United States: Antitrust Advisory: The Full FTC Affirms North Texas Specialty Physicians-Provides First Agency Guidance on Messenger Models

Originally published December 29 2005

In a unanimous opinion authored by outgoing Commissioner Thomas B. Leary, the full Federal Trade Commission (FTC) affirmed the November 2004 opinion by an Administrative Law Judge (ALJ) that North Texas Specialty Physicians (NTSP) illegally fixed prices in its negotiations with payors.¹ The FTC found that NTSP’s actions exceeded what is permissible in the legal implementation of a messenger model. This is the first guidance the agency has given healthcare providers in the area of messenger models. To date, the only other pronouncements on the topic have been the adoption of non-binding Healthcare Policy statements in 1996 and several dozen staff enforcement consents brought through the years since that date. The FTC’s focus on the parameters of a legal messenger model is the most important element of the opinion for the healthcare field.

In his initial opinion, the ALJ found that NTSP, a network of competing independent physicians and physician groups in Fort Worth, Texas, with approximately 480 members at the time of the April 2004 administrative trial, had entered into agreements with its member physicians which allowed NTSP to negotiate on behalf of its members. NTSP was empowered by its members to receive all payor offers and the right of first negotiations with all payors. The NTSP Board also established minimum rates by polling members and made determinations about whether to "messenger" non-risk contracts to members based on the established minimums. The ALJ found that these activities allowed NTSP to demand higher prices from payors, and he ordered NTSP to cease and desist all negotiations on behalf of members as well as any information exchanges among physicians about acceptable contract terms.

The FTC began its analysis by acknowledging that Arizona v. Maricopa County Medical Society² provides the basis for outright "per se" condemnation of NTSP’s conduct. But the FTC declined to apply the per se label. Post-Maricopa, it reasoned, the Supreme Court has urged caution in using the per se label to assess conduct in a professional setting where, as stated in FTC v. In. Fed. of Dentists, "the economic impact…is not immediately obvious."³ Because the FTC now has a better understanding of the potential integration efficiencies of physician networks and wants to encourage providers to engage in efficiency-enhancing collaborative activity, it reasoned that a summary application of the per se standard would be inappropriate and only serve to chill such initiatives.

The FTC instead turned to the "inherently suspect" standard first articulated in its opinion in the Polygram case, affirmed by the United States Court of Appeals for the District of Columbia Circuit.⁴ Under Polygram, a defendant can avoid summary condemnation of a suspect practice by offering justifications that are both cognizable under the antitrust laws and facially plausible. Cognizable justifications ordinarily explain how specific restrictions enable the defendants to increase output or improve product quality, service, or innovation. A justification is facially plausible if it cannot be rejected without extensive factual inquiry, but the defendant must do more than assert the procompetitive nature of the justification—the defendant must articulate the specific link between the challenged restraint and the purported justification to merit a more searching inquiry into whether the restraint may advance procompetitive goals. If a defendant offers cognizable and facially plausible justifications, the burden is then on the plaintiff to make a more detailed showing that the restraints at issue are likely to harm competition.

The Commission examined NTSP’s suspect behavior by looking first at the annual polls NTSP conducted of its physicians and then used to determine minimum reimbursement rates in negotiations with payors. The polling form asked the physicians for the minimum price that they would accept for the provision of medical services in a non-risk contract. NTSP then calculated the minimum acceptable fees identified by physicians to establish its minimum non-risk contract prices and reported these minimums to its participating physicians.

The FTC found that the use of a poll facilitated a price fixing agreement among its competing physician members. NTSP’s polling results essentially set a minimum fee schedule that tended to increase prices overall. In disclosing the results to physicians, the FTC considered that the poll influenced the individual decisions of all NTSP physicians regardless of whether they had actually responded to it. NTSP also made the existence of the minimum fee schedule clear to payors and informed payors that NTSP would not enter into or forward any offers that were below the minimums.

The FTC then looked to the membership agreement (the PPA) that NTSP member physicians entered into. Under the PPA, NTSP was supposed to deliver payor price proposals for non-risk contracts to its physicians. In practice, the PPA granted NTSP the right to receive all payor offers and imposed the duty to forward payor offers to NTSP. The physicians agreed that they would refrain from pursuing offers from a payor until notified by NTSP that it was permanently discontinuing negotiations with the payor.

The FTC found that the PPA rendered NTSP the sole bargaining agent of NTSP competing physicians and thus facilitated price fixing among NTSP physicians. NTSP rejected and did not deliver any non-risk contract that fell below its minimum reimbursement schedule. The terms of the PPA and the manner in which NTSP utilized them meant that, in order for payors to assemble a marketable network of physicians in the Fort Worth area, they had little choice but to submit to the collective bargaining of NTSP. The powers of attorney granted to NTSP by its members whereby NTSP was appointed their sole bargaining agent was just another way for NTSP to solidify its power as a bargaining agent and thus facilitate its price fixing.

Finally, the FTC examined NTSP’s use of its agent powers to terminate its members’ participation in a health plan or refusal to deal with a payor because NTSP determined that the price paid by the payor for a non-risk contract was inadequate. The FTC found that NTSP’s refusals to deal were the collective action of all its independent members and motivated solely by price. Through its refusals to deal, its position as sole bargaining agent, and its use of polling, NTSP was able to collectively set prices and present its physicians as a unified and strong force within Fort Worth. These practices reduced the risk that payors would be able to contract around NTSP and thereby enhanced NTSP’s bargaining power over price.

The FTC turned to the justifications offered by NTSP, and found that none met the cognizable and facially plausible Polygram test. NTSP asserted that its poll and other efforts to "limit" NTSP’s involvement to certain non-risk contracts were justified because they would help NTSP to ensure the spillover of the efficient treatment patterns established in its one risk contract. The FTC rejected this argument because, in the absence of a viable explanation from NTSP regarding the actual realization of spillover efficiencies, it found that the poll and other initiatives were designed for another purpose. NTSP also suggested that its polling and other practices had procompetitive effects on their own. For example, NTSP argued that the PPA increased NTSP’s contracting opportunities in the marketplace by informing NTSP of new contract opportunities and that disclosure to physicians that NTSP would not participate in a particular payor offer alerted physicians that they needed to find other contracting avenues with payors. The FTC rejected these arguments, noting that although an agreement to fix prices may well result in cost savings, such savings cannot provide a justification under the antitrust laws.

Under the FTC’s Order, NTSP is prohibited from participating in or implementing any agreement among any physicians regarding negotiations with payors, refusing to deal with payors, or agreeing not to deal individually with any payor. The Order also prevents NTSP from exchanging information among physicians regarding willingness to deal with a payor or the terms on which the physician is willing to deal with a payor. Many of the elements in the Order — those prohibiting refusals to deal, agreements not to deal individually with any payor, and the exchange of information regarding willingness to deal with a payor — were added by the full FTC to a more limited order issued by the ALJ in order to catch more potentially illegal behavior on the part of NTSP. The FTC Order did, however, echo the concept outlined by the ALJ that an agreement or conduct by NTSP reasonably necessary to participate in a qualified risk-sharing joint arrangement or a qualified clinically-integrated joint arrangement was expressly permitted.

In its opinion, the FTC recognized that, properly used, a messenger model is a legitimate arrangement designed to reduce transaction costs associated with negotiation of contracts between providers and payors. A physician network can use the agent in a messenger model to convey to payors information obtained individually from the providers about the prices or price-related terms that the providers are willing to accept, but the agent does not negotiate on behalf of the providers. The agent may convey to the providers all contract offers made by purchasers, and each provider then makes an independent, unilateral decision to accept or reject the contract offers. Alternatively, the agent may receive authority from individual providers to accept contract offers that meet certain criteria as long as the agent does not negotiate on their behalf. The agent can also assist providers to understand the contracts offered, by supplying objective or empirical information about the terms of an offer. For example, the agent may provide a comparison of the offered terms with other contracts agreed to by network participants, but it would be dangerous for an agent to express an opinion on the terms offered.

The FTC noted that it is illegal to use the messenger model in a way that creates or facilitates collective decisions on prices or price-related terms. Although each case must be examined individually, the FTC specified some examples of activities that can tip the balance toward illegality:

• agent coordination of provider responses to a particular proposal;

• dissemination to network providers of the views or intentions of other network providers about the proposal;

• expression of an opinion on the adequacy of price terms offered;

• collective negotiation of price terms for the providers; or

• decisions not to convey an offer if the agent believes the price terms are inadequate.

A fundamental question for the FTC’s analysis is whether the actions of the messenger are designed to facilitate communications and lower transaction costs for all parties or, instead, to enhance the bargaining power of the providers.

Not surprisingly, the FTC emphasized that financial and clinical integration are key to any agreement by competitors on price or price-related terms. If an IPA can establish that its joint negotiation of price is reasonably related to an efficiency-enhancing integration of the participants’ economic activity and is reasonably necessary to achieve the procompetitive benefits of that integration, then its price (or output) affecting activities may be lawful. The FTC pointed out that NTSP had no such integration. For example, NTSP had no disease management program or patient register that would improve health care quality for patients with specific, long-term conditions. NTSP had no data for patients under its fee-for-service contracts. And NTSP’s hospital utilization management program did not apply to patients under its non-risk contracts. Furthermore, NTSP did not require adherence to its clinical guidelines and protocols.

Yet, even without clinical or financial integration, the FTC noted that there were potentially lawful ways for an association like NTSP to have engaged in the challenged activity. For example, NTSP could have lawfully:

• polled its members on future fees in order to give payors a sense of the fee levels that would be acceptable to a majority of NTSP physicians, provided that
  
  — the results of the poll were not communicated back to the physicians in any manner, to avoid influencing their behavior;
  
  — all payor offers were messengered to the physicians, regardless of how many physicians are deemed likely to accept the offer based on the poll results; and
  
  — NTSP did not use the polling results to negotiate price with payors.

• charged an administrative fee to payors to compensate for the burden of messengering contracts that were unlikely to be accepted. For example, if a contract contained rates that were below the rate a threshold percentage of physicians were likely to consider acceptable based on the polling data, NTSP could have imposed a reasonable transmittal fee (to reimburse the association for an incremental burden, not to signal disapproval). If a payor refused to pay the fee in these situations, NTSP could legally have refused to messenger the contract.

The FTC noted that these modified practices would be justified not on the ground that they contribute to efficiency of medical practice like clinical or financial integration, but rather because they contribute to the efficiency of the contract negotiation process itself. Since they are not designed to enhance the bargaining power of the physicians, they are not suspect in the first place.

The full FTC opinion provides the first guidance from the antitrust agencies on the ways in which a messenger model may legally function. NTSP, or any other non-clinically or financially integrated IPA, could lawfully act as a messenger by choosing to:

• messenger all payor offers;

• refrain from any activity that amounts to influence over physicians, negotiations on their behalf and coercion of payors;

• review and comment on non-economic terms of a contract;

• utilize powers of attorney or agency agreements in a manner that does not facilitate a price-fixing agreement. For example, a power of attorney could legally authorize NTSP to enter a contract on behalf of a physician when a physician’s stated price minimum and other terms are met, so long as NTSP does not attempt to influence those key terms, or use powers of attorney to negotiate with a payor; or

• use current price information provided by physicians for a purpose that is unrelated to the actual establishment of prices. For example, NTSP physicians could agree collectively through NTSP to jointly adopt an electronic billing system that would permit them to run their offices more efficiently. If there are sufficient safeguards to shield the billing rates of individual physicians, the practice would not be suspect.

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