Doctors and the FTC: Advice from an insider

August 6, 2004

Recent actions against doctors have left many of you confused. We asked an expert to help us sort things out.

Recent actions against doctors have left many of you confused. We asked an expert to help us sort things out.

When Timothy J. Muris was appointed head of the Federal Trade Commission in June 2001 (he resigned this May), he quickly let everyone know his priorities. Among other things, said Muris, the FTC would target healthcare, including alleged price-fixing by physicians.

During his three-year tenure, Muris made good on his word. The antitrust agency took dozens of actions against doctors who, it alleged, engaged in price-fixing, along with other anticompetitive conduct. The crackdown has enraged doctors, including the American Medical Association, which has asked the FTC to expend similar energy investigating health plan mergers.

To help explain this and other antitrust matters, Senior Editor Wayne Guglielmo spoke to one of the nation's top experts, Robert F. Leibenluft. A partner in the Washington, DC, office of Hogan & Hartson, Leibenluft was formerly the assistant director for healthcare in the FTC's Bureau of Competition, where he reviewed mergers, acquisitions, and joint ventures, including those involving doctors.

It appears that antitrust agencies are constantly scrutinizing doctors, while health plans merge and grow larger everyday. Why aren't doctors permitted to get together in order to counterbalance the increasing market clout of the plans?

Leibenluft: Let's leave aside health plan conduct for a moment. As a general rule, efforts to achieve "countervailing market power" aren't a legitimate antitrust defense, since such efforts typically result in less competitive markets for consumers.

As for the plans, three points can be made. First, the antitrust laws apply equally to both providers and health plans. So if health plans jointly negotiated with either their providers or with their customers without first creating the requisite integration, they, too, would face scrutiny by the antitrust agencies for illegal price-fixing.

Second, a health plan that grows larger over the years as a result of its own business success isn't necessarily violating the antitrust laws, as long as it doesn't engage in predatory or exclusionary conduct.

Third, antitrust enforcers have closely reviewed past mergers, and most don't involve plans that substantially overlap in the same geographic areas. Thus, they haven't raised significant antitrust issues.

Our readers have heard the term "clinical integration," but many don't fully understand it. Is this one way that physicians can lawfully negotiate with health plans on a joint basis?

Leibenluft: Yes, if properly implemented. Under the antitrust laws, independent physicians who come together for the sole purpose of jointly negotiating with health plans are considered to be engaged in price-fixing. Even if these physicians constitute only a small percentage of the doctors in a given area, their conduct is illegal, and they may be subject to criminal prosecution.

The situation is different for independent doctors who clinically integrate their practices for the purpose of becoming more efficient—for instance, by improving quality or reducing unnecessary services. Such conduct is judged by another yardstick, known in legal terms as the "rule of reason." This rule says, in effect: Joint negotiations are permitted under the antitrust laws, unless the integrated joint venture exercises undue market power. Generally, ventures that include fewer than 35 percent of the physicians in a local area are unlikely to have this power.

Does the "rule of reason" apply to any other form of integration?

Leibenluft: Yes. Besides clinical integration, the federal antitrust agencies—the FTC and the Antitrust Division of the Department of Justice—also recognize financial integration.

In a financially integrated arrangement, the joint venture or network takes on financial risk—for example, by contracting with health plans on a capitated basis. Because doctors have taken on this risk, antitrust enforcers assume they will do what they have to (establish quality and cost-control mechanisms, for instance) to become more efficient.

In a clinically integrated network, physicians may employ some of these same mechanisms, but without taking on financial risk. Given the recent shift away from HMOs, some physicians may find this approach increasingly attractive.

So should clinical integration be the arrangement of choice among certain independent physicians?

Leibenluft: Perhaps, but they face a challenge. Unlike doctors who assume financial risk, doctors who integrate clinically can't point to a reliable "marker" to determine when their network is sufficiently integrated to warrant "rule of reason" treatment. The antitrust agencies have provided only limited guidance, so each network must be evaluated individually. For this reason, doctors who go down this road must be prepared to demonstrate, in measurable ways, what they've done to improve quality and cost savings. Ideally, they should also be working with their local health plans to explain to enrollees how these initiatives will benefit them. All this, of course, involves a substantial outlay in physician time and money.

So, yes, clinical integration may be a viable option for physicians genuinely interested in working together to improve patient care, while maintaining their independent practices. And, as an offshoot of this integration, they may be able to negotiate lawfully with health plans. But no one should underestimate the amount of effort to both develop the network and keep it going.

Many of our readers are equally confused about the use of the "messenger model" in physician contracting. How does this model work?

Leibenluft: To answer this question, I need to refer to something I said earlier: Only independent physicians who integrate sufficiently financially or clinically may jointly negotiate with health plans. Because they aren't integrated, messenger-model physicians can't legally negotiate with health plans—and neither can they reach agreements among themselves about minimally acceptable fees. But they can take steps to reduce their transaction costs—by, for example, using a common messenger (hence the name) to communicate with health plans and to provide information to physicians so they can make informed decisions about contracting proposals.

To be legal, this arrangement must meet certain standards. Among other things, the messenger must be an independent agent who isn't competing with anyone in the network. Also, the agent can't negotiate on anyone's behalf, although he may disclose to health plans the fees and terms that individual members have independently determined are minimally acceptable.

Some doctors like this arrangement because it makes communicating with health plans easier. Plans, in turn, find it a convenient way to assemble a provider network, especially if they're new to an area.

But doctors should proceed cautiously, since antitrust enforcers have challenged physicians who believed they were employing lawful messenger models.

What steps can doctors take in messenger models to keep on the right side of the law?

Leibenluft: In general, they should avoid any conduct that suggests they have reached an agreement among themselves about any competitively sensitive issues. Things to be avoided include pre-established fee schedules that give members the choice of opting-in or opting-out and the use of minimally acceptable fee thresholds. Also, doctors who are part of the network should avoid contracting only through the messenger model. Prospective network members should be especially wary if network administrators promise higher reimbursement levels than doctors would obtain if they negotiated individually, which is a sign something illegal is likely afoot.

Despite all this, messenger arrangements can be helpful to doctors, especially when their network does a good job of explaining and helping to implement individual contracts.

In general terms, what information are doctors permitted to share with one another about health plan contracts?

Leibenluft: Here's one area where doctors can work together—as long as they don't do anything to suggest they're attempting to coordinate their conduct. As I've mentioned, it's illegal for physicians to reach an agreement concerning the price or other terms under which they'll contract. On the other hand, to decide whether or not to enter into a contract, physicians must be able to understand the terms they're being offered. Thus, it's reasonable for them to hire an expert to advise them on the meaning and implications of these terms. It's also reasonable for them to seek comparative fee information, so that they can compare the fees of various health plans to one another or to some objective benchmark, such as the Medicare fee schedule.

But caution is in order. The expert that doctors hire to help them learn about comparative fees, for instance, must proceed objectively, comparing financial terms in a strict and impartial manner. If he deviates from this by, for example, awarding some contracts an A grade and others a D, the antitrust risk would increase significantly, especially if few physicians signed up for the plan offering the D contract. In such a case, enforcers might well infer that doctors had decided among themselves beforehand not to sign up with any health plan receiving less than a certain grade.


Wayne Guglielmo. Doctors and the FTC: Advice from an insider. Medical Economics Aug. 6, 2004;81:48.