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In the past decade, doctors and hospitals have explored different methods of consolidating their businesses through networks. Typically, providers have two competing goals: increasing their financial stability and their bargaining power with their payers, and preserving their operational independence. If providers retain significant operational independence, however, they are vulnerable to antitrust charges that their joint operations constitute a “contract, combination or conspiracy” in “restraint of trade,” in violation of � 1 of the Sherman Act. In particular, they are subject to charges of price fixing and a group boycott, each of which is a per se violation of � 1. Typically, the Antitrust Division of the Department of Justice (DOJ) and the Federal Trade Commission (FTC) have limited antitrust approval to networks of providers that share substantial financial risk. The core element of risk sharing is that the financial rewards of network business to each individual participant will depend on the performance of all providers in the network as a group. The antitrust agencies, however, have recently shown greater flexibility in developing standards for assessing networks, and providers may now have options other than risk sharing that will reduce the antitrust exposure of networks. Nevertheless, the agencies will challenge traditional collusive efforts to fix prices or to engage in group boycotts as classic violations of � 1. A network is a provider-controlled venture in which the network’s members generally agree, among other things, on price schedules and marketing strategies. A pricing agreement among competitors is classically condemned as price fixing, a per se violation of � 1 of the Sherman Act. However, the agencies have recognized that some networks still may benefit the patient/consumer. THE 1996 STATEMENTS In 1996, the agencies issued the Statements of Antitrust Enforcement in Health Care, available at www.ftc.gov/reports/hlth3s.htm. In these guidelines, the antitrust agencies set forth nine statements about their current enforcement policies regarding nine different business practices in the health community. The eighth statement sets forth the agencies’ analysis of physician networks. In general, the agencies announced that they will approve a network that is structured in a way that will promote the efficient delivery of quality health care normally guaranteed through competition. Traditionally, sharing of “substantial financial risk” among providers has been the only substitute for competition. Under a risk-sharing agreement, a group of providers accepts a per capita or other flat fee for all services required by an enrollee. With a fixed payment to the group, each individual provider’s income from the network depends on the performance of all other physicians in the group. Theoretically, the agencies reasoned, risk sharing would induce each provider both to furnish good care efficiently and to monitor and enforce the efficiencies of other providers. Practically, however, physicians have faced numerous problems in forming risk-sharing networks. In particular, physicians disagreed over the methods the group should use to assess individual physicians. In addition, payers set per capita payments that were insufficient to compensate the network for all the work expected of the individual physicians. This compounded the network’s problems in developing formulas for distributing its revenues among the participating physicians. The 1996 statements also state that a group of providers might allay antitrust concerns through operational integration and peer review. The agencies suggested that this type of network would have to monitor and control utilization and costs; assure the quality of care; choose, reward and sanction physicians based on these standards; and require the doctors to invest significant time and money to these ends. Until now, the agencies had not approved this type of network. THE MEDSOUTH EXPERIMENT In February 2002, the FTC issued an advisory opinion tentatively approving a network in Denver proposed by MedSouth Inc. based on partial operational integration. SeeLetter from Jeffrey W. Brennan, assistant director, Health Care Services and Products Division, Bureau of Competition, Federal Trade Commission, dated Feb. 19, 2002, available at www.ftc.gov/bc/adops/medsouth.htm. Under this plan, each participating physician maintained certain financial independence. As proposed, the MedSouth network of doctors would: Develop computerized systems for the exchange of patient data among the participating doctors; Establish benchmarks and common standards of care; and Terminate the participation of any doctor who did not meet the group’s standards. Ancillary to this system, each physician would independently bill for his or her services based on a single fee schedule the network negotiated with payers. The FTC first concluded that the MedSouth network was not a per se violation of � 1, even though the physicians in the group would be agreeing to a single price schedule. The FTC reasoned that the network and its system of benchmarks and common standards of care could induce each physician to deliver good services efficiently despite the absence of either competition or risk sharing. Further, the FTC reasoned that a single price schedule was a necessary ancillary component of this legitimate network system. Typically, if it determines that a network is not illegal per se, the FTC conducts an in-depth analysis to determine whether the network would unreasonably restrain trade. Here, however, the FTC permitted MedSouth to proceed without fully evaluating its proposal under the rule of reason. The FTC suggested that “it appear[ed] to be impossible … to predict the magnitude of anticompetitive or procompetitive effects” or the efficiencies of the network. Therefore, the doctors were permitted to form the network, with the understanding that the network would be subject to ongoing antitrust review. This deference, however, was based on several important presumptions. Most importantly, the network represented, and the FTC assumed, that the network would be nonexclusive, so that member physicians could participate in other networks and could independently contract with payers. The viability of MedSouth is still uncertain. MedSouth organizers have indicated that they turned to clinical and technological integration of the physicians’ practices after different financial risk-sharing plans had failed. Further, a clinically integrated network was necessary because it offered services-particularly the technological integration- that the doctors could not afford on their own. MedSouth was encouraged by the yellow light that it received from the FTC. Still, MedSouth is concerned about the future treatment of its organization because its advantages are long term-better health through care coordination-but the FTC will be satisfied only if MedSouth generates immediate and measurable cost savings. MICHIGAN DEVELOPMENT The antitrust division of DOJ issued a business review letter in 2002 addressing the application of the antitrust laws to a hospital network. Letter from Charles A. James, assistant attorney general for Antitrust, DOJ, to Clifton E. Johnson, dated April 3, 2002, available at www.usdoj.gov/atr/public/busreview/ 10933.htm. A group of seven hospitals proposed to operate as a Michigan nonprofit to negotiate contracts with payers on behalf of the seven member hospitals. The member hospitals are small rural hospitals, ranging in size from 33 beds to 127 beds, with an average daily census ranging from 15 to 70. Significantly, the hospitals are dispersed across the entire lower peninsula of Michigan. The closest two hospitals are 52 miles apart, and some hospitals are more than 100 miles from another hospital in the group. In addition, each network hospital faced competition from other hospitals that were closer than any other facility in the network. The group could facilitate managed care contracting between member hospitals as a group and any large third-party payers. Further, the joint venture would coordinate and improve the delivery of care, through the collection, analysis and dissemination of care data among the participating hospitals. Finally, and most importantly, the group is a nonexclusive network. The antitrust division concluded that the formation of the group would not have anti-competitive effects. Each of the hospital members served a different geographic area and were not competitors. Also, the group was a bona fide joint venture designed to facilitate health care contracting between community hospitals and large third-party payers. Finally, both the hospitals and the payers could save money by combining the process for negotiating contracts. This business review letter-the first instance in which the division considered the formation of a hospital network-shows the division’s flexibility. However, it is unclear yet whether this letter will open the door to the formation of a significant number of hospital networks. Here, the division’s approval of the network rested in large part on the fact that the participating hospitals are small rural facilities serving distinct local geographic areas. The network had expressly represented that the network would be nonexclusive. Still, hospitals in other areas of the country may be able to form a hospital network if these two conditions are met. ONGOING ENFORCEMENT Despite this new flexibility, the antitrust agencies will still condemn conduct that is a classic violation of the antitrust laws. In April 2002, the FTC filed an enforcement complaint against a group comprising virtually all of the obstetricians and gynecologists in Napa County, Calif., charging them with violations of � 1 of the Sherman Act. Obstetrics and Gynecology Medical Corp. of Napa Valley, FTC File No. 011-0153 (April 5, 2002), available at www.ftc.gov/os/2002/05/obgyncmp.pdf. The FTC’s complaint alleged that the doctors engaged in price-fixing and a group boycott, by setting a uniform fee schedule and agreeing to refuse to do business with payers that did not meet these demands. The doctors agreed to settle the case. In May 2002, the FTC filed a lawsuit against two Denver-area physician organizations for price-fixing and an agreement to refuse to deal with payers except on terms negotiated by the two organizations. In the Matter of Physician Integrated Services of Denver Inc., FTC File No. 011-0173 (May 13, 2002), available at www.ftc.gov/os/2002/ 05/pisdagreement.pdf. According to the complaint, each group threatened to terminate their contracts with any payer that did not agree to the terms offered by the group. These doctors also agreed to settle the case. In August 2002, the FTC filed a complaint against a doctor group, most of whose 1,250 members are physicians practicing in the Dallas-Fort Worth area. In the Matter of System Health Providers Inc., FTC File No. 11-0196 (Aug. 20, 2002), reported at www.ftc.gov/os/2002/08/shpdo.pdf. The FTC alleged that this doctor group had agreed to fix prices and to refuse to convey to participating doctors any payer offers that did not conform to the agreed upon standards for contracts. The doctors agreed to settle the case. Significantly, as part of the FTC’s final order, all payers were given the opportunity to terminate existing contracts with the respondents. Also in August 2002, the FTC filed a complaint against a group of obstetricians and gynecologists in Denver. In the Matter of Consultants in Obstetrics and Gynecology P.C., FTC File No. 11-0175 (Aug. 20, 2002), reported at www.ftc.gov/os/2002/ 08/profwomen-agree.pdf. The FTC alleged that the doctors fixed prices and other terms of dealing with payers and refused to deal with payers except on collectively determined terms. According to the complaint, the doctors conducted collective negotiations with payers in order to boycott various payers and to fix the prices and other contract terms. The defendants agreed to settle the case. Finally, the FTC has continued to oppose legislative initiatives of providers seeking state endorsement of physician collective bargaining with health insurers. In January 2002, the FTC opposed a bill pending before the Alaska legislature that sought to authorize competing physicians to engage in collective bargaining with health plans over fees and other terms. Letter from Joseph J. Simons, director, Bureau of Competition, to Rep. Lisa Murkowski, chairwoman, House Labor and Commerce Committee, Alaska House of Representatives, dated Jan. 18, 2002, available at www.ftc.gov/be/v020003.htm. The FTC opposed similar bills pending before the Washington state Legislature in February 2002 and before the Ohio Legislature in October 2002. All of these bills were opposed based on the FTC’s conclusion that collective bargaining likely would increase health care costs and reduce access to care, without ensuring better care for patients. The recent enforcement activities of the antitrust agencies offer two important insights. First, the agencies are considering innovative joint ventures that will use incentives and oversight mechanisms to achieve efficiencies normally generated by competition. Second, agreements that traditionally have been condemned under the antitrust laws, like price fixing and group boycotts, remain vulnerable to challenge. Therefore, providers should reassess alternative ways of forming networks for the delivery of care with the understanding that classic antitrust violations will be challenged. Thomas H. Brock is senior counsel in the Washington office of New York’s Proskauer Rose ( www.proskauer.com). He specializes in representing health care clients in antitrust and third-party payment matters. 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