North Lake Tahoe Medical Group, Inc.; Analysis To Aid Public Comment

FEDERAL TRADE COMMISSION

[File No. 9810261]

North Lake Tahoe Medical Group, Inc.; Analysis To Aid Public

Comment

AGENCY: Federal Trade Commission.

ACTION: Proposed consent agreement.

-----------------------------------------------------------------------

SUMMARY: The consent agreement in this matter settles alleged

violations of federal law prohibiting unfair or deceptive acts or

practices or unfair methods of competition. The attached Analysis to

Aid Public Comment describes both the allegations in the draft

complaint that accompanies the consent agreement and the terms of the

consent order--embodied in the consent agreement--that would settle

these allegations.

DATES: Comments must be received on or before May 26, 1999.

ADDRESSES: Comments should be directed to: FTC/Office of the Secretary,

Room 159, 600 Pa. Ave., NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT:

Paul Nolan, FTC/H-3115, 600 Pennsylvania Avenue, NW., Washington, DC

20580, (202) 326-2770 or Matthew Gold, San Francisco Regional Office,

Federal Trade Commission, 901 Market Street, Suite 570, San Francisco,

CA 94103, (415) 356-5276.

SUPPLEMENTARY INFORMATION: Pursuant to section 6(f) of the Federal

Trade Commission Act, 38 Stat. 721, 15 U.S.C. 46 and Sec. 2.34 of the

Commission's rules of practice (16 CFR 2.34), notice is hereby given

that the above-captioned consent agreement containing a consent order

to cease and desist, having been filed with and accepted, subject to

final approval, by the Commission, has been placed on the public record

for a period of sixty (60) days. The following Analysis to Aid Public

Comment describes the terms of the consent agreement, and the

allegations in the complaint. An electronic copy of the full text of

the consent agreement package can be obtained from the FTC Home Page

(for March 22, 1999), on the World Wide Web, at ``http://www.ftc.gov/

os/actions97.htm.''. A paper copy can be obtained form the FTC Public

Reference Room, Room H-130, 600 Pennsylvania Avenue, NW., Washington,

DC 20580, either in person or by calling (202) 326-3627. Public comment

is invited. Such comments or views will be considered by the Commission

and will be available for inspection and copying at its principal

office in accordance with Sec. 4.9(b)(6)(ii) of the Commission's rules

of practice (16 CFR 4.9(b)(6)(ii)).

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 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 through 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 the 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

[[Page 14731]]

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 this

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

purpose 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) para. 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, or 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 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

[[Page 14732]]

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.

By direction of the Commission.

Donald S. Clark,

Secretary.

Statement of Chairman Robert Pitofsky and Commissioners Sheila F.

Anthony and Mozelle W. Thompson

[North Lake Tahoe Medical Group, Inc., File No. 981-0261]

The Commission has published a proposed complaint alleging that

North Lake Tahoe Medical Group (``Tahoe IPA'') violated section 5 of

the Federal Trade Commission Act, 15 U.S.C. 45, by orchestrating an

illegal group boycott among its member physicians who refused to deal

with Blue Shield of California (``Blue Shield''). Because the actions

of Tahoe IPA went beyond a mere refusal to contract and were, instead,

part of a larger agreement to impede the growth of managed care health

plans, we believe that the proposed order, including the remedial

provisions contained in Section III, prescribes appropriate relief to

restore competition and remedy the harm caused by Tahoe IPA's illegal

activities.

Having reached an impasse in its efforts to raise the reimbursement

rate paid by Blue Shield to its members, Tahoe IPA requested that its

members withdraw from Blue Shield's health plan. Twenty-four doctors

either withdrew, or announced their intention to withdraw, following

Tahoe IPA's request. By engaging in an illegal group boycott directed

at Blue Shield, Tahoe IPA and its members attempted to impair the

growth and effectiveness of health insurance plans in the relevant

market.

The proposed order is designed to restore competition lost as a

result of the boycott. Section II.A of the order would prohibit Tahoe

IPA from negotiating on behalf of its members with any payer or

provider for physician services. Section II.A also would prohibit Tahoe

IPA from orchestrating refusals to deal among its members with payers,

fixing prices or any other terms on which its members deal with

physicians, and preventing physicians from dealing with any payer or

provider individually or through arrangements outside of Tahoe IPA.

Section III of the proposed order further requires that Tahoe IPA

terminate member physicians for a period of six months who refused to

deal with Blue Shield as part of the illegal boycott led by Tahoe IPA.

Section III permits Tahoe IPA to retain these members if they either

(1) attempt in good faith to re-join Blue Shield's network for six

months, or (2) rescind their refusals to deal and participate in the

Blue Shield plan for at least six months.

The Commission is unanimous in its belief that the relief set forth

in Section II is necessary to restore competition in the relevant

market. However, Commissioner Swindle dissents from Section III of the

order and contends that Tahoe IPA's members will have sufficient

independent incentives to negotiate or contract with Blue Shield

without Section III of the proposed order. The facts tell a different

story.

Since the proposed order was reached with Tahoe IPA, 20 of its

member physicians have agreed to re-join the Blue Shield provider

network or to enter negotiations over terms under which they might re-

join. Only four members of Tahoe IPA have refused to enter negotiations

with Blue Shield. There is every reason to believe that the doctors

have re-joined the Blue Shield network in part because of the pending

order, and may have been more reluctant to do so in the absence of

Section III.

Accordingly, given the conduct alleged in the complaint and its

anticompetitive effects, we respectfully disagree with Commissioner

Swindle. Section III of the proposed order is a modest, but

appropriate, step to reverse the harm caused by Tahoe's illegal

conduct. With a large percentage of area doctors withdrawing from its

plan through an illegal boycott, Blue Shield no longer offered adequate

services to its members. Provisions of the cease and desist order other

than Section III prohibit further action to effectuate an agreement to

boycott. But where the action has already succeeded, as it did here,

something more is needed to restore competition that was eliminated

through the anticompetitive conduct alleged in the complaint.

Insufficient relief in this case could increase the likelihood of

similar conduct arising in other markets. Moreover, the relief in

Section III is limited to a six-month time period, and is narrowly

tailored to meet the direct purpose of the proposed order by covering

only the period when negotiations were occurring for the 1999 coverage

year. Tahoe IPA is primarily responsible for the boycott, and it is

therefore appropriate that Tahoe IPA take steps to make clear to its

own membership that they must make a unilateral decision whether to

continue to deal with Blue Shield.

In cases where illegal conduct has caused serious harm, the remedy

should aim to undo the damage when reasonably possible. The objective

of the proposed order in this case is to restore competition that has

been lost through the illegal activities of Tahoe IPA and its members.

Section III of the proposed order is an appropriate limited measure

designed to accomplish this traditional antitrust remedial objective.

It ensures that Tahoe IAP will allow its members to act in a manner

consistent with their independent incentives, not in a fashion that

allows the effects of an antitrust violation to persist.

Statement of Commissioner Orson Swindle Concurring in Part and

Dissenting in Part

[Tahoe Health System, Inc., File No. 981-0261]

The Commission has accepted a consent agreement in this matter that

includes a novel remedy I do not support. North Lake Tahoe Medical

Group, Inc. (``Tahoe IPA''), the respondent, engaged in negotiations on

behalf of its member physicians to obtain from third-party payers

prices that were discounted no more than 10 percent below their usual

fees. Blue Shield, a third-party payer, refused to accede to Tahoe

IPA's demands, leading Tahoe IPA to successfully encourage many of its

members no longer to participate as physicians for Blue Shield. Other

third-party payers that were considering offering HMO products in the

Lake Tahoe area responded to Tahoe IPA's demands by deciding not to

enter.

I agree that there is reason to believe that Tahoe IPA's conduct

violated Section 5 of the FTC Act. To remedy these violations,

Paragraph II of the proposed consent order contains typical provisions

that would prohibit Tahoe IPA from entering into any agreement to (1)

negotiate on behalf of physicians with any payer or provider for

physician services, or (2) refuse to deal with any payer or provider. I

support the relief in Paragraph II because it is necessary to prevent

Tahoe IPA from engaging in unlawful conduct that is identical or

similar to that alleged in the proposed complaint. Both the

Commission's complaint and the relief prescribed by Paragraph II make

it clear to Tahoe IPA's members that they must make unilateral

decisions as to whether to deal with Blue Shield.

The proposed consent order, however, also contains a novel--and

questionable--remedy, Paragraph III requires that Tahoe IPA terminate

the membership of all physicians who refused to deal (or who gave

notice of their intent to refuse to deal) with Blue Shield as a result

of Tahoe IPA's encouragement. Tahoe IPA, however,

[[Page 14733]]

would not have to terminate: (1) physicians who refused to deal but

attempt in good faith to reparticipate in Blue Shield for six months,

and (2) physicians who rescind their notices of refusal to deal and

continue to participate in Blue Shield for at least six months.

I do not believe that Paragraph III is needed. Prior to the refusal

to deal with Blue Shield alleged in the complaint, the Tahoe IPA

physicians who participated in Blue Shield had their own sufficient

market incentives to participate. With the cessation of the refusal to

deal and the prohibition in Paragraph II on future refusals to deal,

these market incentives should revive. With the return of these

incentives, the Tahoe IPA physicians who refused to deal presumably

would choose once again to participate in Blue Shield even without the

burdens imposed by Paragraph III.\1\

---------------------------------------------------------------------------

\1\ Twenty physicians have agreed to reparticipate in Blue

Shield, while four have not. All this demonstrates is that

physicians have reparticipated in Blue Shield while Paragraph III is

in effect. It does not establish that Paragraph III was a cause of

this reparticipation, or that market incentives would not have

caused the physicians to reparticipate in the absence of Paragraph

III.

---------------------------------------------------------------------------

The majority believes that government action beyond these market

incentives is needed to make this market work better in the future. I

disagree. Because Tahoe IPA physicians on their own have sufficient to

return to Blue Shield, there is no reason to add a layer of government

intervention intended to achieve the same result.

I dissent as to Paragraph III of the proposed consent order.

[FR Doc. 99-7404 Filed 3-25-99; 8:45 am]

BILLING CODE 6750-01-M