Pacific International Health, Inc.

Bureau sf Competition
FEDERAL TRADE COMMISSION
WASHINGTON, B.C.28W
Richard 	C s 	Greenberg, E s q .
Burkley, 	W o r e , Greenberg C t p a n
Suite 458 	Union Bank Tower
21515 Hawthorne BPvd,
Torrance, California 	90503
Bear Mr, 	Greenberg::
mis 	letter responds to your 	request Lor 	an informal
advisory opinion letter 	regarding 	the 	legality, under 	the laws
enforced by 	the Federal Trade Commissionr sf the formation and
operation sf your client, a preferred provider organization
("PPO") to be known 	as P a c i f i c 	Xwternatianal Health, Xne.
According 	to the information contained 	in yaur 	written
submission and 	supplemented 	in several telephone eonversatians,
Pacific International Health would be a 	for-profit esrpration
operating 	in the 	L a s Wngeles area, 	It would be pastisufarly
designed to serve the health eare needs 0%Japanese and Japanese-
Fanaesicans which, according to your client, are not being
adequataly served by 	existing plans, but 	it would 	offer services
to 	individuals of 	all demographic groups, 	Its 	service area would
include cornunities with significant oriental populations in the
Los ~ngeles/~ong 	Ana 	primary metropolitan	Beach and ~naheirnl~anta
statistical areas 	( P N S A ? ) . 	f n 	1980, tksse two P m A b had a
total population of 9,4 	million, including 39,880 	persons with
Japanese surnames,
Pacific 	fnternational.Healt2awould be awned "lay 158 or 	fewer
physician 	""raerabers-" 	"ckt 	neraber would pay 	the PPO an annual
enrollment 	fee of $580, 	In addition, each member 	would pay 	the
BP8 a percentage 	(set by 	the 	PBO at between 5 % and 	15%) of any
fees received 	for providing health eare 	services to beneficiaries
of any of 	the P P O b 	third-party payers, 	If the 	PPO" 	expenses
exceeded 	its revenues, each meaer 	would be 	assessed an
additional amount. 	P f 	the P P B h 	revenues exceeded 	its expenses,
the PPO 	could decide to refund all or 	part of 	the excess to its
members in proportion ts their contributions, 	Each 	member would
be sn Pacific International Health" 	provider panel, 	m e
provider panel would aPso include "contnet physicians" who would
not have 	an ownership interest in the PPB. 	m e contract
physicians wsuld pay 	the PPO 	the same percentage that members
would pay of 	fees received 	for providing health care services to
beneficiaries of any of the P P B k 	third-party payors, 	m e y 	would
pay 	no annual enrollment fee, however, and 	they would 	not be
liable f o r 	any additional assessment ar entitled to share in any
excess of the P P O h 	revenues over expenses. 	Pacific fnternational
Health anticipates that 	there will be 	no more 	t h a n 	180 contract
physicians at any time,

Richard 	C. 	Greenberg, E s q .
page 	two
p a c i f i c 	International Health 	expects that 	I t s provider panel
of 	me&ers 	and contract physicians will be about 	65% primcry care
MysisPans 	and 	3 5 8 	specialists* 	TAe panel would 	comprise about
1% sf all physicians in the P M A h 	i n 	which Pacific International
Health will operate, 	Panel physicians would 	n o t 	comprise a
majority 	of practicing physicians 	in the area, nor a majority of
any significant fiysician specialty, 	In addition, t 3 e PPO
anticipates that 	it will provide 	less than 18 of the overall
h e a l t h 	services i n 	the 	&"%Ah 	and 	less 	than 	10% af 	such 	services
in the Japanese 	cornunities in the service area.
Pacific International Health would enter 	i n t o contracts with
third-party paysrs 	(such as employers and 	insurers) that 	offer
group health benefit plans, 	Under 	these 	contracts, the 	PPO would
provide a 	third-party payor 	with a 	list of physicians 	on its
provider panel, 	Tn 	addition, Pacific 	International Health would
perform peer and utilization review to aid 	third-party payors in
quality 	and 	cost controls, 	Initially, 	the third-party payors
would 	not pay 	Pacific International Health directly for any
services, 	I n 	the 	future, the third-party payors might 	agree 	to
reinburse Pacific International Health 	far peer 	and utilization
review.
Pacific Xnternatianal Health 	would 	not 	be 	a party 	to any
price agreements with physicians ar 	third-party payors, 	a t h e r ,
each third-party payor would 	contract directly with 	some or all
sf the physicians ow the PPO" 	provider panel, 	Each 	physician
would 	determine whether and an what conditions 	to contract with
each 	third-party payor, 	me 	third-party 	payors would pay 	the
physician directly for services rendered 	to their beneficiaries,
m e physician 	would 	then pay Pacific International Health the
appropriate percentage 	of 	fees received, 	Pacific 	International
Health would 	use 	these fees for operating expenses, contingencies,
sr expansion of services, 	Unneeded 	funds from any 	fiscal year
c o u l d 	be 	returned to members 	in proportion to their contributions,
According 	to your submissions, Pacific 	International Health
would be a 	"non-exclusive" plan; 	it would 	permit participating
physician providers to affiliate with other plans, 	In addition,
third-party payors 	could permit 	their beneficiaries to seek 	care
from noneparticipating providers 	(although beneficiariesbaut-of-
pocket 	expenses 	might 	be higher when 	noneparticipating providers
are u s e d ) ,

- -
3ichard 	C. 	Greenberg, E s q .
page 	three
Based an the 	above description af 	Pacific International
Health, 	it 	dses 	not appear 	likely that 	formation and operation sf
the PPQ would 	v i o l a t e 	the Federal Trade Coraraissian Act 	or a y
provision sf "te antitrust Laws enfareed 	by 	the 	Cornmi-ssion.f
I n 	general, PPOs 	may be 	procompetitive 	by 	stimulating price,
quality and 	service competition among physicians and 	third-party
payors. 	NsaetAeless, PPQs, 	particularly P P 8 s 	such as 	Pacific
International Health that are established and operated by a
group of providers, can 	raise several potential 	antitrust
issues, 	Appropriate antitrust analysis of these issues seeks to
determine wkzther 	the 	PPO would 	ultimately serve 	significantly
to lessen competition in relevant markets 	rather 	than to
stimulate it-
Since a physisian-e~ntro1I,edPP8 	t p i e a l l y 	contains
physicians who o f f e r similar medical 	services and 	are competitors
in the 	same geographic area, 	its operation involves some
horizontal agreements among eompetitsrs, 	m e nature 	of such
agreements and 	their 	likely effects can determine whether 	the
p l a n 	will 	operate anticompeririuely.
m e 	first concern in the antitrust analysis of a provider-
owned PBO 	is 	the extent to which the PP8 arrangement 	invslves
horizontal agreements among 	competing physicians 	to fix or set
the price at which 	they will 	sell their 	services to be~efieiaries
of plans 	that have contracted that 	the P P 6 , 	Such zgreements may
antitrust Paws,
@ 	457 	O * S * 	33
alth 3as bee
among 	physicians on price or price-related 	terms. 	Instead, there
will be 	individual negotiations between each 	third-party 	payor
and 	each physician provider,
Second, other agreements among 	P P 8 physicians t h a t 	restrain
competition among 	them 	and 	are broader 	than necessary to assure
efficient operation of the P P 8 would be 	l i k e l y 	to violate 	the
antitrust l a w s , 	For example, agreements among otherwise
m i s 	advisory 	opinion is 	limited ta the proposed 	program
described above. 	L t 	does not apply	- 	ts actions that are
different 	from 	those described,
For a discussion of 	the analyses applicable to price-related
agreements amowg 	physicians members of 	a 	P P 8 , 	-	see letter
from M, 	Elizabeth Gee, Assistant Director, Federal Trade
Commission, to Michael A , 	Dunehean, March 	17, 	1986.

Richard CI 	Greenberg, Esq.
@ 	page 	four
mpeting PPO physicians regarding the terms on which 	they would
al with 	patients not covered by 	the P P 6 or vith other P P 6 s
would 	be 	unlawful, 	mere 	is no 	indication t h a t 	such agreements
are 	contemplated 	By 	or will be 	involved 	in the proposal to
establish 	the 	PPO, 	A 	third antitrust concern invollv@s 	agreement
that 	c o u l d 	foreclose 	competition from other BPOs ar 	other
delivery plans 	such as health 	maintenance
organizations 	( ~ Q s ) ,For example, 	exelusive arrangements
between physicians and 	the PPO could unreasonably 	restriet
competition in the 	market 	in which the FPO eolapetes, 	A PP8 could
exclude competition by 	using exclusive contracts i f 	so many
physicians 	I n 	a given m a r k e t 	a f f i l i a t e d 	e x c l u s i v e l y with one PPO
that it Became difficult om 	impossible f o r 	sther 	PPOs or HMOs to
enlist physicians 	and 	to compete for 	paysrs and enrollees,
Based on yous 	representations, however, it appears unlikely that
P a c i f i c 	International Health w i l l be 	structured to or otherwise
be able to 	foreclose 	entry and 	csmpetitian by 	other PPOs 	and by
WOs. 	As a nsn-exclusive plan, the PPO would permit physicians
to participate 	in competing BPOs 	and 	in AMOS, 	n u s , 	the extent
to which physicians 	agree to centract with 	the 	P P 8 	should 	not
serve 	to 	foreclose competition from other plans. 	In addition. 	it
does not appear likely that the PPO will 	include such a 	large
proportion of physicians 	in any market 	t h a t 	competing
organizations would be unable to recruit ensugh 	physicians to
establish 	their own panels,
YOU have asked 	specifically whether organization and
operation sf a PP8 targeting persons of Japanese d e s c e n t 	would
raise significant antitrust questions* 	Unless health 	care
services provided 	to people of Japanese d e s e e n t 	could be
considered a separate relevant product 	market, no new antitrust
issues 	are raised by 	this aspect 	of the proposal. 	Absent 	a
showing of special 	difficulty in providing services to suck
persons 	(ineluding geographic considerations), 	it is unlikely
that 	services sold 	to one demographie group would be eonsidered a
separate product market 	from services sold to the rest of the
population. 	To the extent 	that persons of Japanese ancestry have
access to prepaid health care plans available to others, and
&sent 	any other 	indication that the products 	are distinct, it
seems likely that 	the relevant produet 	market 	would 	not be
limited 	to 	sales of health 	care services to those persons-
Even 	if 	the product market could be 	so 	narrowly d e f i n e d , 	n o
antitrust 	problem would 	arise, so bong 	as the competition for
patients by other groups o f physicians was 	not precluded, 	If
physicians have access to other organizations that can compete@ for patientsVbusiness, OP 	c a n 	sell 	their services directly 	to

Richard C s Greenberg, E s q ,
page 	f i v e
patients without being a melaber 	o f 	the 	W O , 	t h e n 	competition
among PPB physicians and others w i l l 	n o t 	be 	impaired by 	the
operation sf 	the PPO, 	even 	if the 	PPO were 	to obtain a 	very 	large
share af the 	market, 	Moreover, you estimate 	that 	the 	PP8 will
obtain 	less 	t h a n 	s 	10% share 	of 	the 	services rendered, i n 	the
Japanese cornunities 	i n 	the 	service area.
For 	the 	reasons 	discussed above, 	it does n o t 	appear 	t h a t 	the
formation and operation s f 	Pacific International Health 	i n 	the
manner 	described 	above would 	v i o l a t e 	any law enforced by 	the
Federal 	Trade 	Commission,
Yau should be aware 	that 	t h e 	above 	advice 	does 	not bind
either the 	C a m i s s i o n or the 	Bureau 	of 	Competition, 	B a t h 	the
C ~ m i s s i o nand 	the Bureau 	o f 	Competition r e t a i n 	the 	right 	to
reconsider the 	questions involved, 	I f 	implementation of the
proposed 	program 	results I n 	substantial anticompetitive e f f e c t s ,
OP 	if the 	program 	is used 	for improper purposes, the 	B u r e a u 	or
the 	Commission 	may 	take 	such action as 	would 	be 	in the 	public
0 i n t e r e s t ,
S i n c e r e l y ,
Q
Assistafit 	Director