United States: Aggressive Antitrust Enforcement Activity Against Physician Groups Continues in 2005

Action: FTC continues to aggressively pursue provider groups that contract jointy.

Impact: Nonintegrated providers should carefully evaluate their approach to payor contracting.

Effective Date: Immediately.

The Federal Trade Commission (FTC) continues to take aggressive action to prevent non-integrated groups of physicians, using the so called "messengers model," from negotiating collectively with payors.

Although the FTC has stated that the use of a messenger model to facilitate negotiations does not necessarily amount to an antitrust violation, attempts to employ this approach to avoid the bar on collective contracting continues to receive substantial scrutiny and can result in antitrust enforcement actions. As recently as March 2, 2005, the FTC targeted a physician hospital organization (PHO) located in South Carolina (In Re Preferred Health Services). In its complaint, the FTC alleged that the PHO's collective negotiation of reimbursement rates on behalf of its physician members was nothing more than horizontal price fixing. The PHO quickly settled with the FTC and agreed to comply with a consent order that bars physician and hospital members from collectively negotiating with payors on behalf of its physician members. The FTC contends that "such collective negotiation is not only illegal but may lead to higher health costs and limited physician access."

Despite the FTC's warning against the use of messenger models to increase providers' market power through the collective efforts of competing providers, many networks continue to use the messenger model to engage in what the FTC considers to be unlawful activity. In response, the FTC has continued to file complaints against physician groups allegedly engaging in anti-competitive activity.

In evaluating whether the messenger model facilitates unlawful price fixing activity, the FTC determines whether the messenger:

• facilitates collective decision-making by competing providers, rather than independent, unilateral, decisions;

• coordinates the providers' responses to a particular proposal;

• informs providers of the views or intentions of other providers regarding a particular proposal;

• expresses its opinion on offered terms;

• generally negotiates for the providers; or

• decides whether or not to convey an offer based on its judgment concerning the attractiveness of prices or price related terms.

Three 2004 enforcement actions, In Re North Texas Specialty Physicians, In Re Piedmont Health Services, Inc., et al., and In Re White Sands Health Care System illustrate the FTC's vigorous prosecution of messenger models it considers unlawful.

In September of 2003, the FTC issued an administrative complaint against North Texas Specialty Physicians (NTSP), a non-for-profit Independent Physician Association, alleging that the group violated federal law by gathering information from its physician members and using the information to bolster their position with payors. NTSP operated in a manner that is typical of "messenger model."physician groups, and polled its participating physicians to determine the minimum fees that they would accept for medical services. However, after determining the average acceptable fee that physicians would charge for their services, NTSP would report this information to its physician members and use it as the minimum negotiating fee. NTSP would then negotiate more favorable price (and other similar terms) with payors, and refuse to deal with payors that would not agree to the minimum fee.

The FTC alleged that the exchange of price information among otherwise competing physicians reduced competition by enabling physicians to fix the price for their services. Therefore, even though NTSP did not actively prohibit physicians from independently negotiating with payor organizations, it provided physicians with valuable information from other competing physicians. Furthermore, the FTC alleged that NTSP used the information it received from its members as the cornerstone of its negotiating strategy. Although NTSP did not automatically bind all physicians to its negotiated prices, in some instances, NTSP sought a power of attorney or an agency relationship with physician members which was also viewed as illegal

In an unusual and somewhat surprising move, NTSP challenged the FTC's allegations and the case was heard by an FTC Administrative Law Judge ("ALJ"). NTSP denied that any collusion existed among its physician members. Specifically, it claimed that the physicians contracted independently with payors or through various entities; that NTSP had no authority to bind its physician members; and that any non-risk contracts in which NTSP decided to participate were messengered to the physicians who often refused to accept the contracts.

In a decision issued in November, 2004, the ALJ agreed with the FTC, but concluded that: (1) NTSP physician members were not bound by NTSP's actions nor were they discouraged from independently negotiating with insurers; (2) NTSP physician members were not provided with information regarding the actions of other physician participants; and (3) NTSP physician members did not achieve a higher price than the majority of physicians who participate in IPAs. Nevertheless, the ALJ determined that NTSP engaged in a conspiracy that had unreasonably restrained trade, and based its decision on NTSP's use of polling information to negotiate higher rates and more favorable terms for non-risk contracts than those initially offered. Furthermore, the ALJ concluded that the arrangement lacked pro-competitive benefits that could occur when physicians share financial risks or are clinically integrated.

As a remedy, the ALJ ordered NTSP to act in a manner that would not only eliminate current anti-competitive behavior, but would also prevent its reoccurrence. Despite the FTC's insistence that NTSP be prevented from negotiating or engaging in any agreement among and between physicians and payors, the ALJ determined that the FTC's proposed remedy was too broad. Instead, he ordered NTSP to cease collective price fixing in its negotiations of non-risk contracts. Additionally, NTSP is now required to notify the FTC sixty days before entering into any arrangement with any physician in which it will act as a messenger or as an agent on behalf of the physician. The order is consistent with FTC policy supporting physician groups that share financial risks or those that are financially integrated. NTSP has appealed the ALJ's decision.

The FTC charged Piedmont Health Alliance ("PHA") and ten individual physicians with fixing prices for the services of its physician members. PHA purported to serve as a messenger for its physician members in order to facilitate the contracting process with payors. According to the FTC, however, PHA's actions involved more than the simply transmitting information between an individual provider and a payor. Rather, PHA negotiated contract terms on behalf of its physician members in order to achieve favorable prices and similar terms. In order to negotiate the best possible price, members were required to sign agreements stating that they would accept PHA negotiated contracts. Additionally, the physicians agreed to require payors to refrain from contracting with non-PHA physicians or physician organizations in their area if the payor wished to negotiate with PHA physicians.

In 2001, PHA adopted a new contracting method referred to as a "modified messenger model." Under this "modified messenger model," PHA worked closely with physician members to formulate a minimum acceptable rate of payment. Specifically, physician members would report to PHA the minimum price terms each would accept. PHA assisted providers in setting their minimum price by providing practice specific information about the payor's current reimbursement rate. PHA used this information to negotiate favorable rates and other price related terms, such as periodic increases and fee schedule arrangements.

The FTC alleged that PHA had violated federal antitrust law by negotiating on behalf of members, working with physicians to formulate rates that would be acceptable, helping the physicians coordinate the rates, and preventing members from independently negotiating with payors. It alleged that PHA's actions had the effect of restraining trade and hindering competition by: (1) restraining price and competition among its members; (2) increasing the cost of health care for consumers; and (3) depriving individuals of the benefits of competition among physicians. The FTC also claimed there were no competitive benefits generated by the PHA organization or its operations.

Although PHA and its physician members initially denied the FTC's allegations, they eventually agreed to settle the price fixing charges. The FTC's proposed consent order seeks to eliminate current price fixing activity and prevent its reoccurrence in the future; and bans PHA and the ten named physicians from collectively negotiating with payors on behalf of physicians or otherwise attempting to fix prices. Additionally, PHA is prohibited from operating as a messenger or contracting agent for thirty months after the consent order became effective on October 5, 2004. The order does not, however, prevent PHA or its physicians from engaging in activity that fosters competition such as the operation of legitimate financially or clinically integrated joint arrangement among physicians.

In a similar enforcement action, the FTC charged White Sands Health Care System ("White Sands"), Alamogordo Physicians Cooperative Inc. ("Alamogordo"), and James R. Laurenza ("Laurenza") and his consulting company, Dacite Inc., with violations of antitrust law. Specifically, it alleged that White Sands had used the messenger model to engage in horizontal price fixing.

Alamogordo and Gerald Champion Regional Medical Center organized White Sands in 1996 to negotiate and enter into contracts with payors on behalf of its members. In order to reinforce the physicians' position, Alamogordo's Board of Directors developed "contracting guidelines" for Laurenza for use in his negotiations with payors. After Laurenza negotiated with the payors through his consulting company, Dacite, Inc., Alamogordo required Laurenza to report the results to its Board and required full support of the terms related to physician services before they were submitted to White Sand's Board of Directors for final approval. Members of White Sands were automatically bound by the negotiated terms and were prevented from negotiating individually with payors.

White Sands claimed that it operated a legitimate messenger model and merely facilitated the contracting process between physicians and payors. Alamorgordo and Laurenza, however, actively negotiated with payors based on collective terms and refused to deal with payors that would not agree to White Sands' terms. These coercive tactics proved highly successful when paired with White Sands' dominant market position.

White Sands eventually agreed to settle with the FTC and accepted terms to the order described in the Piedmont case. Specifically, the consent order prohibits White Sands from negotiating with, refusing to deal with and setting terms for dealing with payors on the collective behalf of providers. White Sands is required to notify the FTC before entering into any "messenger" arrangements with payors to negotiate a contract. As in Piedmont, the physician members are not prohibited from engaging in pro-competitive behavior such as qualified risk sharing agreements or qualified clinically integrated joint arrangements.

The FTC vows to continue its "vigorous prosecution of physician conduct that amounts to collective naked setting of prices without risk sharing or other integrated efficiencies" in 2005. While it acknowledges that messenger model arrangements are not illegal per se, any attempts by the messenger to negotiate with payors on behalf of a group of competing non-integrated physicians will be carefully scrutinized and could be challenged. Competing physicians who engage in these arrangements should take adequate steps to ensure that the messenger facilitates contract negotiations on an individual basis and does not use information to negotiate collective terms with payors.

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