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May 1996
Volume 60 |
Number 5
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PRACTICE MANAGEMENT
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| Justice Department
Disapproves Group Network |
Karin Bierstein, Practice Management Coordinator
"Justice Department Concludes Joint Venture of Anesthesia
Groups in California Poses Substantial Risk of Competitive Harm"
This headline appeared on a press release issued by the U.S. Department
of Justice (DOJ) on March 8, 1996, announcing that it would not
approve a proposal by five Orange County, California, anesthesia
groups to form a network that would seek capitated contracts.
This represents a major setback to the efforts of many anesthesia
practices to consolidate and grow.
The DOJ's decision follows 12 consecutive "business review
letters" approving various physician networks and a single
negative letter. The negative letter addressed a proposed pediatric
network and was issued one week before the Orange County letter.
The anesthesia and pediatrics decisions are reviewed below.
Proposed Orange County Anesthesiology Network
The DOJ disapproved the Orange County network because it found
that the joint venture as proposed would pose "a substantial
risk of competitive harm" and would "yield no procompetitive
benefits that would outweigh that risk." The network failed,
according to the press release, because it would not cut costs,
improve patient care or offer any efficiencies, and it would most
likely result in higher prices.
Weighing competitive harm against procompetitive benefits is the
classic antitrust "rule of reason" test. In choosing
to apply that test, the DOJ rejected the argument that the network
would fall within the safety zones laid out in the 1994 Statements
of Enforcement Policy and Analytical Principles Relating to Health
Care and Antitrust (see the "Practice Management" column
in the November 1994 NEWSLETTER). In particular, the safety
zone for exclusive physician networks comprising 20 percent or
less of the market was not applicable, since the proposed network
would include at least 30 percent of all anesthesiologists in
the relevant market. Accordingly, the DOJ proceeded to analyze
the Orange County network under the rule of reason.
Narrow definition of "relevant market": The definition
of the relevant market also killed the Orange County network under
the DOJ's rule-of-reason analysis. The network contended that
its members would continue to compete in an area encompassing
Los Angeles, San Diego, San Ber-nardino and Riverside as well
as Orange counties. It estimated that more than 1,000 anesthesiologists
lived within an hour's commute of the central geographic point
of the territory to be covered by the network. Given the oversupply
of anesthesiologists, the willingness of hospitals to replace
existing groups with cheaper anesthesia providers and the aggressiveness
of Premier Anesthesia (now Allegiant Physician Services, Inc.)
in pursuing southern California hospital contracts as well as
the clout of three large southern California groups, the proposed
five-group, 100-anesthesiologist network would not be in a position
to harm competition.
The DOJ, however, determined that the relevant "service"
or "product" market was much smaller, based on the supply
of anesthesiologists who might be "adequate substitutes"
for the five groups at their respective hospitals. In a market
defined this narrowly, the number of anesthesiology groups would
have been reduced from six to two -- an unacceptable situation.
To calculate the number of potential competitors, the DOJ limited
the geographic scope to anesthesiologists who lived within 30
minutes of each hospital and could thus provide on-call coverage.
More importantly, the DOJ determined that possible substitutes
must be "familiar enough" and "acceptable"
to the hospital's surgical staff. In language that one can expect
to see quoted extensively in the future, the DOJ stated:
"[T]he relevant service market for assessing the proposed
joint venture is managed anesthesia services provided by adequately
sized, financially integrated anesthesia medical groups that
have a reputation and range of experience comparable to the
existing Groups and are known and acceptable to the surgeons
at the Affected Hospitals."
Based on interviews with the hospital administrators, the DOJ
concluded that the hospitals would not replace their anesthesiologists
if their surgeons did not have full confidence in the replacements,
even if the latter had significantly lower fees. There was only
one other group that could have satisfied the standard of size,
integration and familiarity and thus compete with the proposed
network. The DOJ did not consider the possibility that the 250
Orange County anesthesiologists who would not be included in the
proposed network might prospectively form large, integrated, acceptable
groups that could offer alternatives to the affected hospitals.
Accordingly, competition could have suffered substantial harm.
This test of the relevant market is not only extremely restrictive,
it also places anesthesiologists between a rock and a hard place
in terms of their relationships with the surgical staff. In order
to have a seat at any physician-hospital organization or multispecialty
group bargaining table, anesthesiologists are well aware that
they must cultivate the confidence and support of their surgical
colleagues. If they are successful, however, it now appears that
those hard-won good relationships may be a brake on growth.
In addition to circumscribing very narrowly the service market,
the DOJ summarily adopted a restrictive geographic market standard.
It considered only the anesthesiologists in Orange County, rejecting
the contention that the four contiguous counties should be included.
Refusal to recognize procompetitive benefits: Having determined
that the proposed Orange County network would have the potential
to harm competition, the DOJ proceeded to the next step of the
rule-of-reason analysis: assessment of procompetive benefits.
None of the "efficiencies" cited by the anesthesiologists,
in the DOJ's view, required that the five groups form a single
entity to negotiate with managed care plans. Thus, the groups
were able to offer risk-sharing agreements individually. They
could seek volume discounts through cooperative purchasing ventures.
Developing cost-reducing practice protocols that must be approved
by all five groups and the hospitals that they would continue
to serve would be more cumbersome, not more efficient, than adopting
protocols separately at each location.
The DOJ's business review letter did not address other procompetitive
effects claimed by the Orange County anesthesiologists. These
effects included cross-coverage opportunities; centralized scheduling;
the ability to provide "cutting edge" training programs
as well as training for ancillary personnel; lowered billing,
data collection and insurance costs; and reduced legal, accounting
and consulting fees.
The legal environment for consolidation of anesthesiology groups
has thus become considerably less favorable. Under the DOJ's rule-of-reason
analysis outlined above, very few anesthesiology groups could
affiliate without threatening competition. It is still possible,
however, that a proposed joint venture will fall within the antitrust
safety zones and thus be exempt from scrutiny under either the
rule of reason or the "per se illegality" standard.
Those safety zones are available for physician networks that propose
to share substantial financial risk and that do not encompass
more than 20 percent of the market in the case of an exclusive
network or 30 percent for a nonexclusive venture. The denominator
for determining the ratio for purposes of the safety zones appears
to be all physicians in the affected specialty in the geographic
area, rather than the more restrictive "familiar, large and
financially integrated" category used by the DOJ in analyzing
the Orange County network under the rule of reason. In some markets,
antitrust counsel should be able to help anesthesiologists structure
affiliations that will come within the safety zones.
New Jersey Pediatricians' Network Proposal
One week before releasing its decision in the case of the Orange
County anesthesiologists, the DOJ issued a negative business review
letter to a group of southern New Jersey pediatricians who had
proposed to form a network to contract with managed care plans
to provide basic health care services for children.
In this instance as well as in the Orange County situation, the
DOJ applied a narrow definition of the relevant service and geographic
markets. Rejecting the contention that the antitrust effects of
the proposed network should be tested in a market including all
pediatricians and family physicians in the Greater Delaware Valley,
the DOJ limited the geographic market to "at most two or
three small adjacent cities or other localized areas probably
not more than 15 miles in diameter." The department reasoned
that most health plan members would be reluctant to travel any
distance to obtain basic medical services for their children.
The department also refused to count family physicians among the
potential competitors, on the grounds that parents expected their
health plans to offer pediatricians as primary care providers.
Under these tests, the proposed network would represent more than
50 percent to 75 percent of the primary care pediatricians in
several of the local markets, and it would "likely be able
successfully to demand supracompetitive rates."
It is important to note that there was extremely strong evidence
of anticompetitive intent on the part of the pediatricians proposing
the network. Documents considered by the DOJ indicated that one
of the prime objectives was to obtain greater bargaining power
by presenting a united front. A network member stated to at least
one managed care plan official that the southern New Jersey pediatricians
were organizing and would soon be in a position to dictate terms
to managed care plans. For these reasons, it would have been very
difficult for the DOJ to approve the network.
The next few decisions that the DOJ makes, either approving or
disapproving physician networks, will be very interesting. On
the one hand, there is a clear preference for highly restrictive
definitions of "relevant markets," which makes it harder
to disprove anticompetitive potential. On the other hand, the
DOJ and the Federal Trade Commission have come under fire from
Congress for having drawn the physician network safety zones so
narrowly. They have testified that legislation is unnecessary
because they are working on new, looser guidelines, which are
expected to be published later this year.
In the short term, the confusion is bound to have a chilling effect
on practice consolidations. The long-term environment is impossible
to predict.
The Health Care Financing Administration has signed a $6 million,
two-year contract with Los Alamos National Laboratory to tap the
power of Los Alamos' supercomputers to help Medicare and its contractors
detect billing mistakes and fraud.
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