FTC Staff Comment Before the Nevada Commissioner of Insurance Concerning Use of Exclusive Health Contracts by HMOs

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UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
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November 	5, 	1986
Davi d A. 	Gates
Commissioner 	of Insurance
·201 	South Fall 	Street
Carson City, 	Nevada 	89701 ••
Dear 	C c;:xnm is si oner 	Gat es:
.
The 	Federal 	Trade 	Commission's Bureaus 	of 	Competition,
Consumer Protection, 	and Economi cs 	are 	pleased 	to 	present 	thei r
vi ews . on 	~ he 	UI e 	of 	exc 1 us i:-re 	cent r act s 	by he~l th. mai nt enance
organlzatlons. 	We 	are 	advlsed 	that 	your 	off1ce 1S 	considering
whether 	to 	prohibit 	health maintenance 	organizations 	(Ht·Os) 	from
entering 	into 	contracts 	with 	participating 	physicians 	that
prevent 	the 	physicians 	from 	affiliating with other 	Hl-Os 	or, 	in
some 	cases, 	with 	preferred 	provider 	organizations. 	Our
experience 	in 	the 	antitrust 	and 	health 	care 	fields 	has 	ena:>led.us
to 	develop 	an 	understanding 	of 	excl usi ve 	arrangements 	between
HMJs 	and 	their 	F8rticiF8ting physicians. 	Our 	conclusion 	is 	that
such 	exclusive 	arrangements 	are 	likely to 	benefit 	consumers 	by
stimUlating cOlllpetition 	among mejical 	pre~yment plans 	and
p~ysicians. 	Although 	in 	some 	circumstances 	exclusive
ar r angem ent shave 	the 	p:::>t ent i al 	to 	endanger 	compet i ti on, 	thos e
circl.mlstances 	are 	rare 	and 	do 	not 	appear 	to 	exist 	in 	the market
in 	whiCh 	Nevada 	HMJs 	operate. 	Therefore, 	a 	blanket 	prohibition
on 	exclusive 	arrangements 	ca."1 	be 	expected 	to 	hamper
procompe t i ti ve 	and 	benef i ci al 	act i vi ti es 	of 	HMJ s, 	and 	deny
cons umers 	t he 	improved 	ser vi ces 	that 	such 	competi tion 	would
stimulate.
The 	federal 	antitrust 	laws 	are 	designed 	to 	improve 	consumer
welfare 	by 	protecting the 	ability 	of 	the marketplace 	to 	supply
the 	full 	range 	of 	g:>ods 	and 	services 	that 	consumers 	want, 	at
prices 	that 	reflect 	the 	lowest 	possible 	cost. 	Certain 	kinds 	of
arrangements, 	such 	as 	agreements 	among 	competitors 	to 	fix 	prices,
are 	virtually 	certain 	to 	hurt 	consumers, 	and 	are 	therefore
SUbject 	to 	a 	blanket 	prohibition. 	Arrangements 	that 	can 	have
either 	procompetitive 	or 	anti competitive 	effects, 	however, 	are
evaluated 	under 	the 	"rule of 	reason." 	The 	purp::>se 	of 	the
analysis 	is 	to 	assess 	whether, 	in 	a 	given 	situation, 	the 	practice
in 	question 	has 	a 	negative 	imF8ct 	on 	compatition, 	a.,d 	if 	so,
whether 	it 	produces 	countervailing 	competitive 	benefits 	that
outweigh 	its 	harmful 	effects. 	Antitrust 	analysis 	focuses 	on 	the
1 	These 	comments 	represent 	the 	views 	of 	the 	commission's
Bureaus 	of Canpetition, 	Consumer Protection, 	and Economics,
and 	do 	not 	necessarily represent 	the 	views 	of 	the Commission
or 	any 	individual Commissioner. 	The Commission, 	however, 	has
authorized 	the 	submission 	of 	these 	comments.

Da\o_'-o 	• 	Gates
Page 	two
eff ects 	of 	a 	practi ce 	on 	cons umer 	choi ce 	and 	weI fare. 	Harm 	to
individual 	competitors 	is 	an 	inevitable 	result 	of 	vigorous
competition, 	and 	does 	not 	by 	itself 	constitute 	harm 	to
marketplace 	competition. 	The 	Supreme Court 	has 	emphasizeo 	that
it 	is 	undesirable 	to 	imp::>se 	blanket 	prohibitions 	on 	busine!ss
activities 	that 	do 	not 	ordinarily harm 	competition. 	Such
prohibitions 	keep 	firms 	from 	operating more 	efficiently or
offering 	new 	services 	or 	products, 	and 	thereby hurt 	cons~ners.
See 	Continental 	T.V., 	Inc. 	v. 	GTE 	Sylvania, 	Inc., 	433 	u.s 	36
lI977) .
Exc 1 us i ve 	arr angem ent s 	b: tween 	firms 	and 	t hei r 	s uppl i er s 	or
customers 	are 	common 	in many sectors 	of 	the 	economy. 	Such
arrangements 	typically permit 	oot'h 	p3rties 	to 	operate 	more
efficiently 	and 	do 	not 	usually 	pose 	an 	unreasonable 	danger 	to
competition. 	Therefore, 	they are 	not 	condemned 	summarily 	under
the 	antitrust 	laws, 	but 	are 	evaluatp.d 	on 	a 	case-by-case 	basis.
Exclusive 	provider 	agreeme:lts 	have 	the 	p:>tential 	to 	help
HM:>s 	provide 	the 	services 	that 	consumers 	fina 	desirable 	and
thereby 	comp:te 	more 	effectively 	for 	enrollees 	against 	other 	Hf-Os
and 	traditional 	insurance 	plans. 	While 	some HM:>s 	enter 	into
particip3.tion 	agreements 	with 	a 	larg.: 	number 	of 	physicians,
others 	choose 	to 	compete 	by 	having 	exclusive 	relationships 	wIth 	a
limited 	panel 	of 	carefully selected 	physicians. 	Such 	a 	strategy
can 	provide 	a 	number 	of 	advantages. 	First, 	it 	can 	foster 	a
cl os er 	coop:rat iva 	r el at i onshi p 	be tween 	the 	HI-o 	and 	its
~lysicians, for 	the 	success 	of 	each 	is 	closely 	tied 	to 	that 	of
the 	other. 	An HloP 	seeking 	to 	obtain 	ex::lusive 	provider
agreements 	must 	satisfy 	its 	physicians 	that 	it 	is 	likely to
succeed 	in 	attracting enrollees 	and 	that 	it 	will 	meet 	the 	needs
of 	the 	physicians. 	A pnysician 	seeking 	a 	contract 	with 	an HMJ
having 	a 	limited 	provider 	p3nel 	must 	satisfy 	the 	HI~ 	that 	he 	or
she 	will 	help 	attract 	and 	retain 	enrollees 	by 	providing 	high
quality and 	cost 	effective 	services, 	and will 	cooperate 	with 	the
H!'10's 	objectives. 	The mutual 	dependence 	between 	the HM:> 	and 	its
p~lysicians should 	promote 	physician 	adherence 	to HM:)' s 	quality,
service 	and 	utilization 	standards. 	This 	should 	help 	it 	deliver
consistently high 	quality services 	at 	a 	lower 	cost.
Second, 	an HM:> 	with 	a 	limited 	panel 	of 	physicians 	exclusively
affiliated 	with 	it 	may he 	able 	to 	attract 	consumers 	and 	create 	a
favorable 	market 	reputation 	based 	on 	its 	careful 	selection 	of
p.'1ysicians 	who 	meet 	high 	quality and 	cost 	control 	standards. 	If
physicians 	are 	affiliated 	with many HM:)s, 	the 	distinctions 	among
the 	pl ans 	may be 	bl unted, 	because 	the 	HMJs 	will 	have 	similar

Davi d A. 	G2.tes
Page 	thr~e
physician 	panels 	and 	as 	a 	result 	may have 	similar 	health care
service 	utilization 	patterns. 	Physicians' 	affiliation 	with 	only
one 	rather 	than 	several 	H~Os sharpens 	the 	distinctions 	among 	the
RIDs 	and 	thus 	clarifies 	the 	choices 	consumers 	need 	to mak~ in
selecting an HM). 	As 	a 	result, 	competition 	based 	on 	price" or
quality. 	will 	be 	more 	vigorous. 	To 	the 	exte9t 	that 	exclusivity
clauses 	facilitate 	these 	and 	other 	benefits, 	they are
procornpetitive 	and 	helpful 	to 	consumers.
Exclusivity will, 	of 	course, 	restrict 	the 	range 	of
physicians 	available 	to 	patients 	enrolled 	in a 	particular HM:).
However, 	this 	in 	itself 	is 	not 	anticompetitive. 	Consumers 	know
that 	their 	choice 	of HM::> 	determines 	the 	physi cians 	to 	whom 	they
will 	have 	access 	and 	HMOs 	accordingly compete 	with one 	another
and 	against 	other 	medical 	prepayment 	plans 	by 	providing a 	highly
qualified 	and 	accessible 	panel 	of 	participating 	physicians.
While 	in 	most 	cases 	exclusive 	physician 	arrangements 	are
likely 	to 	lead 	to 	heig'htened 	competition, 	they may hinder
competi tion 	if 	they 	permit 	an HM:> 	to 	prevent 	other HMOs 	from
entering 	the 	marKet 	(or 	drive 	them 	out 	of 	it) 	by depriving 	th~m
of 	access 	to 	the 	physicians 	they need 	to 	operate 	effectively.
For 	example, 	if 	one 	f!~") were 	able 	to 	obtain 	and 	keep 	exclusive
contracts 	with 	a 	large 	percentage 	of 	physicians 	in 	a 	particular
type 	of 	practice 	in 	a 	geograp'hic market, 	other 	plans 	could 	be
left 	without 	access 	to 	suitable 	physicians. 	Ordinarily, 	however,
an 	HM:l 	would 	not 	be 	able 	to 	obtain enough 	exclusive 	contracts 	of
sufficient 	duration 	to 	exclude 	competitors 	in 	this 	way. 	Some
physicians 	will 	wish 	to 	preserve 	their 	freedom 	to 	affiliate 	with
other 	plans, 	and 	will 	decline 	exclusivity 	unless 	the HMO 	in
question 	has 	some 	power 	over 	them 	(such 	as 	a 	very h~gh share 	of
subscribers 	in 	a 	particular 	area). 	Even 	physicians 	who 	sign
exclusive 	contracts 	will 	be 	able 	to switch 	from 	one HM:> 	to
another, 	unless 	they have 	entered 	into long-term 	contracts 	or 	the
HMO 	imposes 	substantial 	costs 	on 	doctors 	who 	leave 	the 	plan.
Physicians 	who 	are 	particularly 	necessary 	to 	the 	operation 	of
sevaral 	Hl-Os, 	either 	because 	they 	practice 	a 	specialty in which
there 	are 	few 	other 	physicians 	or 	because 	they 	are 	uniquely
attractive 	for 	other 	reasons, 	would 	appear 	to 	be 	the 	least 	likely
j
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2
3
An HM:> 	dealing 	with 	fewer 	p:1ysicians 	will 	probably also 	have
lower 	admi nis tra ti ve 	cos t s.
The 	amount 	of 	o:ms umer 	harm 	tha t 	woul d 	res ul t 	if Hl-O s 	were
hindered 	in 	entering 	the 	market 	would 	depend 	on 	the 	extent 	to
which 	consumers 	re$ard 	other 	types 	of 	insurance 	plans 	as
sat i sf a ct or y 	subs t 1 t ute s 	for HM:> s .

Davi d A. 	Gates
Page 	four
to 	agree 	to 	sign 	long-term 	exclusive 	con~racts, 	because 	other
plans 	would 	also 	bid 	for 	their 	services.
A serious 	threat 	to 	competition 	among HMOs 	could 	arise 	if 	an
HM:> 	controll ed 	by 	parti cipating 	physi cians 	employed excl usi ve
provide.r 	agreements. 	If 	a 	large 	percentage 	of 	physicians
affiliated 	exclusively 	with such 	a 	plan, 	the 	real 	underlying
purp:>se 	might 	be 	·to suppress 	price 	and 	service 	competition 	among
the 	physician members. 	Exclusive 	arrangements 	used 	to 	achieve
this 	purp:>se 	would 	likely 	violate 	the 	antitrust 	laws.
The 	e xperi ence 	of HMO sin Nevada, 	as 	we 	unders tand 	it,
suggests 	that 	the 	c.Jrrent 	use 	of 	exclusive 	provider 	contracts 	has
not 	harmed 	competi ti on 	and 	is 	not 	li kel y 	to 	do 	so in 	the
future. 	It 	appears 	that 	the 	largest 	Hl-D 	in Nevada 	currently has
exclusive 	provider 	arrangements 	with 	only about 	5 	percent 	of
.... lark County physicians 	who 	are 	in 	private 	practice, 	and 	that
even 	these 	agreements 	are 	for 	a 	term 	of 	only 	one 	year.
Exclusivity 	is 	apparently a 	p:>int 	of 	negotiation 	between
physicians 	and 	the HMO. 	Some 	physicians 	have 	accepted 	it, 	some
have 	obtained 	exceptions 	to 	tha 	exclusivity policy, 	and 	others
have 	refused 	to 	accept 	it 	and 	have 	still 	become 	participating
physicians. 	Several 	other 	Hf-Os 	currently active 	in Nevada
apparently 	have 	been 	able 	to 	obtain 	the 	physician 	services 	they
need.
To 	summarize, 	exclusivity clauses 	have 	the 	potential 	to 	help
HMOs 	provide 	at 	lower 	cost 	services 	that 	consumers 	want, 	and
blanket 	prohibition 	of 	their 	use 	is 	likely 	to 	injure Nevada
consumers. 	If 	it 	appears 	in 	the 	future 	that 	use 	of 	exclusivity
hinders 	the 	effective 	operation 	of 	HMOs 	or 	otherwise 	harms
consumers, 	the Nevada 	Insurance Division 	could 	take 	corrective
action 	designed 	to 	address 	p3.rticular 	problems 	as 	they arise.
Antitrust 	rer'ledies 	would 	also 	be 	available 	if 	the 	agreements
,;
4 	The 	first 	plan 	entering a 	p:irticular 	area 	may be 	able 	to 	sign
up 	those 	~1ysicans who 	are 	most 	desirable 	or 	most 	likely to
affiliate 	with 	an Hl-O. 	However, 	this 	is 	not 	necessarily an
anticompetitive 	result, 	because 	other 	plans 	should 	normally
be 	able 	to 	enter 	by developing 	relationships 	with other
physicians 	or 	by 	getting 	the 	first HMO's 	physicians 	to
switch. 	In 	addition, 	HMOs 	might 	be 	able 	to 	enter 	some 	areas
by 	bringing 	in 	p~1ysicians from 	outside.

Davi d A. 	Gates
Page 	five
seriously 	restrain 	competition. 	We 	therefore 	recommend 	against
prohibition 	of 	exclusive 	provider 	contracts.
We hope 	these 	comments 	are 	of 	assistance.
Sincerely 	yours,
Uug;