us-ftc-advisory-opinions-45ada33f41950336690b04d637d365d8•Kitsap Physicians Service
Kitsap Physicians Service
us-ftc-advisory-opinions-45ada33f41950336690b04d637d365d8Kitsap Physicians ServiceGuidance
re: Concerning a proposal by a physician-owned IPA/HMO, with most of the local physicians as participants, to close off access to the plan to new/additional physicians.
FEDERAL TRADE COMMISSION WASWINGTON, D.G. 20588 March 26, 1984 William C, Kopit, Esquire Epstein, Becker, Borsody and Green, P,C, 1140 19th Street, N,W, Waskington, Dee, 28035 Re: Request for Staff Advisory Opinion, Kitsap Physicians Service war MP, Kopltt By letter of November 4, 1984, you have requested that the Federal Trade -mission staff issue an advisory opinion con- cerning two practices proposed to be undertaken by your client, Kitsap P ysicians Service (hereinafter referred to as eKPSm or the @Plane).I Specifically, you have asked; (1) mether a nonprofit TPA-type ftE/10 which is physician sponsored may include a clause in its contracts with partici- pating physicians, whereby such pkysi- ctans agree not to offer any otber health plan lower rates than those offered to the Plan; and ( 2 ) Whether such an HMO may deny membership In the plan to all [new] physicians in a specific category in which the physician to enrollee ratio is currently higher than certain specified generally accept- able standards. Kitsap Physicians Service is a physician-sponsored, nonprofit medical care prepapent plan operating in Ritsap, Jefferson, and This letter reflects my views as an af f icial oE the Cornis- sion" Bureau of Competition, Lt is not binding on the Comission itself, - See Section 1.3(c) of the Commissionts Rules of Practice,8
M s o n c o u n t i e s i n t h e S t a t e of Washington. I t i s l i c e n s e d by t h e S t a t e of Washington a s a " h e a l t h c a r e s e r v i c e c o n t r a c t o r , " w h o s e o p e r a t i o n you d e s c r i b e a s t h a t o f a n i n d e p e n d e n t p r a c t i c e a s s o c i a - t i o n - t y p e h e a l t h maintenance o r g a n i z a t i o n , RPS c o m p e t e s w i t h t h e statewide B l u e Cross and Blue S h i e l d p l a n s , w h i c h o p e r a t e i n its s e r v i c e a r e a , w i t h Group H e a l t h C o o p e r a t i v e o f P u g e t Sound (a h e a l t h m a i n t e n a n c e o r g a n i z a t i o n ) , and w i t h coraraercial h e a l t h i n s u r e r s , You s t a t e t h a t mS c u r r e n t l y c o v e r s a b o u t 2 5 p e r c e n t of t h e p p u l a t i o n o f its t h r e e - c o u n t y s e r v i c e a r e a ( a p p r o x i m a t e l y 44,0 0 0 e n r o l l e e s o u t of a w p u l a t i o n of a b u t 175,000), By o u r estimate from p u b l c l y a v a i l a b l e d a t a , its share of t h e p r i v a t e l y i n s u r e d populationi is a p p r o x i m a t e l y 33 p e r c e n t . According t o your s u h i s s l o n , KPS h a s a m n o n 4 0 m i n a n t a g g r e g a t e m a r k e t sharem s f area s u b s e t i b e m s . ~ O U D sutrrsissisn s t a t e s t h a t WS h a s participation agreements with 2 0 1 p h y s i c i a n s , representing mare t h a n 95 p e r c e n t s f a 1 1 p h y s i c i a n s i n t h e Plan" khre-county s e r v i c e a r e a , The nmber of p h y s i c i a n s p r a c t i c i n g i n KPS" sseevice a r e a h a s i n c r e a s e d by a b u t 50 p e r c e n t since 1977, a rate m s u b s t a n t l a l l y g r e a t e r a t h a n t h e r a t e s f i n c r e a s e i n t h e area" s p u l a t i o n d u r i n g t h a t p e r i o d , P a r t i c i p a t i n g p h y s i c i a n s a r e n o t p r o h i b i t e d from p a r t i c i p a t i n g i n a n y o t h e r h e a l t h p l a n . P a r t i c i p a t i n g p h y s i c i a n s also a r e a t r i s k for cost o v e r r u n s o f t h e P l a n where t h e t o t a l costs o f s e r v i c e s p r o v i d e d e x c e e d t h e P r e v e n u e s from s u b s c r i b e r p r e - m i u s ) " t h r o u g h a p r o r a t a s y s t e m which p e r m i t s r e d u c t i o n s i n t h e amount p a y a b l e t o p h y s i c i a n s e m A s a h e a l t h m a i n t e n a n c e o r g a n i z a - t i o n , KPS a p p a r e n t l y is c o n t r a c t u a l l y a n d l e g a l l y o b l i g a t e d t o p r o v i d e c o v e r e d m e d i c a l s e r v i c e s t o its s u b s c r i b e r s , n o t m e r e l y t o pay f o r s u c h s e r v i c e s . W i t h r e g a r d to y o u r f i r s t q u e s t i o n , c o n c e r n i n g KPS" p r o p o s e d u s e o f a "most f a v o r e d n a t i o n e c l a u s e i n its p a r t i c i p a t i o n a g r e e - ment w i t h mearber p h y s i c i a n s , w e are u n a b l e t o o f f a r a n o p i n i o n ae t h i s time, p u r s u a n t t o S e c t i o n l , l ( b ) of t h e C o m i s s i o n % R u l e s o f P r a c t i c e , s i n c e " t h e sme or s u b s t a n t i a l l y t h e sme c o u r s e of a c t i o n (by a n o t h e r e n t i t y ] is u n d e r i n v e s t i g a t i o n . . . ." w i t h r e g a r d to t h e s e c o n d q u e s t i o n , b a s e d o n o u r a n a l y s i s o f t h e a v a i l a b l e i n f o r m a t i o n , t h e r e is c o g n i z a b l e d a n g e r t h a t c l o s i n g o f f a c c e s s t o p a r t i c i p a t i o n i n KPS f o r a d d i t i o n a l p h y s i c i a n s i n v a r i o u s m e d i c a l s p e c i a l t i e s would, o n b a l a n c e , h a v e s u b s t a n t i a l a n t i c o m p e t i t i v e e f f e c t s , mile w e h a v e n o t , o f c o u r s e , d e t e r m i n e d t h a t a d o p t i o n of t h e p r o p o s e d r e s t r i c t i o n would be u n l a w f u l , w e are n o t a b l e t o p r o v i d e you w i t h a n a d v i s o r y o p i n i o n a p p r o v i n g t h e p r o p o s e d c o n d u c t , T h i s e x c l u d e s t h e u n i n s u r e d a n d t h o s e p e r s o n s c o v e r e d u n d e r g o v e r n m e n t a l programs s u c h as Medicare, Medicaid, and CHAMPUS.
4 RPS is a joint venture of competing fee-foreservice physi- cians that operates an independent practice association-type health maintenance organization, Under t h e Comission- Enforce- ment Policy with Respect to Physician Agreements to Control Medical Prepapent P l a n s n (Sept, 25, 1981) (hereinafter mEnEoreement Policy Statement"), KBS" eexcLusion of new p h y s i c i a n s in various specialties would constitute a concerted refusal to deal with competitors by the physicians controlling a "partially integrated planew Enforcement Policy Statement at 23-24, 27, On its face, a concerted refusal to deal with new entrants by an organization of 95 per cent sf a market" participants is inherently suspect, requiring close antitrust scrutiny, Consis- tent with the Enforcement Policy Statement, we have analyzed the propsed conduct under the antitrust rule of reason, because inde- pendent evidence of a predominantly anticompetitive puspse is absent and t h e c x c l u s i s n may p l a u s i b l y be related to the effective operation sf the plan, Using rule-of-reason analysis, we have attempted to assess any likely anticompetitive effects of the policy in light of the nature o f the restraint and the degree, if any, sf KPS% market pwer. IJnder the RPS propsal, non-member physicians in various specialties -- especially those considering entry, and new entrants in the KPS market area -- would be foreclosed from access to patients covered by KPS, As noted above, these patients reportedly represent approximately 25 percent of the area" pop- ulation and, by our estimate, approximately onethird of the area" residents with private health insurance,3 You state in your letter that KPS is "non-dominant" in its market, Although the available information does not clearly establish either the existence or absence of market power, it does suggest that participation in KPS may be sufficiently important or essential that barring new physicians from KPS would effecti ely discourage or prevent entry by many of them into the marketaS If so, the effect of the propsed pLicy would be to protect the physicians who now participate in RPS from competition by new KBS9s markgt share in recent years has been much higher, but has fallen in the last few years. In October, 1981, a federal district court concluded in an antitrust lawsuit that "KPS is the dominant heaLth care insurerm in its service area, that it had an "entrenched psition," and that "[tlhe financial benefits of KPS member- ship are substantial," Blue Cross v. Kitsap Physicians Service, 1982-1 Trade Cas, (CCH) 164,588 at 73,205, 73,208 (W.D, Wash. 1982). Anticompetitive effects could be very substantial if KPS has market power, Enforcement Policy Statement at 27; Virginia Academy of ical Psychologists v. Blue Shield of Virginia, 624 F,2d 476 (4th Cir, 19801, , 450 U . S , 916 (1981).
e n t r a n t p h y s i c i a n s n o t only for KPS p a t i e n t s , b u t for a l l t h e p a t i e n t s i n t h e m a r k e t , By d e t e r r i n g new e n t r y , t h e rule could a l s o l i m i t t h e s u p p l y of p h y s i c i a n s a v a i l a b l e t o p a r t i c i p a t e i n competing h e a l t h c a r e o r g a n i z a t i o n s t h a t f a c e d i f f i c u l t y i n a t t r a c t i n g a d e q u a t e numbers of p h y s i c i a n s i n t h e area i n t o t h e i r p r o g r m s , I n p a r t i c u l a r , t h e s e plans may h a v e d i f f i c u l t y recruit- i n g p h y s i c i a n s t o t h e a r e a b e c a u s e t h e y p r o b a b l y c a n n o t g e n e r a t e for t h e i r p a r t i c i p a t i n g s p e c i a l i s t s s u f f i c i e n t p a t i e n t volume f o r a f u I p r a c t i c e , i f t h e s e p r a c t i t i o n e r s a r e n o t a l l o w e d t o j o i n KPS. f Because t h e p r s p s e d r e s t r a i n t may be s u b s t a n t i a l l y a n t i c s m - p e t i t i v e i n some respects, we have a t t e m p t e d under t h e r u l e of s e a s o n t o assess its c o u n t e r v a i l i n g j u s t i f i c a t i o n s , Tn t h a t r e g a r d , a r e s t r a i n t may be j u s t i f i e d , n o t w i t h s t a n d i n g its anticom- p e t l t i v e a s p e c t s , i f it is c a p a b l e af i n c r e a s i n g t h e e f f e c t i v e n e s s of KPS as a competitor and is no broader t h a n necessary for t h a t purwse* One stated j u s t i f i c a t i o n is t h a t t h e r e s t r i c t i o n a d d r e s s e s p r o b l e m s of management and p h y s i c i a n c o m i t m e n t t o P l a n objectives c a u s e d by an " e x c e s s i v e m n m b e r of p a r t i c i p a t i n g p h y s i c i a n s , You s t a t e t h a t h a v i n g too many p h y s i c i a n s makes it d i f f i c u l t Eor t h e P l a n t o p e r f o r m e f f e c t i v e u t i l i z a t i o n r e v i e w om to d e m o n s t r a t e t o p h y s i c i a n s t h a t t h e i r economic i n t e r e s t s a r e commensurate w i t h t h o s e o f RPS. T h i s j u s t i f i c a t i o n h a s some p l a u s i b i l i t y a s t o h e a l t h p l a n s i n g e n e r a l , It is d i f f i c u l t , however, t o g i v e sub- s t a n t i a l w e i g h t t o t h i s r a t i o n a l e when p r o f f e r e d by a p l a n t h a t a p p a r e n t l y w i l l c o n t i n u e t o r e p r e s e n t a n d p e r m i t p a r t i c i p a t i o n by v i r t u a l l y a l l o f t h e c u r r e n t m a r k e t p a r t i c i p a n t s , b u t p l a n s to e x c l u d e a l l -- a n d o n l y -- new e n t r a n t s i n v a r i o u s s p e c i a l t i e s , ~ l t k o u g hit c a n n o t c o n c l u s i v e l y be d e t e r m i n e d by u s o n t h e i n f o r - m a t i o n p r e s e n t e d , t h e p r o p o s e d p o l i c y may be b o t h o v e r b r o a d , i n its d i s c r i m i n a t o r y treatment of new e n t r a n t s , a n d u n d e r i n c l u s i v e , i n s o f a r as t h e P l a n is s e e k i n g t o promote e f f e c t i v e u t i l i z a t i o n r e v i e w and less c o s t l y p r a c t i c e p a t t e r n s , S p e c i f i c a l l y , t h e p m e lposal w i l l e x c l u d e a l l new p h y s i c i a n s , r e g a r d l e s s o f t h e i r i n d i - v i d u a l cost c o n s c i o u s n e s s , u t i l i z a t i o n p a t t e r n s or o t h e r p r a c t i c e c h a r a c t e r i s t i c s , w i t h o u t n e c e s s a r i l y s t r e n g t h e n i n g u t i l i z a t i o n c o n t r o l s r e g a r d i n g t h o s e p h y s i c i a n s a l r e a d y p a r t i c i p a t i n g i n t h e P l a n n o r c o n d i t i o n i n g t h e i r c o n t i n u e d p a r t i c i p a t i o n i n t h e P l a n on a d h e r e n c e t o s t r i c t e r u t i l i z a t i o n c o n t r o l s . Nor d o e s t h e P l a n a p p e a r t o be t a k i n g o t h e r s t e p s t h a t w i l l r e d u c e p a r t i c i p a t i o n so as t o a c h i e v e a material d i f f e r e n c e i n P l a n o p e r a t i o n s , Under t h e c i r c u m s t a n c e s , w e do n o t b e l i e v e t h a t t h i s a r g u m e n t c o u l d j u s t i f y t h e p r o p s e d e x c l u s i o n a r y p l i c y . The key stated j u s t i f i c a t i o n f o r t h e p r o p o s e d w l i c y is t h a t r e d u c i n g t h e number o f p a r t i c i p a t i n g p h y s i c i a n s a v a i l a b l e t o RPS S e e B l u e Gross v. K i t s a p P h y s i c i a n s S e r v i c e , - , n o t e 4 a t 73,208; E n f o r c e m e n t P o l i c y S t a t e m e n t a t 2 5 ,
p a t i e n t s t o a n R a p p r s p r i a t e w r a t i o w i l l r e s u l t i n lower u t i l i z a -
t i o n a n d t h u s lower premiums, You e x p l a i n t h a t t h e G r a d u a t e
H e d i c a l E d u c a t i o n ~ a t i o n a l ,A d v i s o r y Comi t t e e s t u d y ('GmNFnCm)
i n d i c a t e s t h a t 8 4 is t h e @ a p p r o p r i a t e mn m b e r of p h y s i c i a n s , drawn
from v a r i o u s s p e c i a l t i e s , f o r a c o r n u n i t y o f 44,000 p e o p l e ,
A p p l y i n g t h i s d o c t o r - p a t i e n t r a t i o t o KPS% 44,000 p e r s o n e n r o l l -
ment m a k e s 8 4 t h e " a p p r o p r i a t e ' s i z e f o r its p a n e l o f p a r t i c i p a t i n g
p h y s i c i a n s , you sulsnrit, r a t h e r t h a n t h e 2 0 1 t h a t RPS now h a s ,
However, RPS9s p r o w s e d a p p l i c a t i o n of t h e f i g u r e s you s t a t e a r e
drawn from t h e W N A C s t u d y seems questions le, e v e n a s s u i n g t h a t
t h e G m N A C s t u d y r e c o r n e n d a t i o n s ace saund, 9
First, t h e mNX s t u d y ' s eonelusisns r e l a t e ts t h e p h y s i c i a n
t o p p u l a t i o n r a t i o s a n d u t i l i z a t i o n r a t e s within g e o g r a p h i c
market areas, and n o t to s u c h ratios OP rates w i t h i n a particular
insurance or p r e p a m e n t p r o g r a m KPSQ stransfen of these conclu-
s i o n s from o n e c o n t e x t t o a n o t h e r is q u e s t i o n a b l e b t h i n c o n c e p t
and a p p l i c a t i o n , Second, e v e n i f t h e y are g e n e r a l l y u s e f u l for
t h e k i n d of p u r p s e c o n t e m p l a t e d by KPS, it d o e s n o t a p p e a r t h a t
t h e GmNAC r e c o r n e n d a t i o n s provide s u p p r t for, or even are
c o n s i s t e n t w i t h , i n p l e m e n t a t i o n of t h e p r s w s e d restraint on t h e
f a c t s h e r e ,
w i t h r e g a r d t o t h e f i r s t w i n k , t h e G m N X report e s t i m a t e s
a p p e a r t o r e f l e c t a n a s s e s s m e n t o f t h e e f f e c t s o f p h y s i c i a n
b e h a v i o r i n a n e n t i r e market a r e a , which m i g h t d i f f e r s u b s t a n -
t i a l l y from p h y s i c i a n b e h a v i o r w i t h i n a p a r t i a l l y i n t e g r a t e d p r e -
p a i d m e d i c a l c a r e p l a n w i t h some u t i l i z a t i o n c o n t r o l s and some
a s s u m p t i o n o f r i s k by p a r t i c i p a t i n g p h y s i c i a n s , Thus, i t seems
w h o l l y s p e c u l a t i v e t o assunre t h a t r e d u c i n g p h y s i c i a n p a r t i c i p a t i o n
i n KPS w i l l a f f e c t t h e i r p r a c t i c e p a t t e r n s so a s t o r e d u c e KPS9s
costs, Moreover, o n a v e r a g e , a KPS doctor p r e s m a b l y s p e n d s o n l y
a b o u t 25 p e r c e n t o g h i s or h e r time t a k i n g c a r t o f KPS p a t i e n t s ,
s i n c e v i r t u a l l y a l l t h e area" c u r r e n t d o c t o r s p a ~ t i c i p a t ei n KPS
a n d it c o v e r s a b u t 25 p e r c e n t of t h e area p p u l a t i o n , Thus,
u n l e s s KPS e n v i s i o n s its p h y s i c i a n s s e k v i n g RPS e n r o l l e e s a l m o s t
e x c l u s i v e l y a n d n o t t r e a t i n g many o t h e r p a t i e n t s (and you h a v e
i n d i c a t e d n o s u c h p l a n s ) , it would a p p e a z t h a t i f 8 4 p h y s i c i a n s ,
working f u l l - t i m e , are, by GmNAC" c o m p u t a t i o n s , ' a p p r o p r i a t e m
f o r a c o r n u n i t y w i t h a p s p u l a t i o n of 4 4 , 0 0 0 , t h e n t h e m a p p r o p r i -
a t e m number of p a r t i c i p a t i n g p h y s i c i a n s s p e n d i n g a b u t a f o u r t h of
t h e i s t i m e w i t h KPS p a t i e n t s and t h e rest af t h e i r time w i t h other
- S e e R e p o r t of t h e G r a d u a t e Medical E d u c a t i o n
N a t i o n a l A d v i s o r y Conunittee to t h e S e c r e t a r y , U , S , - p a r t -
ment o f H e a l t h and Human S e r v i c e s (19801,
The GHENAC s t u d y recommendations were g e n e r a l l y t e n t a t i v e i n
n a t u r e and t h e i r a c c u r a c y a n d u s e f u l n e s s h a s been ques-
t i o n e d , You d o n o t c i t e t o p a r t i c u l a r r e f e r e n c e s i n t h e
G m N A C s t u d y a s t h e s o u r c e f o r t h e p l a n n e d KPS p h y s i c i a n -
p o p u l a t i o n r a t i o s ,
patients would be well over 280 and could be as many as four times 84, or 336 -- far more doctors than D S now has, Or, from another perspective, contrary to your assertion that there is a pro lem of @over-concentration of physicians in the RPS service areaem$ the ~ p u l a t i o nof 175,000 i n that three-county area apparently would need an increase in physician supply, perhaps t s well over 300, in the Rappropriaten physician-patient ratio under NAC guidelines as you describe them, Conse- quently, it is not clear why reducing, in the way KPS propses, the nurnber of physicians treating KP% patients ~ouldresult in utilization by RPS enrollees at a lesser, "appropriateR rate under NA\C study, so long as the participating doctors continue to compete in the broader market, As to t h e second p i n t noted alaave, KPS may be assming, i n adopting the GmNAC study" suggested physician to patient ratios fot comunitles, that EllPS enrollees and physicians make up a sepa- rate cornunity so that their utilization behavior occurs apart from, and unaffected by the rest of the medical care market in KPSSs service area, This could be true to some extent if RPS enrollees were restricted to using only KPS p a r t i c i p a t i n g physi- cians and RPS participating physicians treated only or almost only KPS enrollees, You have indicated no such plans, Viewed this moreoever, to achieve KPS% stated goals of utilization Fzgbction and cost control, it presumably would have to reduce its complement of participating physicians to 84 or at least to that general range, assming the accuracy and usefulness of the GmNAC" study's figures for KPS's purposes. A participation freeze or relatively small reduction in the nlgaber of participating physi- cians would leave substantial @excess capacityw in the KPS system, presmably resulting in the same overutilization problem KPS hopes to address by its propsal, The propsal to close merabership in KnS to new physicians, abaent a prograna to rapidly and radically reduce participation mong current me&ers, appears incapable of advancing significantly KPS% sstted goal of reducing participa- tion so as to reduce any associated excess utilization of ser- vices. As to RPSQstated justifications, therefore, while cost- contaiment is a legitimate, efficiency enhancing function of RPS, the propsed @restraintM -- the closing of membership to new physicians -- does not appear cdpable of achieving such efficiency to any meaningful degree, and in what it does do, seems broader and more restrictive in its treatment of new physicians than is necessary in order to promote E(nS0s stated long-term goal, There is, we emphasize, no inherent likelihood of antitrust illegality in limitations on physician participation in health Letter from William G. Ropit to Mr. Timothy J. Muris, Director, Bureau of Competition, Federal Trade Comission (November 4, 1983) at 7 n.12,
plans, There is, however, a s t r i k i n g difference between KPS and a h e a l t h maintenance aeganization or other plan that is not prs-. vider-.csntrolled, that has always had a l i m i t e d p h y s i c i a n p a n e l , or t h a t has a much smaller market shame, A n t i t r u s t analysis of membership Limitations by s u c h a group Is v e r y likely to have quite different results with regard ts the likelihood that the restraint would predominantly serve a legitimate business p u r p s e withoue undue e x c l u s i o n a r y e f f e c t , I n s u , based an the a v a i l a b l e f a c t s i n t h i s particular situation, there appears to be a r e a l i s t i c p s s i b l l i t y that s u b seantial anticompetitive e f f e c t s could r e s u l t from fmwsition of t h e promsed freeze o n p h y s i c i a n participation i n KPS for various medical specialties, Moreover, It i s uncertain whether t h e r e s t r a i n t would h a v e offsetting procompetitive effects, because i t does not appear r e a s o n a b l y related t o t h e achievement sf s u b s t a n - tial cost s a v i n g s nor does it appear t b s t t h e r e s t r a i n t is n o broader t h a n necessary to promote legitimate cost+ontsiment objectives of the p l a n , We are, therefore, unable to provide you w i t h an advisory opinion that t h e prowsed participation restric- tion would not violate the antitcust laws, Sincerely, Arthur N, Lerner Assistant Director
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