Suburban Health Organization
North Texas Specialty Physicians

Suburban Health Organization

"Federal Trade Commission Rejects Physician-Hospital Organization Clinical Integration Model"
April 20, 2006, Godfrey & Kahn, SC., Attorneys At Law

Physicians and hospitals wishing to work together to share clinical and price information now have more insight about how to construct these arrangements legally. In a March 28, 2006 Advisory Opinion, the Federal Trade Commission (FTC) rejected on antitrust grounds a proposal by Suburban Health Organization (SHO) that would have included medical management activities, quality management programs, practice support and a physician incentive plan. The SHO opinion underscores the reluctance of the FTC to approve the joint price-setting component of a clinical integration plan absent a clear factual support that joint price-setting is necessary for the plan to succeed. Absent such support, joint price-setting can subject providers to serious antitrust risk.

Suburban Health Organization (SHO)
SHO is an Indiana non-profit corporation with a 16-member board, staff of 45 full-time equivalents and a $7.9 million operating budget to undertake risk-based contracts with health plans and other payers of health care services. The FTC deemed SHO a "super-PHO," consisting of seven local physician-hospital organizations in the Indianapolis area, each affiliated with a local hospital and one multi-facility health system. The eight member hospitals of SHO employ a total of 192 primary care physicians who practice medicine at their respective hospitals.

Background on FTC Decision
The FTC rejected SHO’s proposed clinical integration model because it did not view the proposal’s exclusive agent and price-fixing components as reasonably necessary to create more efficient delivery of health care. According to the proposal, SHO would have acted as the physicians’ exclusive agent for negotiating non-risk contracts with large regional and national managed care plans. SHO would have set uniform fees for all medical services performed by the employed primary care physicians because, it argued, the clinical integration program qualifies as a new product that is inextricably linked to all medical services provided by the physicians and creates interdependency among them. However, SHO would have allowed each member hospital to market the services of its employed primary care physicians independently to small local employers and some small managed care plans. In addition, SHO hospital members would have:

1. Jointly developed practice protocols and disease-specific treatment parameters regarding a limited set of medical conditions (such as asthma, cardiovascular disease, congestive heart failure and diabetes);
2. Centralized collection and use of data to monitor physician behavior and outcomes with respect to the treatment protocols;
3. Jointly produced educational materials; and
4. Agreed to have their employed primary care physicians abide by the common practice standards through a jointly funded bonus pool to reward desirable behavior and results.

The FTC analyzed SHO’s proposed plan and found that it would be an unlawful restraint on competition for two primary reasons:

1. Although the FTC recognized that the plan might achieve some limited efficiencies, the FTC failed to see significant interdependence among the hospital and physician members. The ability to share some program implementation costs and clinical data among SHO members did not outweigh SHO’s inability to explain how it would encourage the physicians to work collaboratively as a group or why the joint negotiation of fees was even relevant to the clinical objectives.
2. The FTC believed that the proposal’s limited scope would undermine SHO’s ability to achieve the program’s efficiencies, noting the small number of medical conditions to be addressed and the lack of any specialist physician participants. The FTC viewed SHO’s proposed clinical integration program as a mere enhancement of medical services within each member hospital that did not require joint price setting or exclusive dealing but instead could operate sufficiently under a "messenger model. (The "messenger model" does not permit health care providers to collectively negotiate fees.)

To read the entire FTC advisory opinion for SHO, click here.

North Texas Specialty Physicians

From FTC website, December 1, 2005

Commission Finds That North Texas Specialty Physicians Illegally Fixed Prices

Unanimous Order Bars Respondents from Engaging in Joint Price Negotiations
In a unanimous administrative opinion and order made public today, the Federal Trade Commission ruled that North Texas Specialty Physicians (NTSP), an association of independent physicians in the Forth Worth, Texas area, illegally fixed prices in its negotiations with payors, including insurance companies and health plans. The Commission opinion, authored by Commissioner Thomas B. Leary, affirmed a November 2004 ruling by Administrative Law Judge (ALJ) D. Michael Chappell, with some modifications, and issued an order that requires the respondent association to cease and desist from the illegal conduct and to terminate pre-existing contracts with payors for physician services.

The Commission Opinion
The Commission concluded that NTSP’s contracting activities with payors “amount[s] to unlawful horizontal price fixing.” The opinion states that, through a variety of mechanisms, NTSP was able to orchestrate price agreements among its physicians. The evidence in the case, the Commission found, “shows not only negotiation activity in aid of a collective agreement on a minimum fee schedule, but also specific enforcement mechanisms – such as the powers of attorney and collective withdrawal from payor networks – in order to coerce agreement from payers.” These actions, when viewed as a whole, the Commission wrote, “leave no doubt that the overriding purpose behind NTSP’s conduct was to fix prices.”

The Commission specifically addressed Respondent’s claims on appeal and found that: (1) the FTC does have jurisdictional authority to review alleged anticompetitive conduct by NTSP, because it is a corporation that is “organized to carry on business for its own profit and that of its members”; (2) NTSP’s argument that its physicians are not “members” under Texas law is invalid because it “elevates form over substance”; (3) NTSP satisfies the interstate commerce jurisdictional requirement, because its actions to maintain fee levels, if successful, could be expected to affect the flow of interstate payments from out-of-state payors to NTSP physicians; (4) NTSP is not a “sole actor” when it negotiates on behalf of the competing physicians who control it, but rather, under antitrust law, is the agent for the group, and thus, the member physicians conspired to fix prices even though they did not communicate directly with one another; and (5) NTSP’s claims of teamwork, spillover, and other efficiencies were not legitimate and not supported by the evidence.

In response to the cross appeal of Complaint Counsel, the Commission held that the ALJ incorrectly found it was necessary to define a relevant market in a case of this kind. The Commission also found that the ALJ’s order was inappropriately narrow in some of its core provisions and contained two unwarranted provisos.

“This is not really a close case,” the Commission concluded. “NTSP’s conduct is similar to conduct that has been held per se unlawful and summarily condemned in other contexts. . . . [W]e have analyzed the conduct under our more flexible Polygram framework, and considered each of Respondent’s defenses in depth. Our ultimate conclusion is the same.” A brief description of the Commission’s legal analysis in issuing the decision and order is provided below.

Legal Analysis
The Commission opinion states that an “outright per se condemnation” of NTSP’s conduct could be supported by application of the Supreme Court’s 1982 opinion in Arizona v. Maricopa County Medical Society. The Commission notes, however, that in its later 1999 California Dental Ass’n v. FTC opinion, the Supreme Court “urged caution in the application of the per se label to conduct in a professional setting . . . .” The Commission also notes that “since Maricopa, we have a better understanding of the potential integration efficiencies” of associations like NTSP. Accordingly, after the first administrative trial of a physician association case in over 20 years, the Commission adopted the more flexible methodology of its own recent opinion in the Polygram Holdings, Inc. case and the opinion of the D.C. Circuit Court that upheld Polgram on appeal.

The Polygram approach allows for a more extensive consideration of Respondent’s defenses. Accordingly, the Commission notes, “we have available in this case an extensive record on which to buttress our conclusions about the likely effects of Respondent’s conduct.” The opinion emphasizes, however, that the Polygram methodology “is not the same thing as a full blown rule of reason inquiry.” Once the Commission has found that “Respondent’s proferred justifications for NTSP’s inherently suspect conduct are not legitimate . . . it is not necessary to go on and find actual adverse market effects.”

Case Background
NTSP had approximately 480 physician members at the time of trial in April 2004, including over 100 primary care physicians, and others in 26 medical specialties. These physicians have distinct economic interests and many compete with one another.

NTSP’s main functions are to negotiate and review contract proposals for the services of its members, to review payment issues, and to act as a lobbyist for the interests of its members. NTSP has negotiated both risk-sharing contracts (where doctors are typically reimbursed on a dollar-per-patient basis) and non-risk sharing contracts (which provide “fee-for-service” payments). The challenged conduct involved only the negotiation of non-risk sharing contracts, which were more common for NTSP.

In negotiation of its non-risk sharing contracts, NTSP engaged in conduct designed to enhance the collective bargaining power of its members. This conduct included the use of member polls on prospective fees, and communication of the results to members, in a way that affected payment levels in non-risk sharing contracts. In addition, NTSP’s agreement with its members granted NTSP the right of first negotiation with payors and inhibited independent negotiations by individual physicians. NTSP’s illegal conduct also included refusals to deal and refusals to forward payor offers to member physicians that NTSP itself deemed unacceptable.
The administrative complaint against NTSP was filed in September 2003. The Initial Decision in favor of Complaint Counsel was issued in November 2004. Both NTSP and Complaint Counsel subsequently appealed to the Commission. The Commission found that the practices described above taken together amounted to illegal price fixing, and entered an order that would prohibit them.

The Commission Order
The opinion and order approved by the Commission upholds the initial decision of the ALJ and adopts the findings of fact and conclusions of law as those of the Commission, except where they are inconsistent with the Commission’s opinion and order. The order requires that NTSP cease and desist from engaging in the anticompetitive price-fixing conduct alleged in the complaint. The conduct barred includes “entering into, adhering to, participating in, maintaining, implementing, or otherwise facilitating any combination, conspiracy, agreement, or understanding between physicians with respect to their provision of physician services: (1) to negotiate on behalf of any physician with any payor; (2) to deal, refuse to deal, or threaten to refuse to deal with any payor; (3) regarding any term, condition, or requirement upon which any physician deals, or is willing to deal, with any payor, including, but not limited to price terms; or (4) not to deal individually with any payor, or not to deal with any payor through any arrangement other than Respondent.”

In addition, the order prohibits exchanging, or facilitating the exchange or transfer, of any information among physicians concerning their willingness, or lack thereof, to deal with or not deal with a payor, and prohibits any attempts to engage in the conduct described above. It also bars NTSP from pressuring or inducing anyone to engage in such conduct. Finally, the order contains reporting and distribution requirements to ensure that NTSP complies with its terms and requires NTSP to terminate any preexisting contract with any payor to provide physician services, with extensions allowed under certain circumstances. The order will terminate in 20 years.

In order to avoid interference with potential efficiencies, the order does not prohibit any agreement involving conduct that is reasonably necessary to further a qualified risk-sharing joint arrangement or a qualified clinically integrated arrangement among physicians. The order also allows NTSP to act as a messenger or an agent on behalf of physicians for contracts with payors, but for three years NTSP is required to notify the Commission in advance before doing so.

The Commission vote approving issuance of the opinion and order was 4-0.