The 1996 Justice Department/FTC Statements On Physician Joint Ventures And Multi

The 1996 Justice Department/FTC statements suggest that under some market conditions, competitors who are members of a provider organisation may fix prices if the agreement on price is reasonably necessary and subordinate to potential efficiencies created by the group. The author discusses to what extent agencies' statements protect an agreement on price among competitors from being challenged under the antitrust laws.

On August 28, 1996, the Department of Justice and the FTC revised joint "Statements of Antitrust Enforcement Policy in Health Care." The revised statements were issued in response to, and after consideration of, expressions of concern from health care industry participants that the previous statements, which were published in 1994, did not give adequate guidance to providers seeking to form joint ventures. The focus of concern was that in some cases, providers wanted to form joint ventures to make the delivery of health care services more efficient but did not want to share the financial risk of the ventures.

In the 1996 statements, the agencies hypothesize that a procompetitive joint venture is possible in this industry, even short of financial integration, but one can see that this is a learning process.

Background

Simplistically cutting through more than a century of antitrust jurisprudence, the Sherman Act prohibits contracts, combinations, and conspiracies in restraint of trade. All business contracts restrain trade to some degree, so the judiciary early on explained that the Sherman Act only prohibits unreasonable restraints of trade. Some agreements, like agreements by competitors on the price at which they sell competing products or services, are so likely to be anticompetitive that they are conclusively presumed to be unlawful.

In other words, an agreement on a price term is illegal without the need for providing an anticompetitive effect. These agreements are illegal per se, and the Sherman Act makes them felonies, punishable in some cases by prison sentences and hundreds of thousands of dollars in fines. In other cases, where the conduct is not so clearly egregious, a rule of reason applies. A court will weigh the anticompetitive effects against the procompetitive aspects of particular conduct, and determine whether, on balance, the conduct will promote competition. This analysis almost always requires an examination of the markets in which the parties operate and the shares that those parties hold in the defined markets. If the parties have insignificant marketshares, they are unlikely to have the power to control consumer prices or restrict supply of the relevant product or service (which is another way of pushing prices up).

With regard to all types of anticompetitive conduct, private parties injured in their business or property by such conduct may sue for triple the damages suffered, plus costs and attorneys' fees. This type of litigation can by very costly, much more so to defendants than plaintiffs, because of potential liability and the attorneys' fee provision.

Significance of the Statements

From time to time, the Justice Department and the FTC issue guidelines, like the statements, to help participants in a market stay out of court. They also will provide advisory opinions if requested to do so, called Business Review Letters in the case of the Justice Department, about the enforcement intentions of the agencies with regard to specific planned conduct.

Although the agencies are experts on antitrust policy, they do not make law. When a judge decides a case involving a physician joint venture (or instructs a jury on the law), he or she is bound to follow previous judicial interpretations of the law, not the statements. Antitrust issues are very fact-specific. Although the statements give general guidance, it is impossible to anticipate every real-life scenario that may develop. A third point to consider is that the statements do not speak in absolutes. An arrangement that on its face meets the criteria of a safety zone, for example, will not be challenged "absent extraordinary circumstances". Never and always are not part of the lexicon.

What Has Changed?

Only two of nine statements dealing with physician network joint ventures (statement 8) and multiprovider networks (statement 9), have changed at all from the prior statements issued in 1994. (The 7 statements, which have not been revised since 1994 relate to hospital mergers, hospital joint ventures involving high technology or other extensive health care equipment, hospital joint ventures involving specialised clinical or other expensive health care services, providers' collective provision or non-fee related information to purchasers of health care services, providers' collective provision of fee-related information to purchasers of health care services, provider participation in exchanges of price and cost information, and joint purchasing arrangements among health care providers.) Physician network joint ventures, for purposes of statement 8, are physician-controlled groups wherein physicians (who might otherwise compete) agree on price or price-related terms and jointly market their services. Physician joint networks are but one type of multiprovider organization; the concepts applicable to physician networks for the most part are also applicable to multiprovider networks. The most significant change in both statements, suggesting that competitors may fix prices even absent a financially integrated joint venture, may create more problems than it solves.

The Analytical Structure

The 1994 statement on physician joint ventures created safety zones for exclusive joint ventures (meaning that the participants cannot or, in practice, do not independently contract with other groups or health plans) and nonexclusive joint ventures (meaning that the participants are available to or actually do affiliate with other networks or contract independently) among physicians who otherwise would compete. The agencies ordinarily will not challenge a joint venture where the participants share substantial financial risk and constitute 29% or less of the physicians in each physician speciality with active hospital staff privileges in a relevant geographic market (in the case of an exclusive joint venture), or 30% or less of the physicians in each physician speciality with active hospital staff privileges who practice in the relevant geographic market (in the case of a nonexclusive joint venture).


The substantive criteria for safety zones have not changed in the new statements, despite lobbying by the American Medical Association to increase the percentage of doctors in a speciality that could belong to a joint venture and still be within a safety zone. Some of the reasons for not enlarging the safety zones are that it would not stimulate innovation in joint ventures, and that rule of reason antitrust analysis for arrangements falling outside of the safety zones is a more appropriate way to asses anticompetitive potential.

The safety zones set the boundaries for a combinations that the agencies presume are reasonable, because the participants lack the combined market power to engage in anticompetitive conduct. As the agencies take pains to emphasise in the 1996 statements, many physicians joint ventures that fall outside of the safety zones are lawful, and many have been approved by the agencies after a rule of reason review - weighing the potential anticompetitive effects against the procompetitive benefits of the venture. For example, the Justice Department stated earlier this year that it did not intend to challenge Oklahoma Physicians Network (OPN), a financially integrated network of Oklahoma doctors, even though in some rural areas, OPN had among its members 100% of the doctors a particular speciality.

Likewise, the Justice Department stated that it did not intend to challenge a network of Arizona surgeons specializing in colon and rectal surgery although seven of the nine specialists in one county and seven of the 10 specialists in the state were in the group. The Department decided that in the light of the capitation and risk-withhold procedures adopted by the group; and the competition available from nonspecialists capable of doing colon/rectal surgery, the group was, on balance, not an anticompetitive threat. A third example is Dermnet, a physician joint venture consisting of dermatologists, plastic surgeons, and dermapathologists, which included 43.5% of the board-certified dermatologists, and 11 of the 15 dermapathologists in three neighbouring Florida counties. The Justice Department stated that it did not intend to challenge this venture, explaining that the physicians were free to contract, and did contract, with competing networks and providers, and that buyers were in favour of dealing with one network representative and appreciated the cost-savings and quality control offered by networks. The buyers did not believe that their ability to contract with dermatologists would be hampered by Dermnet. As to dermapathologists, the Department concluded that users of their service would go beyond the three-county area for a dermapathologist. As in all Business Review letters that it issues, the Department was careful to state that if the facts change, so may the opinion.

In contrast with these examples, the Justice Department has stated its intention to challenge joint ventures after a rule of reason examination in situations where the combined market power of the participants made it likely that the joint venture would be able to charge supracompetitive rates.

The traditional rule of reason analysis used by the agencies under the 1994 statements will continue to be used under the 1996 statements. The agencies will undertake a fact-specific analysis of probable effects on competition, such as whether a particular speciality constitutes a market; how far patients will travel for a particular medical service; how many physicians within a particular speciality practice are in one geographic area; whether the arrangement is exclusive or nonexclusive; what safeguards exist against agreements on out-of-network pricing; and the nature and extent of the cost savings that the venture is likely to generate. If the past two years are any indication, joint ventures that are financially integrated, nonexclusive, and in a market where there is more than nominal competition, will, for the most part, not be the subject of enforcement action by the agencies.

The New Development

In the 1994 statements the agencies made clear that in order to avoid condemnation as a per se illegal price-fixing agreement, a physician joint venture had to be financially integrated, that is, the participants had to share substantial financial risk. They gave two noninclusive examples of financial integration: (1) capitation and (2) risk withholds, which would bring a price-fixing joint venture out of the per se illegal category and into the rule of reason group.

In the 1996 statements, the agencies provide a few more examples of financial integration, such as providers assuming the risk of meeting certain cost-containment targets, an agreement to provide treatment in return for a pre-determined share of revenues, and agreements to offer a package of services for a fixed, predetermined charge despite the potential for variability in a patient's course of treatment. However, in the 1996 statements, the agencies also state that they are willing to apply a rule of reason to groups of competitors who agree on the price at which they will sell their services, even absent financial integration, so long as the agreement on price is necessary to achieve the venture's procompetitive benefits. This is the fruit of interaction between the agencies and the industry, a significant change from the 1994 statements, and a departure from the Supreme Court's rulings on how price-fixing among competitors should be treated.

The Maricopa Case and Clinical Integration

In 1982, the US Supreme Court ruled that the conduct of a physician joint venture, which was not financially integrated but established a maximum fee schedule for its participants, was per se illegal under the antitrust laws. The defendants in the case, two non-profit corporations composed of physicians, performed three principal activities. The corporations set maximum fees that their members could accept from approved insurance plans, they reviewed the medical necessity and appropriateness if treatment rendered by their members, and they were authorised to draw checks on the insurance companies to pay participating doctors.

Four of the nine justices, forming the plurality that delivered the opinion of the Court, refused to examine the reasonableness or unreasonableness of the conduct or the fees established. Nor were they willing to examine any of the claimed efficiencies or cost-savings resulting from defendants' operations. Consistent with precedent, the agreement was conclusively presumed to be anticompetitive, regardless of purpose and effect, regardless of the fact that it set price ceilings (rather than price floors), regardless of any procompetitive justifications, and regardless of the fact that the defendants were organisations of professionals. The Court was careful to distinguish "partnerships or other joint arrangements in which persons who would otherwise be competitors pool their capital and share the risks of loss as well as the opportunities for profit." Three dissenting justices (two other justices did not participate in the case) argued that because the services provided by the defendants apparently made possible a new product by achieving efficiencies that could not otherwise be realized, the arrangements should be analysed under a new rule of reason.

The Agencies' View of Clinical Integration

The agencies' and the FTC's willingness to accord nonfinancially integrated physician joint ventures rule of reason treatment is illustrated by a hypothetical physician joint venture involving clinical integration. In the agencies' example, an IPA is established by a group of physicians in a town where there are a number of HMOs and managed care plans. Physicians often participate in more than one of the plans. The IPA will "implement systems to establish goals relating to" performance and utilisation of services by individual participants and by the network in the aggregate, and will modify individual practices where necessary. The IPA will also establish protocols and standards for treatment and engage in peer review with respect to those standards. Capital will have to be invested (in the example, it is not clear by whom) to purchase the information systems necessary to gather and distribute data, and the payers will receive data relating to the performance of the network. The physicians will have to devote time to establishing treatment standards and protocols. An agent will be retained to develop a fee schedule for the participating doctors and to contract with third party payers.

The agencies would evaluate the IPA under a rule of reason, because the price agreement, "under these circumstances," is subordinate to and reasonably necessary to achieve the efficiencies planned by the network. Moreover, the agencies would not challenge the IPA as anticompetitive after a rule of reason analysis, largely because the IPA is nonexclusive, and because there is competition in the market that would keep the IPA physicians from raising prices above competitive levels. The agencies do not explain why the agreement on price is reasonably necessary to achieve the efficiency goals of the IPA. In fact, the IPA sounds much like a hospital without the physical plant. Doctors who admit patients to a hospital benefit from many of the same efficiencies but do not fix prices. Also puzzling is the agencies' specific refusal to consider justifying the IPA as an organization offering what might be a new product, a concept previously embraced by the Supreme Court, and their willingness to justify it solely on the basis of efficiencies - a concept repeatedly rejected by the Supreme Court in Maricopa and other cases.

What's a Multiprovider Organization To Do?

The short answer is be careful and seek guidance. The agencies have offered examples of two "clinically integrated" combinations, one a physician joint venture and one a multiprovider network, that the agencies would not challenge because any agreement on price was reasonably necessary to achieve the efficiencies to be generated. A nonfinancially integrated joint venture or multiprovider network should have two concerns with the agencies' position. First, the example are examples only. Real life is very fact specific, and real-life combinations are likely to differ from the agencies' examples; in small but possibly outcome-determinative ways. The agencies make plain in their third physician joint venture example and their fourth multiprovider network example that agreements on price among nonfinancially integrated competitors for the purpose of increasing bargaining power with managed care plans, and without the likelihood of achieving substantial efficiencies, will be treated as per se illegal price-fixing agreements. This will be true, regardless of whether the members jointly finance the operations of the group, and regardless of whether the price-fixing objectives of the group are achieved indirectly by hiring an agent.

Second, a statement that the agencies do not intend to challenge a particular arrangement is comforting, because it comes from the most likely source of challenge. Yet, the Department of Justice and the FTC are not the only potential plaintiffs. Moreover, although the statements may reflect what the law should be, the law is not there yet. A court considering an attack on a joint venture or multiprovider network by, for example, a state or a private plaintiff, would still be bound by judicial precedent, regardless of how persuasive the court found the statements to be.

The agencies have spent considerable time with participants in the health care industry in the course of developing the statements, and most likely have studied the operations of the industry. The result of their investigation to date is that there are procompetitive combinations that the agencies will not challenge if an agreement on price is subordinate and reasonably necessary to achieving the efficiencies planned by the venture. Their position may be the right one, but physician groups and multiprovider organisations would be well advised to proceed with caution.

Ms Hoffman is a member of Coudert Brothers and specialises in antitrust counselling and litigation. She practices in the law firm's New York City office.

Correspondence: Elinor R Hoffman Esq, Coudert Brothers, 1114 Avenue of the Americas, New York, New York 10036; Tel: + 212 626 4400.

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