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Clinically Integrated Physicians May Jointly Negotiate Payor Contracts

In February of 2002, the Federal Trade Commission (FTC) decided not to challenge a physician group's plan to operate as a clinically integrated joint venture and jointly to negotiate contracts with payors. While the FTC has previously allowed joint negotiation by physicians that are "economically" integrated, such as through joint profit sharing or capitation plans, this is the first time that the FTC has allowed joint negotiation on the basis of "clinical" integration alone.

A. The Program The program analyzed by the FTC was proposed by MedSouth, a multi-specialty, independent practice association composed of competing primary care and specialist physicians who practice in Denver, Colorado. The clinical side of the MedSouth program consists of two parts. First, MedSouth will develop and use a web-based, electronic clinical data record system that will permit its member physicians to share clinical information relating to patients. Second, MedSouth will adopt clinical practice guidelines and measurable performance goals relating to the quality and appropriate use of services provided by MedSouth physicians. Although MedSouth physicians will remain economically independent, all MedSouth physicians will be required to participate in these clinical information and performance activities. The goals of the program are to improve patient care and patient outcomes, reduce medical errors, allow for the more efficient provision of services and reduce medical costs. MedSouth will offer the services of its physicians to third-party payors and will negotiate contracts with the payors. All MedSouth physicians will be required to provide services under these contracts. However, the program will operate as a non-exclusive network, allowing MedSouth physicians individually to negotiate and to contract with payors, as well as participate in other physician contracting organizations.
B. FTC Analysis Standing alone, MedSouth's joint negotiation of price terms with the payors would constitute an agreement among otherwise independent physicians not to compete on price, and would be illegal under the federal antitrust laws. However, in the FTC's opinion, such automatic illegality is not appropriate in this situation. Here, a more elaborate analysis is necessary to determine if the overall effect of the program is anticompetitive, and thereby illegal. The FTC determined that the mere adoption of a common clinical information system by itself does not establish a level of integration sufficient to justify the joint negotiation of prices. However, the FTC reasoned that MedSouth's clinical information system, combined with its establishment of clinical practice guidelines and performance goals, created efficiencies that could not be realized by physicians acting independently. Moreover, the FTC believed that MedSouth's proposed joint negotiation of contracts with payors was reasonably related to the integration and reasonably necessary to achieve the procompetitive goals of the program, because such joint negotiation of prices was necessary to ensure the full participation of the MedSouth physicians in the network and its activities.
C. FTC Warnings Although MedSouth's program passed the first FTC test, the program must pass additional FTC muster in the future. Since the MedSouth program has yet to be implemented, the FTC could not predict the magnitude of anticompetitive or procompetitive effects that will flow from its actual operation, and, therefore, the FTC could not predict the program's ultimate legality. However, the FTC identified the following issues as affecting the legality of the program: 1. Whether the membership of MedSouth is large enough to permit MedSouth to exercise sufficient market power, and thus to extract higher prices. The larger MedSouth is, the greater the antitrust risk. 2. Whether the non-exclusive nature of the program is ignored. MedSouth would face significant antitrust risk if the physicians refused to contract independently, or if the prices negotiated by the group became the focal point for collusion on individual contracts. 3. Whether certain subspecialist physicians have an insufficient amount of MedSouth referrals for their practices to be considered integrated into the plan. MedSouth would face significant antitrust risk if it negotiated prices on behalf of such subspecialists. 4. Whether MedSouth achieves the efficiencies that it expects to realize from the program. The lesser the efficiencies realized, the greater the impact of anticompetitive effects in the analysis of the program.
D. Conclusion The FTC concluded that on balance the proposed program has the potential to improve the quality and effectiveness of health care services, and could provide important benefits to consumers. Based on its preliminary review of the program, the FTC announced that it would not challenge the program's implementation. However, the FTC warned that it will closely monitor MedSouth's operations. If MedSouth's member physicians use their collective power to force payors to contract with the network or to pay higher prices, or if there is no evidence that substantial efficiency benefits outweigh potential anticompetitive effects, then the FTC could deem the program illegal, and subsequently bring an enforcement action against MedSouth.


September 22, 2002




Rosen, Barry F.


Health Care