UNITED STATES OF AMERICA
BEFORE FEDERAL TRADE COMMISSION

In the Matter of

NORTH LAKE TAHOE MEDICAL GROUP, INC., a corporation.

DOCKET NO.

COMPLAINT

Pursuant to the provisions of the Federal Trade Commission Act, as amended, and by virtue of the authority vested in it by said Act, the Federal Trade Commission, having reason to believe that the North Lake Tahoe Medical Group, Inc., a corporation ("Tahoe IPA") has violated Section 5 of the Federal Trade Commission Act, and it appearing to the Commission that a proceeding by it in respect thereof would be in the public interest, hereby issues this complaint stating its charges in that respect as follows:

PARAGRAPH ONE: Respondent Tahoe IPA is a corporation, organized, existing, and doing business under and by virtue of the laws of the State of California, with its office and principal place of business located at P.O. Box 2466, Truckee, California 96160. North Lake Tahoe Medical Group, Inc., also has traded and done business as North Lake Tahoe IPA, North Lake IPA, and Tahoe IPA.

PARAGRAPH TWO: Tahoe IPA physician members compete in the Lake Tahoe Basin, a basin comprised of the North Lake Tahoe area and the South Lake Tahoe area. For physician services, the North and South Lake Tahoe areas each represent a separate geographic market. The North Lake Tahoe area has about 30,000 year-round residents as well as about 150,000 tourists, part-time residents and day users. The North Lake Tahoe area includes the communities of Truckee, Tahoe City, Kings Beach, Carnelian Bay, Homewood, Tahoma and Meeks Bay, California, and Incline Village, Nevada. The South Lake Tahoe area has about 35,000 year-round residents. The South Lake Tahoe area includes the towns of South Lake Tahoe, California, and Stateline, Nevada. The largest cities near the Lake Tahoe Basin are Sacramento, California (about 100 miles and two hours and twenty minutes southwest) and Reno, Nevada (about 31 miles and 45 minutes northeast).

PARAGRAPH THREE: Respondent Tahoe IPA's physician membership consists of the majority of the physicians in both the North and South Lake Tahoe markets. Tahoe IPA's members include at least 78% of the physicians (medical doctors and doctors of osteopathic medicine) in the North Lake Tahoe area and at least 70% of the physicians in the South Lake Tahoe area. In the North Lake Tahoe area, the IPA's members include at least 67% of the primary care physicians in private practice and at least 89% of the specialty physicians in private practice. In the South Lake Tahoe area, Tahoe IPA's members include at least 70% of the primary care physicians in private practice and at least 72% of the specialty physicians in private practice. All of respondent Tahoe IPA's physician members are engaged in the business of providing health care services for a fee. Except to the extent that competition has been restrained as alleged herein, some or all of the physician members of respondent Tahoe IPA have been, and are now, in competition with each other for the provision of physician services.

PARAGRAPH FOUR: The general business practices of respondent Tahoe IPA and its members, including the acts and practices herein alleged, are in or affect "commerce" as defined in the Federal Trade Commission Act, as amended, 15 U.S.C. § 45.

PARAGRAPH FIVE: Respondent Tahoe IPA is a for-profit corporation that also engages in substantial activities for the pecuniary benefit of its physician members. At all times relevant to this complaint, Tahoe IPA is and has been organized in substantial part for the profit of its members, and is therefore a corporation within the meaning of Section 4 of the Federal Trade Commission Act, as amended, 15 U.S.C. § 44.

PARAGRAPH SIX: Respondent Tahoe IPA was formed in 1994 to promote the collective economic interests of the Lake Tahoe Basin physicians. Respondent, acting as a combination of its members, and in a continuing conspiracy with at least some of its members, and other parties, has acted to restrain competition by, among other things, facilitating, entering into, and implementing agreements among its members, express or implied, to (i) act concertedly to delay the market entry of managed care, including health maintenance organizations ("HMOs") and preferred provider organizations ("PPOs"); (ii) engage in collective negotiations over terms and conditions of dealing with third-party payers; and (iii) refuse to deal with Blue Shield of California ("Blue Shield") when Blue Shield did not comply with the IPA's contractual demands.

PARAGRAPH SEVEN: In furtherance of its unlawful agreements, beginning in 1994 and until the present, Tahoe IPA has acted to restrain and delay the market entry of managed care plans. Physicians practicing in the North Lake Tahoe area concluded that such plans would attempt to contract with physicians in the Lake Tahoe Basin, and that competitive pressure could force physicians to lower their fees or to contract on other than standard fee-for-service terms. Accordingly, they formed the Tahoe IPA to combine physicians into a united bargaining front that would prevent managed care from gaining access -- on competitive terms -- to North and South Lake Tahoe physicians. Since the IPA's formation in 1994, a number of third-party payers, including Blue Shield, Hometown Health Plan, St. Mary's Health Network, and Foundation Health, have attempted to develop and market managed care products in the North Lake Tahoe area. However, there are still no HMOs and only a few PPOs operating in the Lake Tahoe Basin.

PARAGRAPH EIGHT: Typically, managed care plans reimburse for, purchase, or pay for all or part of the health care services provided to their enrollees or subscribers. Managed care plans may contract with integrated physician associations or groups to establish the terms and conditions of the relationship between a participating physician and a managed care plan, including the fees to be paid to the physician for treating managed care subscribers or enrollees. Through such contracts, managed care plans may obtain capitated payments or significant discounts from physicians' usual fees, and physicians may obtain access to additional patients. As a result, managed care plans often are able to offer health care coverage to their enrollees or subscribers at an attractive price.

PARAGRAPH NINE: From the time it was formed in 1994, Tahoe IPA's Board developed and implemented an anticompetitive strategy: It required its members to contract only through the Tahoe IPA to resist fee discounting and financial risk-sharing. Tahoe IPA accomplished these goals by including a clause in its Provider Participation Agreement that required members to contract with payors only through the Tahoe IPA and not to contract individually with any PPO, EPO or HMO. In its newsletter and other informal communications with members, the IPA further encouraged physicians to use the IPA as their sole contracting agent. Through these means, the Tahoe IPA resisted competitive pressures from managed care plans to accept financial risk or reimbursement on other than a standard fee-for-service basis.

PARAGRAPH TEN: In October 1996, Blue Shield sought to enter into agreements with Tahoe IPA members to participate in an HMO product. Initially, Tahoe IPA urged Blue Shield not to introduce an HMO product in the Tahoe Basin. Tahoe IPA's Board then demanded that Blue Shield raise its reimbursement levels to area physicians, and told Blue Shield that the IPA would not contract with its HMO. Subsequently, the IPA's Board decided that the IPA should contract only on a fee-for-service basis with all payers, including managed care plans. Also at various times in 1996 and through the present, the IPA has informed payers, including Foundation Health Plan, Hometown Health Plan, St. Mary's PPO Network, and others, that Tahoe IPA was not willing to accept capitation or any other form of financial risk. The IPA's representatives have stated that the IPA would negotiate only fee-for-service contracts on behalf of its members, and they have communicated to these payers the minimum rates that the IPA would accept.

PARAGRAPH ELEVEN: In furtherance of its anticompetitive agreements, from 1996 to the present, Tahoe IPA has 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 utilized the members' collective bargaining power as a united negotiating front to seek more favorable prices than each member could obtain by contracting as an individual in a competitive market. By early 1996, the IPA developed its own minimum reimbursement rates, and sought to negotiate on behalf of its members the highest possible fees without the members sharing a substantial risk of loss from their participation in the IPA. From 1996 to the present, the IPA's leaders have clearly communicated to payers that the IPA is the exclusive representative of physicians in the North and South Lake Tahoe areas. Tahoe IPA has sought to coerce payers into accepting the IPA fee schedules and minimum reimbursement rates. Tahoe IPA leaders have stated that payers, including Blue Cross, St. Mary's Health Network, Hometown Health Plan, CCN, and Interplan, must accept the IPA's price terms if they want to contract with IPA members.

PARAGRAPH TWELVE: After negotiating with Tahoe IPA for extended periods of time, several payers offered contracts to individual Lake Tahoe Basin physicians, but most individual physicians told these payers that they would contract only through Tahoe IPA. Consequently, payers were forced either to accept the IPA's reimbursement rates or to decide not to contract with physicians in the Lake Tahoe Basin. Payers were concerned that Tahoe IPA's minimum rates were much higher than rates that these plans paid physicians in other parts of California or Nevada. Payers also were concerned that they would not be able to do business in the Lake Tahoe Basin because the rates Tahoe IPA demanded would prevent the payers from developing a PPO product that would offer consumers a significant discount from full physician charges.

PARAGRAPH THIRTEEN: Since at least February 1998, Tahoe IPA has represented to Blue Cross, CCN, Interplan and other payers that its physician members will not enter into any contract unless the payer reimburses the IPA's members their usual fees with no more than a ten percent discount. The IPA's negotiators ignored objections that their charge-based reimbursement proposal was inefficient, and informed these payers that this was the minimum reimbursement that the IPA's Board would accept in any contract. The IPA's negotiators also told payers that they would not be disadvantaged relative to other payers competing in the market, because all payers would get the same deal. Tahoe IPA entered contracts with Health Net, CCN PPO Network, and Admar PPO Network, in which the reimbursement was calculated at ten percent off of each physician's charges.

PARAGRAPH FOURTEEN: In furtherance of its unlawful agreements, since 1996 and continuing to the present, Tahoe IPA attempted to coerce Blue Shield of California to raise its level of fee-for-service reimbursement to IPA physicians. Beginning as early as 1996, Tahoe IPA obtained information from its members as to their prevailing fee levels, which it used to develop a fee schedule that represented the minimum levels that it would accept from payers. The IPA demanded that Blue Shield allow the IPA to collectively enter into a contract with higher reimbursement and without any financial risk-sharing among the member physicians. The IPA not only demanded higher reimbursement, but solicited Blue Shield to raise its premiums and redirect the increased revenue to physicians. To pressure Blue Shield into accepting the IPA's demands, Tahoe IPA officials informed Blue Shield that the IPA's members would cease their participation in Blue Shield's PPO if Blue Shield did not agree to negotiate with the IPA.

PARAGRAPH FIFTEEN: 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 PPO. In private and public statements, the 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. The IPA also threatened area employers that few of its members would continue to participate with Blue Shield, and that these employers should contract with payers that have agreed to contract with the IPA.

PARAGRAPH SIXTEEN: Beginning as early as January 1998, many of the physician members of Tahoe IPA submitted letters of termination to Blue Shield. Some members no longer contract with Blue Shield, and other members have terminated their contracts as of January 1, 1999.

PARAGRAPH SEVENTEEN: The physician members of Tahoe IPA have not integrated the IPA in any economically significant way, nor have they created efficiencies sufficient to justify their acts or practices described in Paragraphs Six through Sixteen.

PARAGRAPH EIGHTEEN: By engaging in the acts or practices described above, Tahoe IPA has combined or conspired with its respective physician members to fix and/or increase the fees received from third-party payers for the provision of physician services, to boycott third-party payers, or otherwise to restrain competition among physicians in the Lake Tahoe Basin.

PARAGRAPH NINETEEN: The actions of the respondent described in this complaint have had, and continue to have, the purpose, tendency, and capacity to result in the following effects, among others, in the Lake Tahoe Basin, including the North Lake Tahoe area and the South Lake Tahoe area:

A. restraining competition among physicians;

B. fixing or increasing the prices that are paid for physician services; and

C. depriving third-party payers, their subscribers, and patients of the benefits of competition among physicians.

PARAGRAPH TWENTY: The combinations or conspiracies and the acts and practices described above constitute unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45. The acts and practices, as herein alleged, are continuing and will continue in the absence of the relief herein requested.

WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on this twenty-first day of July, 1999, issues its complaint against said respondent.

By the Commission.

SEAL