networks and their use of a third party messenger in contract negotiations with health plans.

In May 2002, two Denver area physician groups agreed to settle with the FTC charges that the organizations and their members entered into agreements to fix fees and to refuse to deal with payers except on collectively agreed upon terms. The FTC accused two physician groups, its leaders and the messenger of orchestrating boycotts and agreements to fix prices and terms of agreements. Additionally, the complaints alleged that deficient contract offers were not relayed to the participants and that the physician leaders and the messenger advised members to terminate or threaten termination of their individual health plan agreements in an effort to pressure plans to offer new contracts with higher fees.

In August 2002, a proposed settlement involving eight Denver-area obstetrical and gynecological groups, along with their non-physician agent, was announced by the FTC. The FTC complaint alleged that the consultant or “messenger” refused to convey payer contract offers to the physicians if the terms were considered deficient, the physicians collectively demanded and received more advantageous fees and other terms than each of the physicians could have obtained individually, the consultant and physician groups convinced the physicians to terminate their relationships with other IPAs and practice management groups to enhance their bargaining strength, and the consultant advised the physicians to terminate, or threaten to terminate, their pre-existing individual contract with payers, pressuring payers to offer new contracts with higher prices.

In August 2002, the FTC announced a proposed settlement with a group of physicians in the Dallas-Fort Worth area. The FTC alleged that the messenger proposed and counter-proposed fee schedules and other terms. The FTC also alleged that the organization discouraged its physician members from unilaterally entering into agreements with health plans (instructing members that they could enhance their bargaining position by negotiating through the messenger).

Statements of Antitrust Enforcement Policy in Health Care

In 1996, the Department of Justice (DOJ) and FTC issued their revised Statements of Antitrust Enforcement Policy in Health Care (Statements). Essentially, the Statements outline how the agencies analyze certain health care antitrust issues. Statement 8, regarding physician network joint ventures, and Statement 9, concerning networks that include multi-specialty providers, are crucial in analyzing the antitrust implications of physician networks. Statement 9 provides that networks that are not substantially integrated can use a “messenger model” arrangement to facilitate their individual contract negotiations with health plans and avoid price fixing.

Statement 9 provides that activities of the messenger model may include:

• The messenger, not otherwise affiliated with the network, obtains from each participating physician a fee schedule or conversion factor that represents the minimum payment that the participating physician will accept from a payer. (The messenger is authorized to contract on the participating physicians’ behalf with payers offering prices at this level or higher.)

• The messenger conveys to the participating physician price offers that do not meet the authorized fee amount.

• For a specified period of time, the messenger may also be authorized to bind the participating physician to any contract offers with prices equal to, or better than, those in a contract that the participating physician has already approved.

• The messenger may also aggregate the information of various participants and develop a schedule that can be presented to a payer which shows the percentages of participating physicians in the network who have authorized contracts at various levels.

Importantly, the messenger neither negotiates pricing terms with the payer nor shares pricing information with the participating physician.

In February 2002, the FTC issued a favorable advisory opinion to MedSouth, Inc., a physician IPA located in Denver, Colorado, to clinically integrate partially its members and to enter into contracts for sale of its members’ services on a fee-for-service basis. The MedSouth opinion has been viewed as significant because it was the first time the FTC or DOJ approved a “clinically integrated” network. It also is a good example of how to properly utilize a third party messenger in contract negotiations with health plans.

Under MedSouth’s proposed program, the IPA would seek to negotiate price and other contract terms with payers on behalf of its physician members and would use a consultant to develop fee proposals for use in contract negotiations. The consultant would not disclose competitively sensitive information received from network physicians to other physicians in the network. Importantly, the IPA would be a non-exclusive network that would not preclude physicians from participating in other physician contracting organizations or from contracting with payers individually. Additionally, the physician members would not share pricing information with one another and would be prohibited from agreeing to collectively contract only through MedSouth. Finally, MedSouth would not state or suggest to payers that, unless the payer reaches agreement with the IPA, its physicians would not participate in the payer’s plan.

Examining the proposed program under the rule of reason, the FTC indicated that it had the potential to improve the quality and effectiveness of health care services delivered to patients and, therefore, to provide important benefits to consumers. The FTC concluded that it would not challenge implementation of the program if the physician members were, in fact, willing to deal individually on competitive terms with payers that did not wish to contract with the IPA and the number of physicians participating in the group would be reduced, as represented by MedSouth.

The recent enforcement actions provide valuable insight into the type of conduct of physician networks and their messengers that the DOJ and FTC view as anti-competitive. Accordingly, when implementing the messenger model, physician networks and their respective messengers should not:

• Have a fee schedule for the network or price ranges that a health plan must meet in order to contract with the network.

• Negotiate price or price-related terms with health plans.

• Allow the messenger to unilaterally accept or reject contract offers based on price or price-related terms or fail to messenger offers to the participating physicians.

• Restrict the participating physicians’ ability to individually negotiate or contract with health plans.

• Induce participating physicians to terminate or threaten to terminate their existing agreements with health plans.

• Implement a system under which the participating physicians mutually agree to standing offers that will be submitted to health plans or to offers that will be accepted by the participants.

Instead, physician networks and their messengers should strictly follow the parameters set forth in Statement 9 of the Statements of Antitrust Enforcement Policy in Health Care and the FTC’s and DOJ’s guidance in the MedSouth opinion. Failure to do so could result in significant liability to them.

John W. Jones, Esq., is a member of the Health Care Services Group at Pepper Hamilton LLP in Philadelphia.

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