As the health care industry continues to move from traditional fee-for-service arrangements to managed-care concepts and organizations, health care providers have formed various types of networks. Like any combination of competitors, physician networks run the risk of violating the antitrust laws. While these organizations are fairly new, guidelines from the government and a review of the first generation of antitrust cases provide several important "dos" and "don'ts" for physician networks.

Department of Justice/Federal Trade Commission Guidelines

The Department of Justice and the Federal Trade Commission are the two federal agencies charged with the duty of enforcing our antitrust laws. Faced with the challenge of monitoring novel distribution arrangements in the evolving health care market, the agencies have issued joint Guidelines to advise the industry of types of arrangements that are likely to undergo antitrust scrutiny. The Guidelines, most recently revised in 1994, address nine types of activities, one of which is physician network joint ventures.

Physician network joint ventures, for purposes of the Guidelines, are physician-controlled ventures in which physicians (who otherwise might compete), agree on prices or other terms. They jointly market their services, usually to an HMO or other provider organization. A physician joint venture is one type of multiprovider network that might, for example, include a hospital and its physician employees as well as independent physicians. Multiprovider networks are addressed in a separate section of the Guidelines.

Don't Fix Prices

Agreements on price among competitors are generally illegal under the antitrust laws and punishable as a felony. Agreements on price among legitimate joint ventures usually are not. More than ten years ago, the Supreme Court ruled that a physician "foundation" establishing the maximum prices for certain physician services was "per se" illegal -- illegal on its face without any further inquiry. In that same case, though, the Supreme Court hinted that physicians could associate as a "joint venture." To qualify as a joint venture, individuals who would otherwise be competing must share the risk of profits and losses and must integrate to provide a new product to the market. The lesson is that no matter what a network is called, if it amounts to otherwise competing physicians agreeing on price without sharing economic risk, it may well be a violation of the antitrust laws.

The threat of antitrust liability is real for a physician group that fixes prices or engages in other anticompetitive conduct, such as agreeing to boycott a third-party provider. In a recent case in Virginia, a physician group challenged by federal and state antitrust enforcers had to pay $170,000 to the state to settle charges that its members had violated the antitrust laws. A consent decree that was part of the settlement with federal enforcers prohibited the physicians from collectively determining fees or conditions for arrangements with third-party payors. The consent decree did not prohibit operating as an integrated joint venture or in an integrated group practice.

In addition to government enforcement, the antitrust laws provide for private suits by parties injured in their business or property by wrongful conduct. Successful plaintiffs automatically recover treble damages -- three dollars for every dollar of damages proven, plus reasonable attorneys' fees. The cost of violating the antitrust laws can be very, very high.

Do Share Risk

To avoid characterization as an illegal price-fixing arrangement, participating doctors must agree to a system in which they share risk for cost overruns and over-utilization of services. Two examples of risk-sharing used in the Guidelines are capitation and risk withholds. In a capitation scheme, the joint venture provides comprehensive health care to a health care plan's subscribers for a set dollar amount per capita. In a risk withhold arrangement, a certain amount of each participating physician's fees -- such as 20% -- is withheld and paid out only if the physicians achieve their cost-containment goals.

The physicians are also likely to share certain administrative functions, such as billing or marketing, and quality control in order to implement these risk-sharing arrangements. A physician joint venture marked by shared risk has an incentive to control costs and deliver services in an efficient manner. It has the potential for offering the ultimate consumer quality health care at a lower cost. These attributes should make the venture safe from "per se" scrutiny as an illegal price-fixing agreement.

Don't Sign Up Too Many Providers

An agreement on price among competitors that escapes "per se" liability must still survive scrutiny under a test of reasonableness. Under this test (called the "rule of reason"), a court considers the entire competitive impact of an arrangement. If the procompetitive benefits outweigh the anticompetitive effects, the venture will be legal under the antitrust laws.

Physician networks are more likely to have anticompetitive effects when they possess market power -- the power to control prices and limit or foreclose competition. The Guidelines establish two "safety zones" for physician network joint ventures, based on the presumption that if networks are composed of physicians with a limited share of the market in a particular specialty, the procompetitive benefits will outweigh any anticompetitive effects. According to the Guidelines, a network with non-exclusive contracts with 30% or less of the physicians in each physician specialty in a geographic market will not be the subject of antitrust scrutiny except in unusual circumstances. If the network has exclusive contracts with physicians -- that is, the physicians agree not to participate in a competing network - a market share of 20% or less of the physicians in each physician specialty in a geographic market generally will not raise antitrust concerns by the government.

Physician networks that fall outside of these "safety zones" are by no means automatically illegal. Rather, if they are economically integrated joint ventures (as opposed to naked price-fixing schemes), their procompetitive benefits will be weighed against their anticompetitive affects. In a number of recent cases, physician networks that included a larger percentage of physicians in a given specialty have passed antitrust muster when they asked the Justice Department for its views as to whether the arrangement would cause antitrust concern.

Dermnet, for example, a proposed physician network joint venture consisting of dermatologists, plastic surgeons, and dermapathologists, counted among its members 43.5% of the board-certified dermatologists, and eleven out of fifteen dermatopathologists, in three neighboring counties in Florida. At Dermnet's request, the Justice Department reviewed the arrangement and concluded that the proposed venture would not cause anticompetitive effects.

The factors the Justice Department found critical were that Dermnet's physicians were free to contract, and did contract, with competing networks and providers; and that buyers were in favor of dealing with one network representative, appreciated the cost-savings and quality control offered by networks, and believed their ability to contract with dermatologists would not be hampered by the creation of Dermnet. As to dermapathologists, the Justice Department concluded that users of their services would go beyond the three-county area for a dermapathologist of their choice. In stating its present intention not to pursue any enforcement action, the Justice Department warned that should Dermnet members unilaterally or collectively decide not to deal with payors except through Dermnet, the Justice Department might review the arrangement again.

The determination of whether a specific venture will survive a rule of reason analysis is in all cases highly fact-specific. Some considerations that will be relevant include how far patients will travel to seek particular medical services, whether a particular specialty constitutes a market; how many physicians practice in the specialty in a geographic area; whether the arrangement is exclusive or non-exclusive; safeguards against agreements on price unrelated to the legitimate purpose of the venture; and the nature and extent of the cost-savings that the venture is likely to generate.

Do Exclude Providers -- for the Right Reason

Another antitrust issue posed by physician networks concerns the practice of excluding providers from the networks. Many physicians and other health-care professionals have challenged their exclusion from such networks, claiming that the networks kept them out to prevent them from competing with other members of the network.

A physician network that complies with the requirements outlined above should be able to turn down providers for membership if the providers do not fit the network's business strategy. For example, a network can exclude a provider who has a history of providing low quality health care or who makes excessive use of costly procedures. A network cannot exclude a provider or a group of providers just to eliminate competition for the network's patients.

Most of the cases in this area turn on the sufficiency of evidence supporting a network's claim that a provider or group of providers were excluded because of quality or price. In one case, a network's claim that podiatrists could be categorically excluded because of "overutilization" was rejected when evidence showed that the overall costs for foot procedures performed by podiatrists were lower than those of the network's members.

Don't Preclude Competition in the Delivery of Health Care Services:

Multiprovider Network Issues

In an effort to develop innovative methods of delivering health care services, health care providers have formed affiliations with competing providers (like the physician networks discussed above) and with providers of related services. The Guidelines characterize all of these arrangements as "multiprovider" networks. Acknowledging that such networks are new and their competitive impact is untested, the Guidelines set forth general principles that will govern the analysis of such networks by the enforcement agencies.

In several recent cases, multiprovider networks composed of physicians and hospitals have been charged with conspiring to exclude competitition in the development of managed care in particular geographic markets. One case involved Health Choice, a managed care corporation formed by a physician network (SJPI) and Heartland, the only acute care hospital in a three-county area covering Missouri and Kansas. SJPI, which included among its members 85% of the physicians in one county, had been formed to negotiate collectively with managed care organizations without sharing substantial financial risk. Heartland and SJPI agreed that they would deal with managed care plans exclusively through Health Choice, using Health Choice's fee schedule and providers.

The parties settled a Department of Justice Challenge to the Health Choice arrangement by entering into a consent decree. The decree enjoined the exclusionary practices and prohibited the physician members of SJPI from collectively setting the price of their services unless SJPI was itself a managed care plan, the owners of which, among other things, shared substantial financial risk and did not share pricing information unrelated to contracts of the plan.

In Danbury, Connecticut, federal and state officials brought charges against doctors and a hospital allegedly engaged in similar anticompetitive practices, and also entered into a consent decree settling the case. The Danbury case involved an HMO created by the only acute-care hospital in the area and an IPA, consisting of more than 98% of the hospital's physician staff. The overriding goal of the settlement was to open the market to alternatives.

Another case, this time brought by private plaintiffs against a clinic in Wisconsin, demonstrates that a physician network that has exclusive arrangements with many of the physicians in a geographic area also risks a private antitrust suit by other networks who can't sign up enough doctors. In Marshfield, physician members of the Marshfield Clinic were required to sign an agreement not to enter contracts with competing HMOs. Marshfield physicians also denied "cross-coverage" to competitors, and the Clinic itself denied and restricted the hospital staff privileges of competitors. After hearing testimony that more than 60% of the physicians in certain primary and specialty care markets -- including every single physician in five counties -- were affiliated with Marshfield, the jury determined that the Marshfield defendants had prevented the formation of competing HMOs and had violated the antitrust laws, causing the plaintiffs over $16 million in damages. Under the antitrust laws, actual damages are treble,so the Marshfield defendants faced a $48 million judgment. The trial judge eventually reduced the award to $17 million, still a substantial sum for an entity whose 1994 profit was only $4 million.

The Marshfield case was reversed in part on appeal and sent back for a new trial. According to the appellate court, HMOs compete with other health care delivery systems, and there was no evidence that Marshfield had monopolized this broader market. On the other hand, the appellate court found that there was sufficient evidence that the Marshfield defendants had conspired with another HMO allocate markets for medical services to warrant a trial on the matter. Regardless of the outcome, the lesson of the Marshfield case is clear: the use of exclusive contracts and other exclusionary activities by physician networks can pose serious antitrust questions.

Do Seek Advice

Although legislation for a drastic overhaul of the health care market seems to have ground to a halt in Washington, insurers, hospitals, doctors and other providers are taking matters into their own hands. Constantly evolving distribution arrangements raise new antitrust-related questions for all participants in the industry.

One way of limiting uncertainty is to seek the review of the enforcement agencies under the informal Business Review Procedure established by the Antitrust Division of the Department of Justice. The Department will respond within 90 days of receipt of all relevant information regarding a proposed physician network joint venture with a statement of whether it will challenge the arrangement if implemented. While such a response is not binding on private individuals who believe they have been harmed, it is an excellent method of obtaining an expert view as to whether there is realistic antitrust problem. Of course, the government's view is entirely predicated on the information it receives from the parties. If the facts change, so may the opinion.

In sum, the antitrust laws are powerful protection for our system of competition, and they provide for harsh punishment of violators. But the law in this area is definitely not blind. In many instances, and frequently in the health care arena, the economic benefits of a particular arrangement may well outweigh any anticompetitive effects.

Elinor R. Hoffmann is a partner, specializing in antitrust litigation and counseling and C. Allen Garrett is an associate with the New York office of Coudert Brothers. The authors are grateful for the assistance of Phillip A. Habeggar, recently a foreign attorney with Coudert Brothers.
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