THE BACKGROUND
Simplistically cutting through more than a century of antitrust jurisprudence, the Sherman Act prohibits contracts, combinations and conspiracies in restraint of trade. All business contracts restrain trade to some degree, so the judiciary early on explained that the Sherman Act only prohibits unreasonable restraints of trade. Some agreements, like agreements by competitors on the price at which they will sell competing products or services, are so likely to be anticompetitive that they are conclusively presumed to be unlawful.
In other words, an agreement on a price term is illegal without the need for proving an anticompetitive effect. We call such agreements illegal per se, and the Sherman Act makes them felonies, punishable in some cases by prison sentences and fines in the hundreds of thousands of dollars. In other cases, where the conduct is not so clearly egregious, a rule of reason applies. A court will weigh the anticompetitive effects against the procompetitive aspects of particular conduct, and determine, whether, on balance, the conduct will promote competition. This analysis almost always requires an examination of the markets in which the parties operate and the shares that those parties hold in the defined markets. If the parties have insignificant market shares, they are unlikely to have the power to control prices to consumers or restrict supply of the relevant product or service (another way of pushing prices up).
With regard to all types of anticompetitive conduct, private parties injured in their business or property by such conduct may sue for triple the damages suffered, plus costs and attorneys' fees. This type of litigation can be very costly, much more so to defendants than plaintiffs due to potential liability and the attorneys' fee provision.
THE SIGNIFICANCE OF THE STATEMENTS
From time to time the Agencies issue guidelines, like the Statements, to help participants in a market stay out of court. They also will provide advisory opinions if requested to do so, called Business Review Letters in the case of the Justice Department, about the enforcement intentions of the Agencies with regard to specific planned conduct.
While the Agencies are experts on antitrust policy, it is critical to remember that they do not make law. When a judge decides a case involving a physician joint venture (or instructs a jury on the law), he or she is bound to follow prior judicial interpretations of the law, not the Statements. It is also important to remember that antitrust issues are very fact-specific. Although the Statements give general guidance, it is impossible to anticipate every real-life scenario that may develop. A third point to keep in mind is that the Statements do not speak in absolutes. An arrangement that on its face meets the criteria of a safety zone, for example, will not be challenged "absent extraordinary circumstances". "Never" and "always" are not part of the lexicon.
WHAT HAS CHANGED?
Only two of nine Statements, dealing with physician network joint ventures (Statement 8) and multiprovider networks (Statement 9), have changed at all.(2) Physician network joint ventures, for purposes of Statement 8, are physician-controlled groups in which physicians (who might otherwise compete) agree on price or price-related terms and jointly market their services. Because physician joint networks are but one type of multiprovider organization, the concepts applicable to physician networks for the most part are also applicable to multiprovider networks. The most significant change in both Statements, suggesting that competitors may fix prices even absent a financially integrated joint venture, may create more problems than it solves.
THE ANALYTICAL STRUCTURE
The 1994 Statement on Physician Joint Ventures created safety zones for exclusive joint ventures (meaning the participants cannot or in practice do not independently contract with other groups or health plans) and non-exclusive joint ventures (meaning that the participants are available to or actually do affiliate with other networks or contract independently) among physicians who otherwise would compete. The Agencies ordinarily will not challenge a joint venture where the participants share substantial financial risk and constitute 20% or less of the physicians in each physician specialty with active hospital staff privileges in a relevant geographic market (in the case of an exclusive joint venture), or 30% or less of the physicians in each physician specialty with active hospital staff privileges who practice in the relevant geographic market (in the case of a non exclusive joint venture).
The substantive criteria for safety zones have not changed in the new Statements, despite lobbying by the AMA to increase the percentage of doctors in a specialty that could belong to a joint venture and still be within a safety zone. Some of the reasons advanced for not enlarging the safety zones are that it would not stimulate innovation in joint ventures, and that rule of reason antitrust analysis for arrangements falling outside of the safety zones is a more appropriate way to assess anticompetitive potential.
The safety zones set the boundaries for a combination that the Agencies presume are reasonable, because the participants lack the combined market power to engage in anticompetitive conduct. As the Agencies take pains to emphasize in the 1996 Statements, many physician joint ventures that fall outside of the safety zones are lawful and many have been approved by the Agencies after a rule of reason review -- weighing the potential anticompetitive effects against the procompetitive benefits of the venture. For example, the Justice Department stated that it did not intend to challenge OPN, a financially integrated network of Oklahoma doctors, even though in some rural areas, OPN had among its members 100% percent of the doctors in a particular specialty.(3) Likewise, the Justice Department stated that it did not presently intend to challenge a network of Arizona surgeons specializing in colon and rectal surgery although seven of the nine specialists in one county and seven of the ten specialists in the state were in the group. The Department decided that in light of the capitation and risk-withhold procedures adopted by the group, and the competition available by non-specialists capable of doing colon/rectal surgery, the group was, on balance, not an anticompetitive threat.(4) A third of many possible examples is Dermnet, a physician joint venture consisting of dermatologists, plastic surgeons and dermapathologists, which included 43.5% of the board-certified dermatologists, and eleven of the fifteen dermapathologists, in three neighboring Florida counties. The Justice Department stated that it did not intend to challenge this venture, explaining that the 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 Dermnet. As to dermapathologists, the Department concluded that users of their services would go beyond the three-county area for a dermapathologist. As in all Business Review letters that it issues, the Department was careful to state that if the facts change, so may the opinion.(5)
The traditional rule of reason analysis used by the Agencies under the 1994 Statements will continue to be used under the 1996 statements. The Agencies will undertake a very fact-specific analysis of probable effects on competition, such as whether a particular specialty constitutes a market; how far patients will travel for a particular medical service; how many physicians in a particular specialty practice in a geographic area; whether the arrangement is exclusive or non exclusive; what safeguards exist against agreements on out-of-network pricing; and the nature and extent of the cost-savings that the venture is likely to generate. If the past two years are any indication, joint ventures that are financially integrated, non-exclusive and in a market where there is more than nominal competition, will, for the most part, not be the subject of enforcement action by the Agencies.
THE NEW DEVELOPMENT
In the 1994 Statements, the Agencies made clear that in order to avoid condemnation as a per se illegal price-fixing agreement, a physician joint venture had to be financially integrated, that is, the participants had to share substantial financial risk. They gave two non-inclusive examples of financial integration -- capitation and risk withholds -- that would bring a price-fixing joint venture out of the per se illegal category and into the rule of reason group. In the 1996 Statements, the Agencies provide a few more examples of financial integration, such as providers assuming the risk of meeting certain cost-containment targets, an agreement to provide treatment in return for a predetermined share of revenues, and agreements to offer a package of services for a fixed, predetermined charge despite the potential for variability in a patient's course of treatment. But in the 1996 Statements, the Agencies also state that they are willing to apply a rule of reason to groups of competitors who agree on the price at which they will sell their services, even absent financial integration, so long as the agreement on price is necessary to achieve the venture's procompetitive benefits. This is the fruit of interaction between the Agencies and the industry, a significant change from the 1994 Statements, and a departure from the Supreme Court's rulings on how price-fixing among competitors should be treated.
THE MARICOPA CASE AND CLINICAL INTEGRATION
In 1982, the United States Supreme Court ruled that the conduct of a physician joint venture, which was not financially integrated but established a maximum fee schedule for its participants, was per se illegal under the antitrust laws.(6) The defendants in the case, two not-for-profit corporations composed of physicians, performed three principal activities. They set maximum fees that their members could accept from approved insurance plans, they reviewed the medical necessity and appropriateness of treatment rendered by their members, and they were authorized to draw checks on the insurance companies to pay participating doctors.
A plurality of the Court(7) refused to examine the reasonableness or unreasonableness of the conduct or the fees established. Nor were they willing to examine any of the claimed efficiencies or cost-savings resulting from defendants' operations. Consistent with precedent, the agreement was conclusively presumed to be anticompetitive, regardless of purpose and effect, regardless of the fact that it set price ceilings (rather than price floors), regardless of any procompetitive justifications, and regardless of the fact that the defendants were organizations of professionals. The Court was careful to distinguish "partnerships or other joint arrangements in which persons who would otherwise be competitors pool their capital and share the risks of loss as well as the opportunities for profit."(8) Three dissenting Justices argued that because the services provided by the defendants were making possible an arguably different product by achieving efficiencies that could otherwise not be realized, it should be evaluated under a rule of reason. Maricopa is still the law, binding on every court that considers the same facts and legal issues.
THE AGENCIES' VIEW OF CLINICAL INTEGRATION
The Agencies' willingness to accord nonfinancially integrated physician joint ventures rule of reason treatment is illustrated by a hypothetical physician joint venture involving clinical integration. In the Agencies' example, an IPA is established by a group of physicians in a town where there are a number of HMOs and managed care plans. Physicians often participate in more than one of the plans. The IPA will "implement systems to establish goals relating to" performance and utilization of services by individual participants and by the network in the aggregate, and will modify individual practices where necessary. The IPA will also establish protocols and standards for treatment and engage in peer review with respect to those standards. Capital will have to be invested (in the example, it is not clear by whom) to purchase the information systems necessary to gather and distribute data, and the payers will receive data relating to the performance of the network. The physicians will have to devote time to establishing treatment standards and protocols. An agent will be retained to develop a fee schedule for the participating doctors and to contract with third party payers.
The Agencies would evaluate the IPA under a rule of reason, because the price agreement, "under these circumstances," is subordinate to and reasonably necessary to achieve the efficiencies planned by the network. Moreover, the Agencies would not challenge the IPA as anticompetitive after a rule of reason analysis, largely because the IPA is nonexclusive, and because there is competition in the market that would keep the IPA physicians from raising prices above competitive levels. The Agencies do not explain why the agreement on price is reasonably necessary to achieve the efficiency goals of the IPA. In fact, the IPA sounds much like a hospital without the physical plant. Doctors who admit patients to a hospital benefit from many of the same efficiencies but do not fix prices. Also puzzling is the Agencies' specific refusal to consider justifying the IPA as an organization offering what might be a new product, a concept previously embraced by the Supreme Court;(9) and their willingness to justify it solely on the basis of efficiencies -- a concept repeatedly rejected by the Supreme Court in Maricopa and other cases.
SO WHAT'S A MULTIPROVIDER ORGANIZATION TO DO?
The short answer is be careful and seek guidance. The Agencies have offered examples of two "clinically integrated" combinations, one a physician joint venture and one a multiprovider network, that they would not challenge because any agreement on price was reasonably necessary to achieve the efficiencies to be generated. A nonfinancially integrated joint venture or multiprovider network should have two concerns with the Agencies' position. First, the examples are examples only. Real life is very fact specific, and real-life combinations are likely to differ from the Agencies' examples, in small but possibly outcome-determinative ways. The Agencies make plain in their third physician joint venture example and their fourth multiprovider network example that agreements on price among nonfinancially integrated competitors for the purpose of increasing bargaining power with managed care plans, and without the likelihood of achieving substantial efficiencies, will be treated as per se illegal price-fixing agreements. This will be true, regardless of whether the members jointly finance the operations of the group, and regardless of whether the price-fixing objectives of the group are achieved indirectly by hiring an agent.
Second, a statement that the Agencies do not intend to challenge a particular arrangement is comforting, because it comes from the most likely source of challenge, but the Agencies are not the only potential plaintiffs. Moreover, although the Statements may reflect what the law should be, the law is not there yet. A court considering an attack on a joint venture or multiprovider network by, for example, a state or a private plaintiff, would still be bound by judicial precedent, regardless of how persuasive the court found the Statements to be.
The Agencies have spent considerable time with participants in the health care industry in the course of developing the Statements, and most likely have studied the operations of the industry, the nature and extent of competition in the industry, and the impact of Medicare, Medicaid and other insurance reimbursement schedules on pricing. The result of their investigation to date is that there are procompetitive combinations that the Agencies will not challenge if an agreement on price is subordinate and reasonably necessary to achieving the efficiencies planned by the venture. Their position may be the right one, but physician groups and multiprovider organizations would be well-advised to proceed with caution.
(1) Elinor R. Hoffmann is a member of the firm of Coudert Brothers, and specializes in antitrust counseling and litigation. She practices in Coudert Brothers' New York office.
(2) The seven Statements which have not been revised since 1994 relate to hospital mergers, hospital joint ventures involving high-technology or other expensive health care equipment, hospital joint ventures involving specialized clinical or other expensive health care services, providers' collective provision of non-fee-related information to purchasers of health care services, providers' collective provision of fee-related information to purchasers of health care services, provider participation in exchanges of price and cost information and joint purchasing arrangements among health care providers.
(3) Business Review Letter, Oklahoma Physicians Network-IPA Inc. and PROklahoma Care Inc. (Letter 96-1) (1/17/96).
(4) Business Review Letter, Allied Colon and Rectal Specialists (Letter 96-16) (7/1/96).
(5) In contrast to these examples, the Justice Department has stated its intention to challenge joint ventures after a rule of reason examination in situations where the combined market power of the participants made it likely that the joint venture would be able to charge supracompetitive rates. See, e.g., Business Review Letter, Children's Healthcare, P.A. (Letter 96-5) (3/1/96); Business Review Letter, Orange Los Angeles Medical Group Inc. (Letter 96-7) (3/8/96).
(6) Arizona v. Maricopa County Medical Society, 457 U.S. 332 (1982).
(7) The Court was divided. The decision of the Court was rendered by four Justices. Three others dissented, and two took no part in the consideration or decision of the case. The makeup of the Court has changed considerably since 1982, and it is unclear how the present Court would treat the same case.
(8) Id. at 356.
(9) Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979).