Suburban Health Organization

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Bureau of Competition
Health Care Services & Products Division
David R. Pender
Acting Assistant Director
Direct Dial
(202) 326-2549
March 28,2006
Clifton E. Johnson, Esquire
William H. Thompson, Esquire
Hall, Render, Killian, Heath & Lyman
Suite 2000, Box 82064
One American Square
Indianapolis, Indiana 	46282
Re: 	FTC Staff Advisory Opinion Concerning
Suburban Health Organization, Inc.
Dear Messrs. Johnson and Thompson:
You have requested a staff advisory opinion concerning the antitrust implications of a proposal by
Suburban Health Organization, Inc. (hereinafter "SHO"), to undertake a program involving partial
integration among eight independent SHO member hospitals and the 192 primary care physicians that, in
total, they employ (the "program"). You have asked whether the staff would recommend that the
Commission challengejoint negotiation by SHO with payors regarding the fees to be charged for those
physicians' s e ~ c e s	provided under the program.
This advisory opinion is based on the information that you have provided to us in an initial
submission, in a telephone conference with you and SHO's President and CEO, and in your responses to
two requests for additional information. All references to facts regarding the program are based on your
representations; we have not conducted an independent investigation, or otherwise verified the information
that you provided.
We believe that SHO's program involves some integration among its hospital participants that has
the potential to generate efficiencies in the provision of physician services, but also that the integration and
potential efficiency benefits appear to be significantly limited. Further, the program's competitive
restraints do not appear to be reasonably necessary in order to achieve its potential efficiencies, and
therefore would unnecessarily eliminate competition. Accordingly, we believe that the program's
restraints would not be permissible under the antitrust laws. Our analysis is set forth below.
Description of SHO
SHO is an Indiana non-profit corporation formed in 1994 to undertake risk-based contracts with
health plans and other payors of health care services, such as self-insured employers. SHO functions as a
"super-PHO" (physician-hospital organization), consisting of seven local PHOs in the Indianapolis area,
each affiliated with a local hospital, and one multi-facility health system.' The seven PHOs involve

community hospitals, including one osteopathic hospital in Indianapolis and six county hospitals, each in a
different “collar” county surrounding Indianapolis.2 The multi-facility health system, St. Vincent Health,
Inc., is affiliated with St. Vincent Hospital and Health Center, Inc., a tertiary care medical center.3
The eight SHO member hospitals together employ a total of 192 primary care physicians,4 who
generally practice medicine within their respective hospitals’ primary service areas. SHO states “there is
very little overlap” between any pairing of SHO’s member community hospitals’ employed physicians, but
SHO does not claim that the physicians involved in the program (“participating physicians”) are not
competitors for antitrust purposes. This may be because St. Vincent’s employed primary care physicians –
constituting about 45% of all the physicians in the program – are located in several areas served by other
SHO member hospitals and their employed primary care physicians, and thus appear to be competitors of
those physicians.
SHO is governed by a sixteen-person board of directors, and currently has a staff of 45 full-time
equivalents, and an annual operating budget of $7.9 million.5 It currently has two risk-based contracts,
covering about 41,000 lives, with an estimated $116 million in annual capitation revenue. SHO has
“facilitated” seven non-risk contracts between payors and physicians using a “messenger model,” and
states that it also “coordinates quality improvement initiatives for all covered lives,” and “provides
physician support services and shared administrative services.”
SHO’s Proposed Program
SHO proposes to adopt a program – which it refers to as a “clinical integration program”6 – to
promote the quality and efficiency of care provided by the program’s hospital-employed participating
physicians. If the program is successful, SHO anticipates “encourag[ing] additional contracting physicians
to participate so that SHO will be a competitive alternative network in this new environment.” However,
SHO has not asked us to analyze its proposal as a first step in a broader program to provide physician
services and, accordingly, we have not done so.
SHO states that its proposed program consists of four “interrelated components:”
(i) medical management activities, which will include monitoring patients to identify specific
diseases and conditions that require special attention, and adopting and disseminating practice
guidelines and medical management protocols for those diseases to participating physicians;
(ii) quality management programs, which will measure compliance with the guidelines and
protocols, assess quality outcomes to evaluate the effectiveness of the care processes, and identify
necessary changes to improve the system;7
(iii) practice support, which “involves the distribution to individual physician practices of the
educational resources, practice guidelines and outcomes data needed to enhance professional
practice patterns,” with explanation of the materials provided to physicians by SHO staff. This
function also will include credentialing physicians in accordance with National Committee for
Quality Assurance guidelines; and
(iv) a physician incentive plan, which is intended to “encourage active participation and to reward
physician compliance” in the program, and will “reward . . . physicians based on both individual
and group performance.” If the participating physicians meet certain quality management targets,
they each could receive up to an additional 5% of their compensation from an incentive pool
funded by the SHO hospitals, half of which would be based on total group performance, and half
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on the physician’s individual performance.8
SHO’s program also will include efforts to educate patients, and to prevent disease and encourage
healthy lifestyles, for example through smoking cessation and diet control programs, weight loss and
exercise interventions, and promoting immunizations. It also will employ case management of specific
patients with certain conditions, such as diabetes and asthma. These activities seek to reduce the incidence
of avoidable medical interventions and their attendant costs.
The program will use web-based technology to deliver and track information. SHO will
extensively program and customize “technology platforms” that it already uses for its current risk
business.9 Implementation of these systems will take 18 to 24 months. Pending full deployment of this
web-based system, SHO will use “more traditional means” of collecting data, tracking physician
performance, and educating participating physicians, such as medical records review, claims form analysis,
and verbal and written communications with physicians.
SHO estimates that initial investment for the program will be $75,000 to $100,000 over two years,
plus salaries for new personnel for data support, program initiatives, pharmacy management, and
administration over the same period, at an estimated annual cost of $300,000.
SHO’s Requested Opinion
SHO has asked for an advisory opinion whether the Commission Staff would recommend a
challenge under either the per se or rule of reason standard to SHO’s proposed collective negotiation of
contracts with payors, including uniform fees, on behalf of the eight SHO hospitals that are participating in
the proposed program, regarding the services of their combined 192 employed primary care physicians.10
SHO states we should assume that “SHO will be the employed-physicians’ exclusive agent for negotiating
non-risk contracts with large regional and national managed care plans.”11
Analysis
Legal Standard
SHO’s proposed joint contracting on behalf of its member hospitals regarding their employed
physicians’ services and fees, and the accompanying prohibition on individual contracting for those
services by the hospitals, eliminate price competition among the eight otherwise competing providers of
those services.12 Without this program restraint, payors could contract individually with SHO member
hospitals for the services of their respective employed physicians, and competition for payor contracts
could lead the hospitals to reduce prices or enhance the quality of those services. Absent a valid and
cognizable justification under the antitrust laws, SHO’s pricing conduct would be presumed to injure
competition, and would be summarily condemned.13 More extensive analysis of the arrangement’s
procompetitive and anticompetitive effects would be warranted if the competitive restraints were
determined to be “ancillary” to – i.e., related and subordinate to, and reasonably necessary to achieve the
efficiencies of – some primary, potentially efficiency-enhancing economic integration among the joint
venture’s participants.14
The Federal Trade Commission, applying guidance from the decisions of the Supreme Court and
other federal courts, has addressed the concept of ancillary restraints both in guidelines regarding joint
arrangements among physicians and other health care providers, as well as among competitors generally.15
Most recently, the Commission has discussed and applied this type of antitrust analysis regarding restraints
accompanying joint ventures in its decisions in Polygram Holding, Inc.,16 and North Texas Specialty
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Physicians.17
Thus, analysis of SHO’s proposal requires that we first consider whether it involves potentially
efficiency-enhancing integration among the joint venture’s otherwise competing participants, and then
evaluate whether the accompanying restraints are reasonably necessary – i.e., “ancillary” – to the
achievement of the proposed program’s integrative efficiencies.18 If the restraints are ancillary, then
ultimate determination of the legality of the restraints requires a weighing of the arrangement’s
procompetitive and anticompetitive effects.
Integration Through SHO’s Proposed Program
SHO asserts its proposed program is not a “naked restrain[t] of trade with no purpose except
stifling of competition,” and therefore should be evaluated under the rule of reason.19 As we discuss
below, SHO’s proposed program appears to involve a degree of integration among its member hospitals
that holds out some potential to improve the quality and efficiency in the participating physicians’
provision of their professional medical services under the program, and thereby potentially promote
competition. We therefore agree the competitive restraints that are part of SHO’s proposed program
should not be summarily condemned as naked price fixing or as an output restriction.
The legitimacy of SHO’s program, or the bona fides of its participants, however, do not alone
determine the legality of the program’s competitive restraints. A legitimate joint venture may be found to
have engaged in unlawful competitive restraints.20 Therefore, even if the arrangement will involve
integration among the competitors that is likely to create efficiencies, the analysis still must address
whether the proposed competitive restraints are ancillary (i.e., reasonably necessary) to creating that
integration and achieving those efficiencies. Without such an integral connection between a restraint and
the achievement of the venture’s efficiencies, the restraint is viewed as unnecessarily eliminating
competition, and therefore as having no legitimate reason to be sanctioned by the antitrust laws.
The integration in SHO’s program has four main elements: (1) joint development of practice
protocols and disease-specific treatment parameters regarding a limited set of medical conditions;21
(2) centralized collection and use of data to monitor physician behavior and outcomes with respect to the
treatment protocols; (3) jointly produced educational materials; and (4) agreement by the eight participant
hospitals to have their employed primary care physicians abide by the common practice standards,
reinforced by the program’s jointly funded bonus pool to reward desirable behavior and results. This
integration is being undertaken and jointly funded through SHO by the eight SHO hospitals that employ
the physicians whose services SHO proposes to market, rather than by the physicians themselves, as might
be the case if they were in independent medical practices, rather than hospital employees.
SHO states that “by packaging the proposed clinical program with traditional primary care
physician services, it [SHO] will offer a level and quality of physician services that no one SHO hospital
could develop on its own.” However, SHO does not explain why a single hospital could not develop this
type of program and itself provide higher quality services. Subject to the ability to sustain the costs of
doing so, it is not apparent that an individual hospital could not develop educational materials, adopt
practice protocols and standards for its employed physicians, monitor compliance with those standards
through data systems, and encourage or require participation in the program through financial rewards for
good performance, or other means.
SHO provides a mechanism for sharing some program costs by its member hospitals. It also likely
offers some efficiency benefits in developing and implementing the program, due to its ability to use the
systems and equipment already in place from the hospitals’ previous investment and joint participation in
SHO’s risk-based contracts. Participation also allows the member hospitals to pool data on physician
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performance, which may provide more reliable performance benchmarks than would the smaller data set
available from a single hospital’s physicians.22
Despite these joint activities, SHO appears to rely largely on each individual hospital to motivate
its own employed physician participants in the program,23 and relies entirely on the individual hospitals to
discipline those physicians regarding their performance. SHO may encourage efficient behavior by the
program’s physician participants,24 but it has no direct authority or control over their actions or
performance, and appears to lack any enforcement mechanism or authority to discipline or remove from
the program chronically non-compliant physicians.25 Rather, the task of assuring physician compliance
with the program largely will rest with each individual employer hospital. In that regard, SHO states:
Performance data will be tracked and shared with the individual PCP [primary care
physician] to motivate change, and with the PCP’s employer hospital to assist the SHO in
reinforcing the . . . program. This data also may be used in the performance appraisal
process of the employed PCP. Ultimately, this information could be used by the hospital-
employer with respect to employment status decisions of the PCP.
SHO’s program also apparently lacks a mechanism for dealing with a member hospital that fails to
adequately assure its physicians’ compliance and cooperation with the program requirements, except,
perhaps, for the ultimate penalty of exclusion from the program.
A hallmark of integration is interdependence. SHO states that interdependency among the
program’s participating physicians is to be found in “the coordination of the various contributions made by
the stakeholders to the joint venture’s efficiency enhancing program.” Participating physicians will
become interdependent through “the development and implementation of, and adherence to, common
clinical goals and clinical practice guidelines, participation on quality management committees, and
submission to focused peer review.” SHO “will develop performance expectations for all participating
physicians despite [their] having different hospital employers. Because the goals will be set for the group,
individual physicians will need to work collaboratively in order for the group to attain those goals.”26
Participating physicians will have access to educational materials, will be given treatment protocols for use
with identified patients having certain medical conditions, will be monitored for adherence to established
standards, and will be provided with data and feedback regarding their performance.
SHO does not explain, however, how the physicians will or can work collaboratively to attain the
program’s goals, since the program does not appear to involve collaborative provision of physician
services, or direct involvement by participating physicians from any SHO hospital in the delivery of
services by physicians at any other SHO hospital.27 In fact, SHO states that, beyond the development of
quality management programs, outcomes measurement, and professional peer review, little interaction will
occur between or among primary care physicians at different SHO hospitals. And, although SHO states
that “[b]ecause the goals will be set for the group, individual physicians will need to work collaboratively
in order for the group to attain those goals,” it provides no explanation of how such collaborative activity
among the 192 employed primary care physicians will or can occur. Rather, it appears that the program
will involve little or no contact or interaction -- much less interdependence -- among the participating
physicians across the eight member hospitals in the actual delivery of care to patients.28
Limitations on the Program’s Potential Efficiencies
SHO’s program appears to have the potential to improve quality and efficiency, at least with
regard to those medical conditions addressed by the program. The program’s limited nature and scope,
however, appear to significantly limit the magnitude and range of those potential efficiencies. Another
significant limiting factor is the program’s inclusion only of hospital-employed primary care physicians,
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which appears to preclude its efficiencies in the provision of services to patients requiring referral to
specialists or other non-participating physicians.29 SHO states that:
the care provided to patients will involve primary care physicians and specialists who will
not fall under the scope of the contracts SHO negotiates with payors. For example, a
preferred specialist network has been established under SHO’s risk contracting program.
SHO expects these specialists to render care consistent with the guidelines and processes
developed by SHO’s clinical committees in order to ensure consistent levels of high
quality care.
SHO also asserts that the program will include “evaluation of preferred specialty and facility
referrals,” and that treatment in local hospitals and tertiary care services “will be consistent [with that
under the proposed program], due to adherence to inpatient practice guidelines compatible with those used
in the primary care physician’s office.” However, SHO does not satisfactorily explain how this
“consistency” can or will be achieved or assured through the program, inasmuch as those specialist
physicians will not participate in the program’s integration or be subject to the program’s efficiency-
enhancing activities and mechanisms.30 In essence, SHO is asserting that its program will assure efficient
and effective treatment of patients who are referred to, and treated by, physicians not participating in its
program, and thus not subject to its standards or oversight, or participating in its educational or financial
incentive aspects. Such a claim either appears implausible on its face, or brings into question whether
SHO’s program and its competitive restraints are needed to achieve the types of modifications in physician
performance and adherence to set standards that the program purports to seek.
Ancillarity of Joint Pricing and Exclusive Dealing to Achieving SHO’s Efficiencies
We next address whether SHO’s proposed pricing restraints and exclusive contracting requirement
are reasonably necessary – i.e., ancillary – to achieving the program’s procompetitive integration and
efficiencies.
The joint determination through SHO of prices to be charged for one or more of SHO’s
educational, monitoring, data collection, and other potentially efficiency-enhancing services – the
“product” that SHO’s member hospitals actually are creating by integrating through the joint venture –
likely would raise little or no antitrust concern. Since the individual SHO hospitals previously were not
actual competitors (and, arguably, not potential competitors) with regard to developing and providing such
services, the setting of prices for the “new” services that the joint venture makes available likely would not
be characterized as a horizontal price agreement. Rather, it likely would be viewed as unilateral price
setting by a single business entity – the joint venture – that newly entered this separate line of business.31
SHO asserts that these services are inextricably intertwined with the provision of medical services
by the physicians participating in the program, such that the program is, in effect, a new and different
product from primary care physician services provided without SHO’s enhancements. SHO argues that
this creation of a new product justifies the agreement through SHO on the prices to be charged by the
member hospitals for the services of all of their employed primary care physicians. We do not agree with
SHO’s conclusion.
At the outset, SHO’s claimed need to jointly negotiate the fees for the hospitals’ employed primary
care physicians appears to be undercut by its current operation of a “standing offer messenger model”
arrangement in facilitating contracts with payors on behalf of about 350 independently practicing SHO
physicians. That mechanism processes payor contract offers that do not involve financial risk sharing by
SHO’s members, without the physicians engaging in collective price setting. In the case of SHO’s
proposed program, contract offers would only need to be transmitted between a payor and SHO’s eight
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member hospitals that together employ all of the program’s participating physicians. This is a far simpler
task than SHO currently undertakes for some 350 independently practicing physicians, and is an approach
that would not restrict price competition among SHO’s member hospitals regarding physician services.
Additionally, it is not evident, and SHO provides no explanation, why agreement on the entire schedule of
fees to be charged for all medical services performed by the employed primary care physicians in SHO is
necessary to implement a program that only addresses treatment of a very limited subset of medical
conditions treated by those physicians.
SHO asserts two reasons why joint pricing on behalf of all the hospital-employed primary care
physicians in the program is ancillary to the program’s integration:
First, SHO will be offering payors a new, integrated product, whose components – the
physicians’ medical services and the clinical integration program under which those
services will be provided – are inextricably linked, and a single price must be established
for the products together. Second, the physicians (and their hospital employers) are joined
together in an interdependent manner.
SHO adds that, to be successful, it must “motivate physicians to participate in quality management
programs, change long held practice patterns, accept outcomes measures and monitoring, share best
practices, and submit to peer review and re-education programs.” SHO also identifies what it characterizes
as a potential “free rider” problem that it believes can only be addressed by joint pricing by SHO as the
contracting party with payors on behalf of all the program’s participating physicians:
Absent uniform contracting (and uniform prices), SHO fears that its members’ incentives
would be disparate rather than aligned. Each hospital would have the incentive to
facilitate support for the program among its employed physicians, while using the benefits
of the program generated by others to negotiate as high a price as possible for physician
services. Ultimately, the entire program would fail because each hospital would recognize
the opportunistic behavior of others and engage in the same behavior itself. . . . [T]he
bottom line is that, absent joint negotiation, the clinical integration program likely would
not survive.
SHO also argues that the price agreement is necessary to address liability risk arising from the
program and its use of protocols. We discuss these proffered justifications below.
New Product
SHO asserts that the proposed program’s price agreement should be subject to rule-of-reason
analysis, rather than per se condemnation, because the integration through the program will create a “new
product” – i.e., something fundamentally different from the services provided by the participating
physicians outside of SHO.
In Broadcast Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1 (1979), the Supreme Court
applied the “new product” characterization to a joint venture by numerous individual music copyright
holders to offer and set the price of a blanket license to use all of their individually copyrighted songs. The
Court found that the blanket license “cannot be wholly equated with a simple horizontal arrangement
among competitors,” was “quite different from anything any individual owner could issue,” and was “to
some extent a different product” than the aggregation of its components.32 The Court concluded that the
joint setting of fees for that product was subject to rule-of-reason analysis, rather than per se
condemnation, because “a necessary consequence of an aggregate license is that its price must be
established,” and “the agreement on price is necessary to market the product at all.”33
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Subsequently, in Arizona v. Maricopa County Medical Society,34 the Court declined to apply rule-
of-reason treatment to arrangements whereby medical care foundations comprising numerous independent
physicians set the maximum fees that the member physicians would charge for their medical services when
providing those services to patients under contracts between the foundations and insurers. The Court
contrasted the foundation arrangements with other joint health care arrangements that offered something
more than just the services of the individual joint venture participants, such as where competing physicians
come together to guarantee, for a predetermined fee, the provision of care for patients’ complete medical
needs, as occurs in a capitated HMO arrangement, or where a multi-specialty medical clinic offers patients
a broad range of medical specialty services and expertise at a flat fee. 457 U.S. at 356-357. In those
circumstances, the Court reasoned, the joint venture provides something that none of the individual
physicians alone could provide, and that is intrinsically different from what those physicians normally
offer in their individual practice of medicine – i.e., insurance risk coverage or one-stop access to a broad
range of medical specialty services that a patient might need. Such arrangements, the Supreme Court
noted, were fundamentally different from the simple aggregation and joint contracting for individual
physicians’ services through network arrangements like the foundations for medical care at issue in
Maricopa, which the Court condemned as per se illegal price fixing.35
In distinguishing the foundations in Maricopa from the Broadcast Music joint venture, the Court
rejected the idea that the foundations created a new product:
[t]his case is fundamentally different [from the blanket license in Broadcast Music]. Each
of the foundations is composed of individual practitioners who compete with one another
for patients. . . . The members of the foundation sell medical services. Their combination
in the form of the foundation does not permit them to sell any different product. . . . The
agreement under attack is an agreement among hundreds of competing doctors concerning
the price at which each will offer his own services to a substantial number of consumers.
. . . [T]he fee agreements . . . are among independent competing entrepreneurs. They fit
squarely into the horizontal price-fixing mold.36
Like the foundations in Maricopa, SHO proposes an arrangement for joint contracting on price and
other terms with payors on behalf of SHO’s individual members (here eight hospitals) in order for the
payors to obtain access, at contractually agreed-to prices, to primary care physician services offered by
those otherwise competing sellers of those services. The program does not fundamentally alter the nature
of the services to patients, or to payors that arrange for access to those services on patients’ behalf. The
additional benefits resulting from SHO’s program may enhance the attractiveness to patients and payors of
the physicians’ medical services, and ideally will improve the quality and efficiency of patient care by
regulating what specific services the physicians provide to individual patients with certain conditions.
This does not mean, however, that the physicians’ provision of medical services thereby becomes a new
product.
Patients under SHO’s program will continue to seek individual physicians’ services, not the
services of some combined entity that involves the unification of physicians at SHO’s eight hospitals.
Each of SHO’s hospital members likewise will continue to individually bill and collect payment for the
services of their respective employed physicians on a fee-for-service basis, based on the specific services
provided to each patient by each individual physician. Thus, the SHO hospitals will still compete
regarding the sale of their respective employed physicians’ services under the proposed program. Patients
and payors, moreover, will continue to make fee-for-service payments only for the medical services
actually provided by an individual physician to an individual patient. They will not obtain access to
prepaid and guaranteed comprehensive services, or to the broader range of services and expertise provided
by full-service, multi-specialty clinics – both of which the Court in Maricopa contrasted to the medical
care foundations in that case, which consisted of individual physician practices that charged for their
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services on a fee-for-service basis.
Although SHO and its member hospitals will encourage participating physicians to practice
according to jointly-developed and agreed-upon standards, and will monitor their practices for compliance
with those standards, this is not fundamentally different from other common “managed care” arrangements
that do not involve fee agreements. Many physician networks adopt practice protocols and standards, and
monitor provider performance. Provider networks also frequently offer services such as medical and case
management, disease management, utilization and peer review, provider monitoring, and delegated
credentialing to payors at separately established prices for those services. Likewise, various consortia of
payors, providers, and consumers have developed similar types of programs to encourage and reward
efficient and effective treatment of patients by physicians and other health care providers.37
Further distinguishing SHO’s program from the “new product” in Broadcast Music is the fact that,
notwithstanding the blanket license arrangement in that case, the individual music copyright holders
continued to be able to individually sell the rights to use their songs. The blanket license was an efficient
joint sales arrangement that added a new alternative, otherwise unavailable in the market, by which
customers could purchase the right to use a broad range of copyrighted material through a single licensing
transaction.38 This alternative was in addition to what previously existed – and continued to exist – in the
market. The arrangement therefore increased total output, without reducing either price competition or
output in the market outside the joint venture.39 While non-exclusivity itself does not establish that a joint
venture creates a new product, it does avoid an output-reducing elimination of competition among the
venture’s participants. SHO’s proposed program does not share this attribute present in Broadcast Music;
rather, it offers its joint product by largely eliminating its eight member hospitals as individual competitors
of each other in offering the services of their respective employed primary care physicians in the
marketplace.
Motivating Physicians
SHO contends that to motivate the hospital-employed primary care physicians to participate in the
program and accept its requirements, it is necessary to allow its hospital participants to jointly set the fees
for the services of those physicians.
It is not obvious why it should be necessary for SHO to have a joint mechanism, much less one
premised on joint setting of fees, to motivate those physicians to comply with the program’s requirements
and embrace its goals. Each participating physician is an employee of a SHO member hospital, and each
hospital has decided to participate in the program. Those employed physicians can be expected to be
responsive to quality and other practice-related requirements set by their employers. The employed
physicians can be expected to be responsive to their employers’ practice-related requirements, and
undoubtedly operate under numerous directions or suggestions from their employer hospitals to fulfill the
hospitals’ operational, business, contractual, and legal needs and obligations. Thus, the employed
physicians at each SHO hospital can already be presumed to have their incentives aligned to a large degree
with those of their employing hospital. Employed physicians – like employees in other occupations –
already have a substantial incentive to perform in ways that further their employers’ goals and interests.40
Even assuming that SHO has a need to motivate the participating physicians, SHO does not
explain how joint fee setting provides that motivation. The individual employer hospitals, not the salaried
physicians, will bill the charges and receive the payments for each employed physician’s services under the
program, as is the case for services provided by those physicians outside of the program. The employed
physicians may not even know what fees their employers are charging and collecting for those services.
The physicians’ compensation may be affected to a degree by the amount that is billed for their services,
but the specific charges for their services are removed in importance – and thus in potential motivating
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power – from what might be the case if those physicians were independent practitioners who set their own
fees, and who received the full benefit of their pricing decisions.41
To the extent that additional motivation is necessary for employed physicians in the program, each
hospital could independently devise its own motivating incentives, best attuned to its particular employees,
without engaging in the price agreement in SHO’s proposed program. Beyond that, SHO and its member
hospitals could, just as effectively or more effectively, devise a program that directly sets and apportions
the hospitals’ contribution to any financial incentive pool, without involving agreement on the fees they
charge for their physicians’ services.42 Any need to motivate cooperation in the proposed program by the
hospitals’ employed primary care physicians cannot justify an approach that – like SHO’s proposal – is
indirect and tenuous, at best, in its motivational effects, that inherently has the potential to undermine the
cooperation and the efficiency goals it seeks to encourage, and that unnecessarily eliminates price
competition among the eight SHO hospitals for their employed primary care physicians’ services.
SHO’s arguments as to the need to set prices in order to motivate cooperation with its proposed
program by the employed primary care physicians also are undermined by other of its assertions. SHO
states that hospital and tertiary care physician services – neither of which is a part of the program – will be
provided “consistent” with the integrated primary care physician services “due to adherence to inpatient
practice guidelines compatible with those used in the primary care physician’s office.” SHO has provided
little or no explanation as to how these services can or will be provided consistently with the integrated
primary care physician services, except to say that it will rely on “developed referral relationships with
certain specialty physicians and facilities,” apparently referring to providers who participate in SHO’s risk
contracts. Insofar as such preexisting referral relationships and voluntary adherence by specialists to
practice guidelines alone are adequate to assure efficient provision of services, this would appear to
indicate that SHO’s program does not require agreement on the prices to be charged for the services of the
primary care physicians who are part of, and subject to the strictures imposed by, SHO’s program in order
to achieve a similar level of cooperation.
SHO believes that the program’s success in improving quality and achieving “value enhancement”
depends in large part on its ability to align provider incentives. However, as discussed above, the issue of
incentive alignment appears to relate less to the employed physicians than to the eight hospital employers
participating in the proposed program. The question then is whether, in order to align the SHO hospitals’
incentives regarding the program, and to avoid what SHO characterizes as a “free rider” problem,43 it is
reasonably necessary for the hospitals to agree through SHO on the prices to be charged for the services of
their employed primary care physicians, and not to deal with payors other than through SHO for the
services of those physicians.
The “Free Rider” or Equity Problem
SHO expresses concern that, unless SHO jointly and uniformly sets the prices for the services of
its member hospitals’ employed primary care physicians, any individual hospital that participates in the
proposed program will be reluctant to fully commit its time, resources, and expertise to the program, since
other hospital participants will be able to benefit from the arrangement despite a lesser commitment and
contribution to the venture. SHO identifies apparently contradictory concerns about how this problem –
which it calls “free riding” – might occur.44 SHO states that, absent joint pricing, a hospital could unfairly
benefit from its participation in SHO by “negotiat[ing] as high a price as possible for physician services,”
which then would be followed by the other hospital participants. Elsewhere, SHO expresses concern that,
if its member hospitals made significant investments in SHO and its clinical integration program, “[i]t
would clearly be inequitable to allow a SHO-member hospital to take advantage of these investments and
offer the benefits of SHO’s clinical integration program independently at lower prices.”
Page 10 of 19

Both concerns appear to relate to the need to have equitable distribution of costs and benefits
among the program’s hospital participants. SHO raises the possibility of an individual SHO member
hospital obtaining an “unfair” or disproportionate benefit from participation in SHO – by generating
disproportionately higher revenues and profits than other SHO hospitals, either by pricing its physician
services higher than them (and thus, presumably earning more per unit of service delivered), or by
charging lower unit prices, and thus gaining a disproportionately larger share of primary care physician
services than the other SHO hospitals. SHO is concerned that this type of problem may fatally undermine
the entire program, but asserts that it can be remedied by SHO jointly negotiating and holding all managed
care contracts, since “each participant [thereby] is assured that all participants will be treated equally under
each contract.” However, all payors will continue to contract at individually negotiated prices with each
SHO hospital for hospital services, and certain smaller, local payors will be allowed to continue to contract
individually with the SHO hospitals for services provided by their employed primary care physicians,
apparently without concern by SHO that individual hospitals may benefit unequally in this respect from
their identification as SHO members.45
SHO’s concerns about the possible adverse effects of inequitable sharing of costs and benefits by
the participants in its proposed program is the type of problem common to virtually all joint ventures,
which usually address the problem without the need to resort to horizontal price fixing. Moreover,
allowing uniform pricing by SHO would not eliminate the possibility of differences among the SHO
hospitals in the benefit each would receive from the program. Different SHO hospitals have different
numbers of employed primary care physicians and different cost structures, and are likely to provide
different mixes and amounts of services, thereby generating different amounts of revenue and profit under
the program, regardless of whether a hospital has the same price levels as the other SHO hospitals for its
physicians’ services.46
SHO’s arguments for uniform pricing are flawed in other respects as well. Regarding the first
scenario – where, absent joint pricing, a SHO hospital could “unfairly” benefit by raising the prices for its
physicians’ services – SHO seems to be suggesting that a member hospital will be able to raise the prices
for its employed physicians’ services due to its identification as a “superior product” from being a
participant in SHO. SHO claims that this would provide an unfair advantage relative to the other hospitals
participating in SHO which, in turn, would then also raise their prices. However, an individual SHO
hospital that raised its physicians’ prices above a quality-adjusted market price potentially would face the
loss of business from payors to other competing SHO hospitals not charging supra-competitive prices for
their physicians’ services. SHO’s scenario also is inconsistent with commonly accepted understanding of
economic behavior on which the antitrust laws are premised. In essence, SHO’s argument postulates that
competitors that price independently are likely to set their prices higher than when those competitors all
agree on uniform prices, as SHO proposes to do. In a competitive market, which SHO asserts exists in its
service area, market forces should constrain such price increases by reducing the quantity of primary care
physician services demanded from any SHO hospital that sought to charge higher than a quality-adjusted
market price.
SHO’s second scenario, which also concerns possible inequitable gaining of benefits by a SHO
hospital, involves a SHO hospital charging less than the other SHO hospitals for the services of its
employed primary care physicians. This scenario implies that lower prices by an individual SHO hospital
will increase the quantity demanded of its employed primary care physicians’ services, thereby resulting in
disproportionately higher revenue for that hospital, and perhaps some concomitant reduction in demand for
the services of the primary care physicians employed by the other SHO hospitals that charge higher prices.
SHO expresses concern that, as a result, some hospitals might decide not to participate in its program.
Basic economic theory agrees that lower quality-adjusted prices should increase the quantity demanded for
the firm with lower prices. However, if the SHO hospitals’ prices for their physicians’ services are set at
competitive levels (as SHO implicitly asserts by claiming that it faces competition and lacks market
Page 11 of 19

power), then none of the SHO hospitals will have an economic incentive to cut prices below that level,
since doing so would reduce the price-cutting hospital’s profits, even if it increased the quantity of its
services that were demanded. If, however, SHO hospitals collectively were to set prices for the services of
their employed physicians at the monopoly price level, then an individual SHO hospital could increase its
profits by offering those services at lower prices, and other SHO hospitals then also would have the
incentive to cut their prices.47 Moreover, as noted previously, even if SHO jointly sets uniform price levels
for the services of its eight hospitals’ employed primary care physicians, each SHO hospital still will
receive different amounts of revenue and profit from the program. Thus, to the extent that SHO perceives
a member hospital charging lower prices than other SHO hospitals as a problem, joint pricing will not cure
the problem.
Various ways exist for SHO to fairly apportion the costs and share the benefits of operating its
proposed program, without fixing the prices of the hospital-employed primary care physicians’ services.
For example, any potential inequity to an individual hospital could be remedied by each hospital assuming
a portion of the joint venture’s expenses, or by sharing revenue from business under SHO contracts, in
proportion to the volume of the business or revenue each hospital derived from the program. This could be
done without the hospitals agreeing on uniform fees for their physicians’ services. Another possible
approach would be to allocate costs based on some other, less direct, measure of potential benefit of SHO
participation, such as the number of employed physicians in the program. Numerous alternative
approaches like these exist, without reliance on a horizontal price agreement. Regardless of how SHO
chose to apportion costs among its member hospitals, each hospital would have the incentive to participate,
so long as it was better off economically being in SHO than not participating in the program. Still another
alternative to address SHO’s stated concerns – albeit one that itself potentially carries some antitrust risk –
might be to prohibit participants in the program from selling any of their employed primary care
physicians’ services outside of the program, which SHO has partially done.48 SHO thereby might be able
to identify and “capture” a measure of whatever benefit a SHO member hospital obtained from
participating in SHO.49
In summary, to the extent that individual pricing of services of the SHO hospitals’ employed
primary care physicians potentially creates an equitable treatment problem for SHO’s members – what
SHO calls a “free rider” problem -- it appears: 1) that agreement on those prices through SHO will not
remedy the problem; and 2) reasonable alternatives exist to address the problem without resort to
horizontal price fixing. Thus, SHO’s concerns do not necessitate or justify joint pricing of the services of
the SHO hospitals’ employed primary care physicians.
Increased Liability Risk
SHO states that it:
likely will incur increased liability risk with respect to clinical protocols distributed to
network physicians if they do not fully participate in SHO’s corresponding clinical
monitoring and quality management programs. If the physician is contracted [with payors]
through SHO, however, SHO has the ability to facilitate compliance with the quality
management programs or terminate the contract. SHO will not have such influence over
physicians if it does not hold the contract.
First, it is not apparent why developing and distributing treatment protocols, and monitoring
physicians’ compliance with them, should increase liability exposure, either for SHO or its member
hospitals, which employ the physicians who will be using the protocols. Nor does SHO provide any
factual support for its concern. Protocols already are widely available and frequently employed within the
medical care industry today and, insofar as they are evidence-based and aimed at improving the quality of
Page 12 of 19

care rendered, should reduce, rather than increase, both bad treatment outcomes and liability exposure by
physicians who adhere to them.
Second, and more importantly, there is no logical connection between an agreement among the
SHO hospitals to fix the prices of their employed primary care physicians and the reduction of any liability
exposure of the hospitals or SHO. SHO’s expressed concern relates more to assuring compliance by the
physicians with the program’s protocols and standards. As discussed above concerning the need to
motivate physicians in the program, much of this compliance obligation is left to the individual hospitals,
and SHO’s joint actions in this regard are not facilitated by, and do not require, the competitive restraints
of the proposed program. Regardless of whether SHO holds the contracts with payors, it can require as a
condition of membership and participation in the proposed program that the member hospitals agree to
assure that their employed primary care physicians will cooperate with the program’s monitoring
procedures and adhere to its practice standards and procedures. Moreover, to the extent that there is a
concern about increased liability exposure, however well-founded, this can be addressed more directly and
effectively without resort to price fixing. Any concern about liability exposure can be addressed by
obtaining liability insurance coverage, which can be funded by the joint venture and its participants.50 The
competitive restraints that SHO’s proposed program would entail are unnecessary, and do not address the
liability concerns SHO raises.
Conclusion
SHO’s proposed program appears to have the potential to create limited efficiencies in the
provision of primary care physician services. However, as discussed above, horizontal agreement among
SHO’s eight member hospitals on the fees to be charged for the services of their combined 192 employed
primary care physicians, and elimination of the individual hospitals’ freedom to compete with SHO and
each other in the sale of those physician services, do not appear to be reasonably necessary or “ancillary”
to achieving those efficiencies. Accordingly, the staff concludes, without the need for further analysis
under the rule of reason, that the price agreement and exclusivity requirement components of SHO’s
proposed program are likely to be unlawful restraints on competition.
This letter sets out the views of the staff of the Bureau of Competition, as authorized by the
Commission’s Rules of Practice. Those views are based on information provided to Commission staff by
you and your client. Staff have not engaged in independent factual investigation regarding the proposal.
Under Commission Rule § 1.3(c), 16 C.F.R. § 1.3(c), the Commission is not bound by this staff opinion
and reserves the right to rescind it at a later time.
Sincerely,
David R. Pender
Acting Assistant Director
Page 13 of 19

1. The seven PHOs are: Health Link Network; Hancock Regional PHO, Inc.; Hendricks PHO, Inc.; Morgan County
Health Delivery Network, Inc.; Riverview Health Network; Westview Delivery System, Inc.; and Boone County
PHO. The health system is St. Vincent Health, Inc.
2. These seven community hospitals are: Westview Hospital in Indianapolis; Witham Memorial Hospital in
Lebanon; Hancock Memorial Hospital & Health Services in Greenfield; Hendricks Regional Health in Danville;
Henry County Memorial Hospital in New Castle; Morgan Hospital and Medical Center in Martinsville; and
Riverview Hospital in Noblesville. All except Westview Hospital are county hospitals, which are considered
political subdivisions of the state under Indiana law. Ind. Code 5 34-6-2-1.10 (2005). SHO declines to assert that its
proposal is lawful based on a state action exemption from the antitrust laws.
3. St. Vincent Health, Inc., is the sole corporate member of St. Vincent Hospital and Health Care Center, Inc. The
latter provides tertiary level medical services not offered by SHO's other member hospitals, as well as lower level
services, including medical care provided by the 87 primary care physicians employed by St. Vincent Hospital and
Health Care Center, Inc.
4. SHO defmes "primary care" as including family practice, internal medicine, general medicine, and pediatrics.
The number of employed primary care physicians at each SHO hospital is as follows: Westview Hospital (7);
Witham Memorial Hospital (1 1); Hancock Memorial Hospital (2 1); Hendricks Regional Health (24); Henry County
Memorial Hospital (14); Morgan Hospital and Medical Center (7); Riverview Hospital (21); and St. Vincent
Hospital (87). The eight SHO hospitals also employ a number of specialist physicians.
5. The SHO Board includes two representatives appointed by each of SHO's seven PHO members, one appointed
by St. Vincent Health, Inc., and one appointed by the Suburban Physician Organization, which represents nearly 400
physician investors from the approximately 2500 contracted independent (i.e., non-hospital-employed) primary care
and specialty physicians that are in SHO's provider network for its capitated contracts.
6. We focus our analysis on the nature and extent of the efficiency-enhancingjoint activity among the program's
participants, rather than relying on the label "clinical integration."
7. The standards of care to be measured through the program "predominantly will address medical conditions that
are typically treated in the PCP [primary care physician] office setting - i.e., wellness and stable phases of chronic
illnesses common to the general population." The primary focus of the program will be to address treatment of four
medical conditions - asthma, cardiovascular disease, congestive heart failure, and diabetes - and provision of
preventive health care services. SHO will monitor and measure "process indicators" (physician performance related
to the established practice parameters) and "outcome indicators" (assessing "the effectiveness of care management
interventions on patient well-being"). Outcome indicators will be measured by review of data that SHO compiles,
and will include evaluation of inpatient admissions and reahssions, emergency department utilization patterns
related to asthma, cardiovascular disease, and diabetes, and "quality of life indices." SHO will use these measures to
guide improvements in the program. Cost efficiency will be assessed by comparing pre- and post-intervention costs
related to fluctuations in avoidable utilization of services, including hospital admissions, emergency visits, and
average lengths of stay in facilities.
8. Each participating physician could earn a bonus of up to 2.5% of his or her previous year's compensation, based
on group performance. This amount appears to be non-trivial, at least in absolute amount, though it is not clear how
significant an incentive a potential bonus of this size is llkely to be in generating interdependence among, and
modifying the behavior of, the physicians in the program. SHO does not claim, however, that the program's shared
financial incentive aspect independently justifies the program's competitive restraints.
9. SHO states that its program will include an "outcomes-based interactive learning system'' to deliver physician
education modules, track scores on interactive exercises and quizzes, and collect feedback from participating
physicians." Later, SHO will add "on-line survey (including patient satisfaction) and quality auditing data collection
capabilities." Finally, all of the data will be integrated into a "data warehouse" capable of generating network-wide
trend reports.
Page 14 of 19

10. Current antitrust analytical standards no longer involve such a "dichotomous categorical approach," whereby
restraints are either labeled as per se illegal, or are subject to a full rule-of-reason analysis. See Polygram Holding,
Inc. v. FTC, 416 F.3d 29,33-35 (D.C. Cir. 2005).
11. As an exception to this exclusive dealing policy, SHO will allow each hospital to market the services of its
employed primary care physicians independently to "small local employers, local governmental units and school
districts, and some small managed care plans."
12. The physicians employed by any single SHO member hospital are not considered competitors of each other. See
Copperweld v. Independence Tube Corp., 467 U.S. 752,769 (1984) ("employees of the same firm do not provide
the plurality of actors imperative for a 5 1 conspiracy").
13. Under the analysis used by the Commission in Polygram Holding, Inc., 5 Trade Reg. Rep. (CCH) 7 15,453
(FTC 2003) (available at 0,	and affirmed by the Court of
Appeals, Polygrarn Holding, Inc. v. FTC, 416 F.3d 29 (D.C. Cir. 2005), this type of conduct could be described as
"inherently suspect," because there is a "close family resemblance between the suspect practice and another practice
that already stands convicted in the court of consumer welfare." 4 16 F.3d at 37 (quoted in the Commission's opinion
in North Texas Specialty Physicians, Dkt. No. 93 12, at 12 (FTC Nov. 29,2005) (available at
h~:ilwww.ftc.no~~iios~adiproid93	12/051201opinion.pdf)), appeal docketed, No. 06-60023 (ShCir. Jan. 10,2006).
14. See United States v. Addyston Pipe &Steel Co., 85 F. 271,282-283 (6th Cir. 1898), modzfied, 175 U.S. 21 1
(1899); Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d 210,224 (D.C. Cir. 1986), cert. denied, 479 U.S.
1033 (1987) ("To be ancillary, and hence exempt from the per se rule, an agreement eliminating competition must be
subordinate and collateral to a separate, legitimate transaction. The ancillary restraint is subordinate and collateral in
the sense that it serves to make the main transaction more effective in accomplishing its purpose. . . . [Tlhe restraint
imposed must be related to the efficiency sought to be achieved. If it is so broad that part of the restraint suppresses
competition without creating efficiency, the restraint is, to that extent, not ancillary."); Gen. Leaseways, Inc. v. Nut '1.
Truck Leasing Ass 'n., 744 F.2d 588,595 (7th Cir. 1984) (there must be an "organic connection between the restraint
and the cooperative needs of the enterprise that would allow us to call the restraint a merely ancillary one"); North
Texas Specialty Physicians at 29 (finding that NTSP had "failed to articulate a logical nexus between these
[anticompetitive] activities . . . and the claimed efficiencies," and reiterating that "[als we stated in Polygram,.a
defendant '. . . must articulate the specific link between the challenged restraint and the purported justification to
merit more searching inquiry into whether the restraint may advance procompetitive goals'. . .").
15. See U.S. Department of Justice and Federal Trade Commission, Statements of Antitrust Enforcement Policy in
Health Care (1996) (hereinafter Health Care Statements) (available at http:l/wuw-.ftc..govireports/hlth3~.pd	at
Statement 8 at 7 B. 1 and Statement 9 at 7 A; Federal Trade Commission and U.S. Department of Justice, Antitrust
Guidelinesfor Collaborations Among Competitors (hereinafter Joint Venture Guidelines) at 5 3.2 (2000) (available
at l~~:i/w\.~\~~.ftc.~0~~o~~2C)OO~O4ificdoiguidelines.pdf).
16. 5 Trade Reg. Rep. (CCH) 7 15,453 (FTC 2003) at 22,453-54,22,465,22,468-69 (articulating and applying
ancillarity analysis in holding that an anticompetitive restraint regarding the sale of products produced by earlier
joint ventures among the parties was not justified by their joint production of a different product by the current joint
venture involving the same parties).
17. Dkt. No. 9312 (FTC Nov. 29,2005) (applying the Polygram analysis, and concluding that a physician network's
proffered justifications for price agreements and collective refusals to deal were not cognizable and plausible, so as
to warrant M e r consideration. See also Id. at 13 n. 20 (noting that "[tlhe concept of ancillary restraints . . . is
subsumed in the Commission's Polygram analysis" and quoting from the Commission's Polygram Opinion at n. 42
that "[tlhe ancillary restraints doctrine retains its vitality in evaluating efficiency claims."); and at 28 n. 43 (again
stating that ancillarity analysis is subsumed within the Polygram analysis, and noting that the Commission's "use [ofJ
the terminology of Polygram rather than the terminology of ancillary restraints . . . does not mean that we disagree
with . . . [that] alternative analysis.").
Page 15 of 19

18. Availability of less competitively restrictive alternatives to achieving the efficiencies of an integration among
competitors may be part of the analysis as to whether the joint venture's competitive restraints are reasonably
necessary, and thus ancillary, to achieving those efficiencies. See Nat 'I Collegiate Athletic Ass 'n. v. Bd. of Regents
of the Univ. of Oklahoma, 468 U.S. 85 (1984) ("NCAA ") at 97 (quoting the decision of the Court of Appeals [707
F.2d at 11521 agreeing with the District Cowt7sfinding "that any contribution the plan [to restrict individual
college's sale of rights to televise football games] made to [address the joint venture's concern about its operation] . .
. could be achieved by less restrictive means."); Los Angeles Mem 'I Coliseum Comm 'n v. Nat 'I Football League,
726 F.2d 1381, 1396 (9th Cir. 1984), cert. denied, 469 U.S. 990 (1994) (analyzing territorial allocations by the NFL,
and stating that "[tlhe same goals can be achieved in a variety of ways which are less harmful to competition. . . .
[A] factor in determining the reasonableness of an ancillary restraint is the 'possibility of less restrictive alternatives7
which could serve the same purpose. . . . [W]e find that the jury could have reasonably concluded that the NFL
should have designed its 'ancillary restraint7in a manner that served its needs but did not so foreclose competition.").
See also Bork, The Antitrust Paradox 266 (1978) ("[Judge Taft's definition of 'ancillarity' in Addyston Pipe & Steel
Co.] requires that the agreement eliminating competition be no broader than the need it serves."); Joint Venture
Guidelines at 5 3.2 ("[aln agreement may be 'reasonably necessary' without being essential. However, if the
participants could achieve an equivalent or comparable efficiency-enhancing integration through practical,
significantly less restrictive means, then . . . the agreement is not reasonably necessary.").
19. SHO asserts that its program "integrates participating physicians sufficiently to withstand Rule of Reason
scrutiny under Broadcast Music [Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 44 1 U. S. 1 (1979)]
and its progeny." SHO claims that its program should be subject to rule-of-reason analysis based on the Supreme
Court's decision in State Oil Co. v. Kahn, 522 U.S. 3 (1997). In Kahn, the Court held that vertical maximum price
fixing henceforth would be subject to rule-of-reason analysis. SHO argues that, post-Kahn, the Supreme Court
would have treated differently, and applied a rule-of-reason analysis to, the arrangement at issue in Arizona v.
Maricopa County Med. Soc jl, 457 U.S. 332 (1982). In Maricopa, the Court held that a medical society's adoption,
through a medical care foundation, of a maximum fee schedule for its physician members was per se illegal
horizontal price fixing. Kahn, however, dealt with vertical, not horizontal, price fixing, and the Court, citing and
quoting from its decision in Maricopa, reiterated that per se treatment continued to be appropriate for horizontal
price fixing. 522 U.S. at 10.
20. See, e.g., NCAA, 468 U.S. 85 (1984) (holding unlawful a sports league's restriction on its members' rights to
individually negotiate television contracts for their games, which raised price and reduced output, where the evidence
did not support assertions that the restraint furthered the legitimate procompetitive purposes of the league
arrangement - itself a legitimate joint venture).
2 1. These conditions include asthma, cardiovascular disease, congestive heart failure, and diabetes, as well as
provision of certain non-specified "wellness" activities. SHO does not discuss the basis for selecting the medical
conditions to be addressed by its program. However, these may be among the areas within primary medical care that
have greater potential for improvement in quality and efficiency.
22. However, it is not apparent why such data pooling by the proposed network, and sharing of associated costs,
could not be accomplished without the joint price agreement and exclusive dealing requirement proposed by SHO.
23. For example, each individual hospital will continue to determine the method and amount of compensation of its
employed physicians regarding the medical services they provide under the program.
24. For example, by providing feedback through performance data, implementing the bonus incentive program, and
possibly arranging for provision of continuing medical education credits for participating in SHO's educational
programs.
25. SHO does state, without any elaboration, that "[qluality management findings will be taken into account during
the provider recredentialing process."
26. SHO acknowledges that integration among the primary care physicians in its proposed program will be different
from that which is present in joint ventures involving the sharing of financial risk, where "participating physicians
are interrelated in that the poor performance of one will necessarily be absorbed by other members of the group."
Page 16 of 19

27. SHO makes one reference to "peer to peer mentoring," but provides no information as to who this will involve,
or what it will entail (e.g., whether this refers to feedback to individual physicians by program staff regarding the
physicians' performance, or actually involves interaction among participating physicians).
28. Because of their largely informational character, the types of efficiencies likely to result from the program
appear equally capable of being achieved through a joint venture comprising physicians in diverse areas who are not
competitors of each other.
29. In this respect, SHO's program differs significantly from the subject of the Commission staffs advisory opinion
regarding MedSouth, Inc. That program involved intensive coordination and oversight of patient care across the
entire spectrum of medical specialties and treatment levels. Letter from Jeffrey W. Brennan, Assistant Director,
Bureau of Competition, to John J. Miles, Ober, Kaler, Grimes & Shriver (Feb. 19,2002) (available at
http:llu~~v.ftc.nov/bcladopsimedsouth.htrn)	("MedSouth Advisory Opinion").
30. The program also will not apply to care provided by other non-participant providers, including care provided in
hospitals or other health care facilities that are not under the supervision of an employed primary care physician
participating in SHO's program.
3 1. See Health Care Statements at Statement 8, n. 35. This view is consistent with the analysis applied by the
Supreme Court in its recent decision in Texaco Inc. v. Dagher, 547 U.S. -(February 28,2006), holding that the
determination of the price to be charged for the products produced and sold by the joint venture was subject to
evaluation under the rule of reason, rather than per se treatment, and contrasting that situation to pricing agreements
"between competing entities with respect to their competing products" (Id. at slip op. at 4), which more aptly
describes SH07smember hospitals regarding the sale of the services of their respective employed primary care
physicians.
32. 441 U.S. at 22,23.
33. 441 U.S. at 21,23.
34. 457 U.S. 332 (1982).
35. 457 U.S. at 356-357. The Court reached its conclusion that the arrangements did not create a new product
despite the fact that the medical care foundations also performed peer review as to the medical necessity and
appropriateness of the services provided to patients by the physicians under the program, and performed the claims
payment function for services provided by the physicians. Id. at 339-340.
36. 457 U.S. at 356-357. The Court did not characterize the joint price setting by the physicians as ancillary to their
integration, even though the foundations performed legitimate and potentially efficient joint activities, including peer
review and claims payment services. Id. at 339-340.
37. See, e.g., Bridges to Excellence at www.brid~estoexcellence.orn/bte/index.html;	Integrated Healthcare
Association at ww7-iha.org/irzdex.html.
38. The Court in Broadcast Music noted that the arrangement there "made a market in which individual composers
are inherently unable to compete fully effectively." 441 U.S. at 23. Here, by contrast, SHO states that its proposed
program will face competition from other provider networks in the area with which SHO seeks to compete more
effectively.
39. See NCAA, 468 U.S. at 114 ("In Broadcast Music, the availability of a package product that no individual could
offer enhanced the total volume of music that was sold. . . . [Tlhere was no limit of any kind placed on the volume
that might be sold in the entire market and each individual remained free to sell his own music without restraint.").
See also Regents of the Univ. of California v. Am. Broad. Companies, Inc., 747 F.2d 5 11,518 (9th Cir. 1984).
Page 17 of 19

40. The physician integration in the MedSouth proposal (see n. 29, supra) stands in contrast to SH07sprogram. In
MedSouth, absent joint contracting by the more than 400 independent physicians, who practiced in over 200 separate
groups, it was unlikely that the physicians in the program could know in advance which other physicians would
participate in the program. The ability to rely on continuing participation in the venture by an identified group of
physicians was essential "[iln order to establish and maintain the on-going collaboration and interdependence among
physicians from which the projected efficiencies flow." MedSouth Advisory Opinion at 6. SH07sproposed
program, by contrast, involves only eight providers of primary care physician services (the eight hospitals). It also
does not include any independent physician practices with which care must be coordinated, and does not include any
specialist physicians to whom the primary care physicians might refer their patients and with whom they would need
to maintain ongoing relationships, so as to assure achievement of efficiencies fiom coordinating provision of medical
services under the program.
?
4 1. SHO states that "[tlhe compensation [of the primary care physicians under the "vast majority" of their hospital
employment contracts] is structured as a combination of a base salary and a productivity incentive . . . [which is]
based on the professional services personally performed by the physician, . . . or collections. The base salary usually
accounts for the largest percentage of the physicians7total compensation, although at least one SHO hospital
compensates its employed physicians based entirely on productivity." Relying on the hospitals7fixed prices for their
employed physicians7services as a motivator for physician cooperation in the program also potentially could
undermine, rather than advance, the efficiency goals of the program. Insofar as each SHO physician's compensation
from his or her employer.hospita1is tied to the dollar volume billed for the individual physician's services under the
program, this will maintain a financial incentive for the physician to provide more services to patients. Billings for
additional services, whether or not consistent with the program's guidelines, will increase the physician's
compensation under the hospitals' existing payment methods.
42. The bonus pool will include funds equal to between 1% and 10% of the total non-risk commercial
reimbursement received by each SHO member hospital for services rendered by its employed primary care
physicians under the program. However, nothing in the bonus arrangement requires that its funding be based on
revenues derived from the use of uniform, agreed-to, fees, rather than some other method of apportioning each
hospital's benefit from the program.
43. As we discuss below, the problems that SHO identifies are more properly characterized as ones involving
equitable distribution of the joint venture's costs and benefits, rather than a true economic "free rider" problem.
44. The court in Rothery Storage & Van Co. v. Atlas Van Lines, Inc. described the free rider problem in the context
of a joint venture: "A free ride occurs when one party to an arrangement reaps benefits for which another party pays,
though that transfer of wealth is not part of the agreement between them. The free ride can become a serious
problem for a . . .joint venture because the party that provides capital and services without receiving compensation
has a strong incentive to provide less, thus rendering the common enterprise less effective." 792 F.2d at 2 12-213.
45. That different participants in a joint venture will receive different benefits or have different costs of participation
does not necessarily imply that there is a free rider problem in the joint venture. Differences in benefits and costs
among participants are common in joint ventures, which may impose greater costs of participation on participants
that stand to benefit disproportionately from the venture. The key from an individual participant's standpoint is
whether the benefits of participation will outweigh the costs (both direct and opportunity costs) of doing so. If so,
then the participant will be better off participating in the arrangement than not doing so, regardless of how the
arrangement benefits other participants.
46 For example, St. Vincent's has 87 of the 192 total primary care physicians employed by the eight SHO hospitals,
and therefore can be expected to generate considerably greater revenues fiom the proposed program than any other
SHO hospital, none of which has more than 24 employed primary care physicians.
47. This type of behavior often is seen regarding cartels, where individual members have an economic incentive to
"cheat" on the cartel, thereby increasing the cheating firm's profits. However, if this scenario were to present
regarding SHO, the ability of SHO hospitals to set monopoly prices would factually contradict SH07sfbndamental
assertion in its advisory opinion request that SHO and its members lack market power and face substantial
competition in the provision of primary care physician services. Moreover, if SHO and its member hospitals had
Page 18 of 19

market power regarding primary care physician services, allowing SHO to set (and presumably police adherence to)
monopoly pricing would leave consumers worse off than if the price cutting about which SHO expresses concern
was to occur.
48. As noted previously, requiring SHO's hospital participants to contract with most payors exclusively through
SHO regarding the services of their employed primary care physicians itself raises an antitrust issue, since it is a
horizontal agreement that eliminates competition among those entities. This "exclusivity" aspect of SHO's proposed
operation, in effect, involves an agreement by SHO's eight member hospitals to refuse to deal individually with those
types of payors regarding sale of the services of their employed primary care physicians, and only to contract on
collectively determined terms, including price terms, through SHO. However, just like price agreements, an
exclusivity requirement in a joint venture may have different effects, and receive a different conclusion as to its
legality under the antitrust laws, depending on the circumstances in which it is employed. For example, "exclusivity"
- i.e., refusal by health care provider network participants to deal except through the network and on jointly
determined terms - is a common approach used to facilitate illegal price-fixing agreements by those networks and
their members. As discussed previously, the absence of exclusivity also was an important factor in the Supreme
Court's determination that the blanket licensing arrangement in Broadcast Music created a new product and was
procompetitive, justifjlng rule-of-reason analysis of the price agreement that arrangement entailed. Similarly, non-
exclusivity in contracting with payors by the program's physicians, both as a formal program characteristic, and in
actual subsequent practice, was an important factor in the Commission staffs analysis and conclusion in the
MedSouth advisory opinion, supra n. 29. By contrast, exclusivity was determined by the court in Rothery Storage &
Van Co. to be a necessary and appropriate mechanism (i.e., an ancillary restraint) for avoiding free riding in that
particular joint venture. And in the Health Care Statements (at Statement 8,T 1A), the Commission and the
Department of Justice have even identified a "safety zone'' where, absent extraordinary circumstances, certain
exclusive physician networks may rely on not being challenged as violating the antitrust laws.
49. While SHO states that its proposed program will be "exclusive" - i.e., include such a prohibition on sales other
than by the joint venture - as noted previously, it nevertheless also states that it will allow the individual SHO
hospitals to independently sell their services - including those of their employed primary care physicians
participating in the proposed program - directly to certain smaller local payors.
50. SHO and its hospital participants may even be sufficiently large and financially able to self-insure this risk
exposure.
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