United States: The Future Of Provider Networks

Recent actions of the Federal Trade Commission have got healthcare provider networks scratching their heads. In the last sixteen months, the FTC has filed more complaints and entered into more consent orders than it had in the previous eight years since providing its initial guidance on provider networks. Each of the complaints targets the manner in which these networks operated under the "messenger" model. If the FTC was seeking to send a message, it has been sent loud and clear.

At the outset, it is important to understand the Sherman Act and its prohibitions. Section 1 of the Sherman Act makes unlawful any contract, combination or conspiracy in unreasonable restraint of trade. Specifically, any such contract, combination or conspiracy that "affects" price is a per se violation of Section 1. In other words, a price-fixing claim is not subject to any defenses or justifications. In order to prevail on a price-fixing claim, the FTC need prove only that two or more competitors reached agreement to raise, lower, stabilize or otherwise set the price of their services. The mere exchange of current price information among competitors raises significant risks under Section 1. The seriousness of a Section 1 violation is evidenced by its penalties. A violation of Section 1 is subject to civil lawsuits by private parties as well as the FTC or to criminal prosecution by the FTC. Violation of the Sherman Act is a felony punishable by up to 3 years in prison and criminal fines of up to $350,000 per violation for individuals and up to $10 million for corporations.

Until two years ago, the Antitrust Division of the Department of Justice and the FTC had overlapping antitrust enforcement jurisdiction over the healthcare industry. Together they issued a variety of healthcare guidelines and safety zones beginning in 1993 and culminating in the 1996 Statements of Antitrust Enforcement Policy in Health Care. Among other things, these safety zones addressed provider networks including a description of the "messenger model" arrangement for network contracting.

One thing was clear about provider networks as they cropped up in the late 1980’s: the FTC was concerned that the network structure would be used as a means to increase the bargaining strength of otherwise competing providers. The FTC recognized that provider networks could have considerable benefits to patients. The problem in the eyes of the FTC, however, was that if the network was entering into contracts with payors on behalf of its provider members on common terms, then the network and its members, usually consisting of physicians who competed against one another, were agreeing on the price they charged for their services.

There were three ways around this problem according to the FTC: (1) financial integration; (2) clinical integration; and (3) the "messenger" model. Financial integration provided that the otherwise competing provider members would have to share in the financial risk of the network. In other words, when acting within the network, the provider members should be incentivized to act in such a way as to replicate the conduct of a single unit or joint venture where the fortunes of all of the constituent members are tied to one another. Financial integration could be achieved through the formation of fixed rate or capitated payment contracts and the implementation of risk pools and utilization review. Clinical integration involved the imposition of a uniformity in clinical practice among providers. Generally, clinical integration is achieved through the adoption of standards and protocols covering the vast majority of procedures performed by the members, a regular process of evaluation of conformity to those standards, and either modification of practice patterns in conformity with those standards or expulsion of those members who do not conform. Finally, the messenger model was offered as an alternatives whereby an independent third-party would be employed to collect price information from members, thereby insulating that information form each member, and to contract on behalf of the members.

Clinical integration was the least appealing of the options, and until recently, had hardly been implemented at all. On the other hand, financial integration was employed early on by a number of networks across the country. Capitated and fixed fee contracts proved to be a disaster to many networks as historic information did not prove to be a reliable indicator of future costs and utilization. The clear preference, however, was for the "messenger" model. Networks employing the messenger model were developed across the country in the early to mid-1990s. Often the network was a creation of a for-profit entity in the messenger business. Other messenger networks were the creation of a provider, usually a hospital, or a group of physicians. For nearly a decade, these networks have operated in the same way: the messenger collects threshold fee information from the members, takes that information to create contract proposals, and negotiates contracts which the members could then opt out of. With the most recent FTC complaints, it is clear that this method of operation is no longer viable.

What conduct does and does not violate the Sherman Act is not always clear. Even when the specific conduct anticipated and the circumstances surrounding it are presented to the FTC in advance, the FTC, in its advisory opinions, will not make any definitive statements about the lawfulness of the anticipated conduct. Often, the decision about whether to proceed with potentially violative conduct is a matter of practically assessing the risks rather than a determination of whether the conduct is illegal. Finally, the level of attention paid to a particular industry or institutional conduct has varied over time, often determined by the priorities of each Presidential administration. Thus, the riskiness of activity often varied over time.

The signals the FTC and DOJ sent about networks employing a messenger model early on were equally obtuse. It certainly seemed that the FTC and DOJ were most interested in the manner in which price information was exchanged, the exclusivity of membership, the ability of members to opt out of contracts, and the use of the network as an exclusive contracting tool for its members. In guiding messengers through what they could and could not do, these issues took precedent; the FTC/DOJ’s warning that a messenger should not negotiate contracts on behalf of its members was either ignored or presumed to present little risk. That is clearly not the case anymore.

In April, the FTC issued a press release announcing that a doctors’ group, Obstetrics & Gynecology Medical Corp. of Napa Valley ("OGMC") consisting of virtually every obstetrician and gynecologist with active medical staff privileges at the two general acute care hospitals in Napa County, California, and its members had agreed to settle FTC charges that they engaged in anticompetitive conduct by facilitating and implementing agreements to fix fees and other terms of dealing with payors. The FTC alleged that OGMC had been formed by a group of physicians who had become dissatisfied with their previous multi-specialty IPA ("NPV"). NPV had been financially integrated; OGMC was not. OGMC was formed, according to the FTC, to promote the physicians’ collective economic interest by increasing their negotiating power with NVP. The FTC highlighted that members of OGMC refused to contract individually and agreed to boycott NVP in an attempt to coerce it to meet their fee demands. OGMC agreed to disband. In and of itself, the announcement did not raise concerns about provider network models. Only in hindsight does it seem clear that this was the beginning of the FTC’s increased scrutiny of providor networks.

One month later, in May 2002, the FTC announced two more settlements with provider networks. Both were located in the Denver area. The complaints were issued against two Denver-area physician organizations, Physicians Integrated Services of Denver ("PISD") and Aurora Associated Primary Care Physicians ("AAPCP") as well as their physician leaders and non-physician agents. The complaints alleged that PISD and AAPCP did not use a legitimate messenger model arrangement, but instead orchestrated boycotts and agreements among physicians to fix the prices and other terms they would accept from payors. The FTC pointed out that one of the big problems with each group was that the messenger for the networks negotiated fees and other terms and refused to convey to network members contract offers containing price and other terms that the messenger deemed to be deficient. This was the first complaint targeting messenger negotiations. Even still, it was easy to lose the significance of that complaint in the midst of the more traditional complaints about the network acting as exclusive contracting representative for the members or boycotting payors who did not raise reimbursement rates.

Three months later, in August 2002, the FTC’s new attention on the activities of the messenger could not have been made clearer. Complaints were announced against a Dallas-Fort Worth-area physicians group and eight Denver-area physician practice groups, as well as their non-physician agents, on the very same grounds as those filed three months earlier: the messengers were negotiating contacts with payors and refused to convey payor contract offers to the physician members of the messenger deemed the terms deficient. By now, networks all over the country had to begin re-assessing the risks associated with their messenger models.

Then this summer, first in June 2003, then during a two week span in July, and finally on September 9, the FTC filed complaints against another Dallas/Fort Worth non-profit physicians’ group, Southwest Physician Associates, a San Francisco medical group, Brown & Toland Medical Group, a St. Louis non-profit provider network, Washington University Physician Network, a non-profit physician-hospital network in northeast Maine, the Maine Health Alliance, and a large Georgia physician-hospital organization, South Georgia Health Partners. The FTC settled all but the claims against Brown & Toland¹ In each instance, the FTC alleges that the network, group or PHO were organized as vehicles through which competing providers could bargain collectively with people to obtain higher fees. Specifically, the FTC has emphasized that in addition to exclusive contracting requirements and refusals to deal except on certain terms, the messenger employed by the network or physician group or PHO engaged in collective price negotiation on behalf of the individual physician members and often refused to pass offers on to members if the messenger viewed the offer as "deficient."

The FTC has made it clear that if a messenger negotiates on behalf of a non-integrated network, the messenger is leveraging the collective power of the members to achieve contract terms that are more favorable than the members could have gotten on their own. Thus, messengers who do more than convey information back and forth between network members and payors are engaged in conduct that is extremely risky and is likely to be viewed as a price-fixing vehicle. The FTC has also made it clear through the sheer number of enforcement actions it has taken that networks that negotiated on behalf of their members cannot act comfortably unchanged. Without the ability to negotiate on behalf of its members, the business justification for a messenger model network becomes less clear. The costs of the financial integration model, the intrusiveness of the clinical integration model, and the lack of benefit of the messenger model are going to make the choice of network structure much more difficult than it used to be.