North Lake Tahoe Medical Group, Inc.

Analysis of Proposed Consent Order to Aid Public Comment

The Federal Trade Commission has accepted, subject to final approval, an agreement to a proposed consent order from North Lake Tahoe Medical Group, Inc. ("Tahoe IPA"). The agreement settles charges by the Federal Trade Commission that Tahoe IPA has violated Section 5 of the Federal Trade Commission Act by: (1) acting concertedly to delay the entry into the market of managed care; (2) engaging in collective negotiations over prices with payers; and (3) refusing to deal with Blue Shield of California ("Blue Shield") when it did not comply with the Tahoe IPA's demands. The proposed consent order has been placed on the public record for sixty (60) days for reception of comments by interested persons. Comments received during this period will become part of the public record. After sixty (60) days, the Commission will review the agreement and the comments received, and will decide whether it should withdraw from the agreement or make final the agreement and proposed order.

The purpose of this analysis is to facilitate public comment on the proposed order. The analysis is not intended to constitute an official interpretation of the agreement and proposed order, or to modify in any way their terms. Further, the proposed consent order has been entered into for settlement purposes only and does not constitute an admission by Tahoe IPA that the law has been violated as alleged in the complaint.

The Complaint

Under the terms of the agreement, a proposed complaint will be issued by the Commission along with the proposed consent order. The allegations in the Commission complaint are summarized below.

Tahoe IPA is a physician organization based in Truckee, California. All of the members of Tahoe IPA are physicians practicing in and around the Tahoe Basin, which includes the North Lake Tahoe and South Lake Tahoe areas. During the time period addressed by the allegations of the complaint, Tahoe members constituted at least 70% of all physicians practicing in the North and South Lake Tahoe areas.

Tahoe IPA was formed in 1994 as a vehicle for its members to deal concertedly with the impending entry into North and South Lake Tahoe of managed care. Beginning in 1994, and continuing until at least 1998, when Tahoe IPA first learned that it was under investigation by the staff of the Commission, Tahoe IPA conspired to fix the prices and other terms under which its members dealt with third-party payers. Tahoe IPA also conspired to prevent or delay the entry into the North Lake and South Lake Tahoe areas of managed care. Tahoe IPA refused to participate, either individually or collectively, in HMO plans offered by Blue Shield, Hometown Health Plan, Foundation Health Plan, St. Mary's Health Plan, and other third-party payers attempting to do business in the Tahoe Basin. Tahoe IPA engaged in collective negotiations to fix price terms and other competitively significant terms with all payers seeking to enter the North and South Lake Tahoe areas. Tahoe IPA maintained an exclusivity clause in its "Provider Participation Agreement," and encouraged its members to deal with third-party payers only though Tahoe IPA. Tahoe IPA sought to coerce payers into accepting the IPA fee schedules and minimum reimbursement rates. Tahoe IPA leaders stated that payers must accept the IPA's price terms if they want to contract with IPA members.

In furtherance of its unlawful agreements, since 1996 Tahoe IPA attempted to coerce Blue Shield to raise its level of fee-for-service reimbursement to IPA physicians. Since November 1997, when it became clear that Blue Shield would not negotiate on the Tahoe IPA's terms, the IPA encouraged its physician members to departicipate from Blue Shield's preferred provider organization ("PPO"). In private and public statements, the Tahoe IPA reminded its members that it was acting as their agent with Blue Shield, and that the IPA would ultimately be successful in its negotiations with Blue Shield if the members continued to contract on a united front. Beginning as early as January 1998, many of the physician members of Tahoe IPA submitted letters of termination to Blue Shield. Some of these members no longer contract with Blue Shield, and others have notified Blue Shield of their intent to terminate their contracts as of January 1, 1999.

Tahoe IPA's members have not integrated their medical practices in any economically significant way, nor have they created any efficiencies that might justify this conduct. Tahoe IPA's actions have harmed consumers in the North and South Lake Tahoe areas by restraining competition among physicians, by fixing or increasing the prices that are paid for physician services, and by depriving third-party payers, their subscribers, and patients of the benefits of competition among physicians.

The Proposed Consent Order

The proposed consent order is designed to prevent the illegal concerted action alleged in the complaint, while allowing Tahoe to engage in legitimate joint conduct. Section II of the proposed order contains the core operative provisions. Section II.A prohibits Tahoe IPA from: (1) engaging in collective negotiations on behalf of its members; (2) orchestrating concerted refusals to deal; (3) fixing prices, or any other terms, on which its members deal, and (4) restricting the ability of any physicians to deal with any payer or provider individually or through any arrangement outside of Tahoe IPA.

Section II.B prohibits Tahoe IPA from exchanging or facilitating the exchange of information among physicians of information concerning the terms or conditions of reimbursement. Section II.C prohibits the Tahoe IPA from encouraging, advising or pressuring any person to engage in any action that would be prohibited if the person were subject to the order.

Section II includes a proviso allowing Tahoe IPA to engage in conduct (including collectively determining reimbursement and other terms of contracts with payers) that is reasonably necessary to operate (a) any "qualified risk-sharing joint arrangement," or (b) any "qualified clinically integrated joint arrangement," provided Tahoe IPA complies with the order's prior notification requirements. For the purposes of the order, a "qualified risk-sharing joint arrangement" must satisfy three conditions. First, all physicians participating in the arrangement must share substantial financial risk from their participation in the arrangement. The order lists ways in which physicians might share financial risk, tracking the types of financial risk sharing set forth in the Statements of Antitrust Enforcement Policy in Health Care, issued jointly by the FTC and the Department of Justice. Statements of Antitrust Enforcement Policy in Health Care, issued August 28, 1996, 4 Trade Reg. Rep. (CCH) ¶ 13,153. Second, any agreement on prices or terms of reimbursement entered into by the arrangement must be reasonably necessary to obtain significant efficiencies through the joint arrangement. Third, the arrangement must be non-exclusive, i.e., it must not restrict the ability, or facilitate the refusal, of physicians participating in the arrangement to deal with payers individually or through any other arrangement.

A "qualified clinically integrated joint arrangement" includes arrangements in which the physicians undertake cooperative activities to achieve efficiencies in the delivery of clinical services, without necessarily sharing substantial financial risk. For purposes of the order, such arrangements are ones in which the participating physicians have a high degree of interdependence and cooperation through their use of programs to evaluate and modify their clinical practice patterns, to control costs and assure the quality of physician services provided through the arrangement. As with risk-sharing arrangements, the definition of clinically integrated arrangements reflects the analysis contained in the 1996 FTC/DOJ Statements of Antitrust Enforcement Policy in Health Care. In addition, as with risk-sharing arrangements, the arrangement must be non-exclusive in light of Tahoe IPA's large share of the market.

For a qualified clinically integrated joint arrangement to fall within the proviso, the Tahoe IPA must comply with the order's requirements for prior notification. The prior notification mechanism will allow the Commission to evaluate a specific proposed arrangement and assess its likely competitive impact. This requirement will help guard against the recurrence of acts and practices that have restrained competition and consumer choice.

Section II also contains a proviso that permits the Tahoe IPA to refuse to transmit information from payers or providers to less than all of its participating physicians. This proviso, however, does not permit the Tahoe IPA to require that payers or providers make offers to all participating physicians or to any particular physician.

Section III of the proposed order requires the Tahoe IPA to terminate the participation in the Tahoe IPA of physicians who have terminated their participation, or have given notice of their intent to terminate their participation, in Blue Shield's PPO. This provision requires the Tahoe IPA to provide to Blue Shield the names and addresses of all of its participating physicians, and to request from Blue Shield the names of all participating physicians who either have terminated participation in Blue Shield, or have given notice of intent to terminate future participation in any Blue Shield health plan between January 1, 1998, and the date the agreement was signed. Within twenty days after Tahoe IPA has received from Blue Shield the names and addresses of the boycotting physicians, the Tahoe IPA must terminate their participation unless the physician either: (1) attempts in good faith to reestablish participation in a Blue Shield health plan for a period of at least six months thereafter; or (2) rescinds in writing his or her notice of intent to terminate future participation in a Blue Shield health plan and continues to participate in a Blue Shield health plan for a period of at least six months thereafter.

Section IV.A requires that Tahoe IPA notify its members and certain third parties, including certain third-party payers, about the order. Section IV.A also requires the IPA to revise its "Provider Agreement," which contains a clause requiring members to contract exclusively through the Tahoe IPA, so that it complies with the order. Section IV.B requires the IPA to terminate any contracts with any payers that do not comply with Section II of the order, at the earlier of (1) the termination or renewal date of the contract; or (2) receipt of a written request from the payer to terminate the contract. Section IV.C requires that the IPA, for the next five years (1) distribute copies of the complaint and order to new members, and (2) publish annually to members a copy of the complaint and order.

Sections V, VI, and VII consist of standard Commission reporting and compliance procedures, with the exception that Section V specifies some of the information Tahoe IPA must include in its annual compliance reports, including: (1) information identifying each health plan that has contacted Tahoe IPA for the purpose of contracting for physician services, the terms of any contract the health plan was seeking with Tahoe IPA, and Tahoe IPA's response to the health plan; (2) information sufficient to describe the manner in which Tahoe IPA's members share financial risk in each "qualified non-exclusive risk-sharing arrangement" in which the Tahoe IPA participates; and (3) copies of the minutes of Tahoe IPA's annual meetings.

Finally, Section VIII of the proposed order contains a twenty year "sunset" provision under which the terms of the order terminate twenty years after the date of issuance.