HMO/IPA

-. 	March 	22, 1984
G2Uart M e 	Friraat, 	E s ~ i r c
primst, 	Ballmy, 	Gilcbrist & 	t i t t s , 	P , C ,
333 West 	Port S t r e e t
S u i t e 	2600
Detroit, 	Michigan 	48226
T h i s 	Latter 	responds to your 	February 	1, 1984, rewest 	f o r
a 	staff 	advisory opinion concerning savaraB issuas 	ragasding t h e
s p e r a t i u a 	sf an W O / f P A 	p l a 	t h a t 	you 	represent, 	Some sf 	tbe
conduct 	sat you asked 	about appaass 	t o be 	an-going 	rather 	than
prospactiva 	and, 	with 	regard 	to 	certain 	issues, we d i d 	n o t 	have
a&& 	t h a 	inesrrnration 	we 	needed 	ts judge 	t h e 	impact sL tba 	conduct
involved, 	T(biece%orapi n 	accgtdanca w i t h 	tba C s m i s s i o n g s R u l e s
of Practice, 	S % , P ( a ) , wa 	cannot g i v e 	s 	formal advisory 	pinion,
~s can, bowever, supply 	sac 	genegal 	guidance w i t h 	regard 	to 	t h e
questions you have raised.
k c o ~ d i n gt o 	a a 	infaranation 	t h a t 	you 	have 	prsvided, 	yaur
o f f i c e represents a 	l a r g e 	a O / f P A 	plan 	that 	h a s 	approximately 	12%
sf 	the 	population 	of 	a 	three-csunty 	service 	area 	as 	e n r ~ P l e c s ,
Tba a0 contzacts 	with 	an 	XPA 	physician 	group 	composed of
s~ptoximately608 of 	t h e 	primary 	care physicians 	i n 	t h e 	service
area 	and 	6 5 % of 	the tstal n u b e r 	of 	physicians 	p r a c t i c i n g 	i n 	t h e
s a e 	area, 	I n 	addition, 	you 	have 	also 	infarmed us 	t h a t 	t h e
eairaburses 	t h o 	LEA brr 	s 	capitation 	basis. 	The 	physicians 	i n 	t h e
PPA, 	however, 	are 	reimbursed on 	t h e 	basis 	sf a fee schedule or 	on
t h e 	basis 	of 	their 	a c t u a P 	charges, 	whichever 	anaunt 	is 	lawar, 	I n
addition, a 	percentage 	sf 	t h e 	fee 	due 	t h e 	physicians 	is w i t h h e l d
by 	t h e 	IPA and 	placed 	i n 	arr account t o 	b e 	used 	t o 	cover 	expanses
Ln 	t h e 	e v e n t 	t h a t 	t h e 	capitation psyracnts age 	Rat 	sufficient 	ts
cover 	tbc 	e x p e n s e s 	o f 	the 	IPA, 	Qso, 	t h e 	and 	t h e 	LPA have 	an
ageetment 	under 	which 	t h e y 	share, 	on an 	equal 	basis, 	any 	deficit
ar 	s u r p b u s 	t h a t 	results 	frsm t h e 	provision 	of 	h e a l t h 	services,
ather 	t h m medical 	secvices, 	to t h e 	eenrsiiees,
Ysu have 	ask& 	f 	s 	~	advice 	on 	tba 	following issues:
L(a) 	Givan 	its caeitation 	and 	r i s k 	sharing 	arxanqcmcnt w i t h
t h e W O , 	c m 	the 	IPA 	independently 	establish 	a 	fee scheduie
f o r 	distribution of 	its 	capitation 	p a p a n t 	t o 	i t s 	physician-
shaheholders 	without 	visiating 	t h e 	a n t i t r u s t 	laws?

( b ) 	Waul4 	t h e 	answer 	to t h i s 	q e s t i o w 	change 	if 	t h e
medership qzaw 	to include more 	physicians 	sr 	if 	a 	Lsrgas
propontion af 	&he p s p u l a t i o n 	e n r o l l & 	in t h e m81
(c) 	IS 	it 	nacassany 	t h a t 	t h e 	undcc take.the 	t a s k 	of
updating 	and 	c o n s t r u e t i n q 	t h e 	t e a 	sebedule and, 	i f 	so, 	what
other 	measures could 	be 	undertaken t o 	alleviate any
a n t i t ~ u s fconcerns?
2, 	Wauld 	any 	st a l l 	of 	t h e 	following proposals, 	i f 	adopted
by 	t h e 	IPA* be a 	violation oe 	t h e 	a n t l t z u s t 	laws?
(a) A p~sposalthaf 	any 	f P A 	s h a ~ a h o L d a ~ 	is or	who
$acmes a f f i l i a t d w i e 	s n o t h a ~ 	s n 	sirnilas 	e n t i t y
$a ineligible t o 	be 	an 	PBA s h a r a h o l d a t ,
( b ) A 	g r o ~ s a lt h a t 	IPA sbseeboldars 	t h a t 	are
a g e i l i a t a d 	w i t h 	other mas 	or 	similar e n t i t i e s 	hold
a 	separate c&ass o f 	s+ock with 	diminished 	v o t i n g 	or
economic sights,
(cj A 	proposal 	that 	t h e 	PPA would 	have 	t h e 	exclusive
use og 	t h e 	s h a r e h o l d c r b 	sname, 	specialty, 	and 	c e r t i f i -
c a t i o n far advertising 	and 	promotional purposes.
T h i s 	l e r t a s 	i s 	Limited 	ts t h e 	facts s a t 	o u t 	above 	and 	in
yeue 	Letter 	o f 	F e b r u a r y 	L , 	%984,
w i . t $ 	regard 	to" t h e 	slfirse sat of issues raised 	i n 	y s u ~l e t t e r
concerning'tbe 	u s e 	sf 	a 	t e e 	schedule 	by 	t h e 	XLBA, 	t h i s 	esmduct
itsc.l&f does no* 	aggcrag 	ts represent 	s 	v i o l a r i o n 	of.t h e 	a n t i t r u s t
Laws, a s s u i n g 	t h a t 	t h e 	physicians " j ~ i n t 	participation 	i n 	t h e
W O proggara, 	t h t o u g b 	t h e 	I B A , 	is Lawful, 	"Pbe C o m i s s i o n 	b a s
analyzed 	some of 	t h e 	competitive 	problems 	Ghat 	may 	occur 	when
physicians 	farm a% apegate 	an 	IPA-type 	EslvlO or o t h e e 	s i m i P a ~
p e e p a n e n t 	plan, 	or 	deal 	with 	a p r e p a p e n f 	plan 	i n 	w h i c h 	t h e
S tatemnt") 	(copy anclosed) , 	Sn 	that 	statement, 	the eonuraission
indicated 	thaf w b a ~ ephysicians 	had 	"partially 	integrated' 	their
practices 	in a erepapane p l a n , 	either 	t h r o u g h 	a 	financial
s~atsibution to 	t h e 	plan 	os 	thrauqb 	an agreement 	to share 	t h e
risk 	of any 	adverse 	financial conscqcnces 	t h a t 	m i g h t 	result 	f ~ a m
the 	2 L a n h 	sopemation, 	then most 	antitrust 	issues 	r e l a t e d 	t o 	the
o p e r a t i o n 	of 	s u c h 	a 	2lan 	would 	%e judged 	under 	t h e 	cule o f
reasan, 	Under 	s u e 3 	an 	analysis, 	t a e 	L i k e f y 	procompetitive 	and
8 a n t i c e m p e e i t i v e 	e f f e c t s 	af 	t h e 	arrangeaent 	a r e 	S a l a ~ c e din 	order
t o 	assess 	its o v e r a i l 	impact 	sn 	c o m p e t i t i o n , 	Snfcrceaent
S t a c o a e n t 	a r 	4 8 9 8 9 ,

G i l b e r t M a 	Primatl E s q i r e 	Page 	-3-
In 	klris 	i n s t a c e , 	t h e 	XPA physicians appeaz 	to have 	a clear
f i n a c i a S , involveman"ein 	t h e 	Ma's 	sparatlon, first 	a ~ o u c g hwhat
is p c t s u a b l y 	a 	substantial 	risk a s s u p t i a n 	v i a 	t h e 	fPASs sccep-
tancar 	s f 	a cspitatisra 	p a p e n t # and second, 	s t ' L a a s t 	arguably,
throuqb 	tbe 	%PA'S paartial 	ownership of 	t h e a Q v,ia 	t h e 	newly-
formed 	nongrofit c o ~ p r a t i o n , Undas 	thaaa 	ciecmstancar, 	t h e
ageements 	on price 	by 	the 	LPA physicians 	r e l a t i v e 	t@ 	their
ps~ticipationi n 	the 	MO--bslh 	in. s e t t i n g 	maxim= 	aflowable 	fees
f o r 	se~vicaspr~vided ta 	aQ1 	and 	i n 	colPecaivaly	p a t i e n t s ,
negotiating 	a capitatian 	r a t e 	with 	a a 	tbat, 	at Least 	i n
p a r t , 	is derived 	from t h e 	p h y s i c i a n s h a g r e d - u p o n 	fee 	Levels--axe
evaiuatad 	under 	rule 	06 	reason and 	axe BistinguishabBa $I-
illaga$ pmfca 	fixing 	in
457 	O,S, 	332 	11982)
46 	OSS* 	643 	(1980) e
the C ~ m i s s i s n -	nstad
t h a t 	u s u a l l y 	t h e practices 	of a p h y s i c i m 	group pagtieipatfng 	i n
the 	g ~ o g s a so$ a medical pscgaypfaant plan 	i n 	a i s manner 	" w L I I
not 	vioiata 	t h e 	a n l i t r u s t 	laws 	u n I t s s 	t h e y 	h a v e , 	or 	are 	likely to
have, 	a 	s i g n i f i c a n t 	anticorapeti t i v e 	effect,.* 	-farcamant
Statement 	a t 	48993,
Ha do 	not baec 	sufgicient i n g o m a t i o n 	to conclude definitively
whether 	tba 	nature 	of 	t h e 	LPA physiciansD invalvemane 	in t h e 	EftvrO
is 	aneicompetitiva 	under 	the rule oP 	reasan, 	Hswcvct, 	absent
e v i d e n c e 	o f 	anticomgceitiva 	e f f e c t , 	and 	a p p l y i n g 	t h e 	guidelines
s e t 	o u t 	by 	t h e 	C c m i s s i o n 	i n 	its 	Enforcement 	S t a t e m e n t , 	we 	d a 	n s t
see 	s u b s t a n $ i a l 	antitrust 	concesns amisinq 	e ~ o msuch 	i n v o l v e m e n t ,
C ~ n s e q u e n t L y ~we Bo 	not sac 	any substantiaE a n t i t r u s t 	problem
a g i s i n g 	E t a 	t h e 	P P A b 	a s d s p t i ~ nag a maximuar 	fa+ 	schedule 	f o r 	its
physicians 	i n 	their 	t r c a a e n t 	oe 	m0 patients, 	Tba 	fee schedule
is 	aggasent&y s vehicle 	fog 	detasmining 	how 	t h e 	revenues from 	t h e
We3 are 	te b e 	d i s t t i b u t a d 	w i t h i n 	t h e 	fBA, 	just as 	any 	corporation
oa 	business 	ocganizati~nm u s t 	determine how 	its revenues will 	b e
d i s t r i b u t e d , 	T h u s , 	t h e 	use sf 	t h e 	f e e 	sekedufe 	to determine 	haw
ts divide 	up 	t h e 	capitation 	p a p n f 	docs 	not, 	i n 	itself, a p p e a r
to presanf 	an 	a n t i t x u s t 	prabfem, 7
C a ~ es h o u l d 	be 	taken 	t h a t 	the 	fee 	schedule 	used 	by 	t h e 	XPA
doas not 	bac~aetRa 	basis upon 	which 	these 	physicians
deec~minatheir 	tees 	to patients 	not 	anzaLlad 	in t h e 	m B ,
Such conduct 	could be c ~ n s i d c r c devidence o f 	i l l e g a l price-
f i x i n g .
X i t h 	regard 	to question 	l ( b ) , 	set 	s u t 	shave, 	t 3 c 	analysis cf
t h e 	L e g a l i t y 	sf 	t h e 	fee 	s c h e d u l e 	f o r 	t h e 	guraoses 	d e s c r i S e d
aaove 	sdauld 	n o t 	appear 	to chanqe 	it 	t h e 	numker 	af 	shysrcrans
sr Gercentage 	of 	t h e 	?spulation 	a a r z i s + p a t f ~ gI n 	:?.e 	2YC* 	,
jr?w. 	.VL.=Z r d g a r d 	zo 	queszian 	L : c ! , siace 	Eke 	: s @ cf 	t:s
;Cznt:nuedi

GiLbccf 	Me Ftimat, Eswire 	Page 	-4-
irn a n t i t r u s t 	grobLem, of 	eesurse, 	could 	exist, w i t h 	ragamd 	to
t h e j a f n t 	n q o l i a t i o n and 	agreement by 	the 	p b y s i c i m s 	i n 	the 	fPA
sn t h e 	eapitagion 	rate t h a t 	they 	will 	accept 	frm 	the 	if 	t h e
LPA physicians 	d i d not have 	a 	financial os 	risk-sharing 	i n t e r e s t
i n 	t h e 	flE(0, 	Sea 	a l o r c m a n f 	Statmane 	at note 	27 	and 	aceaaapanying
t e x t ; 	a t 	356-57, 	Such a c t i v i t y 	is 	net 	v i ~ l a t i v a
sf 	t h 	so long as 	i t 	Is p a r t 	of 	a 	true 	joint
venture and 	so 	long 	as 	its 	anticompatitive aspects arc 	outweighed
b y 	any grccomgetitiva 	b e n e f i t s , 	&farcamant 	Statesent 	a t 	48989-
9 9 1 , 	In 	t h i s 	instance, 	so 	ioaq 	as 	tba 	physicians have 	made
a 	s u b s t a n t i a l 	cantributisn ts t h e 	o p e r a t i o n 	of 	the pban 	or have
undertaken a substantial f i n m c i a l 	r i s k , 	t h a n 	t h i s 	aspact 	of 	t h e
a r ~ m g m a n tpssbably 	alsa waul4 	not 	rapsasant 	an 	a n t i t r u s t
vioLatfsra,
With 	resqect f o 	t h e 	second 	issue 	raised 	i n 	your 	letter,
relating to 	t h e 	possibility sB 	i~16r(aclimgsn t h e 	physicians in t h e
I P A 	a 	that 	they 	not 	a f f i l i a t e 	w i t h 	another	r a ~ i ~ c m c n t 	at
similar 	e n t i t y , 	mar@serious a n t i t r u s t 	issues spa raised, 	Als
nsted above, 	tha 	Comission 	h a s 	indicated t h a t 	i n 	assessing 	t h e
legality 	of 	such 	conduct, 	it will u s u a l l y 	apply 	a 	r u l e 	0% reason,
mforcoment 	Statement 	a t 	48991, 	In 	its 	Eneorcament 	Statement,
t h e 	C s m i s s i o n 	noted 	t h a t 	it 	vsuld 	ba 	likely 	t o 	consider
enfarcement 	a c t i o n 	against 	thsse 	p l a n s 	t h a t 	"prevent 	sr make
impracticable 	t h e 	formatian o f 	other 	p l a n s 	t h a t 	would 	otherwise
be 	Likely 	t o 	enter-the market" 	and 	t h u s 	r e s u l t 	i n 	t h e 	elimination
a f 	p o t e n t i a l 	csmpeti t i o n , 	Enforcement S t a t e m e n t 	a t 	48996-91, 	I n
assessing 	whctbes 	the 	operation of 	a p l a n 	raises 	s u c h 	a n t i t r u s t
s o n c e k n s , 	tba 	Corarraission 	indicated 	that 	i f 	would 	cxminc 	cLosePy
wheeher 	the 	pLan 	i n 	qlrrestion had 	magkct -wet, 	since some degree
of market 	power 	is 	usually required i f 	an 	act or 	practise 	is 	to
h a v e 	a 	significant anticompetitive 	e f f e c t , 	f n 	this regazd
t h e 	G ~ m i s s i o nnotad:
h t i t s u s t 	concern would 	a l s o 	sbisc 	i f 	a 	partially
intagraged 	plan 	required 	its 	participating 	physicians
t o 	sign contracts 	t h a t 	effectively barred 	them 	from
participating 	i n 	any 	other 	p r e p s p a a t 	p l a n , 	and 	so many
physicians 	signed 	up 	t h a t 	it was 	difficult 	f s a 	o t h c r
pLans to saeruit 	a-sufficient physician 	p a n e l ,
Enforeemant Statamant 	a t 	48991 	(footnote omittad), 	Sea 	also 	Blue
, 1982-1 	T r ,
it 	cantract-
i n g 	2hysisians 	from 	becoming 	affiliated 	w i t h 	eoGpctinq 	mas 	h e l d
sufficiently likely 	to 	v i o l a t e 	t h e 	a n t i t r u s t 	laws 	so 	as 	ta warrant
Lssuanee of 	greliminary 	i n j u n c t i o n ) ; 	YedicaL 	S e r v i c e Coro, 	of
f e e scheduie does 	nos 	appear 	ca 	2e 	iilegal, 	no 	f s r c k e r
:tsgonse 	to 	t h i s 	~ u e s c i o n is 	r e q u i z c d ,

88 P.T.C. 	906 	(1976) (consent o r d a ~barring Blue
a physician group fron boycotting 	BHOs 	and
physicians who practlch 	i n 	mas),
Based 	on 	the above 	guidclinss, 	i f 	the 	IPA adopted 	a propcsal
requiring 	all TPA mcmbcrs 	to deal 	exclusively w i t h 	t h a t 	organiza-
t i o n , 	such a c t i o n cou&d present 	serious a n t i t r u s t 	concerns 	and
t h e 	C o m i s r i o n might 	decide 	t h a t 	entorc.mcnt 	a c t i o n was warranted.
w he 	IPA 	i n question 	i n c l u d e s 	a 	substantial majority of 	t h e
physicians 	i n 	t h e 	area: 	khcr&fore s u c h 	an crclurivity 	provision
could make 	it extremely difricukt 	Lor 	a 	new or existing 	aMO a r
simiiar organization to a t t r a c t 	o r 	retain 	t h e 	physicians t h a t 	it
wculd 	c ~ a dto operate cf2c t i v a L y 	iL enough 	physicians 	agreed 	t o
the 	exclusivity @rorision.' 	Thus, i L 	t h e 	IPA enact& 	such 	a
p r o p s a l 	i@ 	could 	have a 	significant anticompetitive 	a t t a c t 	and
might 	w e l l 	b e 	unlavtul. 	unless it could be 	shown 	to hare 	an equal
or 	g ~ e a t e rg ~ ~ e m ~ e t i e i v e 	P r o l 	t h e 	inrormaefon you-	effcet.
provided. 	bowaver, eherc 	appears 	t o 	b e 	little 	valid 	procompetitive
juaeiticaeion foe 	Chis 	restriction. 	Yaur 	letter s t a t e s 	thaC 	t h e
IPA h a s 	an 	i n t e r e s t 	i n 	a a a u ~ i n gthat 	physician 	ahareholdarr 	a f t 	i n
the 	best 	i n t e r e s t 	oC 	t h e 	BHO/IPA 	plan. 	Bcwevcc, 	it 	is not clear
why 	t h e 	Legitimate 	i n t e r e s t s o f 	t b e 	XPA 	eculd 	not 	adequately 	bc
protected 	through 	scma means 	c h a t 	has less p o t c n t i a Z 	f o r 	i n j u r i n g
competition,
G i n a i l y , 	eha 	a a t e r n a t i v a 	p ~ o g o s s l s i n 	youp 	I c t t c r , 	such 	as
giving 	physicians -who a r e 	affiliated 	w i t h 	another 	Bn0 a 	scpagate
class o f 	stock 	w i t h 	diminished 	v o t i n g 	or 	ecancmic 	r i g h t s 	o r
requiring-that-phybiciansg i v e 	t h e 	TPA 	t h e 	exclusive 	use of 	t h e
their 	rime Eog advertising 	and 	pramctional purges.., 	also could
r a l s a 	tba 	s;lmae a n t i f r u s t 	problems notad 	above 	if 	a 	sufficient
number 	or 	physicians 	i n 	t h e 	IPA agreed 	to be bcund 	by 	t h e 	terms
of 	t h e s e 	propcsalr 	hnd 	a 	new 	firm 	attempting 	to enter 	would 	have
d i f f i c u l t y 	a t t r a c t i n g 	t h e 	necessary 	physicians 	or successfully
mscketing 	its p r o g r a 	to consumers,
Of 	course, 	if 	e h c r e 	were 	e v i d e n c e 	t h a e 	doczors 	would 	fareqo
e h e ~ rscabership 	in 	t h e 	i P A 	i n 	order 	t o 	aerzit 	t h e i r 	a a r r i -
GL2acren 	L R a t h e r 	v e n t z z l s , 	then 	t h e 	s o s s i b i e 	a n t L c % m p e ~ i : i v e	. - .
+ f z a c z s a f 	t h e 	a x c l ~ s i v r = ; ~ 	s ~ u - G2e 	ameL:ors:od+	~ r o v i s ~ c n
2

G i l b e r t M, 	F t h c t l 	E s q u i ~ a 	Paqa 	-6-
be 	d o v e 	legal advice 	i s an informal 	staff 	n i o n , 	mdet
issisn's 	U l a s of 	Practice 	QP, 3 (c), t h e 	C ission 	is
this advice 	a d 	reserves t h e 	s i g h t 	t o 	rescind 	it a t a
later 	ti8~0~
SLncemely y o u r s ,