After the Federal Trade Commission brought an antitrust challenge against a physician-hospital organization in Billings, Mont., the PHO's doctors came up with a way to respond to managed care's impending invasion without getting into hot water with antitrust enforcers.
In May 1997 the doctors won the FTC's antitrust blessing to form Yellowstone Physicians, a for-profit multispecialty physician network through which they could pursue managed-care service contracts. Some of the doctors had participated in the PHO, which settled antitrust charges with the FTC in October 1996. Under the settlement, the doctors agreed to restructure their company to comply with antitrust law.
While business concerns have since forced the doctors to put their plans for a new company on indefinite hold, the case has made the antitrust rules a little clearer for other alliance-minded physicians anxious to avoid lengthy and costly run-ins with government lawyers. This is "the first, and so far the only," case the commission has brought against a PHO, according to an FTC source who asked not to be identified.
The FTC launched its antitrust investigation of the PHO, Billings Physician Hospital Alliance, in 1992. The doctors, through their independent practice association, had formed the PHO a year earlier in response to what they viewed as managed care's imminent invasion of their practice region. The IPA, Montana Associated Physicians Inc., partnered with Saint Vincent Hospital and Health Center, also in Billings, to form the PHO. The doctors hoped the venture would give them the upper hand in negotiations with health plans.
At the time, the rules of antitrust law in regard to physician and physician-hospital associations were unclear. Such concepts as restraint of trade and illegal pricing agreements were understood in industries like banking and oil, but when it came to healthcare, doctors and law enforcement officials were operating in the dark.
It's not that the FTC hadn't been reviewing provider collaborations for years, explains Robert Leibenluft, assistant director for healthcare in the FTC's Bureau of Competition. "But things have been changing as providers do new things, either to keep managed care out or to raise their prices to managed care," Leibenluft notes.
In the Billings case, the FTC alleged the IPA and PHO had blocked the development of managed-care plans in the area. The complaint the FTC filed alleges that, beginning in 1987, the Billings IPA (and later the PHO) obstructed efforts by Blue Cross and Blue Shield of Montana and the Blues' HMO Montana, as well as another unnamed health plan in Billings, to contract with the IPA's members.
During a presentation this past February sponsored by HHS' Office of Rural Health Policy, Leibenluft said the FTC is happy when physicians unite to improve the efficiency or marketability of their services.
But the problem with the Billings IPA and PHO, the complaint emphasized, was that federal laws, including the Sherman Antitrust Act, prohibit such unions when they restrain competition and fix prices. And that's exactly what the FTC alleged the Billings IPA and PHO did.
MAPI, the IPA, comprised 115 physicians, who together constituted about 43% of all the doctors in Billings. Its purpose, the FTC said in the complaint, had been to engage in collective bargaining with managed-care entities, to resist pressure to discount fees and to avoid reimbursement except on a fee-for-service basis.
Meanwhile, BPHA, the PHO, had 126 physician members, who constituted 45% of all doctors in Billings. BPHA's purpose, the FTC said, was to negotiate contracts for its physicians with third-party payers. But a key factor, according to the complaint, was that almost all MAPI's members also were members of BPHA, although no specific numbers were cited.
That wouldn't have been a problem if Billings were an urban area, where lots of doctors and hospitals compete against one another and join forces in multiple ways to combat an array of managed-care entities. But as the FTC saw it, Billings is not a big city. Although it's Montana's largest city, with a population of about 100,000, it's considered a rural district. And as Leibenluft commented during his HHS-sponsored presentation, the FTC "must be sensitive . . . to the increased danger of serious consequences that may flow from anti-competitive conduct in rural areas, given the scarcity of alternative providers."
The upshot was that MAPI and BPHA, while technically distinct, were actually operating in cahoots, Leibenluft said. "BPHA was a vehicle through which MAPI carried out its illegal activities," he said. And Saint Vincent, whose business MAPI and BPHA dominated, was one of only two hospitals in town.
Although it wasn't a case of outright monopoly (since there was another hospital in Billings), MAPI and BPHA had crossed a line. By agreeing behind closed doors on what terms to accept or reject, on what prices to charge and on which managed-care entities to do business with, the groups could effectively shut out or insist on favorable terms with anyone they chose.
Either way, said the FTC, MAPI and BPHA were harming consumers by keeping their fees artificially, and illegally, high. Far from improving efficiency, the FTC said, the two groups were engaged in a "naked restraint of trade" that restricted competition, conspired to fix fees, and conducted boycotts against HMOs and PPOs.
In the face of the FTC's complaint, MAPI and BPHA officials decided against a fight. Instead, they agreed to "cease and desist" from almost all their prior activities in a consent decree that became final in October 1996. In the settlement, MAPI and BPHA admitted all the facts alleged in the complaint and waived all rights of judicial review. The settlement left the two groups free to remain in business, but in a much more limited form.
For example, both MAPI and BPHA agreed to no longer negotiate, deal or refuse to deal with any third-party payer. They also promised to refrain from fixing prices and determining the terms and conditions of physician services. And both groups agreed to provide mountains of public documentation on all their activities for a period of five years.
As the FTC wrote in its 1995-1996 annual report, "the order does not prevent these associations from entering into legitimate joint ventures that are non-exclusive and involve the sharing of substantial financial risk." However, it does seem to have left the Billings doctors with the sense that they had to retrench.
In February 1997 Milwaukee attorney David Meany, the legal counsel hired by some of the former MAPI/BPHA doctors, wrote Leibenluft a letter outlining a new physician network the doctors were proposing, Yellowstone Physicians. In his letter, Meany sought some indication from Leibenluft as to whether the FTC would go after Yellowstone the way it had attacked MAPI and BPHA.
It was Leibenluft's May 14, 1997, letter back to Meany that gave the Billings doctors the green light they had been waiting for. In his 10-page letter, Leibenluft said Yellowstone "raises a significant potential danger to competition." He said he worried that "Yellowstone members could collectively resist market pressure to participate with managed care plans on competitive terms."
Nevertheless, Leibenluft wrote, "commission staff has no present intention to recommend a challenge to the proposed operation of Yellowstone." That meant the Yellowstone physicians were free to go ahead and launch their new group as soon as they wished.
So what were the substantive differences between the MAPI/BPHA and Yellowstone cases?
Leibenluft's letter contains the answers, and it should be required reading for all physicians (and their lawyers) who practice in rural areas and are contemplating similar associations. (It can be found on the World Wide Web at www.ftc.gov/bc/adops/yelltone.htm.)
Leibenluft found a number of mitigating factors to allow Yellowstone to go forward. The first was a simple historical change: Billings had become "significantly more competitive . . . following the FTC investigation" of MAPI and BPHA, Leibenluft asserted.
Yellowstone would comprise 141 physicians, or about 39% of all Billings doctors -- virtually the same as the 43% that had belonged to MAPI. But the Yellowstone doctors would assume "substantial financial risk" through capitation or withholds. That stood in stark contrast to the kind of fee-for-service reimbursement arrangements the FTC alleged MAPI and BPHA strove to protect and was a tacit recognition by the doctors that managed care had arrived. The new payment methods, Leibenluft concluded, would "provide significant incentives . . . to cooperate in controlling costs and improving quality."
Leibenluft also noted a promise the Yellowstone physicians had made: They vowed to avoid the kind of overlapping conflicts of interest that pervaded the MAPI and BPHA relationship. Instead of being separated by a revolving door, Leibenluft determined, Yellowstone would erect a stone wall between itself and another IPA, Billings Clinic, a 137-doctor association affiliated with the city's other hospital, Deaconess Medical Center.
Under the new rules, none of Billings Clinic's physicians would ever be allowed to join Yellowstone, as BPHA doctors had been able to join MAPI. This, Leibenluft determined, would foster true geographic and product competition between Billings Clinic and Yellowstone.
True, Leibenluft mused, there were certain problems with Yellowstone. One cause for some concern, he said, was that in a number of specialty fields Yellowstone had an alarmingly high percentage of physicians. Another was Yellowstone's high proportion of non-Billings Clinic doctors, which "raises a significant potential danger to competition," he wrote.
Nevertheless, he continued, Yellowstone had asserted "plausible business reasons" for its decisions. For example, Yellowstone argued that the high number of specialists was necessary to provide enrollees with a high level of quality, and, Leibenluft said, it would be "impractical (if not impossible) to offer participation to fewer than all members of an integrated group practice."
The final reason for approval, Leibenluft wrote, was the fact that "none of the payers to whom we spoke expressed concern" about Yellowstone.
Charles Butler Jr., the top spokesman for Blue Cross and Blue Shield of Montana and HMO Montana, confirms this. "Things have changed significantly in the Billings market in the last few years," he says. "Managed care has truly arrived, and there's good competition," he adds, rattling off a string of new HMOs now competing for business.
Of course, Leibenluft appended a warning to his go-ahead signal: The FTC will continue to scrutinize Yellowstone to make sure it does not drift back into anti-competitive conduct. But in the meantime, the organization was free to do business.
And so Yellowstone made the cut. Ironically, after going through all that trouble, its creators have decided, at least for the time being, not to start up their new company after all."
"It has nothing to do with the legal decision," Meany says. "The participants decided for other reasons, on a business basis, not to go forward." He would not provide details, nor did Yellowstone's principals respond to queries.
The Blues' Butler also expressed puzzlement. "I don't think anyone in our company knows anything about Yellowstone," he says. In fact, MAPI appears to be in limbo as well. "I don't know what its status is today -- if it exists on paper or what. We don't deal with them," Butler says.
The highly placed FTC source cited earlier says of Yellowstone's start-up hassles: "We did give (Yellowstone) the OK, and they still can't get it off the ground."
Whatever the physicians' reasons are for scuttling the new group, there's a lesson to be learned from the MAPI/BPHA/Yellowstone saga. As Leibenluft pointed out during his February presentation, genuine risk sharing in a truly competitive market is a prerequisite for the formation of such groups in a rural market.
It's also true, Leibenluft says, that the MAPI/BPHA case "has only limited applicability to PHOs in general," since each case is different and analyzed on its own merits.
That's reassuring, but physicians shouldn't expect clear, easy answers to their questions. "I know people want a black-and-white (answer), in the sense of, 'If you do this, it's not good; if you do that, it's OK,' " Leibenluft says. "But that doesn't reflect reality."
Steven H. Heimoff is an Oakland, Calif.-based writer who specializes in healthcare business topics.