Mayo Medical Laboratories

The staff of the Federal Trade Commission said in a letter made public today that it would not recommend that the Commission challenge a plan by Mayo Medical Laboratories to establish networks of hospital labs to perform services for outpatients who are members of managed care plans. The staff was responding to a request for an advisory opinion from Mayo, which had told the FTC that health maintenance organizations and other third party payers increasingly prefer regional, statewide or national laboratory service contracts. Mayo said its plan can improve service and reduce costs to payers while helping hospitals use excess lab capacity through increased outpatient testing volume. The FTC staff letter addresses a statewide network in Michigan and a regional network in the San Francisco Bay area. Mayo is an affiliate of The Mayo Clinic in Rochester, Minnesota.

In a letter signed by Robert F. Leibenluft, Assistant Director for Health Care in the FTC’s Bureau of Competition, the FTC staff analyzed the proposed networks using principles discussed in the FTC/Justice Department Healthcare Policy Statement that addresses multi provider networks. The letter noted that when competing sellers form a network that involves substantial economic integration among then, agreements on the prices of services sold through the network may be permissible if the agreements are reasonably necessary for the network to produce significant efficiencies.

Mayo said it expects that the networks will provide the great majority of laboratory services at a capitated rate or subject to a financial risk withhold from established fees, arrangements that involve the sharing by network members of substantial financial risk for the volume and cost of services delivered to patients under the contracts. Some payers also are expected to request contract proposals on a discounted fee-for-service basis. The networks would respond to such requests through an independent agent who would develop an initial offer based on a price survey of network members and other information obtained by the agent. Individual network members would make independent decisions whether to accept the payer’s offer. While the use of an agent in this way avoids direct discussion of prices among network members, and thus reduces the risk of anticompetitive effects on individual members’ pricing decisions regarding services delivered outside the network, the FTC staff said, it does not eliminate the price agreement among members of the networks.

The staff said that the price agreements involved in all the types of contracts discussed in the letter would be analyzed under the “rule of reason.” The FTC staff letter concludes that the networks would involve substantial integration among their members that is likely to produce significant efficiencies, and that the price agreements are reasonably necessary for the networks to achieve those efficiencies. The networks intend to work with payers and their physician panels to create integrated laboratory delivery systems that will improve laboratory service and clinical care while reducing laboratory costs. The letter notes that "the networks intend to apply the types of coordination and integration among the laboratories that are necessary to permit the networks to manage costs under the risk contracts to the services rendered under non-risk contracts as well."

The FTC staff also noted that neither planned network involves a large proportion of hospitals in its service area, and the networks face significant competition from commercial laboratories. Therefore, the two networks do not appear to pose a significant risk to competition in the areas in which they will operate, the staff said. Indeed, the letter notes, the networks could be procompetitive by providing payers with an additional purchasing option.

NOTE: The letter to Mayo sets out of the views of the staff of the FTC’s Bureau of Competition, as authorized by the Commission’s Rules of Practice. It has not been reviewed or approved by the Commission. As the Commission’s rules explain, the staff’s advice is rendered “without prejudice to the right of the Commission later to rescind the advice and, where appropriate, to commence an enforcement proceeding.” Staff advice concerning issues covered by the FTC/DOJ Health Care Policy Statements will be given within 90 to 120 days (depending on the topic) after all necessary information is provided.

Copies of the staff letter and the original inquiry, as well as the DOJ/FTC Health Care Policy Statements, are available from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 1-866-653-4261. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases, advisory opinions, and other materials also are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov