Just over a year after issuing its Initial Decision ordering the breakup of Evanston Northwestern Healthcare Corporation, In the Matter of Evanston Northwestern Healthcare Corporation (Oct. 20, 2005), the Federal Trade Commission (“FTC”) has again found health care payors in the Chicago metropolitan area to be victims of anticompetitive conduct by health care providers. The FTC charged that Advocate Health Partners (“AHP”), each of its eight member physician/hospital joint ventures (“PHOs”) and two other AHP affi liates (collectively, the “Respondents”) agreed to fi x prices and refused to deal with certain health plans except on collectively determined terms, thereby unreasonably restraining competition in violation of Section 5 of Federal Trade Commission Act. In the Matter of Advocate Health Partners, et al. (Dec. 29, 2006). Simultaneously with the filing of its complaint, the FTC announced that the Respondents had entered into a consent order (the “Order”) granting the FTC extensive equitable relief. The Order became fi nal on February 7, 2007.
Advocate Health Partners is just the latest in a series of successful antitrust enforcement actions to thwart attempts by health care providers to increase reimbursement levels through collective bargaining. Several of these actions are catalogued in In the Matter of North Texas Specialty Physicians (Nov. 29, 2005, modifi ed Jan. 20, 2006), where Commissioner Leary stated:
The common theme of these cases has been coordinated bargaining by groups of competing physicians, in order to increase their reimbursement rates. In these cases, competing physicians have often joined together in independent practice associations (IPAs, or networks) and agreed to boycott or refuse to deal with particular payors during contract negotiations. When the competing physicians are not fi nancially or clinically integrated in a manner that is likely to produce effi ciencies, the Commission has consistently maintained that this type of conduct amounts to illegal price fi xing. The enforcement agencies have required that, to engage in joint contracting, physicians must either use the “messenger model” to negotiate prices or must economically or clinically integrate their practices to create signifi cant effi - ciencies. Agreements on reimbursement or other terms or conditions of dealing must be reasonably necessary to obtain signifi cant effi ciencies through the joint arrangement. See, e.g., Dept. of Justice & FTC Statements of Antitrust Enforcement Policy In Health Care (1996), available at http:// www.ftc.gov/reports/hlth3s.pdf.
Joint contracting by physicians with the primary purpose of creating negotiating leverage, even where the payor has enormous market clout, is not permitted. While the agencies recognize that there “appear to be disparities in bargaining power between some payors and some providers,” they “do not believe that allowing providers to exercise countervailing power is likely to serve consumers’ interests.” Improving Health Care: A Dose of Competition, a Report by the FTC and Dept. of Justice, July 2004, available at http:// www.ftc.gov/reports/healthcare/040723healthcarerpt.pdf.
AHP’s Contracting Process
AHP, a not-for-profi t health care corporation, is one of the largest health care provider organizations in the Chicago metropolitan area. It has approximately 2,523 staffed beds in its eight hospitals, over 2,900 physician members in its PHOs and additional physicians employed by affi liates. The FTC charged that AHP unlawfully attempted to use its size as leverage to negotiate joint contracts for its physicians’ services without creating any demonstrable countervailing effi ciencies through clinical or fi nancial integration. According to the FTC’s complaint, AHP’s contracting activity is controlled by the PHOs and the AHP affi liates and, ultimately, by otherwise competing physicians. In AHP’s contracting process, “each PHO negotiated through AHP and made contracting decisions collectively on behalf of its respective physician members.” One of these contracting decisions was that “[e]ach PHO’s Board of Directors established a minimum acceptable rate for fee-for-service contracts and communicated that rate to AHP.” AHP then “negotiated rates and other terms with payors collectively on behalf of each PHO’s physicians and, at times, collectively on behalf of all Advocate Physicians.” Further, AHP’s physicians “did not integrate their practices in any economically signifi cant way, nor did they create any effi ciencies to justify their acts or practices.” AHP used this arrangement to jointly negotiate on behalf of its physicians from 1995 through 2000.
In 2001, AHP restructured its operations and assumed complete responsibility for physicians’ contracting. In doing so, AHP established a centralized Contract and Finance Committee (the “Committee”) comprised of representatives of its physicians and hospitals, and charged with “developing and approving physician contracting strategies and terms acceptable to the group as a whole.” As AHP had done prior to 2001, the Committee obtained minimum rates for physician fees from the PHOs, but in negotiating with payors it “established a single benchmark for the entire group that was higher than the minimum rate that some PHO Boards of Directors were willing to accept.” The FTC alleged that AHP negotiated contracts with at least 12 payors using this process.
Alleged Anticompetitive Acts
The FTC alleged two specifi c instances of anticompetitive conduct by AHP: (1) AHP’s alleged refusal to deal with Blue Cross Blue Shield of Illinois (“Blue Cross”); and (2) AHP’s alleged unlawful coercion of United Healthcare of Illinois, Inc. (“United”) into paying excessive rates for physician services. The complaint alleges that prior to December 2001, Blue Cross had direct contracts with AHP physicians “at rates lower than AHP typically had been able to negotiate by bargaining collectively with other payors.” As part of its strategy to renegotiate a group contract for the physicians, AHP solicited agency agreements from all AHP physicians with Blue Cross contracts authorizing AHP to terminate and collectively renegotiate those contracts. In urging the physicians to grant AHP this authority, AHP told physicians that “a major part of [AHP’s] value has been your access to the favorable rates negotiated by AHP for many of your fee-forservice contracts,” and that “[AHP] fully expects to negotiate rate increases that will bring reimbursement levels for [Blue Cross] products closer to reasonable market rates.” Additionally, in an internal email concerning physicians who might rescind the agency agreement, AHP’s President wrote “that if they rescind there is no hope of getting increases going forward and it will impact everyone’s ability to get increases from other payors as [other payors] won’t be able to compete” with Blue Cross. Approximately 1,700 physicians signed the agency agreements, and AHP terminated the physicians’ contracts with Blue Cross on October 1, 2002.
The dispute between AHP and Blue Cross was widely publicized. On October 4, 2002, Blue Cross fi led a private antitrust suit against AHP alleging price-fi xing, tying and a group boycott to coerce Blue Cross into increasing the reimbursement paid to physicians under their PPO contracts.
Some important allegations in Blue Cross’s complaint against AHP concerning consumer welfare were not alleged in the FTC complaint. Blue Cross claimed that one-fi fth of its members receive medical care through physicians affi liated with AHP and that AHP’s refusal to contract with Blue Cross would force Blue Cross insureds to either endure a price increase, fi nd a new doctor, or change insurance providers to keep their current doctor. AHP also created public pressure on Blue Cross through a September 23, 2002 article in Crain’s Chicago Business that stated a renegotiation of the contract must result in Blue Cross setting new reimbursement rates. Blue Cross further alleged that physicians who had attempted to revoke the agency agreement were told that AHP would retaliate by ejecting them from AHP’s HMO network. Additionally, Blue Cross alleged that AHP attempted to illegally tie the individual physicians’ contracts with AHP’s hospital contracts. AHP allegedly refused to negotiate its hospital contracts unless and until Blue Cross capitulated to AHP’s demand for joint contracting of its individual physicians’ contracts.
The AHP-Blue Cross dispute ultimately was settled, with AHP dropping its efforts to negotiate a group contract on behalf of its physicians, and Blue Cross increasing the reimbursement to AHP’s hospitals and HMO services and making certain payments to AHP to support physicians’ practices. The FTC alleged that those payments were made only to the AHP physicians who signed the agency agreements. The second specifi c contracting incident involved AHP’s agreement with United. In this incident, the FTC alleged that AHP attempted to renegotiate its joint physician contract with United. After United threatened to contract individually with the physicians, AHP threatened to terminate United’s hospital contracts. Eventually, United entered into a contract with AHP with rates that were “20 percent to 30 percent higher than United’s direct contracts with individual doctors in the Chicago area.”
While the FTC made the Blue Cross lawsuit part of the allegations in its complaint, it did not aver to the fact that the legality of AHP’s contracting arrangements with United was challenged in a private arbitration decided on November 18, 2005. In the arbitration, United charged that AHP’s joint contracting practices between 2000-2003 constituted per se unlawful price fi xing and sought over $250 million in treble damages. United also sought injunctive relief preventing AHP from continuing its alleged unlawful conduct. United’s antitrust claims were soundly rejected by the arbitration panel. A copy of the Arbitration Order furnished to the FTC in North Texas Specialty Physicians is available at http://www.ftc.gov/os/adjpro/d9312/ 051201respmoleavfi learbitratbrief.pdf.
The FTC Decision and Order
The FTC’s action demonstrates that the FTC disagreed with the arbitration panel’s conclusion that AHP’s fee-for-service contracting practices did not constitute unlawful price fi xing. Accordingly, the Order prohibits each of the Respondents from “[e]ntering into, adhering to, participating in, maintaining, organizing, implementing, enforcing, or otherwise facilitating any combination, conspiracy, agreement, or understanding between or among any physicians with respect to their provision of physician services:”
(1) to negotiate with payors on any physician’s behalf;
(2) to deal, not to deal or threaten not to deal with payors;
(3) to collectively agree on what terms to deal with any payor; and
(4) not to deal individually with any payor, or to deal with a payor only through an arrangement involving the defendants.
The only exception to these prohibitions is the use of one of the two antitrust safe harbors: using the messenger model, or establishing either a “qualifi ed risk-sharing joint arrangement” or a “qualifi ed clinically-integrated joint arrangement.” AHP is required to satisfy extensive notifi - cation requirements for any such arrangements relating to price or other terms or conditions of dealing with any payor. The FTC made no determination with respect to the AHP’s “Clinical Integration Program,” and the Order does not prohibit the Respondents from continuing to engage in this program.
When viewed through the lens of the enforcement agencies’ longstanding advisory statements, published orders and litigated cases, the conduct alleged in Advocate Health Partners presents a clear case of unlawful behavior. On the other hand, AHP’s successful defense in arbitration with United and settlement with Blue Cross suggest some doubt in that regard. In any event, as a matter of litigation strategy, AHP appears to have been well served in settling with Blue Cross and in defeating United’s private action prior to the conclusion of the FTC’s investigation, thus enabling AHP to resolve the FTC investigation without the threat of treble damage claims by those payors.