Physicians contemplating a merger or network should certainly think about antitrust laws, but they need not fear them.
Fam Pract Manag. 1998 Jul-Aug;5(7):37-41.
Practice mergers, consolidations and physician networks have become more and more commonplace as physicians seek new ways to cut costs and remain competitive in managed care. One issue that has caused concern for many family physicians contemplating these moves is the risk of antitrust liability. While antitrust violations can be serious offenses, with potentially large damages and even jail sentences, and while it can be costly and exhausting to defend an antitrust lawsuit, many of the concerns surrounding antitrust are exaggerated. In fact, most physician mergers and networks are achievable without antitrust problems as long as the physicians are careful in their conduct and in their documentation.
What to consider
In general, antitrust concerns arise when a merger or network results in an entity with a very substantial market share, which the government defines in terms of the percentage of active, practicing physicians in a specific specialty in a specific area. What makes entities with high market share such a threat is their power to act anti-competitively, should they choose to do so, by fixing prices, dictating terms to payers, etc.
Federal antitrust authorities have never challenged a physician practice merger, and the physician networks they have attacked all had in excess of a 70-percent market share. (Some state attorneys general have restricted physician groups to market-share levels of 40 percent as part of agreed-upon consent decrees; however, this has usually occurred where other antitrust problems were also present.) Recently, federal authorities have attacked hospital mergers only when their market shares were in excess of 50 percent. Because physician mergers tend to have fewer anticompetitive effects than hospital mergers, they will likely be attacked only at higher market-share levels.
For networks, however, additional antitrust concerns may arise regardless of the entity's market share. If an IPA or other network engages in managed care negotiations on behalf of competing physicians, its activities may be viewed as “price fixing,” unless the IPA is taking other steps that would cause the government to view it as a legitimate joint venture. These other steps include significant risk sharing or cooperation among the physicians to improve quality and/or reduce costs.
That said, a network that does not restrict its activities to risk-sharing contracts and does not engage in significant activities to improve quality or reduce utilization may still avoid price-fixing problems if it utilizes the “messenger model.” Under this model, a network may utilize a messenger simply to pass on to payers the views of individual physicians or groups on the rates they desire. The messenger then passes on the payers' responses to each individual physician or group. The messenger may not negotiate for a network as a whole and cannot attempt to negotiate one price that reflects the views of all the physicians in the network. For these reasons, a true messenger model is often not a viable alternative for physicians seeking to form a network.
If price-fixing concerns arise, they apply regardless of the network's market share. Moreover, networks that engage in price fixing can (at least in theory) face the possibility of criminal prosecution. However, no physician network to date has been prosecuted for criminal wrongdoing by antitrust authorities.
Market parameters. Even if a merger or network results in an entity with a very high market share in its local community, antitrust concerns are not necessarily present. For example, physicians who practice in very small, rural areas may indeed have high market shares, but for good reason: There are only a few doctors in their area. In general, these entities will be too small to register on the antitrust radar. Additionally, physicians in many specialties, usually subspecialists, compete in much broader geographic markets than their local communities, and their market shares are much lower in these broader areas. For example, one court found that cardiac surgeons compete over a very broad area, at least 60 miles in radius. Some (though not all) courts have found that hospital-based physicians such as pathologists compete in a national market in which groups offer their services to hospitals. Family physicians, on the other hand, tend to compete in much narrower markets, usually a county or smaller area. But if you find yourself merging with a multi-specialty group, you'll want to consider whether a broader market applies.
To determine your relevant geographic market, you'll need to take into consideration the specific behavior of the merging or affiliating groups and their specialties. For example, identify the areas from which the merging physicians draw patients, look at where their physician competitors are located and find out the degree to which payers perceive physicians in other areas as real alternatives.
Competition. With the geographic market properly defined, if a merger or network still results in a group with high market share, antitrust concerns are unlikely if new physicians can still enter the market fairly easily and be competitive. In such an environment, if the new group attempted to raise prices, collectively refused to deal with payers who did not meet their demands or otherwise acted anti-competitively, it would likely face significant new competition. Recently Columbia HCA challenged the merger of two multispecialty clinics in Vicksburg, Miss. Despite the fact that this transaction would have resulted in market shares of 67 percent to 100 percent in various specialties, the court refused to stop it. A primary reason for the court's decision was its conclusion that new physicians could easily be brought into the market to compete with the merged group and that such entry had in fact occurred in the past.
Such easy entry is often a fact of competitive life in physician markets, where practices, hospitals and payers regularly recruit new physicians and where retiring physicians are continually being replaced by new ones. But whether the government finds market entry easy depends on the market. For example, if a market happened to have an excess of family physicians and if its patients were not likely to switch from their existing family physicians to new ones, it would be difficult to enter such a market competitively. Similarly, if hospitals in the market had closed medical staffs, this could impede effective entry. Groups will need to examine their individual markets to determine whether an easy-entry defense applies.
Other protections. IPAs and other physician networks that do not involve a full merger can benefit from other antitrust defenses. If a network is truly nonexclusive (its physician members can and in fact do contract with some payers outside the network), it will not necessarily violate antitrust laws even if it includes the vast majority of the physicians in that market. In Hassan v Independent Practice Associates, I successfully defended a court challenge against a physician network involving over 75 percent of the physicians in its area on the grounds that it was nonexclusive and therefore did not restrict competition. Of course an IPA or other network will still need to avoid concerns about price fixing, as discussed earlier.
Paradoxically, some recent pronouncements by federal antitrust agencies have stirred up more concern about physician mergers and networks, much of which is unnecessary. For example, the federal enforcement statements on health care set forth “safe harbors” for physician networks of 30 percent market share for nonexclusive and 20 percent market share for exclusive networks. These safe harbors have led many physicians (and some lawyers) to believe that market shares above the 30-percent level create undue antitrust risks. This is simply incorrect. As the antitrust agencies themselves have emphasized, safe harbors merely represent the level at which antitrust agencies are willing to say there is no antitrust risk under any circumstances. Most physician mergers and networks involving higher market shares will not raise significant antitrust risks. As explained above, the government agencies have brought legal challenges only when much higher shares have been present.
Business review letters. Some Justice Department advisory opinions, called “business review letters,” have caused concerns because of their approach to the geographic market issue and their great reliance on the views of payers. In the case of Children's Health, P.A., the Justice Department found that a proposed pediatricians' network would likely be anti-competitive because it would possess 55 percent to 70 percent of the pediatricians in what the Justice Department defined as their relevant market, several small clusters of towns in southern New Jersey. In rejecting the idea that the physicians competed in a broader market, the Justice Department relied on payers' input that their members would not travel more than 15 miles to use a pediatrician. In addition, the payers did not consider family physicians to be competitors of pediatricians and did not factor family physicians into the market-share formula, which would have lowered the pediatricians' market share. Similarly, in a recent business review letter, the Department of Justice found that a merger of three gastroenterology groups in Allen-town, Pa., would be anti-competitive because it would involve 67 percent to 92 percent of the gastroenterologists in Allentown. Again the Department of Justice rejected a broader market, relying primarily on the views of payers who told the department that their patients would not travel 15 to 25 miles to see gastroen-terologists in other communities.
These business review letters do not represent the law and do not represent an accurate picture of the circumstances that would cause the antitrust agencies to file suit against a physician merger or network. As a result, these letters should not preclude physicians from considering ventures that involve high local-market shares if they in fact compete in broader areas.
Business review letters express the views of the antitrust agencies responding to providers' requests for an “advisory opinion.” By making such requests, providers imply that they will follow the advice given and will not force the Justice Department to go to court to prevent the merger or affiliation. As a result, they receive an opinion that is probably much more negative than what a court would reach. In all likelihood, it is also more negative than the conclusion the department itself would reach if it had to back up its conclusion by suing and risking a loss in court. Given the antitrust agencies' poor track record in recent court cases (losing a series of hospital merger cases in Joplin, Mo.; Dubuque, Iowa; and Grand Rapids, Mich.), the government in unlikely to bring a court case based on the kinds of facts presented by these business review letters.
The voice of payers. These business review letters do, however, provide some useful pointers for physicians considering a merger or network formation. In both cases, as in all its health care activities, the government relied significantly on the views of payers. It is very important that groups considering an antitrust-sensitive merger or network try to avoid payer hostility by informing payers of their plans and by making the case that their actions will make them more attractive to managed care companies, usually because the merger or network will reduce their costs and/or improve utilization. To accomplish this, the groups will need to develop a careful communication plan and will need to articulate how the new entity will serve the health care needs of the community.
Careful documentation. A number of recent government cases have been built on damaging admissions in the parties' own documents. Physician groups that become involved in a merger or network need to be careful from the very first day of discussions that their documents do not inadvertently and incorrectly suggest that they compete in a narrow market or that their activities involve an anti-competitive purpose or have anti-competitive effects. Notes and documents that reflect proper motives and lawful plans will provide one more safeguard against antitrust accusations.
Believe it or not, antitrust laws are not designed to hassle physicians. Instead, they are intended to protect your opportunity to compete and thrive in today's health care market. When contemplating a merger or network, give antitrust all the attention it deserves but no more. Odds are, your group has nothing to worry about.
Copyright © 1998 by the American Academy of Family Physicians.
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