Pan American Management Associates

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UNITED STATES OF A M E R I C A
FEDERAL TRADE COMMISSION
WASWINGTON, D.C.20580
B U R W Of COMPETITION
June 27, 	1 9 8 9
Robert P. Maeina, 	Esq.
Greederg, Traurig, Hoffman, Lipoff, Rosen & Quentel, 	P.A,
1 2 2 1 Brickell Ave,
M i m i , 	Florida 	33231
Dear Mr, Macina:
This letter responds to your rewest 	on behalf of Pan
merican Management Associates, Ltd, 	f o r a s t a f f 	a d v i s o q
opinion concerning the legality under the laws enhorced by
the Federal Trade Comissioa of a proposal to establish a
preferred provider organization,
According to the i n f o m a t i o n contained 	in your 	letter,
Pan Elanesiean Management Asesciates, Ltd, ("I?
Led partnership organized under the laws of Florida.
% general partner Is Pan Weriean Cornunity Health
Semites, Tnc* ("CHSw), a for-profit corporation wholly owned
by Pan herican Hospital Foundation, Tne. 	The Foundation is
a not-for-profit Florida corporation whose primary function
I s to provide financial and other support for the operation
sf Pan meriean Hospital ("the Hospital"), a 146-bed
nonprofit acute care hospital located in Dade County,
Florida, 	I? 	has 	61 Idited partners who are physicians on
the medical staff of the N 	tan- 	The limiked partners 	have
each invested $ 	10,000 	in 	and together they have an 80%
interest in the partnership, 	CNS, 	the general partner, owns
the remaining 20% interest in the partnership.
and the Hospital are Located in Dade County,
Florida, 	There are approximately 31 acute care hospitals
located in the county with a total of more that 9500 B e d s ,
The Hospital has approximately I I/% per cent of the acute
care beds in the county* 	Tn addition, there are a variety of
specialized hospitals operating in the area, including
psychiatric 	hospitals, rehabilitation hospitals, and
sdstanee abuse treatment centere, 	There are more than 6,800
licensed physicians in the county,
currently has a contract to provide management
senices to the Hospital, 	In addition, 	it proposes %a
establish and operate a " e o d i n e d 	provider unitM 	QwCPUm), a
business venture shilar to a preferred provider organization
( n P P O w ) . The CPU will be comprised sf the Hospital and some
of its physician staff members and will provide health care
services to managed health care plans, 	including health

t
Robert P. Maeina, E s q .
maintenance organizations, BPOs, 	insurance companies, and
third-party a b i n i s t r a t a r s , 	with which P 	contracts,
will solicit physicians who are me&ers 	of the
medical staff sf the Hospital to contract w i t h the CBU. 	The
initial solicitation will be of the 61 limited partners,
Other physicians will then be invited to contract w i t h the
CPU, 	with &Be expectation that between PO0 and 200 physicians
will emolle
will then contract to provide health care senices
other 	individuals covered by managed health
care plans* 	P 	intends to negotiate contracts with
individual health care plans t h a t will specify, mong other
t h i n g s , 	the price o f 	the medical semices to be provided by
the CPU% 	participating physicians and the Hospital,
Contracting health care plans will pay the providers the
lesser o f 	t h e i r 	cuslomaq charge or the negotiated 	rate,
Some contracts may provide for p a p e n t 	on a eapitated basis,
will not 	have the authority to contract on behalf sf
idens; rather, it will present the negotiated agreements
to the individual providers, who will decide inde
whether or not 	to participate in each contract, 	I?
also provide administrative services, including utilization
review and q a l i t y assurance services, to contracting plans,
Managed 	health care plans w i t h which P 	contracts will
provide 	financial incentives for individuals covered by the
plans to use the services of the G P U Q 	participating
providers. 	Covered individuals will be free to obtain
sewices 	from non-contracting providers, but they may incur
additional out-of-pocket expnses if they do so,
Participating physicians as a group will have no role in
the negotiations between P 	and the con%raeling plans, 	The
Agreement of Limited Part 	hip states t h a t 	the limited
partners, the 6 1 physicians who have invested in P
not participate 	or control the partnership" 	business,
lanagement sf P 	is vested 	in the general partner, CHS,
which is owned 	the Hospital Foundation, 	m o of the f o u r
meacJlers of CNS" 	Board of Bi 	ors are physicians, 	of whom
one is a I h i t e d partner in 	. 	Both of i t s offleers are
physicians, and one sf 	is a limited partner in
The negotiatio 	contracts w i t h managed care plans
be cosrdueted by 	" s Chief merating Officer and L t s
Chief Financial Officer, neither o f 	whom 	is a physician,
Prices negotiated by 	P 	will not affect what providers
charge patients who are not mehers oh contracting plans,
@ Providers will be 	free to participate in other health

Robert P. Maeina, 	Esq.
maintenance organizations, PB88, 	or other managed care plans,
except for plans that provide 	senices 	to menntaers o f 	plans
w i t h which 	P 	has a contract,
Based on the i n f o m a t i o n you have provided, which is
arized a o v e , 	does not appear that the establishen$
operation by l? 	sf the proposed "codined provider
unitm would violate any law enforced by the Comission, In
general, preferred provider organizations bave the potential
to benefit consmers of health care senices by 	organizing
providers into identifiable groups that can compete w i t h one
another and w i t h other providers on the basis ah price,
quality and serviceel PPOs that are organized or controlled
by health care providers 	raise several potential antitrust
issues, 	The mcst 	h p s r t a n t 	o f 	these are whether operation of
%he PP6 	(1) involves suspect agreements mong horizontal
competitors or (2) estalishes barriers to e n t q by other
PPOs 	or similar e n t i t i e s , 	St does not 	appear 	that the
proposed PP8 would endanger competition in either of these
ways,
F i r s t , 	as you bave described the proposed operation of
the PPO, it does not appear that it necessarily would involve
any agreements mong horizontal competitors concerning the
prices to be charged for their services.
Management 0% the PPO, 	ineluding negotiation of prices,
is the prerogative of the general partner, CHS, 	which is
closely affiliated with the Hospital, 	Even if the Hospital
is able to exercise control over the PPO, 	this would not
raise a n t i t m s t 	issues because the Hospital is the only
provider af hospital semiees 	included in the PPO.
Therefore, negotiation o f 	prices will not 	involve price-
related agreements msng competing hospitals,
Operation of the PP0 does not appear to involve
agreements mong competing physicians either, 	According to
your letter, the physician limited partners as a group have
no role in the management of I? 	and will not be involved
in price negotiations, 	The participating providers likewise
In an advisoq opinion issued to Health Care
lanagcement Associates, the Comission analyzed a proposed
preferred provider organization that was organized by 	an
inlemediaq that was not a health ease provider, 	1% stated
that the PP08s operation would not violate the antitmst
laws and, on the e o n l r a q , 	was likely %a be procompetitive,
Letter from Emily H. Rock, Secretary, 	to I m i n 	S. 	Smith,
H.B., 	101 F , T , C . 	1014 	(1983).

Robert I?. 	Haeina, 	E s q , 	4
are not 	involved either i n managing the PPQ or in price
negotiations, 	The prices agreed upon between P
purchasers 06 	health care s e n i c e s 	will be submitted to the
individual physicians, who will decide independently whether
to participate in each contract, 	There is no agreement mong
the providers to accept particular priees, and there are no
agreements concerning prices to be charged to patients not
covered by 	P 	contracts,
Antitrvst issues would be raised by any agreements mowg
the PPB" 	participating physicians as to the priees 	they
would accept from third party payers contracting w i t h 	the PPO
or the prices they charge to other patients, or by 	an
agreement to deal with t h i r d parthes only twough P
agreements are not inherent 	in the operation o f 	the PP8 as
its has been proposed, 	However, the physician participating
providers and the management sf the CPU should be aware that
a n t i t m s t 	issues would arise if P 	becme a vehicle f o r
collective negotiation between the participating physicians
and third party payors,
According 	Lo your submission, dour individuals who are
physicians, two of whom are also li 	Partners in
are officers or directors o f 	CNS, 	I? 	" general partnere
@ 	While your letter states that these 	dividuals will not
t 2 y participate in the negotiation sf contracts between
and managed care plans, it 	possible t h a t they could
le to direct or influence P 	" activities, including
contract 	negotiations, 	However, the presence sf individual
providers in the management structure s f 	a PPO does not
necessarily mean that the actions sf the entity are
considered %o be the product 	of a horizontal agreement, 	As
long as the physician managers 	are not responsible to, or
othemise acting on behalf of, a group sf competing
physicians, CHS would not be considered to 	an organization
eontrolled by 	competitors. 	Accordingly, P
negotiations would not appear necessarily
agreements mong competing physicians, 	H o w e v e r , 	horizontal
price agreements could well be found to exist if the
plnysieians 	acted as agents for the participating physicians
and did influence the negotiations between P
parties,
For the reasons stated above, 	it appears that the
proposed PPO can be operated in a way that would avoid
horizontal agreements with respect Lo the prices of health
care services, and %bat it is the PP08s intention to do so.
Therefore, it is not neeessaq to eoneider whether any such
price agreements eould be considered legitimate ancillary
@ aspects of the PPO@s operation.

I 	.
Robert 	P. 	Macina, 	Esq,
A 	second area o f 	concern w i t h respect to provider-
sponsored PPOs 	relates to the effect of t h e PPO on possible
market 	e n t q by otber competing organizations of providers,
24 PPO could impede the development of other similar
organizations if it ineluded a large proportion of %he
providers in a market and those providers would n o t 	or could
not participate in other plans, 	This could be the ease if
the PPO w e r e organized in order to prevent the fornation of
competing plans and mast local providers refused to
participate in any other plan, or if the plan had a large
proportion o f 	local physicians and was able to revire
participating providers to affiliate only w i t h 	it, 	In t h i s
case, 	the proposed PPO would have such a small share of 	the
hospital and physician markets that there appears to be no
possibility that i t s operation would impede entw by 	other
PPOs .
For the reasons 	discussed above, it does not 	appear t h a t
the operation by P 	of the proposed co&ined 	provider u n i t
would violate 	any law enforced by 	the Federal 	Trade
Comission. 	This office retains the r i g h t 	to reconsider the
cquestions 	involved and, w i t h notice to the requesting party,
to rescind or revoke i t s opinion if implementation of the
proposed program results in substantial anticompetitive
effects, if %be pragrm 	is used for impraper purposes, ar If
it would be in the p&lic 	interest go do so, 	The above legal
advice 	i s that of 	staff of the Bureau of Competition only,
Under 	the Comission% Rules of Practice S 	% * 3 ( c ) ,the
Comission is not bound by t h i s 	advice and resesves the right
to rescind 	it at a later 	time and take such action as the
p a % i cinterest may require,
Michael 	D. McNeely
Acting Assistant Director